<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1998
REGISTRATION NO. 333-63323
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
AMENDMENT NO. 4
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 NO.) IDENTIFICATION NUMBER)
</TABLE>
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:
<TABLE>
<S> <C> <C> <C>
MARK BONHAM FRANK SLATTERY BARBARA FISKE ROD J. HOWARD
PAUL R. TOBIAS GENERAL COUNSEL GENERAL COUNSEL JON C. PERRY
KEVIN M. GALLIGAN USWEB CORPORATION CKS GROUP, INC. GRAY CARY WARE &
STEVEN LIU 2880 LAKESIDE DRIVE, 10441 BANDLEY DRIVE FREIDENRICH LLP
WILSON SONSINI GOODRICH & SUITE 300 CUPERTINO, CA 95014 400 HAMILTON AVENUE
ROSATI SANTA CLARA, CA 95054 (408) 366-5100 PALO ALTO, CA 94301
PROFESSIONAL CORPORATION (408) 987-3200 (650) 328-6561
650 PAGE MILL ROAD
PALO ALTO, CA 94304-1050
(650) 493-9300
</TABLE>
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and the
satisfaction or waiver of certain conditions under the Agreement and Plan of
Reorganization described herein.
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. [_] _________________
In 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
Preliminary Joint Proxy Statement/Prospectus
filed as of November 20, 1998
USWEB CORPORATION
2880 Lakeside Drive, Suite 300
Santa Clara,
California 95054
[LOGO OF USWEB(TM)]
November 23, 1998
Dear Stockholder:
A Special Meeting of stockholders (the "USWeb Special Meeting") of USWeb
Corporation ("USWeb") will be held on December 16, 1998 at the offices of
USWeb at 2880 Lakeside Drive, Suite 300, Santa Clara, California 95054, at
10:00 a.m. local time to consider, among other things, a strategic business
combination with CKS Group, Inc., a Delaware corporation ("CKS Group") (the
"Merger"). The proposed combined company is referred to in this letter as
"USWeb/CKS."
At the USWeb Special Meeting, you will be asked to consider and vote upon
(i) the issuance of shares of the Common Stock, par value $0.001 per share, of
USWeb (the "USWeb Common Stock"), to the stockholders of CKS Group pursuant to
an Agreement and Plan of Reorganization, dated as of September 1, 1998 (the
"Reorganization Agreement"), among USWeb, CKS Group and USWeb Acquisition
Corporation 134, a wholly owned subsidiary of USWeb ("Merger Sub"); and (ii) an
amendment to the Amended and Restated Certificate of Incorporation of USWeb
(the "Certificate") to increase the number of authorized shares of USWeb Common
Stock by 100 million shares to 200 million shares. Each of the foregoing
proposals is described more fully in the accompanying Joint Proxy
Statement/Prospectus.
After careful consideration, USWeb's Board of Directors (the "USWeb Board")
by unanimous vote 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 Merger is fair to, and in the best interests
of, USWeb and its stockholders. The USWeb Board believes that the Merger is
strategically important to USWeb and will create a stronger, more competitive
company with a broader and more diverse range of products and services to
offer to enterprises that need or desire to obtain integrated Internet systems
and communications services from a single source. In addition, after careful
consideration, the USWeb Board has approved the proposed amendment to the
Certificate, and has concluded that such amendment is fair to, and in the best
interests of, USWeb and its stockholders. THE USWEB BOARD UNANIMOUSLY
RECOMMENDS A VOTE IN FAVOR OF THE ISSUANCE OF THE USWEB COMMON STOCK PURSUANT
TO THE REORGANIZATION AGREEMENT AND THE PROPOSED AMENDMENT TO THE CERTIFICATE.
Pursuant to the Reorganization Agreement, the Board of Directors of
USWeb/CKS following the Merger 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 resigning from the USWeb Board
effective upon the consummation of the Merger.
In addition, following the Merger, the principal executive officers of the
Combined Company will include: Mark Kvamme, currently Chairman of the Board
and Chief Executive Officer of CKS Group, will be Chairman of the Board of the
Combined Company; Robert Shaw, currently Chairman of the Board and Chief
Executive Officer of USWeb, will be Chief Executive Officer of the Combined
Company; Joseph Firmage, a co-founder, director and former Chief Executive
Officer of USWeb, will continue to serve the Combined Company 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, currently Chief
Creative Officer of CKS Group, Sheldon Laube, a co-founder and current Chief
Technical Officer of USWeb, 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.
<PAGE>
The Merger will become effective as soon as practicable after all necessary
regulatory and stockholder approvals are obtained and certain other conditions
are satisfied or waived (the time at which the Merger becomes effective being
referred to herein as the "Effective Time"). At the Effective Time, each
outstanding share of Common Stock of CKS Group, par value $0.001 per share
("CKS Group Common Stock"), will be converted into the right to receive 1.5
shares (the "Exchange Ratio") of USWeb Common Stock and each outstanding
option to acquire CKS Group Common Stock will be assumed by USWeb and
converted into an option to acquire USWeb Common Stock as adjusted to reflect
the Exchange Ratio. The Merger is intended to be a tax-free reorganization and
to be accounted for as a pooling of interests.
Based on 15,582,563 shares of CKS Group Common Stock and 45,543,660 shares
of USWeb Common Stock outstanding as of November 16, 1998, and the Exchange
Ratio, the stock of CKS Group prior to the Merger will be converted into
approximately 33.9% of the Common Stock of the Combined Company, and the stock
of USWeb outstanding prior to the Merger will represent approximately 66.1% of
the stock of the Combined Company. If the Merger had occurred on November 16,
1998, then 23,373,845 shares of USWeb Common Stock, having an aggregate value
of approximately $421 million, as determined by the $18.00 per share closing
market price of USWeb's Common Stock on the Nasdaq National Market on such
date, would have been issued to the CKS Group stockholders.
All stockholders are invited to attend the USWeb Special Meeting in person.
The amendment to the 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 in the Merger
requires the affirmative vote of a majority of the total votes cast at the
USWeb Special Meeting in person or by proxy regarding such proposal.
In the materials accompanying this letter you will find a Notice of Special
Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the
actions to be taken by the USWeb stockholders at the USWeb Special Meeting and
a Proxy Card. The Joint Proxy Statement/Prospectus more fully describes the
proposed transactions. Stockholders are urged to review carefully the
information contained in the accompanying Joint Proxy Statement/Prospectus,
including in particular the information under the captions "Risk Factors,"
"USWeb Special Meeting--Recommendations of USWeb Board of Directors,"
"Approval of the Merger and Related Transactions--Joint Reasons For the
Merger," "--USWeb's Reasons For the Merger," "--Material Contacts and Board
Deliberations" and "Terms of the Merger--Interests of Certain Persons" prior
to making any voting decision in connection with their USWeb Common Stock.
Even if you do not expect to attend the USWeb Special Meeting in person,
please complete, sign and promptly return the enclosed proxy card in the
enclosed postage-prepaid envelope to ensure representation of your shares. You
may revoke your proxy at any time before it has been voted, and if you attend
the Special Meeting you may vote in person even if you have previously
returned your proxy card.
BECAUSE AN ABSOLUTE MAJORITY OF THE OUTSTANDING SHARES OF USWEB COMMON STOCK
IS REQUIRED TO APPROVE THE AMENDMENT TO THE CERTIFICATE, THE EFFECT OF AN
ABSTENTION OR BROKER NON-VOTE OR OF FAILING TO RETURN A PROXY IS THE SAME AS A
VOTE AGAINST THE AMENDMENT TO THE CERTIFICATE. IT IS THEREFORE IMPORTANT THAT
YOU COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. YOUR
PROMPT COOPERATION WILL BE GREATLY APPRECIATED.
Sincerely,
/s/ ROBERT SHAW
Robert Shaw
Chairman of the Board and Chief
Executive Officer
YOUR PROXY IS IMPORTANT--PLEASE VOTE PROMPTLY
<PAGE>
Preliminary Joint Proxy Statement/Prospectus
filed as of November 20, 1998
USWEB CORPORATION
2880 LAKESIDE DRIVE, SUITE 300
SANTA CLARA, CALIFORNIA 95054
---------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 16, 1998
---------------
TO THE STOCKHOLDERS OF USWEB CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "USWeb
Special Meeting") of USWeb Corporation, a Delaware corporation ("USWeb"), will
be held on December 16, 1998 at 10:00 a.m., local time, at the offices of
USWeb at 2880 Lakeside Drive, Suite 300, Santa Clara, California 95054.
At the USWeb Special Meeting you will be asked to consider and vote upon the
following matters:
(1) the issuance of shares of the Common Stock, par value $0.001 per
share, of USWeb ("USWeb Common Stock") to the stockholders of CKS Group,
Inc., a Delaware corporation ("CKS Group"), pursuant to an Agreement and
Plan of Reorganization, dated as of September 1, 1998 (the "Reorganization
Agreement"), among USWeb, CKS Group and USWeb Acquisition Corporation 134,
a wholly owned subsidiary of USWeb ("Merger Sub"), providing for the merger
of Merger Sub with and into CKS Group (the "Merger");
(2) an amendment to the Amended and Restated Certificate of Incorporation
of USWeb ("the "Certificate") to increase the number of authorized shares
of USWeb Common Stock by 100 million shares to 200 million shares; and
(3) Such other matters as may properly come before the USWeb Special
Meeting, including any motion to adjourn the USWeb Special Meeting to a
later date to permit further solicitation of proxies, or any postponements
or adjournments thereof.
Each of the foregoing proposals is described more fully in the accompanying
Joint Proxy Statement/Prospectus.
Stockholders of record at the close of business on October 20, 1998 (the
"Record Date") are entitled to notice of, and to vote at, the USWeb Special
Meeting and any adjournments or postponements thereof, and are cordially
invited to attend the USWeb Special Meeting in person. Approval of the
issuance of USWeb Common Stock in connection with the Merger will require the
affirmative vote of a majority of the total votes cast at the USWeb Special
Meeting in person or by proxy regarding such proposal. Approval of the
amendment to the Certificate will require the affirmative vote of the holders
of a majority of the shares of USWeb Common Stock outstanding on the Record
Date. The list of stockholders entitled to vote at the USWeb Special Meeting
will be available for examination ten days prior to the USWeb Special Meeting
at the principal executive offices of USWeb located at 2880 Lakeside Drive,
Suite 300, Santa Clara, California 95054.
For the Board of Directors,
/s/ ROBERT SHAW
Robert Shaw
Chairman of the Board and Chief
Executive Officer
Santa Clara, California
November 23, 1998
WHETHER OR NOT YOU EXPECT TO ATTEND THE USWEB SPECIAL MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE
ENCLOSED ENVELOPE IN ORDER TO ENSURE REPRESENTATION OF YOUR SHARES. NO
POSTAGE NEED BE AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED STATES.
YOUR PROXY MAY BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS VOTED. EXECUTED
BUT UNMARKED PROXIES WILL BE VOTED FOR APPROVAL OF THE ISSUANCE OF SHARES
IN CONNECTION WITH THE MERGER AND FOR THE AMENDMENT TO THE AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION OF USWEB.
<PAGE>
Preliminary Joint Proxy Statement/Prospectus
filed as of November 20, 1998
CKS GROUP, INC.
10441 Bandley Drive
Cupertino,
California 95014
[LOGO OF CKS GROUP] November 23, 1998
Dear Stockholder:
As most of you are aware, CKS Group, Inc. ("CKS Group") has entered into an
Agreement and Plan of Reorganization, dated as of September 1, 1998 (the
"Reorganization Agreement"), with USWeb Corporation ("USWeb"), providing for a
strategic business combination of CKS Group and USWeb. A special meeting of
stockholders of CKS Group (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 to consider and vote upon the
approval and adoption of the Reorganization Agreement and the approval of the
merger of CKS Group with a wholly owned subsidiary of USWeb (the "Merger")
pursuant to the Reorganization Agreement. Upon consummation of the Merger, CKS
Group will become a wholly owned subsidiary of USWeb. As a result of the
Merger, each outstanding share of CKS Group Common Stock will be converted
into the right to receive 1.5 shares (the "Exchange Ratio") of USWeb Common
Stock and each outstanding option to acquire CKS Group Common Stock will be
assumed by USWeb and converted into an option to acquire USWeb Common Stock as
adjusted to reflect the Exchange Ratio. The Merger is described more fully in
the accompanying Joint Proxy Statement/Prospectus. The proposed combined
company is referred to in this letter as "USWeb/CKS."
After careful consideration, your Board of Directors concluded that the
Reorganization Agreement and Merger are fair to, and in the best interests of,
CKS Group and its stockholders and unanimously approved and adopted the
Reorganization Agreement and the other transactions contemplated thereby. Your
Board of Directors believes that the Merger is strategically important to CKS
Group and will create a stronger, more competitive company with a broader and
more diverse range of products and services to offer to enterprises that need
or desire to obtain integrated Internet systems and communications services
from a single source. FOR THESE AND OTHER REASONS DISCUSSED IN THE
ACCOMPANYING MATERIALS, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
IN FAVOR OF APPROVAL OF THE MERGER AND THE APPROVAL AND ADOPTION OF THE
REORGANIZATION AGREEMENT.
Pursuant to the Reorganization Agreement, the Board of Directors of
USWeb/CKS following the Merger 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.
The principal executive officers of USWeb/CKS after completion of the Merger
will include: 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 co-founder, director and
former Chief Executive Officer of USWeb, will continue to serve USWeb/CKS as
Chief Strategist; and the following persons will continue in 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, 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
<PAGE>
Electronic Services of USWeb. In addition, upon consummation of the Merger,
Robert Clarkson, current Executive Vice President, CKS Technology Group East,
CKS International and Business Development, will become Executive Vice
President of Field Operations (East Coast/Europe) of USWeb/CKS, Kimberly
Johnson, currently Executive Vice President of Operations, CKS Group West,
will become Executive Vice President of Field Operations (West) of USWeb/CKS,
and Ian Small, currently Executive Vice President and Chief Technology Officer
of CKS Group, will become Chief Integration Officer of USWeb/CKS.
Based on 15,582,563 shares of CKS Group Common Stock and 45,543,660 shares
of USWeb Common Stock outstanding as of November 16, 1998, and the Exchange
Ratio, the stock of CKS Group outstanding prior to the Merger will be
converted into approximately 33.9% of the Common Stock of USWeb/CKS, and the
stock of USWeb outstanding prior to the Merger will represent approximately
66.1% of the Common Stock of USWeb/CKS. If the Merger had occurred on November
16, 1998, then 23,373,845 shares of USWeb Common Stock, having an aggregate
value of approximately $421 million, as determined by the $18.00 per share
closing market price of USWeb's Common Stock on the Nasdaq National Market on
such date, would have been issued to the CKS Group stockholders.
In the materials accompanying this letter you will find a Notice of Special
Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the
actions to be taken by the CKS Group stockholders at the CKS Group Special
Meeting and a Proxy Card. The Joint Proxy Statement/Prospectus more fully
describes the proposed transactions. Stockholders are urged to review
carefully the information contained in the accompanying Joint Proxy
Statement/Prospectus, in particular the information under the captions "Risk
Factors," "CKS Group Special Meeting--Recommendations of CKS Group Board of
Directors," "Approval of the Merger and Related Transactions--Joint Reasons
For the Merger," "--CKS Group's Reasons For the Merger," "--Material Contacts
and Board Deliberations" and "Terms of the Merger--Interests of Certain
Persons" prior to voting on the proposal.
All stockholders are cordially invited to attend the CKS Group Special
Meeting in person. If you attend the CKS Group Special Meeting you may vote in
person if you wish even though you have previously returned your proxy.
Approval and adoption of the Reorganization Agreement and approval of the
Merger require the affirmative vote of the holders of a majority of the
outstanding shares of CKS Group Common Stock. Therefore, even if you do not
plan to attend the CKS Group Special Meeting, it is important that your shares
be represented and voted at the CKS Group Special Meeting, regardless of the
number of shares you hold.
BECAUSE THE AFFIRMATIVE VOTE OF AN ABSOLUTE MAJORITY OF THE OUTSTANDING
SHARES OF CKS GROUP COMMON STOCK IS REQUIRED TO APPROVE THE MERGER AND THE
REORGANIZATION AGREEMENT, THE EFFECT OF AN ABSTENTION OR BROKER NON-VOTE OR OF
FAILING TO RETURN A PROXY IS THE SAME AS A VOTE AGAINST THE MERGER AND THE
REORGANIZATION AGREEMENT. IT IS THEREFORE IMPORTANT THAT YOU COMPLETE, SIGN,
DATE, AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE.
Sincerely,
/s/ MARK KVAMME
Mark Kvamme
Chairman of the Board and Chief
Executive Officer
YOUR PROXY IS IMPORTANT--PLEASE VOTE PROMPTLY
<PAGE>
Preliminary Joint Proxy Statement/Prospectus
filed as of November 20, 1998
CKS GROUP, INC.
10441 BANDLEY DRIVE
CUPERTINO, CALIFORNIA 95014
---------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 16, 1998
---------------
TO THE STOCKHOLDERS OF CKS GROUP, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "CKS
Group Special Meeting") of CKS Group, Inc., a Delaware corporation ("CKS
Group"), will be held on December 16, 1998 at 10:00 a.m., local time, at the
offices of CKS Group at 10441 Bandley Drive, Cupertino, California 95014 to
consider and vote upon the following:
1. A proposal to: (a) approve and adopt the Agreement and Plan of
Reorganization, dated as of September 1, 1998 (the "Reorganization
Agreement"), among USWeb Corporation, a Delaware corporation ("USWeb"),
USWeb Acquisition Corporation 134, a Delaware corporation and a wholly
owned subsidiary of USWeb ("Merger Sub"), and CKS Group and (b) approve the
merger of Merger Sub with and into CKS Group, with CKS Group continuing as
the surviving corporation and becoming a wholly owned subsidiary of USWeb
(the "Merger"), pursuant to the Reorganization Agreement. Upon consummation
of the Merger, each outstanding share of Common Stock, par value $0.001 per
share, of CKS Group (the "CKS Group Common Stock") will be converted into
the right to receive 1.5 (the "Exchange Ratio") shares of Common Stock, par
value $0.001 per share, of USWeb ("USWeb Common Stock"), and each
outstanding option to acquire CKS Group Common Stock will be assumed by
USWeb and converted into an option to acquire USWeb Common Stock as
adjusted to reflect the Exchange Ratio; and
2. Such other matters as may properly come before the CKS Group Special
Meeting, including any motion to adjourn the CKS Group Special Meeting to a
later date to permit further solicitation of proxies, or any postponements
or adjournments thereof.
Information relating to the above matters is set forth in the attached Joint
Proxy Statement/Prospectus. Stockholders of record at the close of business on
October 20, 1998 (the "Record Date") are entitled to notice of, and to vote
at, the CKS Group Special Meeting and any adjournments or postponements
thereof. Approval and adoption of the Reorganization Agreement and approval of
the Merger will require the affirmative vote of the holders of a majority of
the shares of CKS Group Common Stock outstanding on the Record Date. The list
of stockholders entitled to vote at the CKS Group Special Meeting will be
available for examination ten days prior to the CKS Group Special Meeting at
the principal executive offices of CKS Group located at 10441 Bandley Drive,
Cupertino, California 95014. All stockholders are cordially invited to attend
the CKS Group Special Meeting in person.
For the Board of Directors,
/s/ Mark Kvamme
--------------------------------
Mark Kvamme
Chairman of the Board and Chief
Executive Officer
Cupertino, California
November 23, 1998
WHETHER OR NOT YOU EXPECT TO ATTEND THE CKS GROUP SPECIAL MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE
ENCLOSED ENVELOPE IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES. NO
POSTAGE NEED BE AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED STATES. DO
NOT SEND ANY STOCK CERTIFICATES WITH THE PROXY CARD. EXECUTED BUT UNMARKED
PROXIES WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE REORGANIZATION
AGREEMENT AND APPROVAL OF THE MERGER.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 20, 1998
[LOGO OF CKS GROUP]
[LOGO OF USWEB(TM)]
JOINT PROXY STATEMENT
-----------
USWEB CORPORATION PROSPECTUS
USWeb Corporation, a Delaware corporation ("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 "Merger"). The proposed combined company
is referred to herein as "USWeb/CKS" or the "Combined Company."
This Joint Proxy Statement/Prospectus is being furnished to holders of USWeb
Common Stock in connection with the solicitation of proxies by the Board of
Directors of USWeb (the "USWeb Board") for use at a Special Meeting of USWeb
stockholders (the "USWeb Special Meeting") to be held on December 16, 1998, at
the offices of USWeb at 2880 Lakeside Drive, Suite 300, Santa Clara, California
95054, commencing at 10:00 a.m., local time, and at any adjournments or
postponements thereof.
This Joint Proxy Statement/Prospectus also is being furnished to stockholders
of CKS Group, in connection with the solicitation of proxies by the Board of
Directors of CKS Group (the "CKS Group Board") for use at a Special Meeting of
CKS Group stockholders (the "CKS Group Special Meeting") to be held on December
16, 1998, at the offices of CKS Group at 10441 Bandley Drive, Cupertino,
California 95014, commencing at 10:00 a.m., local time, and at any adjournments
or postponements thereof. The CKS Group Special Meeting and the USWeb Special
Meeting are referred to collectively herein as the "Special Meetings."
This Joint Proxy Statement/Prospectus also constitutes the Prospectus of
USWeb with respect to the USWeb Common Stock to be issued in the Merger in
exchange for outstanding shares of CKS Group Common Stock.
-----------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS
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 JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY STATEMENT/
PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. THE STOCKHOLDERS OF
USWEB AND CKS GROUP ARE URGED TO READ AND CONSIDER CAREFULLY THIS JOINT PROXY
STATEMENT/PROSPECTUS (INCLUDING THE ANNEXES HERETO) IN ITS ENTIRETY,
INCLUDING THE MATTERS REFERRED TO BEGINNING ON PAGE 17 UNDER "RISK FACTORS."
-----------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE ARE
NOT PERMITTED TO ISSUE THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS JOINT PROXY
STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
-----------
This Joint Proxy Statement/Prospectus and the accompanying proxy cards are
first being mailed to stockholders of USWeb and CKS Group on or about November
23, 1998.
The date of this Joint Proxy Statement/Prospectus is November 20, 1998.
<PAGE>
Upon consummation of the Merger, each issued and outstanding share of CKS
Group Common Stock (other than shares owned by USWeb, Merger Sub, or any
subsidiary of USWeb) will be converted into the right to receive 1.5 shares of
USWeb Common Stock and each outstanding option to acquire CKS Group Common
Stock (each a "CKS Group Option") will be assumed by USWeb (each an "Assumed
Option") and will be converted to an option to purchase that number of shares
of the 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 Merger, 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 each such Assumed
Option was exercisable immediately prior to the Effective Time by the Exchange
Ratio, with the result rounded up to the nearest whole cent. Upon consummation
of the Merger, all shares of CKS Group Common Stock will cease to be
outstanding and will be canceled and retired and will cease to exist, and each
holder of a certificate formerly representing shares of CKS Group Common Stock
will thereafter cease to have any rights with respect thereto, except the
right to receive shares of USWeb Common Stock.
USWeb Common Stock is listed on The Nasdaq National Market ("Nasdaq") under
the symbol USWB. CKS Group is listed on Nasdaq under the symbol CKSG. It is a
condition to the obligations of USWeb and CKS Group to the consummation of the
Merger that the shares to be issued in the Merger be approved for quotation on
Nasdaq upon notice of issuance. Following consummation of the Merger, CKS
Group Common Stock will be removed from registration under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and will no longer be
listed for quotation on Nasdaq.
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 sale prices of the USWeb Common Stock and CKS Group Common Stock
on Nasdaq were $14.44 per share and $14.13 per share, respectively. On
November 16, 1998, the closing sale prices of the USWeb Common Stock and CKS
Group Common Stock were $18.00 per share and $25.94 per share, respectively.
Because the Exchange Ratio is fixed, changes in the market price of USWeb
Common Stock will affect the dollar value of the USWeb Common Stock to be
received by stockholders of CKS Group in the Merger. Stockholders of USWeb and
CKS Group are encouraged to obtain current market quotations for USWeb Common
Stock and CKS Group Common Stock prior to the Special Meetings. The trading
prices of USWeb and CKS Group Common Stock are subject to volatility. See
"Risk Factors--Risks Related to the Merger--Risks Associated with Fixed
Exchange Ratio" and "Risk Factors--Risks Related to the Combined Company,
USWeb and CKS Group--Volatility of Stock Price." Neither CKS Group nor USWeb
is entitled to terminate the Reorganization Agreement based on changes in the
per share trading price of USWeb Common Stock or CKS Group Common Stock. See
"Terms of the Merger--Material Adverse Effect."
----------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY STATEMENT/
PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF
SECURITIES MADE HEREBY, AND, IF GIVEN, ANY SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY USWEB, CKS GROUP OR ANY
OTHER PERSON. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF USWEB OR CKS GROUP
SINCE THE DATE HEREOF, OR THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
ii
<PAGE>
AVAILABLE INFORMATION
USWeb and CKS Group are subject to the information reporting requirements of
the Exchange Act, and in accordance therewith file reports, proxy statements
and other information with the Securities and Exchange Commission (the "SEC").
Such reports, proxy statements and other information may be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
SEC's regional offices located at Seven World Trade Center, Suite 1300, New
York, New York 10048, and at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60611-2511. Copies of such materials may
be obtained by mail from the Public Reference Section of the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The SEC also maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants (including CKS Group
and USWeb) that file electronically with the SEC at http://www.sec.gov. USWeb
Common Stock and CKS Group Common Stock are quoted on Nasdaq, and such
reports, proxy statements and other information can also be inspected at the
offices of Nasdaq Operations, 1735 K Street, N.W., Washington D.C. 20006.
After the consummation of the Merger, CKS Group will no longer file reports,
proxy statements or other information with the SEC or Nasdaq. Instead such
information will be provided, to the extent required, in filings made by the
Combined Company.
Under the rules and regulations of the SEC, the solicitation of proxies from
stockholders of CKS Group to approve and adopt the Reorganization Agreement
and to approve the Merger constitutes an offering of USWeb Common Stock to be
issued in connection with the Merger. Accordingly, USWeb has filed with the
SEC a Registration Statement on Form S-4 (herein, together with all amendments
and exhibits, referred to as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"). This Joint Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the SEC. For further information, reference is
hereby made to the Registration Statement. Copies of the Registration
Statement and the exhibits and schedules thereto may be inspected, without
charge, at the offices of the SEC or through the SEC's Electronic Data
Gathering and Retrieval System ("EDGAR") at http://www.sec.gov, or obtained at
prescribed rates from the Public Reference Section of the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Statements contained in this Joint Proxy Statement/Prospectus as to the
contents of any contract or other document referred to herein or therein are
not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement or such other document, each such statement being qualified in all
respects by such reference.
iii
<PAGE>
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.
All information contained in this Joint Proxy Statement/Prospectus relating
to CKS Group has been supplied by CKS Group and all information contained
herein relating to USWeb and Merger Sub has been supplied by USWeb.
THIS JOINT PROXY STATEMENT/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 USWEB AND CKS GROUP AND ARE AVAILABLE, WITHOUT CHARGE,
UPON ORAL OR WRITTEN REQUEST BY ANY PERSON TO WHOM THIS JOINT PROXY
STATEMENT/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 PRIOR TO THE SPECIAL MEETINGS, ANY SUCH REQUEST
SHOULD BE MADE BY DECEMBER 11, 1998 AND IN ANY EVENT AT LEAST 5 DAYS BEFORE
MAKING AN INVESTMENT DECISION (DECIDING HOW TO VOTE REGARDING THE MATTERS
DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS).
TRADEMARKS
This Joint Proxy Statement/Prospectus contains trademarks of USWeb and CKS
Group and may contain trademarks of others.
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.
CKS|Group is a registered trademark of CKS Group, Inc. CKS|Partners,
CKS|Pictures and CKS|Interactive are registered trademarks of CKS Partners,
Inc., a wholly owned subsidiary of CKS Group, and CKS|Onsite is a trademark of
CKS Partners, Inc.
iv
<PAGE>
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS MADE IN THIS JOINT PROXY STATEMENT/PROSPECTUS, INCLUDING
STATEMENTS AS TO THE BENEFITS EXPECTED TO RESULT FROM THE MERGER AND AS TO
FUTURE FINANCIAL PERFORMANCE AND THE ANALYSES PERFORMED BY THE FINANCIAL
ADVISORS TO USWEB AND CKS GROUP, ARE FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE
ACT. ANY STATEMENTS CONTAINED HEREIN (INCLUDING WITHOUT LIMITATION STATEMENTS
TO THE EFFECT THAT USWEB, CKS GROUP OR THEIR RESPECTIVE 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. ACTUAL
RESULTS COULD DIFFER MATERIALLY AND ADVERSELY FROM THOSE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH IN "RISK FACTORS" BEGINNING ON PAGE 17, WHICH STOCKHOLDERS SHOULD
CAREFULLY REVIEW.
Neither USWeb nor CKS Group makes any express or implied representation or
warranty as to the attainability of the projected or estimated financial
information referenced or set forth herein under "Approval of the Merger and
Related Transactions--Opinion of USWeb's Financial Advisor," "--Opinion of CKS
Group's Financial Advisor" or elsewhere herein or as to the accuracy or
completeness of the assumptions from which such projected or estimated
information is derived. Projections or estimations of USWeb and CKS Group'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," "USWeb Management's
Discussion and Analysis of Financial Conditions and Results of Operations" and
"CKS Group Management's Discussion and Analysis of Financial Condition and
Results of Operations."
v
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY.................................................................... 1
SELECTED HISTORICAL AND SELECTED PRO FORMA COMBINED FINANCIAL DATA......... 14
RISK FACTORS............................................................... 17
COMPARATIVE PER SHARE DATA................................................. 32
COMPARATIVE MARKET PRICE DATA.............................................. 33
USWEB SPECIAL MEETING...................................................... 34
Date, Time and Place of USWeb Special Meeting............................ 34
Purpose.................................................................. 34
Record Date and Outstanding Shares....................................... 34
Vote Required............................................................ 34
Proxies.................................................................. 35
Solicitation of Proxies; Expenses........................................ 35
Recommendations of USWeb Board of Directors.............................. 35
CKS GROUP SPECIAL MEETING.................................................. 36
Date, Time and Place of CKS Group Special Meeting........................ 36
Purpose.................................................................. 36
Record Date and Outstanding Shares....................................... 36
Vote Required............................................................ 36
Proxies.................................................................. 36
Solicitation of Proxies; Expenses........................................ 37
No Appraisal Rights...................................................... 37
Recommendations of CKS Group Board of Directors.......................... 37
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS............................ 38
Joint Reasons For the Merger............................................. 38
USWeb's Reasons For the Merger........................................... 39
CKS Group's Reasons For the Merger....................................... 40
Material Contacts and Board Deliberations................................ 42
Post-Signing Events...................................................... 47
Opinion of USWeb's Financial Advisor..................................... 47
Opinion of CKS Group's Financial Advisor................................. 51
Material Federal Income Tax Considerations............................... 55
Governmental and Regulatory Approvals.................................... 57
Accounting Treatment..................................................... 57
No Appraisal Rights...................................................... 57
TERMS OF THE MERGER........................................................ 58
Effective Time........................................................... 58
Manner and Basis of Converting Securities................................ 58
Stock Ownership Following the Merger..................................... 59
Conduct Following the Merger............................................. 59
Conduct of CKS Group's and USWeb's Businesses Prior to the Merger........ 60
Representations and Warranties........................................... 62
No Solicitation.......................................................... 63
Stock Options and Employee Benefits...................................... 66
Interests of Certain Persons............................................. 68
Holder Agreements........................................................ 69
Stock Option Agreements.................................................. 69
</TABLE>
vi
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Voting Agreements...................................................... 72
Material Adverse Effect................................................ 73
Conditions to the Merger............................................... 74
Termination of the Reorganization Agreement; Termination Fees.......... 75
COMPARISON OF CAPITAL STOCK.............................................. 78
Description of USWeb Capital Stock..................................... 78
Description of CKS Group Capital Stock................................. 78
Comparison of Rights of CKS Group and USWeb Stockholders............... 79
ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE OF ONLY USWEB STOCKHOLDERS.. 81
Proposal Two--Amendment to Amended and Restated Certificate of Incorpo-
ration--Increase to Authorized Common Stock........................... 81
USWEB CORPORATION........................................................ 83
USWeb Business......................................................... 83
USWeb Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 97
USWeb Management....................................................... 110
USWeb Certain Transactions............................................. 122
USWeb Principal Stockholders........................................... 124
CKS GROUP, INC........................................................... 126
CKS Group Business..................................................... 126
CKS Group Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 133
CKS Group Management................................................... 142
CKS Group Certain Transactions......................................... 148
CKS Group Principal Stockholders....................................... 149
LEGAL MATTERS............................................................ 150
EXPERTS.................................................................. 150
STOCKHOLDER PROPOSALS.................................................... 151
FINANCIAL STATEMENTS..................................................... F-1
ANNEX A--Agreement and Plan of Reorganization, dated as of September 1,
1998, among USWeb, USWeb Acquisition Corporation 134 and CKS
Group
ANNEX B--Opinion of Morgan Stanley & Co. Incorporated
ANNEX C--Opinion of Goldman Sachs & Co.
</TABLE>
vii
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus. This summary does not contain a complete
statement of all material elements of the proposals to be voted on and is
qualified in its entirety by the more detailed information appearing elsewhere
in this Joint Proxy Statement/Prospectus and in the information and documents
annexed hereto. Unless otherwise defined herein, capitalized terms used in this
summary have the respective meanings ascribed to them elsewhere in this Joint
Proxy Statement/Prospectus. Stockholders of USWeb and stockholders of CKS Group
are urged to read carefully this Joint Proxy Statement/Prospectus and the
Annexes and exhibits hereto in their entirety.
Information contained in this Joint Proxy Statement/Prospectus 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," "estimates,"
"potential" or "opportunity" or other variations thereof or comparable
terminology or the negative thereof. See "FORWARD-LOOKING STATEMENTS." The
matters set forth under the caption "RISK FACTORS" in this Joint Proxy
Statement/Prospectus 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.
INTRODUCTION
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation by the CKS Group Board of proxies from holders of CKS Group Common
Stock for use at the CKS Group Special Meeting and by the USWeb Board in
connection with the solicitation of proxies from holders of USWeb Common Stock
for use at the USWeb Special Meeting. At the CKS Group Special Meeting, the
holders of CKS Group Common Stock will be asked to approve and adopt the
Reorganization Agreement and to approve the Merger. At the USWeb Special
Meeting, the holders of USWeb Common Stock will be asked to approve the
issuance of USWeb Common Stock in the 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
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.
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 Joint Proxy Statement/Prospectus.
1
<PAGE>
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 Joint Proxy Statement/Prospectus.
USWeb Acquisition Corporation 134
Merger Sub is a corporation recently organized by USWeb for the purpose of
effecting the Merger. It has no material assets and has not engaged in any
activities except in connection with the 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 Merger; Exchange Ratio
At the Effective Time (as defined below in "--Certain Provisions of
Reorganization Agreement") of the 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
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 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.
2
<PAGE>
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 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. See "Comparative Market Price Data."
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 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 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. See "USWeb Special Meeting--Date, Time and Place of USWeb
Special Meeting" and "--Purpose."
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. See "USWeb Special Meeting--
Record Date and Outstanding Shares" and "--Vote Required."
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 USWeb Record Date, there were no
shares of USWeb Preferred Stock outstanding. See "USWeb Special Meeting--Vote
Required."
3
<PAGE>
As of the USWeb 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% of the votes entitled to be cast by holders of
USWeb securities entitled to vote together with USWeb Common Stock issued and
outstanding as of the USWeb Record Date. 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. See "Terms of the Merger--Voting Agreements" and "--
Conditions to the Merger."
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 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. Stockholders should read this Joint Proxy
Statement/Prospectus and all annexes attached hereto carefully prior to voting
or executing proxies. See "Risk Factors," "USWeb Special Meeting--
Recommendations of USWeb Board of Directors," "Approval of the Merger and
Related Transactions--Joint Reasons For the Merger," "--USWeb's Reasons For the
Merger," "--Material Contacts and Board Deliberations" and "Terms of the
Merger--Interests of Certain Persons."
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 Merger. See "CKS Group Special Meeting--Date, Time and Place of
CKS Group Special Meeting" and "--Purpose."
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 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. See "CKS Group Special Meeting--
Vote Required."
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
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19.0% of the votes entitled to be cast by holders of CKS Group Common Stock
issued and outstanding as of the CKS Group Record Date. 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 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. See
"Terms of the Merger--Voting Agreements" and "--Conditions to the Merger."
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 Merger is fair to, and in the
best interests of, CKS Group and its stockholders. After careful consideration,
the CKS Group Board unanimously recommends a vote in favor of approval and
adoption of the Reorganization Agreement and approval of the Merger. CKS Group
stockholders should read this Joint Proxy Statement/Prospectus and all annexes
attached hereto and exhibits attached thereto carefully prior to voting or
executing proxies. See "Risk Factors," "CKS Group Special Meeting--
Recommendations of CKS Group Board of Directors," "Approval of the Merger and
Related Transactions--Joint Reasons For the Merger," "--CKS Group's Reasons For
the Merger," "--Material Contacts and Board Deliberations" and "Terms of the
Merger--Interests of Certain Persons."
RISK FACTORS; DISADVANTAGES OF THE MERGER TO CKS GROUP AND USWEB STOCKHOLDERS
The completion of the 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 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 Merger and the combined businesses of USWeb and CKS Group.
REASONS FOR THE 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 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,"
"Approval of the Merger and Related Transactions--Joint Reasons For the
Merger," "--USWeb's Reasons For the Merger" and "--CKS Group's Reasons For the
Merger."
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. The full text of
the opinion of Morgan Stanley, which sets forth certain assumptions made and
matters considered, is attached as Annex B to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. Holders of USWeb
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Common Stock are urged to, and should, read such opinion in its entirety. See
"Approval of the Merger and Related Transactions--Opinion of USWeb's Financial
Advisor" and Annex B hereto.
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. The full text of the opinion of Goldman Sachs, which
sets forth assumptions made and matters considered, is attached as Annex C to
this Joint Proxy Statement/Prospectus, and is incorporated herein by reference.
Holders of CKS Group Common Stock are urged to, and should, read such opinion
in its entirety. See "Approval of the Merger and Related Transactions--Opinion
of CKS Group's Financial Advisor" and Annex C hereto.
INCOME TAX TREATMENT
The 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 Merger, each of USWeb and CKS Group will have received an opinion from its
respective tax counsel to the effect that the 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. See "Approval of the
Merger and Related Transactions--Certain Federal Income Tax Considerations."
REGULATORY MATTERS
Consummation of the 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 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's requests for early termination of review under the HSR Act were
granted. The Merger is also subject to satisfaction of the requirements of
federal securities laws and applicable securities and "blue sky" laws of the
various states. See "Approval of the Merger and Related Transactions--
Governmental and Regulatory Approvals."
ACCOUNTING TREATMENT
The 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 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 Merger under Accounting Principles Board Opinion No. 16 ("APB No. 16"), if
consummated in accordance with the Reorganization Agreement. See "Approval of
the Merger and Related Transactions--Accounting Treatment" and "Terms of the
Merger--Conditions to the Merger."
CERTAIN PROVISIONS OF REORGANIZATION AGREEMENT
Effective Time of the Merger
The 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
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USWeb and CKS Group and specified in the Certificate of Merger (the "Effective
Time"). Assuming all conditions to the Merger are met or waived prior thereto,
it is anticipated that the Closing Date of the Merger (the "Closing Date") and
Effective Time will be on December 16, 1998. See "Terms of the Merger--
Effective Time."
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 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. See "Terms of the Merger--Manner and Basis of Converting
Securities."
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. See "Terms
of the Merger--Manner and Basis of Converting Securities."
Stock Ownership Following the 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 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
immediately prior to the 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. See "Terms of the Merger--Stock Ownership Following the
Merger."
Board of Directors; Management Following the Merger
Pursuant to the Reorganization Agreement, the Board of Directors of USWeb/CKS
following the 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 Merger.
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In addition, following the Merger, the principal executive officers of the
Combined Company will include: 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 and Chief Executive Officer of USWeb, will be
Chief Executive Officer of USWeb/CKS; Joseph Firmage, a co-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, co-founder current Chief
Technical Officer of USWeb, 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. See "Terms of the
Merger--Conduct Following the Merger."
Conduct of Business Prior to the 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 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 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. See "Terms of the
Merger--Conduct of CKS Group's and USWeb's Businesses Prior to the Merger."
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. See "Terms of the Merger--No
Solicitation."
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 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
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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 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 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 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). See
"Terms of Merger--Termination of the Reorganization Agreement; Termination
Fees" and "Terms of the Merger--Material Adverse Effect."
Each of USWeb and CKS Group has agreed that if the Merger is not consummated
as a result of certain specified events, it will pay to the other party a
termination fee of $12 million. See "Terms of the Merger--Termination of the
Reorganization Agreement."
If the USWeb stockholders do not approve the issuance of USWeb Common Stock
in connection with the 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 Merger may entitle USWeb to terminate the
Reorganization Agreement and, in certain circumstances, CKS 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. See "Terms of the Merger--Termination of
Reorganization Agreement; Termination Fees" and "--Stock Option Agreements."
Conditions to the Merger
The obligations of USWeb and CKS Group to consummate the Merger are subject
to certain conditions, including: (i) certain approvals by the stockholders of
CKS Group and USWeb in connection with the Merger; (ii) declaration by the SEC
of the effectiveness of this Joint Proxy Statement/Prospectus; (iii) absence of
any law or order prohibiting consummation of the Merger; (iv) receipt by USWeb
and CKS Group of opinions of their respective tax counsel that the 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 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 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
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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 this 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 Merger are subject to the continued effectiveness of
certain non-competition agreements with Mr. Kvamme and Mr. Suiter. See "Terms
of the Merger--Conditions to the Merger" and "--Material Adverse Effect."
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 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. The full texts of the CKS Group Stock Option
Agreement and the USWeb Stock Option Agreement (as defined herein) are attached
as Exhibit A and B, respectively, to Annex A to this Joint Proxy
Statement/Prospectus and are incorporated herein by reference. Holders of USWeb
and CKS Group Common Stock are urged to, and
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should read such USWeb and CKS Group Stock Option Agreements in their entirety.
See "Terms of the Merger--Stock Option Agreements."
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 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 Merger and
the shares of USWeb Common Stock received by them in the Merger to help ensure
that the Merger will be treated as a pooling of interests for accounting and
financial reporting purposes. See "Terms of the Merger--Conditions to the
Merger" and "--Holder Agreements."
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 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 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. See "Terms of the Merger--Conditions to the
Merger" and "--Voting Agreements."
Interests of Certain Persons in the Merger
In considering the recommendation of the CKS Group Board with respect to the
Reorganization Agreement and the Merger, holders of CKS Group Common Stock
should be aware that certain directors and executive officers of CKS Group have
certain interests in the 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 this Joint Proxy Statement/Prospectus will hold a
senior management position with USWeb/CKS following the 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 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. See "Terms of the Merger--Interests of Certain Persons."
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.
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The foregoing interests of the directors and certain members of management of
CKS Group in the Merger may mean that such persons have personal interests in
the Merger that may not be identical to the interests of other CKS Group
stockholders. See "Terms of the Merger--Interests of Certain Persons."
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 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 Merger. See "Approval of the 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 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 Merger, or in the event the Merger is
not consummated. See "Comparative Market Price Data."
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 Merger, or in the event the
Merger is not consummated. See "Comparative Market Price Data." In the event
the 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
Joint Proxy Statement/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
12
<PAGE>
USWeb Common Stock will affect the market value of the USWeb Common Stock to be
received by stockholders of CKS Group in the 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 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 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 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 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. See "Terms of the Merger--Holder Agreements."
13
<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 or incorporated by reference in this Joint Proxy
Statement/Prospectus. The selected unaudited historical financial information
as of September 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 or incorporated by reference in
this Joint Proxy Statement/Prospectus, and which, in the opinion of USWeb's and
CKS Group's respective 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 Joint Proxy Statement/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 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
-------- -------- -------- ----------
(RESTATED)
<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) (3.23)
Weighted average shares.............. 1,334 7,312 4,845 34,521
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
-------- ------- -------------
(RESTATED)
<S> <C> <C> <C>
HISTORICAL CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term invest-
ments......................................... $ 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>
14
<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' equity. 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.
15
<PAGE>
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH 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
Leases 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 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
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.
16
<PAGE>
RISK FACTORS
The following factors should be considered carefully by holders of CKS Group
Common Stock in evaluating whether to approve and adopt the Reorganization
Agreement and to approve the Merger and by holders of USWeb Common Stock in
evaluating whether to approve the issuance of USWeb Common Stock pursuant to
the Reorganization Agreement and the other proposals in this Joint Proxy
Statement/Prospectus. These factors should be considered in conjunction with
the other information included or incorporated by reference in this Joint
Proxy Statement/Prospectus. 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 MERGER
Difficulties of Integrating USWeb and CKS Group. Following the Merger, to
maintain and increase profitability and to achieve the anticipated benefits of
the Merger, the Combined Company will need to effectively and efficiently
integrate the two companies' operations in a timely manner. In particular, the
Combined Company will need to integrate (i) management, technical, creative
and other personnel, (ii) technical and creative service offerings, (iii)
sales and marketing efforts and (iv) financial, accounting and other
operational controls, procedures, information systems and policies. The
integration process will be further complicated by the need to integrate
widely dispersed operations and distinct corporate cultures. There can be no
assurance that such integration will be accomplished in an efficient or
effective manner, if at all. The integration process will require the
dedication of management and other personnel which may distract their
attention from the conduct of day-to-day business activities, the formulation
of strategy and the rapidly evolving industry in which the Combined Company
will compete. In addition, the integration process will require the
development of new service offerings and the pursuit of other business
acquisition opportunities. These factors, in turn, could interrupt or cause a
loss of momentum in the pre-Merger activities of either or both companies
following the Merger, and could lead customers to defer, reduce and/or cancel
purchase decisions or to select other vendors. The business of the Combined
Company also may be disrupted by employee departures or reductions in employee
productivity due to uncertainty during the integration process. The
integration of USWeb and CKS Group will be made more difficult by the large
number of other relatively small businesses recently acquired by the two
companies, some of which the companies still are in the process of integrating
into their respective businesses. Moreover, while USWeb and CKS Group each
recently have acquired other businesses, neither USWeb nor CKS Group has
attempted an acquisition with the scope or magnitude of the Merger.
Difficulties encountered in the transition and integration process, disruption
caused by the process of combining the companies, the diversion of management
and employee attention from day-to-day and other activities, or an inability
to effectively and efficiently integrate the operations of the companies in a
timely manner could have a material adverse effect on the business, financial
condition, results of operations and prospects of the Combined Company and on
the anticipated benefits of the Merger. See "--Risks Related to the Combined
Company, USWeb and CKS Group--Integration of Other Acquired Businesses."
Risk of Failure to Achieve Synergies. USWeb and CKS Group have entered into
the Reorganization Agreement with the expectation that the Merger will result
in beneficial operating synergies. These expectations are based on certain
assumptions, including that clients desire integrated Internet professional
services and marketing communications from a single vendor, that the two
companies will be able to sell their respective expertise to one another's
current customers, that the increased scale of the business will make the
Combined Company a more desirable partner for Fortune 500 accounts, and that
certain cost savings can be realized. The inability to achieve the desired
synergies for any reason could have a material adverse effect on
17
<PAGE>
the business, financial condition, results of operations and prospects of the
Combined Company and on the benefits anticipated from the Merger. See
"Approval of the Merger and Related Transactions--Joint Reasons for the
Merger."
Risks Associated with Fixed Exchange Ratio. At the Effective Time, each
outstanding share of CKS Group Common Stock will be converted into the right
to receive 1.5 shares of USWeb Common Stock. Because the Exchange Ratio is
fixed, it will not increase or decrease with fluctuations in the market price
of either USWeb Common Stock or CKS Group Common Stock. The specific market
value of the shares of USWeb Common Stock to be received by CKS Group
stockholders in the Merger will, therefore, depend on the market price of the
USWeb Common Stock on and after the Effective Time. 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 Merger would correspondingly decrease or increase. USWeb
and CKS Group stockholders are advised to obtain current market quotations for
USWeb Common Stock and CKS Group Common Stock immediately prior to the Special
Meetings. See "--Risks Related to the Combined Company, USWeb and CKS--
Volatility of Stock Price," "Summary--Market and Price Data" and "Comparative
Market Price Data."
Dependence upon Key Personnel and Integration of Management. The success of
the Combined Company will depend upon the retention of senior executives and
other key employees who are critical to the continued advancement, development
and support of the companies' technologies as well as ongoing sales and
marketing efforts. As commonly occurs with mergers of technology companies,
during the pre-merger and integration phases competitors may intensify their
efforts to recruit key employees. Employee uncertainty regarding the effects
of the Merger could also cause increased turnover. USWeb and CKS Group
employees are generally not bound by employment agreements or noncompetition
covenants. The recent decline in stock market prices in general, and the stock
prices of both USWeb and CKS Group in particular, may have the effect of
decreasing the incentive value of stock options or other equity held by
employees and thereby increase the risk of employee turnover, as could recent
management changes. There can be no assurance that the Combined Company will
be able to retain key creative, technical, sales or marketing personnel prior
to or after the Merger. The loss of the services of any key personnel or of
any significant group of employees could have a material adverse effect on the
Combined Company's business, results of operations, financial condition and
prospects and on the benefits anticipated from the Merger. See "Terms of the
Merger--Post-Signing Events."
The Combined Company's success depends to a significant extent on the
ability of its executive officers and other members of senior management to
operate effectively, both independently and as a group. In addition, some
members of management, including Robert Shaw as Chief Executive Officer, have
recently joined or will have new roles in the Combined Company. No assurance
can be given that management will succeed in their roles or that the Combined
Company can efficiently allocate management responsibilities and cause its
officers and senior managers to operate effectively as a group.
Client Uncertainty; Conflicts. Uncertainty regarding the Merger and the
ability of USWeb and CKS Group to effectively integrate their operations
without significant reduction in quality of service could lead certain
customers to defer purchase decisions or select other vendors, as could recent
management changes. In addition, some clients desire that their vendors avoid
providing similar services to the competitors of such clients. The Merger and
resulting combination of client bases may generate client conflicts and
potentially cause the loss of current clients or an inability to perform
services for certain competing businesses. The loss of significant clients or
an inability to provide services to a significant group of potential clients
could have a material adverse effect on the Combined Company's business,
financial condition, results of operations and prospects. See "Terms of the
Merger--Post-Signing Events."
18
<PAGE>
Uncertain Market Acceptance of the Combined Company Brands. USWeb and CKS
Group have each invested significant efforts in building brand recognition and
customer acceptance of their respective brand names. The Combined Company
believes that transferring market acceptance for the USWeb and CKS Group
brands to the Combined Company brands will be an important aspect of its
efforts to retain and attract clients. The Combined Company expects that the
importance of recognition and acceptance of the Combined Company brands will
increase due to the increasing number of companies entering the market for
Internet marketing and communications services. Promoting and positioning the
Combined Company brands will depend largely on the success of the Combined
Company's marketing efforts and the ability of the Combined Company to provide
high quality, reliable and cost-effective services in the areas of Internet
marketing, communications, strategy consulting, analysis and design,
technology development, implementation and integration, audience development,
and maintenance. If clients do not perceive the Combined Company's services as
meeting their needs, or if the Combined Company fails to market those services
effectively, the Combined Company will be unsuccessful in maintaining and
strengthening its brands. In addition, although the Combined Company intends
to centralize its marketing efforts, it intends to provide a significant part
of its client services through individual consulting offices and client
dissatisfaction with the performance of a single office could diminish the
value of the Combined Company brands. Furthermore, in order to promote the
Combined Company brands in response to competitive pressures, the Combined
Company may find it necessary to increase its marketing expenditures or
otherwise increase its financial commitment to creating and maintaining brand
loyalty and awareness among existing and potential clients. If the Combined
Company fails to promote and maintain its brands, or incurs excessive expenses
in an attempt to promote and maintain its brands, the Combined Company's
business, financial condition, results of operations and prospects will be
materially adversely affected and the Combined Company will not achieve the
benefits anticipated from the Merger. See "USWeb Corporation--USWeb Business--
Services" and "--Marketing."
Substantial Expenses Resulting from the Merger. The negotiation and
implementation of the Merger will result in significant pre-tax expenses to
USWeb and CKS Group. Excluding costs associated with combining the operations
of the two companies and costs associated with the new brands of the Combined
Company (which costs are difficult to estimate), pre-tax expenses are
estimated at approximately $18.0 million, primarily consisting of fees for
investment bankers, attorneys, accountants, regulatory compliance, financial
printing and other integration-related charges. The aggregate amount of such
expenses may be greater and unanticipated contingencies could occur that would
substantially increase the costs of combining the operations of the two
companies. In any event, costs associated with the Merger are expected to
negatively affect results of operations in the quarter ending December 31,
1998 and possibly the quarter ending March 31, 1999. The substantial majority
of these costs will have been incurred whether or not the Merger is approved
or consummated.
Risks Associated with Noncompletion of the Merger. The obligations of USWeb
and CKS Group to complete the Merger are subject to the satisfaction or waiver
of certain conditions, including the accuracy of the other party's
representations and warranties, compliance by the other party with its
obligations under the Reorganization Agreement, the absence of a "Material
Adverse Effect" as defined in the Reorganization Agreement with respect to the
other party, and other conditions. See "Terms of the Merger--Conditions to the
Merger." There is no guarantee that these conditions will be satisfied or
waived or that the Merger will be completed. Noncompletion of the Merger may
have a material adverse effect on the stock trading price of either party or
both parties or on the business, financial condition, results of operations or
prospects of either party or both parties.
19
<PAGE>
RISKS RELATED TO THE COMBINED COMPANY, USWEB AND CKS GROUP
Fluctuations in Quarterly Operating Results and Margins; Seasonality of
Business. Each of USWeb's and CKS Group's operating results have fluctuated in
the past and the Combined Company's operating results are likely to fluctuate
in the future as a result of a variety of factors, many of which will be
outside of the Combined Company's control. Some of these factors include
timing of the completion, material reduction or cancellation of major projects
or the loss of a major client; the amount and timing of the receipt of new
business; timing of hiring or loss of personnel; the amount and timing of the
opening or closing of an office; the amount and the relative mix of high-
margin creative or strategy consulting projects as compared to lower margin
projects, capital expenditures and other costs relating to the expansion of
operations; the level of demand for Intranet, Extranet and Web site
development; the productivity of consultants; the ability to maintain adequate
staffing to service clients effectively; the cost of advertising and related
media; the amount and timing of expenditures by clients for professional
services; the introduction of new products or services by competitors; pricing
changes in the industry; the relative mix of lower cost full-time employees
versus higher cost independent contractors; technical difficulties with
respect to the use of the Internet; economic conditions specific to Internet
technology usage; government regulation and legal developments regarding the
use of the Internet; and general economic conditions. The Company Combined may
also experience seasonality in its business, resulting in diminished revenues
as a consequence of decreased demand for professional services during summer
and year-end vacation and holiday periods. Due to all of the foregoing
factors, the Combined Company's operating results in any given quarter may
fall below the expectations of securities analysts and investors. In such
event, the trading price of the Combined Company's Common Stock would likely
be materially and adversely affected and litigation may ensue. See "USWeb
Corporation--USWeb Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "CKS Group, Inc.--CKS Group 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,
20
<PAGE>
respond to competitive developments and continue to attract, retain and
motivate qualified employees. There can be no assurance that the Combined
Company will be successful in meeting these challenges and addressing such
risks and the failure to do so could have a material adverse effect on the
Combined Company's business, financial condition, results of operations and
prospects.
Dilution, Earnings and Growth. The Combined Company expects that future
acquisition agreements, if any, could provide for consideration to be paid in
cash, stock or a combination of cash and stock. The number of shares which may
be issued in future acquisitions will depend on the market price of the
Combined Company's Common Stock and a variety of other factors and, as a
result, future acquisitions may have a significant dilutive impact on USWeb's
and CKS Group's existing stockholders. The Merger will dilute the percentage
ownership held by the stockholders of each of USWeb and CKS Group in the
Combined Company when compared to their ownership in each of the respective
companies. Based upon the capitalization of USWeb and CKS Group as of October
20, 1998, an aggregate of approximately 23,306,912 shares of USWeb Common
Stock will be issued in connection with the Merger. As a result, the CKS Group
stockholders will hold approximately 33.9% of the outstanding shares of the
Combined Company's Common Stock after giving effect to such issuance. USWeb
has outstanding a large number of warrants and both USWeb and CKS Group have
outstanding a large number of stock options to purchase Common Stock of the
respective companies, many of which have exercise prices significantly below
the market price of each company's respective Common Stock as of the date of
this Joint Proxy Statement/Prospectus. To the extent such options or warrants
are exercised, there will be further dilution. The Combined Company expects to
continue to make acquisitions to fill strategic needs and expand
internationally. If such acquisitions are made using the Combined Company's
securities, such acquisitions could result in significant dilution to the
Combined Company's stockholders. USWeb currently has in effect a shelf
Registration Statement, which registers 16,666,667 shares of its Common Stock
(of which approximately 9,200,000 shares, subject to potential additional
"earn out" issuances, remain available for future issuance as of November 16,
1998), which may be used for future acquisitions. Pursuant to its prior
acquisition agreements, USWeb may be required to issue substantial additional
"earn out" stock to the sellers of the acquired companies as well as stock
options and stock bonuses to the employees of the acquired companies. These
obligations will continue following the Merger. Furthermore, the Combined
Company expects to continue to enter into selected acquisition agreements that
require it to issue stock, stock options and stock bonuses to the stockholders
and employees of acquired companies. Although such additional issuances have
not resulted in significant dilution to date, they could be material in the
future. For these reasons, the Combined Company's acquisition program may
result in further substantial ownership dilution.
While the Combined Company is expected to generate higher earnings per share
than those historically generated by USWeb, it is also expected to generate
lower earnings per share than those historically generated by CKS Group and,
therefore, CKS Group stockholders may experience dilution of earnings per
share as a result of the Merger. CKS Group's business has historically grown
at a lower rate than USWeb's historic growth rate. In addition, although USWeb
has had significant growth in net revenue and net income in absolute terms,
USWeb's growth rate has slowed in recent periods. The Combined Company is
expected to have an overall lower growth rate than USWeb's historic growth
rate both because of the Merger and the decrease in growth rate as the size
and maturity of the Combined Company increases.
Recruitment and Retention of Consulting Professionals. The Combined
Company's business of delivering Internet professional services is labor
intensive. Accordingly, the Combined Company's success depends in large part
on its ability to identify, hire, train and retain consulting professionals
who can provide the Internet strategy, technology, marketing, audience
development and creative skills required by clients. There is currently a
shortage of such personnel, and this shortage is likely to continue for the
foreseeable future. The Combined Company will encounter intense competition
for qualified personnel from other companies, and there can be no assurance
that it will be able to identify, hire, train and or retain other highly
qualified technical, marketing and managerial personnel in the future. The
inability to attract and retain the necessary technical, marketing and
managerial personnel would have a material adverse effect on the Combined
Company's business, financial condition, results of operations and prospects.
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Integration of Other Acquired Businesses. Over the 24-month period ended
September 30, 1998, USWeb completed acquisitions of over 30 businesses and CKS
Group completed acquisitions of six businesses. The difficulties of
integrating USWeb's and CKS Group's businesses may be exacerbated by the size
and number of prior business combinations. Further, the Combined Company's
future performance will depend on its ability to integrate these acquired
businesses, which, even if successful, may take a significant period of time,
will place a significant strain on the Combined Company's resources, and could
subject it to additional expenses during the integration process and to the
risks commonly encountered in acquisitions of businesses. Such risks include,
among other things, the difficulty of assimilating the operations and
personnel of the acquired businesses, the potential disruption of the Combined
Company's ongoing business, the inability of management to maximize the
financial and strategic position of the Combined Company through the
successful incorporation of acquired personnel and clients, the maintenance of
uniform standards, controls, procedures and policies and the impairment of
relationships with employees and clients as a result of any integration of new
management personnel. There can be no assurance that the services,
technologies, key personnel and businesses of previously acquired companies
will be effectively integrated into the Combined Company's business or service
offerings, or that such integration will not adversely affect the Combined
Company's business, financial condition, results of operations or prospects.
There can also be no assurance that any acquired services, technologies or
businesses will contribute at anticipated levels to the Combined Company's
sales or earnings, or that the sales and earnings from combined businesses
will not be adversely affected by the integration process. Because a majority
of the Combined Company's acquisitions have been completed since March 1997,
the Combined Company is currently facing all of these challenges and its
ability to meet them over the long term has not been established. The failure
to integrate such acquisitions successfully could have a material adverse
effect on the business, financial condition, results of operations and
prospects of the Combined Company. See "USWeb Corporation--USWeb Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Acquisition of Internet Professional Services Firms," "USWeb Corporation--
USWeb Business--Strategy," "--Consulting Office Network Development," "--
Employees," "CKS Group, Inc.--CKS Group Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "--CKS Group Business--
Strategy" 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
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terms, if at all. As the Combined Company issues stock to complete future
acquisitions, existing stockholders will experience further ownership
dilution. See "--Dilution, Earnings and Growth" "--Future Capital Needs;
Uncertainty of Additional Financing," "USWeb Corporation--USWeb Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"USWeb Corporation--USWeb Business--Consulting Office Network Development" and
Note 1 to Consolidated Financial Statements.
Risks Associated with Failure to Manage Growth. The growth of each of USWeb
and CKS Group has placed, and any further expansion of the Combined Company
would continue to place, a significant strain on the company's limited
personnel, management and other resources. In the future, the Combined Company
will be required to attract, train, motivate and manage new employees
successfully, to effectively integrate new employees into its operations and
to continue to improve its operational, financial, management and information
systems and controls. There can be no assurance that the Combined Company's
systems, procedures or controls will be adequate to support the Combined
Company's operations or that the Combined Company's management will be able to
achieve the rapid execution necessary to exploit the market for the Combined
Company's business model. The failure to effectively manage any further growth
could have a material adverse effect on the Combined Company's business,
financial condition, results of operations and prospects.
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 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. 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. See "CKS Group, Inc.--CKS Group
Business--Legal Proceedings."
Risks Associated with International Operations. Upon completion of the
Merger, the Combined Company will have ten offices outside of the United
States; however, it has limited experience in either managing an international
network of consulting offices or in marketing services to international
clients. The Combined Company expects to incur significant costs to do both.
If revenues from international consulting offices are not adequate to offset
the expenses of establishing and maintaining international operations and of
localizing the Combined Company's marketing programs, the Combined Company's
business, results of operations and financial condition could be materially
adversely affected. There can be no assurance that the Combined Company will
be able to establish and maintain international consulting offices or market
its services to international clients. In addition to the uncertainty as to
the Combined Company's ability to generate revenues from foreign operations
and expand its international presence, there are certain risks inherent in
doing business on an international level, such as unexpected changes in
regulatory requirements, export and import restrictions, tariffs and other
trade barriers; difficulties in staffing and managing foreign operations;
potentially adverse differences in business customs, practices and norms;
longer payment cycles; problems in collecting accounts receivable; political
instability; fluctuations in currency exchange rates; software piracy;
seasonal reductions in business activity; and potentially adverse tax
consequences, any of which could adversely affect the Combined Company's
international operations. There can be no assurance that one or more of the
factors described above will not have a material adverse effect on the
Combined Company's future international operations and, consequently, on the
Combined Company's business, financial
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condition, results of operations and prospects. See "USWeb Corporation--USWeb
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Competition; Low Barriers to Entry. The market for Internet professional
services is relatively new, intensely competitive, rapidly evolving and
subject to rapid technological change. The Combined Company expects
competition to persist, intensify and increase in the future. The Combined
Company's competitors can be divided into several groups: computer hardware
and service vendors such as International Business Machines Corporation
("IBM"), Digital Equipment Corporation ("DEC") and Hewlett-Packard Company
("Hewlett-Packard"); advertising and media agencies such as Ogilvy & Mather,
Young & Rubicam, and Foote, Cone & Belding; Internet integrators and Web
presence providers such as Agency.com, iXL Holding, Inc. ("iXL"), Organic
Online, Inc. ("Organic Online"), Proxicom, Inc. ("Proxicom"), Sapient (which
recently announced a business combination with Studio Archetype, a design and
branding firm); large information technology consulting service providers such
as Andersen Consulting, Cambridge Technology Partners and Electronic Data
Systems Corporation ("EDS"); telecommunications companies such as AT&T
Corporation ("AT&T") and MCI Communications Group ("MCI"); Internet and online
service providers such as America Online Incorporated ("America Online"),
NETCOM On-Line Communications Services Inc. ("ICG Netcom") and UUNet
Technologies, Inc. ("UUNet"); and software vendors such as Lotus Development
Corporation ("Lotus"), Microsoft Corporation ("Microsoft"), Netscape
Communications Corp. ("Netscape"), Novell, Inc. ("Novell") and Oracle
Corporation ("Oracle"). Many of the Combined Company's current and potential
competitors have longer operating histories, larger installed customer bases,
longer relationships with clients and significantly greater financial,
technical, marketing and public relations resources than the Combined Company
and could decide at any time to increase their resource commitments to the
Combined Company's target markets. In addition, the market for Intranet,
Extranet and Web site development is relatively new and subject to continuing
definition, and, as a result, may better position the Combined Company's
competitors to compete in this market as it matures. As a strategic response
to changes in the competitive environment, the Combined Company may from time
to time make certain pricing, service, technology or marketing decisions or
business or technology acquisitions that could have a material adverse effect
on the Combined Company's business, financial condition, results of operations
and prospects. Competition of the type described above could materially
adversely affect the Combined Company's business, results of operations,
financial condition and prospects.
In addition, the Combined Company's ability to maintain its existing client
relationships and generate new clients will depend to a significant degree on
the quality of its services and its reputation among its clients and potential
clients, compared with the quality of services provided by, and the
reputations of, the Combined Company's competitors. To the extent the Combined
Company loses clients to its competitors because of dissatisfaction with the
Combined Company's services or its reputation is adversely affected for any
other reason, the Combined Company's business, financial condition, results of
operations and prospects could be materially adversely affected.
There are relatively low barriers to entry into the Combined Company's
business. Because professional services firms such as USWeb and CKS Group rely
on the skill of their personnel and the quality of their client service, they
have no patented technology that would preclude or inhibit competitors from
entering their markets. The Combined Company is likely to face additional
competition from new entrants into the market in the future. There can be no
assurance that existing or future competitors will not develop or offer
services that provide significant performance, price, creative or other
advantages over those offered by the Combined Company, which could have a
material adverse effect on its business, financial condition, results of
operations and prospects. See "USWeb Corporation--USWeb Business--Competition"
and "CKS Group, Inc.--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
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from Intel and SAP), Sun Microsystems, Inc. ("Sun Microsystems"), Reuters Ltd.
("Reuters") and NBC Multimedia, Inc., and with the Interpublic Group of
Companies, a leading advertising consortium. The loss of any one of these
strategic relationships would deprive the Combined Company of the opportunity
to gain early access to leading-edge technology, cooperatively market products
with the vendor, cross-sell additional services and gain enhanced access to
vendor training and support. Maintenance of the Combined Company's strategic
relationships is based primarily on an ongoing mutual business opportunity and
a good overall working relationship. The legal contracts associated with these
relationships, certain of which are terminable at-will by the parties, would
not be sufficient to force the strategic relationship to continue effectively
if that were otherwise not in the strategic partner's best interests. In the
event that any strategic relationship is terminated, the Combined Company's
business, financial condition, results of operations and prospects may be
materially adversely affected. See "USWeb Corporation--USWeb Business--
Strategy" and "--Strategic Relationships."
Developing Internet Economy, Market for e-Commerce Solutions; Unproven
Acceptance of the Combined Company's Complete Media Solutions and Client
Outsourcing. A substantial portion of the Combined Company's revenues is
expected to be derived from services that depend upon the adoption of Internet
solutions by companies to improve their business positioning and processes,
and the continued development of the World Wide Web, the Internet and e-
Commerce. The Internet may not prove to be a viable commercial marketplace
because of inadequate development of the necessary infrastructure, lack of
development of complementary products, implementation of competing technology,
delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet activity, governmental regulation, or
other reasons. The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and volume of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. Moreover,
critical issues concerning the use of Internet and e-Commerce solutions
(including security, reliability, cost, ease of deployment and administration
and quality of service) remain unresolved and may affect the growth of the use
of such technologies to maintain, manage and operate a business, expand
product marketing, improve corporate communications and increase business
efficiencies. The adoption of Internet solutions for these purposes,
particularly by those individuals and enterprises that have historically
relied on traditional means, can be capital intensive and generally requires
the acceptance of a new way of conducting business and exchanging information.
If critical issues concerning the ability of Internet solutions to improve
business positioning and processes are not resolved or if the necessary
infrastructure is not developed, the Combined Company's business, financial
condition, results of operations and prospects will be materially adversely
affected.
Even if these issues are resolved, there can be no assurance that businesses
will elect to outsource the design, development and maintenance of their Web
sites to Internet professional services firms. Companies may decide to assign
the design, development and implementation of Internet solutions to their
internal information technology divisions, which have ready access to both key
client decision makers and the information required to prepare proposals for
such solutions. If independent providers of Internet professional services
prove to be unreliable, ineffective or too expensive, or if software companies
develop tools that are sufficiently user-friendly and cost-effective,
enterprises may choose to design, develop or maintain all or part of their
Intranets, Extranets or Web sites in-house. If the market for such services
does not continue to develop or develops more slowly than expected, or if the
Combined Company's services do not achieve market acceptance, its business,
results of operations, financial condition and prospects will be materially
adversely affected. See "USWeb Corporation--USWeb Business--Industry
Background" and "--Strategy."
Volatility of Stock Price. The trading prices of USWeb Common Stock and CKS
Group Common Stock have historically been subject to wide fluctuations, due to
a variety of factors including announcements regarding financial results,
acquisitions, and significant orders. Failure to achieve periodic revenue,
earnings and other operating and financial results as forecasted or
anticipated by brokerage firms or industry analysts could result in an
immediate and adverse effect on the market price of the Combined Company's
common
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stock. The Combined Company may not discover, or be able to confirm, revenue
or earnings shortfalls until the end of a quarter, which could result in a
greater immediate and adverse effect on the common stock of the Combined
Company. In addition, the stock market, which has recently been at or near
historic highs, has experienced extreme price and volume fluctuations that
have particularly affected the market prices of equity securities of many
technology companies and that often have been unrelated to the operating
performance of such companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against such a company. Such litigation could result
in substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Combined Company's business,
financial condition, results of operations and prospects. See "--Risk of
Litigation."
Conflicts of Interest. Conflicts of interest are inherent in certain
segments of the marketing communications industry, particularly in
advertising. CKS Group has in the past, and the Combined Company likely will
in the future, be unable to pursue potential advertising and other
opportunities because such opportunities will require the Combined Company to
provide services to direct competitors of existing CKS Group or USWeb clients.
In addition, CKS Group and USWeb risk alienating or straining relationships
with existing clients each time CKS Group or USWeb agree to provide services
to even indirect competitors of existing CKS Group or USWeb clients. Conflicts
of interest may jeopardize the stability of revenues generated from existing
clients and preclude access to business prospects, either of which
developments could have a material adverse effect on the Combined Company's
business, financial condition, results of operations and prospects.
Rapid Technological Change. The market for Internet professional services
and marketing communications services is characterized by rapid technological
change, changes in user and client requirements and preferences, frequent new
product and service introductions embodying new processes and technologies and
evolving industry standards and practices that could render the Combined
Company's existing service practices and methodologies obsolete. The Combined
Company's success will depend, in part, on its ability to improve its existing
services, develop new services and solutions that address the increasingly
sophisticated and varied needs of its current and prospective clients, and
respond to technological advances, emerging industry standards and practices,
and competitive service offerings. Failure to do so could result in the loss
of existing customers or the inability to attract and retain new customers,
either of which developments could have a material adverse effect on the
Combined Company's business, financial condition, results of operations and
prospects. There can be no assurance that the Combined Company will be
successful in responding quickly, cost-effectively and sufficiently to these
developments. If the Combined Company is unable, for technical, financial or
other reasons, to adapt in a timely manner in response to changing market
conditions or client requirements, its business, financial condition, results
of operations and prospects would be materially adversely affected. See "USWeb
Corporation--USWeb Business--Strategy" and "--Clients."
Risks of Fixed-Price Engagements. CKS Group generates a significant portion
of its revenues through project fees on a fixed fee for service basis and
USWeb intends to increase the percentage of its engagements that are billed on
a fixed-price basis, as well as the percentage of revenues derived from fixed-
price engagements, as distinguished from USWeb's current principal method of
billing on a time and materials basis. Both USWeb and CKS Group assume greater
financial risk from fixed-price type contracts than on either time-and-
material or cost-reimbursable contracts. The failure to estimate accurately
the resources and time required for an engagement, to manage client
expectations effectively regarding the scope of services to be delivered for
the estimated fees or to complete fixed-price engagements within budget, on
time and to clients' satisfaction would expose the Combined Company to risks
associated with cost overruns and, in certain cases, penalties, any of which
could have a material adverse effect on the Combined Company's business,
results of operations and financial condition. See "USWeb Corporation--USWeb
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "CKS Group, Inc.--CKS Group Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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Intellectual Property Risks. Each of USWeb and CKS Group regard their
copyrights, trademarks, trade secrets (including their methodologies,
practices and tools) and other intellectual property rights as important to
the success of the Combined Company. To protect their rights in these various
intellectual properties, both USWeb and CKS Group have relied on a combination
of trademark and copyright law, trade secret protection and confidentiality
agreements and other contractual arrangements with their employees,
Affiliates, clients, strategic partners, acquisition targets and others to
protect its proprietary rights. USWeb and CKS Group have also registered
several of their trademarks in the U.S. and internationally. Effective
trademark, copyright and trade secret protection may not be available in every
country in which USWeb or CKS Group offer or intend to offer their services.
There can be no assurance that the steps taken by USWeb or CKS Group to
protect their proprietary rights will be adequate or that third parties will
not infringe or misappropriate USWeb's or CKS Group's proprietary rights, or
that USWeb or CKS Group will be able to detect unauthorized use and take
appropriate steps to enforce their rights. In addition, although USWeb and CKS
Group believe that their proprietary rights do not infringe on the
intellectual property rights of others, there can be no assurance that other
parties will not assert infringement claims against the Combined Company. Such
claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources. In addition, patents recently
issued to third parties regarding Internet business processes indicate that
additional Internet business process patents may be issued in the future.
While USWeb and CKS Group do not believe they infringe any existing business
process patent, future patents may limit the Combined Company's ability to use
processes covered by such patents or expose the Combined Company to claims of
patent infringement or otherwise require the Combined Company to seek to
obtain related licenses. There can be no assurance that such licenses would be
available on acceptable terms or at all. The failure to obtain such licenses
on acceptable terms could have a material adverse effect on the Combined
Company's business, financial condition, results of operations and prospects.
Potential Liability to Clients. Many of USWeb's and CKS Group's consulting
engagements involve the development, implementation and maintenance of
applications that are critical to the operations of their clients' businesses.
The Combined Company's failure or inability to meet a client's expectations in
the performance of its services could injure the Combined Company's business
reputation or result in a claim for substantial damages against the Combined
Company, regardless of its responsibility for such failure. In addition, USWeb
and CKS Group possess technologies and content that may include confidential
or proprietary client information. Although USWeb and CKS Group have
implemented policies to prevent such client information from being disclosed
to unauthorized parties or used inappropriately, any such unauthorized
disclosure or use could result in a claim for substantial damages. USWeb and
CKS Group have attempted to limit contractually their damages arising from
negligent acts, errors, mistakes or omissions in rendering professional
services; however there can be no assurance that any contractual protections
will be enforceable in all instances or would otherwise protect the Combined
Company from liability for damages. Although USWeb and CKS Group maintain
general liability insurance coverage, including coverage for errors and
omissions, there can be no assurance that such coverage will continue to be
available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against the Combined Company that are uninsured, exceed available insurance
coverage or result in changes to USWeb's or CKS Group's insurance policies,
including premium increases or the imposition of a large deductible or co-
insurance requirements, could adversely affect the Combined Company's
business, results of operations and financial condition.
Year 2000 Compliance. Many computer systems and software and electronic
products are coded to accept only two-digit entries in the date code field.
These date code fields will need to accept four digit entries to 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.
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USWeb has conducted an internal review of most of its internal corporate
headquarters IT Systems, including finance, human resources, Intranet
applications and payroll systems. USWeb has contacted most of the vendors of
its internal corporate headquarters IT Systems to determine potential exposure
to Year 2000 issues and has obtained certificates developed in cooperation
with USWeb's independent auditors from such vendors assuring Year 2000
compliance. Although USWeb has determined that most of its principal internal
corporate headquarters IT Systems are Year 2000 compliant, certain of such
internal systems, including USWeb's Windows NT operating system and internal
networking systems are not Year 2000 compliant or have not been evaluated by
USWeb. USWeb has not yet made an assessment of the status of the IT Systems at
USWeb's subsidiaries or the Non-IT Systems for the corporate headquarters and
its subsidiaries.
CKS Group is conducting an internal review of its IT Systems and is in the
process of correcting areas of exposure to Year 2000 issues. CKS Group's core
financial and reporting systems have also been identified by internal review
as either being Year 2000 compliant or upgradable to be Year 2000 compliant,
although a number of ancillary applications may not yet be Year 2000
compliant. CKS Group has not yet made an assessment of the status of its Non-
IT Systems.
As part of the integration of USWeb and CKS in connection with the Merger,
USWeb and CKS intend to appoint a task force (the "Task Force") to oversee
Year 2000 and leap year issues of the Combined Company. The task force is
expected to review all IT Systems and Non-IT Systems that have not been
determined to be Year 2000 and leap year compliant and will attempt to
identify and implement solutions to ensure such compliance. USWeb and CKS
expect to evaluate its systems for Year 2000 and leap year compliance in
accordance with DISC PD2000-1 Year 2000 compliance standards established by
the British Standards Institute. To date, USWeb and CKS Group have spent an
immaterial amount to remediate their Year 2000 issues. USWeb and CKS presently
estimate that the total cost of addressing their Year 2000 and leap year
issues will be immaterial. These estimates were derived utilizing numerous
assumptions, including the assumption that they have already identified their
most significant Year 2000 and leap year issues and that the plans of its
third-party suppliers will be fulfilled in a timely manner without cost to the
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
28
<PAGE>
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 "USWeb Corporation--USWeb Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000--USWeb and the
Combined Company" and "CKS Group, Inc.--CKS Group Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000--CKS
Group."
Future Capital Needs; Uncertainty of Additional Financing. USWeb and CKS
Group currently anticipate that their available cash resources and credit
facilities will be sufficient to meet the Combined Company's presently
anticipated working capital and capital expenditure requirements for at least
the next 12 months. However, the Combined Company may need to raise additional
funds in order to support more rapid expansion, develop new or enhanced
services and products, respond to competitive pressures, acquire complementary
businesses or technologies or take advantage of unanticipated opportunities.
The Combined Company's future liquidity and capital requirements will depend
upon numerous factors, including the success of the Combined Company's
existing and new service offerings and competing technological and market
developments. The Combined Company may be required to raise additional funds
through public or private financing, strategic relationships or other
arrangements, particularly as its acquisition strategy matures. There can be
no assurance that such additional funding, if needed, will be available on
terms acceptable to the Combined Company, or at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants, which may limit
the Combined Company's operating flexibility with respect to certain business
matters. Strategic arrangements, if necessary to raise additional funds, may
require the Combined Company to relinquish its rights to certain of its
intellectual property or selected business opportunities. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of the stockholders of the Combined Company will be reduced, stockholders may
experience additional dilution in net book value per share, and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Combined Company's Common Stock. If adequate funds are not
available on acceptable terms, the Combined Company may be unable to develop
or enhance its services and products, take advantage of future opportunities
or respond to competitive pressures, any of which could have a material
adverse effect on the Combined Company's business, financial condition,
results of operations and prospects. See "USWeb Corporation--USWeb
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Government Regulation and Legal Uncertainties. USWeb and CKS Group are not
currently subject to direct government regulation, other than pursuant to
certain franchising regulations, the securities laws and the regulations
thereunder applicable to all publicly owned companies, and laws and
regulations applicable to businesses generally, and there are currently few
laws or regulations directly applicable to access to or commerce on the
Internet. However, due to the increasing popularity and use of the Internet,
it is likely that a number of laws and regulations may be adopted at the
local, state, national or international levels with respect to the Internet
covering issues such as user privacy, freedom of expression, pricing of
products and services, taxation, advertising, intellectual property rights,
information security or the convergence of traditional communications services
with Internet communications. For example, the Telecommunications Act of 1996
(the "Telecommunications Act") imposes criminal penalties on anyone who
distributes obscene or indecent communications over the Internet. Although the
anti-indecency provisions of the Telecommunications Act have been declared
unconstitutional by the federal courts, the increased attention focused upon
these liability issues as a result of the Telecommunications Act could
adversely affect the growth of the Internet and therefore demand for the
Combined Company's services. In addition, because of the growth in the
electronic commerce market, Congress has held hearings on whether to regulate
providers of services and transactions in the electronic commerce market,
which regulations could negatively affect client demand for Internet solutions
that facilitate electronic commerce. Moreover, the adoption of any such laws
or regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Combined Company's services or increase the cost
of doing business or in some other manner have a material adverse effect on
the Combined Company's business, financial condition, results of operations or
prospects. In addition, the applicability to the Internet of existing laws
governing issues such as property ownership,
29
<PAGE>
copyrights and other intellectual property issues, taxation, libel and
personal privacy is uncertain. The vast majority of such laws were adopted
prior to the advent of the Internet and related technologies and, as a result,
do not contemplate or address the unique issues of the Internet and related
technologies. Changes to such laws intended to address these issues, including
some recently proposed changes, could create uncertainty in the marketplace
which could reduce demand for the Combined Company's services or increase the
cost of doing business as a result of costs of litigation or increased service
delivery costs, or could in some other manner have a material adverse effect
on the Combined Company's business, financial condition, results of operations
and prospects.
Dependence on Key Accounts. CKS Group's five largest clients accounted for
39% and 37% of CKS Group's revenues for the fiscal years ended November 30,
1996 and November 30, 1997, respectively, with fluctuations in the amount of
revenue contribution from each such client from quarter to quarter. Audi of
America, Inc. and Computer Associates International, Inc., CKS Group's two
largest clients during the fiscal year ended November 30, 1997, accounted for
approximately 15% and 7% of CKS Group's revenues, respectively, during the
period. Since many of CKS Group's clients generally retain CKS Group on a
project by project basis, a client from whom CKS Group generates substantial
revenue in one period may not be a substantial source of revenue in a
subsequent period. For example, of the five largest clients (in terms of fees
paid to CKS Group) during the fiscal year ended November 30, 1997, only two
were in the top five for the fiscal year ended November 30, 1996. To the
extent that any of CKS Group's major clients does not remain a significant
source of revenues, there could be a direct and immediate material adverse
effect on the Combined Company's business, financial condition, results of
operations and prospects. For instance, one of CKS Group's major clients,
Barnett Bank, was acquired during the fourth quarter of 1997 and, as a result,
substantially reduced its level of spending with CKS Group. This reduction in
spending contributed to a significant decline in CKS Group's earnings during
that quarter. Historically, CKS Group's typical project has lasted only four
to six weeks, and once a project is completed there can be no assurance that a
client will engage CKS Group for further services. In addition, CKS Group's
clients may unilaterally reduce their use of CKS Group's services or terminate
existing projects without penalty. The termination of CKS Group's business
relationship with any of its significant clients or a material reduction in
the use of CKS Group's services by a significant client may have a material
adverse effect on the Combined Company's business, financial condition and
operating results.
Risks of Franchising. USWeb has entered into franchise agreements with
certain franchisees (each an "Affiliate"), which manage a number of its
consulting offices. While these agreements permit USWeb to terminate the
franchise relationship if an Affiliate continues to underperform relative to
other Affiliates, such an Affiliate must be given at least 12 months to
improve its performance. Consequently, a significantly underperforming
Affiliate could adversely affect USWeb's, and correspondingly the Combined
Company's, reputation. In addition, a terminated Affiliate may refuse to
comply with the terms of the franchise agreement relating to relinquishment of
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
30
<PAGE>
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. See "Comparison of Capital Stock."
Concentration of Stock Ownership. The present directors, executive officers
and their respective affiliates beneficially own a substantial portion,
although less than a majority, of the outstanding Common Stock of the Combined
Company. 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 "--Effect of Certain
Provisions; Antitakeover Effects of Certificate of Incorporation, Bylaws and
Delaware Law," "USWeb Corporation--Principal Stockholders" and "Comparison of
Capital Stock."
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.
31
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of USWeb
and CKS Group and combined per share data on an unaudited pro forma basis
after giving effect to the Merger on a pooling of interests basis of
accounting, assuming that 1.5 shares of USWeb Common Stock are issued in
exchange for one share of CKS Group Common Stock in the Merger. This data
should be read in conjunction with selected historical financial data, the
unaudited pro forma combined financial information, and the separate
historical financial statements of USWeb and CKS Group and notes thereto
(which are included elsewhere or incorporated by reference in this Joint Proxy
Statement/Prospectus). The pro forma combined financial data are not
necessarily indicative of the operating results that would have been achieved
had the Merger been consummated as of the beginning of the periods presented
and should not be construed as representative of future operations.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------- --------------
1996 1997 1997 1998
------- ------ ------ ------
<S> <C> <C> <C> <C>
HISTORICAL--USWEB
Net loss per share--basic and diluted......... $(10.35) $(7.98) $(8.10) $(3.23)
Book value per share(1)....................... $ (1.96) $ 1.97 $(0.96) $ 5.00
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
NOVEMBER 30, AUGUST 30,
----------------- -----------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
(PRO FORMA)
<S> <C> <C> <C> <C> <C>
HISTORICAL--CKS GROUP
Net income per share--basic...................... $0.44 $0.61 $0.50 $0.42 $0.48
Net income per share--diluted.................... $0.36 $0.58 $0.47 $0.39 $0.45
Book value per share(1).......................... $0.56 $4.28 $6.36 $5.85 $6.78
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------
1995 1996 1997 1997 1998
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PRO FORMA COMBINED NET INCOME (LOSS) PER
SHARE(2)
Per USWeb share--basic.................. $0.29 $(0.25) $(5.24) $(4.46) $(1.61)
diluted............................... $0.24 $(0.25) $(5.24) $(4.46) $(1.61)
Per equivalent CKS Group share(3)--ba-
sic.................................... $0.44 $(0.38) $(7.86) $(6.69) $(2.42)
diluted............................... $0.36 $(0.38) $(7.86) $(6.69) $(2.42)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
PRO FORMA COMBINED BOOK VALUE PER SHARE(4)
Per USWeb share................................................... $4.57
Per equivalent CKS Group share.................................... $6.86
</TABLE>
- ---------------------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
each period.
(2) The pro forma combined net income (loss) per share for the years ended
December 31, 1995, 1996 and 1997 includes CKS Group's net income per share
for the years ended November 30, 1995, 1996 and 1997, respectively. The
pro forma combined net income per share for the nine months ended
September 30, 1997 and 1998 includes CKS Group's net income per share for
the nine months ended August 31, 1997 and 1998, respectively.
(3) The CKS Group equivalent pro forma combined per share amounts are
calculated by multiplying the combined pro forma per share amounts by the
Exchange Ratio of 1.5 shares of USWeb Common Stock for each share of CKS
Group Common Stock.
(4) The pro forma combined book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of common
stock outstanding at the end of each period.
32
<PAGE>
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 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.
33
<PAGE>
USWEB SPECIAL MEETING
DATE, TIME AND PLACE OF USWEB SPECIAL MEETING
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.
PURPOSE
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 ("Proposal
One"); and (ii) an amendment to the USWeb Certificate to increase the
authorized shares of USWeb Common Stock by 100 million shares to 200 million
shares ("Proposal Two"); and (iii) such other matters as may properly come
before the USWeb Special Meeting. See "Terms of the Merger" and "Additional
Matters Being Submitted to a Vote of Only USWeb Stockholders--Proposal Two--
Amendment to Amended and Restated Certificate of Incorporation--Increase to
Authorized Common Stock."
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of USWeb Common Stock on the USWeb Record Date are
entitled to notice of and to vote at the USWeb Special Meeting. As of the
USWeb Record Date (October 20, 1998), there were approximately 853
stockholders of record of USWeb Common Stock holding an aggregate of
approximately 45,451,382 shares of USWeb Common Stock.
On or about November 23, 1998, a notice meeting the requirements of the DGCL
was mailed to stockholders of record as of the USWeb Record Date.
VOTE REQUIRED
Under the DGCL, the charter documents of USWeb and Nasdaq rules, approval of
(i) Proposal One requires the affirmative vote of a majority of the total
votes cast at the USWeb Special Meeting in person or by proxy regarding such
proposal and (ii) Proposal Two requires the affirmative vote of a majority of
the votes entitled to be cast by holders of outstanding shares of USWeb Common
Stock as of the USWeb Record Date. Each stockholder of record of USWeb Common
Stock on the USWeb Record Date is entitled to cast one vote per share,
exercisable in person or by properly executed proxy, on each matter properly
submitted for the vote of the stockholders of USWeb at the USWeb Special
Meeting.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of USWeb Common Stock entitled to vote at
the USWeb Special Meeting shall constitute a quorum for the transaction of
business at the USWeb Special Meeting. Broker non-votes and shares held by
persons abstaining will be counted in determining whether a quorum is present
at the USWeb Special Meeting. For purposes of Proposal One, abstentions are
counted as votes cast and accordingly have the same effect as votes against
the proposal, whereas broker non-votes are not counted as votes cast and
therefore once a quorum is present, will have no effect on the proposal. For
purposes of Proposal Two, the effect of an abstention or broker non-vote is
the same as a vote against such proposal.
As of the USWeb Record Date, the executive officers and directors and
certain significant stockholders of USWeb owned 25.4% of the outstanding
shares of USWeb Common Stock, representing 25.4% of the votes entitled to be
cast by holders of USWeb Common Stock issued and outstanding as of the USWeb
Record Date. Each executive officer and director of USWeb and certain
stockholders has entered into a Voting Agreement with CKS Group obligating
such officer, director, and stockholder, among other things, to vote his, her
or their shares of USWeb Common Stock in favor of approval of the issuance of
USWeb Common Stock pursuant to the Reorganization Agreement. In addition each
of these executive officers, directors and significant stockholders has
granted the CKS Group Board an irrevocable proxy entitling them to vote all
34
<PAGE>
USWeb securities held by such executive officers, directors and significant
stockholders in favor of approval and adoption of the Reorganization Agreement
and approval of the Merger. See "Terms of the Merger--Voting Agreements" and
"--Conditions to the Merger."
PROXIES
Each of the persons named in the proxy is an officer of USWeb. All shares of
USWeb Common Stock that are entitled to vote and are represented at the USWeb
Special Meeting either in person or by properly executed proxies received
prior to or at the USWeb Special Meeting and not duly and timely revoked will
be voted at the USWeb Special Meeting in accordance with the instructions
indicated on such proxies. If no such instructions are indicated, such proxies
will be voted for the approval of the issuance of shares of USWeb Common Stock
pursuant to the Reorganization Agreement and the amendment to the USWeb
Certificate.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of USWeb at or before the taking of the vote at the USWeb
Special Meeting, a written notice of revocation bearing a later date than the
proxy; (ii) duly executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of USWeb before the taking of the vote at the
USWeb Special Meeting; or (iii) attending the USWeb Special Meeting and voting
in person (although attendance at the USWeb Special Meeting will not in and of
itself constitute a revocation of a proxy). Any written notice of revocation
or subsequent proxy should be sent so as to be delivered to USWeb at 2880
Lakeside Drive, Suite 300, Santa Clara, California, 95054, Attention:
Secretary, or hand delivered to the Secretary of USWeb, in each case at or
before the taking of the vote at the USWeb Special Meeting.
SOLICITATION OF PROXIES; EXPENSES
The cost of the solicitation of USWeb stockholders will be borne by USWeb.
In addition, USWeb may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation materials to such beneficial owners. Proxies also may be
solicited by certain USWeb directors, officers and regular employees
personally or by telephone, telegram, letter or facsimile. Such persons will
not receive additional compensation, but may be reimbursed for reasonable out-
of-pocket expenses incurred in connection with such solicitation. In addition,
USWeb and CKS have jointly retained Corporate Investor Communications to
assist in the solicitation of proxies from brokers, nominees, institutions and
individuals at an estimated aggregate fee of $11,000 plus reimbursement of
reasonable expenses. Arrangements also will be made with custodians, nominees
and fiduciaries for forwarding of proxy solicitation materials to beneficial
owners of shares held of record by such custodians, nominees and fiduciaries,
and USWeb will reimburse such custodians, nominees and fiduciaries for
reasonable expenses incurred in connection therewith.
RECOMMENDATIONS OF USWEB BOARD OF DIRECTORS
The USWeb Board by unanimous vote of the directors at the special meeting of
the USWeb Board on September 1, 1998 approved the Reorganization Agreement and
the transactions contemplated thereby and determined that the 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
Proposals One and Two.
35
<PAGE>
CKS GROUP SPECIAL MEETING
DATE, TIME AND PLACE OF CKS GROUP SPECIAL MEETING
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.
PURPOSE
The purpose of the CKS Group Special Meeting is to consider and vote upon
(i) a proposal to approve and adopt the Reorganization Agreement and to
approve the Merger, and (ii) such other matters as may properly come before
the CKS Group Special Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of CKS Group Common Stock on the CKS Group Record
Date (October 20, 1998) are entitled to notice of, and to vote at, the CKS
Group Special Meeting. As of the CKS Group Record Date, there were
approximately 126 stockholders of record holding an aggregate of approximately
15,537,941 shares of CKS Group Common Stock.
On or about November 23, 1998, a notice meeting the requirements of the DGCL
was mailed to stockholders of record as of the CKS Group Record Date.
VOTE REQUIRED
Under the DGCL, the CKS Group Certificate and CKS Group Bylaws and Nasdaq
rules, the affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding shares 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 Merger. Because an absolute majority of the
outstanding shares of CKS Group Common Stock is required, the effect of an
abstention or a broker non-vote is the same as that of a vote against the
proposal. Each stockholder of record of CKS Group Common Stock on the CKS
Group Record Date will be entitled to cast one vote per share on each matter
to be acted upon at the CKS Group Special Meeting.
The representation, in person or by proxy, of at least a majority of the
outstanding shares of CKS Group Common Stock entitled to vote at the CKS Group
Special Meeting shall constitute a quorum for the transaction of business at
the CKS Group Special Meeting.
As of the CKS Group Record Date, the executive officers and directors and a
significant stockholder of CKS Group owned approximately 30.6% of the issued
and outstanding shares of CKS Group Common Stock. Each of these executive
officers, directors and significant stockholder have entered into a Voting
Agreement with USWeb obligating such officer, director and significant
stockholder, among other things, to vote his, her or its shares of CKS Group
Common Stock in favor of approval of the Reorganization Agreement and the
Merger. See "Terms of the Merger--Voting Agreements" and "--Conditions to the
Merger." In addition each of these executive officers, directors and
significant stockholder has granted the USWeb Board an irrevocable proxy
entitling them to vote all CKS Group Common Stock held by such executive
officers, directors and significant stockholder in favor of approval and
adoption of the Reorganization Agreement and approval of the Merger.
PROXIES
Each of the persons named in the proxy is an officer of CKS Group. All
shares of CKS Group Common Stock that are entitled to vote and are represented
at the CKS Group Special Meeting either in person or by
36
<PAGE>
properly executed proxies received prior to or at the CKS Group Special
Meeting and not duly and timely revoked will be voted at the CKS Group Special
Meeting in accordance with the instructions indicated on such proxies. If no
such instructions are indicated, such proxies will be voted to approve and
adopt the Reorganization Agreement and to approve the Merger.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of CKS Group at or before the taking of the vote at the CKS
Group Special Meeting, a written notice of revocation bearing a later date
than the proxy; (ii) duly executing a later-dated proxy relating to the same
shares and delivering it to the Secretary of CKS Group before the taking of
the vote at the CKS Group Special Meeting; or (iii) attending the CKS Group
Special Meeting and voting in person (although attendance at the CKS Group
Special Meeting will not in and of itself constitute a revocation of a proxy).
Any written notice of revocation or subsequent proxy should be sent so as to
be delivered to CKS Group at 10441 Bandley Drive, Cupertino, California 95014,
Attention: Secretary, or hand-delivered to the Secretary of CKS Group, in each
case at or before the taking of the vote at the CKS Group Special Meeting.
SOLICITATION OF PROXIES; EXPENSES
The cost of solicitation of CKS Group stockholders will be borne by CKS
Group. In addition, CKS Group may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation materials to such beneficial owners. In addition, proxies also
may be solicited by certain directors, officers and employees of CKS Group
personally or by mail, telephone or telegraph following the original
solicitation. Such persons will not receive additional compensation for such
solicitation. CKS Group and USWeb have jointly retained Corporate Investor
Communications, an independent proxy solicitation firm, to assist in
soliciting proxies at an estimated aggregate fee of $11,000 plus reimbursement
of reasonable expenses. Arrangements also will be made with custodians,
nominees and fiduciaries for forwarding of proxy solicitation materials to
beneficial owners of shares held of record by such custodians, nominees and
fiduciaries, and USWeb will reimburse such custodians, nominees and
fiduciaries for reasonable expenses incurred in connection therewith.
NO APPRAISAL RIGHTS
In connection with the Merger, CKS Group stockholders are not entitled to
appraisal rights under the DGCL. See "Approval of the Merger and Related
Transactions--No Appraisal Rights." Accordingly, CKS Group stockholders who do
not wish to receive shares of 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 Merger.
RECOMMENDATIONS OF CKS GROUP BOARD OF DIRECTORS
The CKS Group Board, by unanimous vote of the directors at the special
meeting of the CKS Group Board on September 1, 1998 approved the
Reorganization Agreement and the transactions contemplated thereby and
determined that the Merger is fair to, and in the best interests of, CKS Group
and its stockholders. After careful consideration, the CKS Group Board
unanimously recommends a vote in favor of approval and adoption of the
Reorganization Agreement and in favor of approval of the Merger.
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APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
The following discussion summarizes the proposed Merger and related
transactions. The following is not, however, a complete statement of all
provisions of the Reorganization Agreement and related agreements. Detailed
terms of and conditions to the Merger and certain related transactions are
contained in the Reorganization Agreement, a conformed copy of which is
attached to this Joint Proxy Statement/Prospectus as Annex A. Reference is
also made to the other Annexes hereto. Statements made in this Joint Proxy
Statement/Prospectus with respect to the terms of the Merger and such related
transactions are qualified in their respective entireties by reference to the
more detailed information set forth in the Reorganization Agreement and the
other Annexes hereto. Other than statements of historical facts, statements
made in this section including statements as to the benefits expected to
result from the Merger and as to the future financial performance and the
analyses performed by the financial advisors of USWeb and CKS Group are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in "Risk Factors" and
elsewhere in this Joint Proxy Statement/Prospectus.
JOINT REASONS FOR THE MERGER
The Boards of Directors of USWeb and CKS Group have each determined that,
compared to their respective companies on a stand-alone basis, USWeb/CKS would
have the potential to realize improved long-term operating and financial
results and a stronger competitive position. With the Internet emerging as a
platform for new modes of business communication and interaction and new forms
of business, each of USWeb and CKS Group were shaping their companies to
become integrated providers of the full spectrum of service offerings needed
by clients preparing to compete in this new business environment. USWeb is a
leading provider of Internet consulting services, with strong technology
offerings, while CKS Group is a leading provider of integrated marketing
communications services, with a strong creative practice. USWeb/CKS will be
able to offer clients a broad 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.
Each company's Board of Directors has identified a number of additional
potential mutual benefits of the Merger that they believe will contribute to
the success of USWeb/CKS. These potential benefits include principally the
following:
With its comprehensive service offerings, USWeb/CKS will have the
opportunity to increase its market penetration with existing Fortune 500
enterprise accounts, particularly those who need or desire to obtain
integrated Internet systems and communications services from a single
source;
The Combined Company should be able to use its leadership position and
brand recognition (with USWeb's widely recognized strength in Internet
technology and CKS Group's widely recognized strength in creative services)
to support USWeb/CKS's efforts to broaden the market, increase the demand
for its services and win new enterprise accounts;
The combination should accelerate the two companies' efforts to offer a
full spectrum of integrated technology and communications services, giving
USWeb/CKS a strong position for selling its services to clients who the
companies believe are increasingly making purchasing decisions regarding
Internet systems and communications services with input and influence from
both information systems executives and marketing executives;
The two companies' complementary service offerings and limited overlap of
existing customers provide the opportunity to cross-sell services in the
areas of their respective strengths, thereby creating the potential for
increased revenue per customer;
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The diversification of service offerings and customer base, and the
increased scale of the business should give USWeb/CKS improved stability,
with reduced risk of volatility of financial performance;
The creation of a larger organization, a higher market profile and
greater financial strength, with correspondingly increased marketing
capability, is expected to increase the Combined Company's sales
opportunities both in the United States and internationally; and
The combined experience, financial resources, size and breadth of service
offerings of USWeb/CKS are expected to allow USWeb/CKS to respond more
quickly and effectively to increased competition and market demands in an
industry experiencing rapid innovation and change.
The strength of the combined management team and the immediate addition
of talented senior executives upon consummation of the Merger will help
USWeb/CKS as it seeks to establish and maintain a leadership position in
integrated Internet systems and marketing communications services.
The potential for cost savings on a percentage-of-revenue basis, through
integration of facilities and other economies of scale, could yield
improved operating results for USWeb/CKS.
USWeb and CKS Group have each identified additional separate reasons for the
Merger, which are discussed below. However, each Board of Directors recognizes
that the potential benefits of the Merger may not be realized. See "Risk
Factors."
USWEB'S REASONS FOR THE MERGER
The USWeb Board considered the proposed Merger at board meetings on August
24, 27 and 30, and by unanimous vote of the directors at the special meeting
of August 30, 1998 approved the Reorganization Agreement and the transactions
contemplated thereby (including the issuance of USWeb Common Stock in the
Merger and the proposed amendments to the USWeb Certificate) and determined
that the Merger and other transactions contemplated by the Reorganization
Agreement are fair to, and in the best interests of, USWeb and its
stockholders.
In addition to the anticipated joint benefits described above, the USWeb
Board believes that the following are additional reasons the Merger will be
beneficial to USWeb and for stockholders of USWeb to vote FOR the issuance of
the shares of USWeb Common Stock pursuant to the Reorganization Agreement and
the proposed amendment to the USWeb Certificate:
Given the complementary nature of the service offerings of USWeb and CKS
Group, the Merger will enhance the opportunity for the realization of
USWeb's strategic objective of being the leading provider of services to
clients seeking to participate in and profit from the new business
environment created by the emergence of the Internet; and
The Merger is expected to provide an opportunity for expanded sales of
USWeb's technology services to current CKS Group customers. In many
instances, the same groups of executives are the decision makers regarding
purchases of USWeb and CKS Group services; and
As a result of the Merger, USWeb stockholders should benefit from owning
part of a larger and financially stronger enterprise.
The USWeb Board considered a number of factors relating to the Merger,
including, but not limited to, the following: (i) the strategic benefits of
the Merger; (ii) historical information concerning USWeb's and CKS Group's
respective businesses, financial performance and condition, operations,
technology, management and competitive position, including public reports
concerning results of operations during the most recent fiscal year and fiscal
quarter for each company filed with the SEC; (iii) USWeb management's view of
the financial condition, results of operations and businesses of USWeb and CKS
Group before and after giving effect to
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the Merger and the USWeb Board's assessment of their effect on short- and
long-term stockholder value; (iv) current financial market conditions and
historical market prices, volatility and trading information with respect to
USWeb Common Stock and CKS Group Common Stock; (v) the consideration to be
paid to CKS Group stockholders in the Merger relative to comparable merger
transactions; (vi) the belief that the terms of the Reorganization Agreement
and the other agreements contemplated thereby, including the parties'
representations, warranties and covenants, and the conditions to their
respective obligations, are reasonable; (vii) the potential for other third
parties to enter into strategic relationships with or to acquire CKS Group;
(viii) USWeb management's view of the prospects of USWeb as a stand-alone
entity; (ix) the impact of the Merger on USWeb's customers and employees; and
(x) advice from management, legal, financial and accounting advisors as to the
results of the due diligence investigation of CKS Group concerning the
business, technology, products, operations, properties, assets, financial
condition, operating results and prospects of CKS Group as well as trends in
CKS Group's business and financial results. The USWeb Board also considered
the terms of the Reorganization Agreement regarding USWeb's and CKS Group's
respective rights to consider and negotiate other acquisition proposals in
certain circumstances, the possible effects of the provisions regarding
termination fees, cross-options and voting agreements and CKS Group's
representation on the Board of Directors of USWeb/CKS. In addition, the USWeb
Board noted that the Merger is expected to be accounted for as a pooling of
interests and that no goodwill is expected to be recognized by USWeb/CKS as a
result thereof. The USWeb Board also considered financial presentations by
Morgan Stanley, including the opinion of Morgan Stanley that as of August 30,
1998, and subject to the assumptions set forth therein, the Exchange Ratio
pursuant to the Reorganization Agreement was fair from a financial point of
view to USWeb.
The USWeb Board also identified and considered a variety of potentially
negative factors in its deliberations concerning the Merger, including, but
not limited to: (i) the risk that the potential benefits sought in the Merger
might not be fully realized; (ii) the risk that the issuance of USWeb Common
Stock in the Merger could be dilutive to USWeb stockholders if anticipated
synergies are not realized; (iii) the possibility that the Merger might not be
consummated and the effect of public announcement of the Merger on (a) USWeb's
sales and operating results, (b) USWeb's ability to attract and retain key
management, marketing and technical personnel and (c) the progress of certain
initiatives to increase USWeb's creative service offerings; (iv) the
significant risks related to integrating the two companies, including risks
related to duplicate facilities and personnel; (v) the substantial charges to
be incurred in connection with the Merger, including the costs of integrating
the businesses and transaction expenses arising from the Merger; (vi) the risk
that despite the efforts of USWeb/CKS, key technical, sales, support and
management personnel might not remain employed by USWeb/CKS; and (vii) the
risks identified under "Risk Factors."
The USWeb Board believed that certain of these risks were unlikely to occur
or unlikely to have a material impact on USWeb/CKS, while others could be
avoided or mitigated by USWeb or by USWeb/CKS, and that, overall, the risks
associated with the Merger were outweighed by the potential benefits of the
Merger.
The foregoing discussion of the information and factors considered by the
USWeb Board is not intended to be exhaustive but is believed to include all
material factors considered by the USWeb Board. In view of the variety of
factors considered in connection with its evaluation of the Merger, the USWeb
Board did not find it practicable to, and did not, quantify or otherwise
assign relative weight to the specific factors considered in reaching its
determination. In addition, individual members of the USWeb Board may have
given different weight to different factors.
CKS GROUP'S REASONS FOR THE MERGER
The CKS Group Board considered the proposed Merger at special board meetings
held on August 26, 30 and 31 and, at the special meeting held on September 1,
1998, unanimously approved the Reorganization Agreement and the Merger. The
CKS Group Board determined that the Merger, the Reorganization
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Agreement and the transactions contemplated thereby are fair to, and in the
best interests of, CKS Group and its stockholders. In arriving at its decision
to approve the Reorganization Agreement and the Merger, the CKS Group Board
considered a number of factors, including the reasons set forth under "--Joint
Reasons for the Merger." In particular, the CKS Group Board considered: (i)
the strategic benefits expected from the Merger, and the anticipated effect of
the Merger on long-term stockholder value, in light of the business, financial
condition, results of operations and prospects of CKS Group and USWeb, the
current economic and industry environment, the risks and uncertainties of
proceeding as a separate stand-alone company, and the relative advantages and
disadvantages of a number of other strategic alternatives, taking into account
the risks and uncertainties associated with such alternatives; (ii) the fact
that the Exchange Ratio represented a premium of 53% to CKS Group stockholders
based on the closing prices of USWeb Common Stock and CKS Group Common Stock
on September 1, 1998 and a premium based on the average closing prices of
USWeb and CKS Group Common Stock in recent historical periods; (iii) the
immediate access to specific technical skills and depth of technical talent
that USWeb possesses; (iv) the opportunity for CKS Group stockholders to
participate in a combined company with the potential for a higher blended
growth rate than CKS Group as a stand-alone company; (v) the complementary
characteristics of the respective business and management philosophies and
corporate cultures of CKS Group and USWeb; (vi) the potential benefits of the
Merger to CKS Group's customers and employees; (vii) the potential for reduced
stockholder risk after the Merger as a result of the diversification of
service offerings and revenue bases; (viii) USWeb's experience in integration
of other entities which is necessary to support a growth model driven by
acquisitions; (ix) the fairness to CKS Group of the terms and conditions of
the Reorganization Agreement, which were the product of extensive arm's length
negotiations; (x) the opinion of Goldman Sachs that the Exchange Ratio was
fair to the holders of CKS Group Common Stock, as of the date of such opinion,
from a financial point of view; (xi) the fact that the Merger is expected to
qualify as a tax-free reorganization (generally enabling CKS Group
stockholders to exchange their stock in CKS Group for stock of the Combined
Company without having current taxes due); and (xii) the expectation that the
Merger will be accounted for as a pooling of interests (and is conditioned on
the receipt of letters from the two companies' independent public accountants
stating that the independent accountants concur with the conclusions of the
two companies' managements that the Merger will qualify for such treatment)
and that no goodwill charges will be recognized by USWeb/CKS as a result of
the Merger.
In addition to the anticipated benefits described above, the CKS Group Board
believes that the following are additional reasons the Merger will be
beneficial to CKS Group and for stockholders of CKS Group to vote FOR the
approval of the Merger and the approval and adoption of the Reorganization
Agreement.
Given the complementary nature of the service offering of USWeb and CKS
Group, the Merger is expected to enhance the opportunity to realize CKS
Group's strategic objective of diversifying and building upon its core
strengths in marketing communication services;
The Merger is expected to provide an opportunity for expanded sales of
CKS Group's marketing communications services to current USWeb customers.
In many instances, the decision makers for purchasing USWeb and CKS Group
products are the same groups of executives at the companies' clients; and
As a result of the Merger, CKS Group stockholders will own part of a
larger enterprise with a broader range of products and services and a
larger and more diverse client base.
In assessing the Merger, the CKS Group Board considered a number of sources
of information, including (i) historical information concerning the respective
businesses, financial performance, condition, operations and results of
operations, technology, management style, competitive position, trends and
prospects of USWeb and CKS Group and the CKS Group Board's assessment of that
information; (ii) SEC filings by USWeb; (iii) current and historical market
prices, volatility and trading data for the two companies; (iv) information
and advice based on the results of due diligence investigations by members of
the CKS Group Board and management and CKS Group's legal, financial and
accounting advisors concerning the business, technology, products, operations,
properties, assets, financial condition, operating results and prospects of
USWeb, trends
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in USWeb's business and financial results and the capabilities of USWeb's
management team; (v) reports from Goldman Sachs on companies comparable to
USWeb and other financial analyses performed by Goldman Sachs; (vi) reports
from management relating to the prospects for successful integration of the
two companies; and (vii) reports by Gray Cary Ware & Freidenrich LLP
("GCW&F"), CKS Group's special legal counsel, on the terms of the
Reorganization Agreement and related agreements, and an evaluation of those
terms in comparison to the terms of other recent mergers and acquisitions.
The CKS Group Board also identified and considered a number of uncertainties
and risks in its deliberations concerning the Merger, including, but not
limited to: (i) the risk that the potential benefits sought in the Merger
might not be fully realized, if at all; (ii) the potential effects of the
public announcement of the Merger on CKS Group's stock price, sales, customer
relations and operating results and CKS Group's ability to attract and retain
key management, creative, account and technical personnel; (iii) the risk that
despite the efforts of USWeb/CKS, key management, creative, account and
technical personnel might not choose to remain employed by USWeb/CKS; (iv) the
risk of market confusion and potential delay or reduction in or cancellation
of project engagements; (v) the risk of loss of current product brand
awareness before the Combined Company's new brand name gains market
acceptance; (vi) the risk that USWeb/CKS would be unable to sustain
profitability after the Merger; (vii) the risk that the Combined Company would
experience slow growth relative to USWeb's prior growth rate and (viii) the
other risks associated with the businesses of CKS Group, USWeb and the
Combined Company and the Merger described under "Risk Factors" herein.
The CKS Group Board believed that certain of these risks were unlikely to
occur or unlikely to have a material impact on USWeb/CKS, while others could
be avoided or mitigated by CKS Group or by USWeb/CKS, and that, overall, the
risks associated with the Merger were outweighed by the potential benefits of
the Merger.
The foregoing discussion of the information and factors considered by the
CKS Group Board is not intended to be exhaustive but is believed to include
all material factors considered by the CKS Group Board. In view of the variety
of factors considered in connection with its evaluation of the Merger, the CKS
Group Board did not find it practicable to and did not quantify or otherwise
assign relative weight to the specific factors considered in reaching its
determination. In addition, individual members of the CKS Group Board may have
given different weight to different factors.
MATERIAL CONTACTS AND BOARD DELIBERATIONS
It has been a regular practice of senior management of CKS Group to meet
periodically to review CKS Group's corporate strategies, technology vision,
internal product development and acquisition plans, as well as to assess the
impact on CKS Group of trends in the marketplace. This review has included an
assessment of various alternatives to strengthen CKS Group's position relative
to both its traditional peers and new entrants into the market for integrated
marketing communications services. On June 16, 1998 a transaction review
committee consisting of Messrs. Lamond, Balkanski and Slade was formed to
consider such alternatives.
Beginning in April 1998, CKS Group consulted with Goldman Sachs regarding
potential business combinations. Goldman Sachs was consulted on the basis of
its reputation, experience and expertise, and its historical relationship with
CKS Group, having acted as the managing underwriter of CKS Group's initial
public offering in December 1995 and its follow-on offering of shares in June
1996. Over the following three months, CKS Group directly or through Goldman
Sachs approached ten companies regarding the possibility of a strategic
business relationship with CKS Group, including possible business
combinations, investments, joint ventures and other strategic business
relationships. Of these ten, six companies expressed preliminary interest, but
further analysis and discussions led CKS Group to conclude that a transaction
was unlikely to result. In certain instances, CKS Group concluded that the
parties were unlikely to reach mutually acceptable transaction terms,
including financial terms and transaction structure. In other instances,
further analysis and
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discussions led CKS to conclude that a transaction would be less attractive to
CKS Group and its stockholders than other alternatives, including continued
stand-alone operation and other potential strategic transactions. In still
other instances, CKS Group concluded that a transaction was unlikely to be
completed within an acceptable time frame. Of the remaining four companies
approached by Goldman Sachs, two companies expressed initial interest but did
not pursue the matter, and two companies expressed no interest. In no instance
did any of the discussions progress to the submission of a written offer or
proposal or the exchange or negotiation of written term sheets or draft
transaction agreements. Goldman Sachs was consulted on the basis of its
reputation, experience and expertise, and its historical relationship with CKS
Group, having acted as the managing underwriter of CKS Group's initial public
offering in December 1995 and its follow-on offering of shares in June 1996.
Preliminary discussions with several companies were pursued during the period
from May 1998 through July 1998, but none of these developed into meaningful
proposals. On June 16, 1998 a transaction review committee consisting of
certain members of the CKS Group Board was formed to review strategic
opportunities and alternatives, including possible business combinations, for
possible further consideration by the full CKS Board.
USWeb and CKS Group have been generally familiar with each others' services
since USWeb's inception because both companies are leaders in their related
fields and both sell services to a number of the same clients. In addition, a
representative of Capital Research and Management Company (a beneficial holder
of 5.2% of CKS Common Stock as of February 24, 1998, and a holder of less than
5% of USWeb Common Stock) suggested to executives of both companies that, as a
result of their complementary strengths, the companies might mutually benefit
from working together in some capacity. Thereafter, on July 28, 1998,
Mr. Kvamme, Chief Executive Officer of CKS Group, telephoned Mr. Corey,
President of USWeb, to discuss USWeb's and CKS Group's respective business
strategies. Following the meeting, Mr. Corey consulted with members of USWeb
management and Mr. Kvamme consulted with certain members of CKS Group's
management and with representatives of Goldman Sachs.
On July 31, 1998, Mr. Firmage, then Chief Executive Officer of USWeb,
accompanied by Mr. Corey, met with Mr. Kvamme, who was accompanied by Mr.
Clarkson, Executive Vice President, Operations, CKS Technology Group, CKS
International and Business Development and Secretary for CKS Group, and
Mr. Thomas Suiter, Executive Vice President and Chief Creative Officer of CKS
Group. At this meeting, those present discussed on a preliminary basis a
possible business combination between USWeb and CKS Group. Following the
meeting Mr. Kvamme consulted with a member of the transaction committee of the
CKS Group Board.
On August 3, 1998, USWeb and CKS Group executed a confidentiality agreement.
On the evening of August 3, 1998, and the morning of August 4, 1998, Mr. Corey
and Mr. Firmage, accompanied by Ms. Aver, Chief Financial Officer of USWeb,
and Mr. Laube, Chief Technical Officer of USWeb, met with Mr. Kvamme and Mr.
Clarkson, who were accompanied by Mr. Carlton Baab, Chief Financial Officer of
CKS Group, Mr. Suiter, Chief Creative Officer of CKS Group, and Ian Small,
Chief Technical Officer of CKS Group. At these meetings, the management of the
two companies discussed the strategic and cultural fit of the organizations.
After the meetings, Mr. Firmage and Mr. Kvamme discussed in broad terms the
financial structure of a possible business combination transaction. They spoke
again on August 5, 1998, to confirm that the ranges of financial terms each
would consider for a business combination were such as to merit pursuing
further discussions.
On August 6, 1998, Ms. Aver spoke with Mr. Baab regarding the procedures
they might use for review of each other's financial and other business
information in connection with considering a possible business combination.
On August 7, 1998, USWeb retained Morgan Stanley as its financial advisor in
connection with a possible business combination with CKS Group. On the
afternoon of August 7, 1998, Ms. Aver and Mr. Firmage met with representatives
of Morgan Stanley to discuss the possible business combination. On the evening
of August 7, 1998, Mr. Firmage and Mr. Kvamme met to continue outlining the
possible terms of such a
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transaction, and to consider the percentage of the Combined Company that would
be allocated to each company's existing equity holders.
On August 10, 1998, Messrs. Baab and Small met with representatives of
Goldman Sachs to review their preliminary financial and transaction analysis.
On August 11, 1998, Ms. Aver, Messrs. Baab and Small, other executives of
CKS Group and USWeb, and representatives of Goldman Sachs and Morgan Stanley
met to begin reviewing each company's financial information and to conduct due
diligence.
On August 16 and 17, 1998, Mr. Kvamme spoke with Mr. Firmage to further
discuss the merits of proceeding with the proposed transaction.
On August 19, 1998, Messrs. Kvamme, Baab, Suiter, and Clarkson, along with
other members of the management of CKS Group and representatives of Goldman
Sachs, met with Messrs. Firmage and Corey, along with Ms. Aver, other members
of USWeb management, and representatives of Morgan Stanley. During this
meeting, Mr. Firmage and Mr. Kvamme continued to discuss the possible terms of
a transaction including the percentage of the Combined Company that would be
allocated to each companies' existing equity holders.
On August 22 and 23, 1998, the management teams of the two companies,
accompanied by financial representatives and legal counsel, met to conduct
financial and legal due diligence. At these meetings the parties discussed,
among other things, the companies' accounting and other policies, operational
issues associated with a potential business combination and opportunities for
the combined companies. During these meetings, extensive discussion occurred
regarding the proper basis on which to measure the fully weighted number of
shares of USWeb Common Stock outstanding as well as what fixed exchange ratio
would be appropriate for the transaction.
On August 24, 1997, the USWeb Board held a special meeting at which
representatives of Morgan Stanley and Wilson Sonsini Goodrich & Rosati,
Professional Corporation ("WSGR"), USWeb's legal counsel, were present. During
this meeting, Mr. Firmage updated the USWeb Board on the conversations to date
with CKS Group and its representatives. Mr. Firmage also discussed the
commercial and strategic rationales for the proposed business combination,
many of which are discussed above in "--Joint Reasons for the Merger" and "--
USWeb's Reasons for the Merger." The USWeb Board authorized USWeb's management
to continue discussions with CKS Group. Representatives of WSGR briefed the
USWeb Board on its fiduciary duties in connection with the Merger.
During the period from August 24, 1998 through August 28, 1998, USWeb and
CKS Group exchanged information and the two companies' management teams and
legal, financial and accounting advisors continued business, financial, legal
and accounting due diligence.
On August 25 and 26, 1998, WSGR delivered to GCW&F a draft of a proposed
Reorganization Agreement and related documents.
On August 26, 1997, the CKS Group Board held a special telephonic meeting at
which representatives of Goldman Sachs were also present. During this meeting,
CKS Group management updated the CKS Group Board on the discussions to date
and the potential benefits of the proposed combination with USWeb. The CKS
Group Board heard reports from Mr. Kvamme on the status of discussions
relating to the proposed Merger, the results of meetings between members of
CKS Group management and USWeb management, and the results of management's
initial "due diligence" investigation of USWeb. The CKS Group Board also heard
a report on the preliminary results of Goldman Sachs' financial "due
diligence"on USWeb, including USWeb's history of corporate acquisitions, the
accounting methods used by USWeb in connection with its corporate
acquisitions, and the acceptance by Wall Street equity analysts of a "cash
EPS" model for evaluating USWeb. The CKS Group Board discussed USWeb's
business and history, the strategic rationale for the Merger, CKS Group's
long-term strategy and alternatives, the evolving competitive environment
facing CKS
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Group, and the potential strategic advantages of a combination with USWeb,
including (i) the ability to offer broader solutions to clients and the
increased competitive strength of the Combined Company, (ii) the complementary
nature of the two companies' customer bases, (iii) the complementary nature of
the two companies' workforces, and (iv) the resulting possibility of increased
stockholder value. In addition, the CKS Group Board discussed a number of
other alternatives available to CKS Group, including the possibility of other
strategic relationships and the possibility of continued operation as a stand-
alone company. The CKS Group Board also discussed possible financial terms for
a combination, the compatibility of the two companies' corporate cultures and
strategic visions, and the capabilities of USWeb's management team. In
addition, the CKS Group Board discussed at length a number of potential risks
relating to the proposed Merger, including (i) the limited operating history
of USWeb and its lack of positive earnings, (ii) risks associated with past
acquisitions by USWeb (including goodwill amortization and related accounting
issues), (iii) potential future dilution from earn-out provisions, and revenue
trends following the end of earn-out periods, (iv) differences between the two
companies' growth rates and stockholder bases, and (v) the possibility of
trading pressure on the two companies' stocks following a Merger announcement.
At the conclusion of the meeting, the CKS Group Board directed management to
continue discussions with USWeb and to report further to the Board.
On August 27, 1998, CKS Group directors Lamond, Balkanski, Kvamme and Suiter
visited USWebs' headquarters and met with Messrs. Firmage and Corey. Messrs.
Corey and Firmage gave a presentation on USWeb's business, long-term
strategies, capacities and clients.
On August 27, 1998, the USWeb Board held a special meeting at which
representatives of Morgan Stanley and WSGR were present. The USWeb Board
reviewed the potential benefits of the Merger to USWeb and its stockholders
and the potential effect of the Merger on stockholder value, in light of the
financial condition and prospects of USWeb and CKS Group and the current
economic and industry environments, and other possible strategic alternatives
reasonably available to USWeb. In addition, at the request of the USWeb Board,
Morgan Stanley made a presentation with respect to a potential business
combination with CKS Group. During this presentation, Morgan Stanley, among
other things, reviewed certain comparative financial information concerning
CKS Group and USWeb based on historical financial results and publicly
available industry analyst estimates, CKS Group's products and business, CKS
Group's historic stock performance, certain financial analyses and strategic
considerations concerning a possible business combination with CKS Group. In
addition, representatives of WSGR reviewed with the USWeb Board the terms of
the draft Reorganization Agreement and related documentation. In addition to
discussions concerning the exchange ratio, matters discussed included CKS
Group's requests that following the closing of the Merger the USWeb Board
include at least two CKS Group representatives (Mr. Kvamme and Mr. Suiter),
proposed restrictions on USWeb acquisition activities pending consummation of
the Merger, proposed no-shop restrictions on USWeb, and the provisions for
reciprocal break-up fees.
On August 28 and 29, 1998, representatives of WSGR and GCW&F continued
negotiations concerning the proposed terms and conditions contained in the
draft documents. In addition, members of management of both companies met to
further discuss potential transition and integration arrangements and
organizational and management structures and arrangements for the Combined
Company. On August 29, 1998, representatives of CKS Group requested that the
exchange ratio in the transaction be adjusted if the stock price of USWeb
Common Stock at the closing of the Merger was outside a certain range.
On August 30, 1998, representatives of USWeb responded that such a condition
was unacceptable. After substantial negotiation, the parties tentatively
agreed to set the exchange ratio at 1.5 and to proceed without any conditions
or adjustment provisions related to stock price performance. USWeb's and CKS
Group's legal counsel, financial advisors and certain executive officers
continued to negotiate additional material unresolved terms of the
Reorganization Agreement and related documents throughout the day, including
the termination rights relating to the Reorganization Agreement, the
conditions upon which any breakup fees would be payable and the amount of such
fees, and the representations, warranties and covenants to be made.
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On the afternoon of August 30, 1998, the USWeb Board held a special meeting
at which representatives of Morgan Stanley and WSGR were present.
Representatives of WSGR explained the determinations to be made regarding the
Reorganization Agreement previously distributed. USWeb management also
reported on the results of their due diligence investigation over the previous
weeks and responded to questions regarding various aspects of the Merger.
Representatives of Morgan Stanley made formal presentations to the USWeb Board
regarding the proposed transaction, including the delivery of an oral opinion
(which opinion was later confirmed in writing) regarding the fairness of the
proposed exchange ratio from a financial point of view to USWeb, and reviewed
detailed financial analyses and pro forma and similar information with respect
to the companies. See "--Opinion of USWeb's Financial Advisor." The USWeb
Board then by unanimous vote of the directors approved the Reorganization
Agreement and the transactions contemplated thereby and determined that the
Merger was fair to, and in the best interests of, USWeb and its stockholders.
On the evening of August 30, 1998, the CKS Group Board held a special
meeting at which representatives of Goldman Sachs, KPMG Peat Marwick and GCW&F
were also present. GCW&F briefed the CKS Group Board on its fiduciary duties
in connection with the Merger, the proposed Reorganization Agreement and the
agreements contemplated thereby, and presented the results of GCW&F's legal
due diligence. In addition, GCW&F delivered a summary and analysis of the
principal terms of the proposed Reorganization Agreement, Stock Option
Agreements, Voting Agreements, Holder Agreements and non-competition
agreements, together with the remaining unresolved issues. Representatives of
Goldman Sachs reviewed its financial analyses with respect to the companies
and the proposed Merger and advised the CKS Group Board that it was prepared
to deliver a fairness opinion in connection with the Merger. Representatives
of KPMG Peat Marwick discussed the results of their due diligence
investigation of USWeb. The CKS Group Board considered the rationale for the
Merger, including the reasons summarized above under the heading "CKS Group's
Reasons for the Merger." In particular the CKS Group Board considered the
likely benefits of the Merger, including the synergies to be derived from
combining the complementary service offerings of the two companies, the
opportunities for increased sales and the potential benefits to CKS Group
stockholders of owning part of a larger corporation with a broader range of
products and services and a larger more diverse client base. In addition, the
CKS Group Board discussed the risks entailed in combining the two businesses,
including the possible market response to the announcement of the Merger, the
potential future impact of past acquisitions by USWeb on USWeb's business,
financial results and outstanding shares; USWeb's limited operating history;
and the other risk factors described above under "Risk Factors" and "CKS Group
Reasons for the Merger." After lengthy deliberations regarding the proposed
Merger (including deliberations by the full board and by the non-executive
directors separately in executive session), the meeting was adjourned with an
agreement to reconvene the following evening. On August 31, 1998, the CKS
Group Board held a special meeting during which the CKS Group Board continued
its deliberations regarding the proposed Merger. At the conclusion of the
meeting, the CKS Group Board directed Mr. Kvamme to communicate certain issues
and concerns to USWeb, and to request that Messrs. Firmage and Corey meet with
Michael Slade, a director of CKS Group, the next day.
On August 31 and September 1, 1998, USWeb's and CKS Group's management and
legal counsel completed a number of open details of the Reorganization
Agreement and the other agreements contemplated thereby and continued to
negotiate a number of remaining unresolved differences regarding termination
rights, break-up fees, employee benefits and other issues.
On the morning of September 1, 1998, Messrs. Firmage and Corey met with Mr.
Slade to discuss USWeb's business strategy and its ability to manage growth.
On the afternoon of the same day, the CKS Group Board held a special meeting
at which representatives of Goldman Sachs and GCW&F were also present. Mr.
Kvamme reviewed the results of his further discussions with Mr. Firmage
regarding the proposed exchange ratio. Representatives of GCW&F reported on
the completion of the details of the Reorganization Agreement. Goldman Sachs
delivered its opinion that the Exchange Ratio pursuant to the Reorganization
Agreement was fair from a financial point of view to holders of CKS Group
Common Stock as of such date. The CKS Group Board concluded, by a unanimous
vote, that the Merger was fair to, and in the best interests of, CKS Group and
its stockholders and approved the Reorganization Agreement.
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Following the approval of the Boards of CKS Group, USWeb and Merger Sub, the
Reorganization Agreement was executed by all parties, and a press release
announcing the execution of the Reorganization Agreement was issued.
POST-SIGNING EVENTS
For some time USWeb had given consideration to hiring additional executive
management to assist in its growing business. In late October 1998, Robert
Shaw, an experienced high-tech professional services executive, began
discussions with USWeb's financial advisors about joining USWeb. In early
November 1998, USWeb and CKS Group executives discussed Mr. Firmage's role in
the Combined Company and personal interests he was pursuing. After several
discussions, and after consultation with and concurrence of directors from
each company, Mr. Firmage and other USWeb executives and directors determined
to extend an offer to Robert Shaw to join USWeb as Chief Executive Officer and
Chairman of the Board of USWeb. Mr. Shaw accepted that offer in early November
1998. In connection with this change in management on November 4, 1998, USWeb
and CKS Group entered into a Waiver and Consent Agreement consenting to
USWeb's management change, and the change in the Combined Company's board
size, and acknowledging that certain related events would not constitute a
Material Adverse Effect with respect to either party. See "Terms of the
Merger--Material Adverse Effect," "USWeb Corporation--USWeb Management" and
"--USWeb Certain Transactions."
OPINION OF USWEB'S FINANCIAL ADVISOR
Pursuant to a letter agreement dated as of August 7, 1998 (the "Engagement
Letter"), Morgan Stanley provided to USWeb financial advisory services and a
financial fairness opinion in connection with the Merger. Morgan Stanley was
selected by the USWeb Board to act as USWeb's financial advisor based on
Morgan Stanley's qualifications, expertise and reputation and its knowledge of
the business and affairs of USWeb. At the meeting of the USWeb Board on August
30, 1998, Morgan Stanley rendered its oral opinion, subsequently confirmed in
writing, that as of August 30, 1998, based upon and subject to the various
considerations set forth in the opinion, the Exchange Ratio pursuant to the
Reorganization Agreement was fair from a financial point of view to USWeb.
THE FULL TEXT OF THE WRITTEN OPINION OF MORGAN STANLEY DATED AUGUST 30,
1998, WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, PROCEDURES
FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF THE REVIEW
UNDERTAKEN BY MORGAN STANLEY IN RENDERING ITS OPINION, IS ATTACHED AS ANNEX B
TO THIS JOINT PROXY STATEMENT/PROSPECTUS. USWEB STOCKHOLDERS ARE URGED TO, AND
SHOULD, READ THE OPINION CAREFULLY AND IN ITS ENTIRETY. MORGAN STANLEY'S
OPINION IS DIRECTED TO THE USWEB BOARD AND ADDRESSES ONLY THE FAIRNESS OF THE
EXCHANGE RATIO PURSUANT TO THE REORGANIZATION AGREEMENT FROM A FINANCIAL POINT
OF VIEW AS OF THE DATE OF THE OPINION; IT DOES NOT ADDRESS ANY OTHER ASPECT OF
THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF USWEB
COMMON STOCK AS TO HOW TO VOTE AT THE USWEB SPECIAL MEETING. THE SUMMARY OF
THE OPINION OF MORGAN STANLEY SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION.
In connection with rendering its opinion, Morgan Stanley, among other
things: (i) reviewed certain publicly available financial statements and other
information of USWeb and CKS Group, respectively; (ii) reviewed certain
internal financial statements and other financial and operating data
concerning USWeb and CKS Group prepared by the management of USWeb and CKS
Group, respectively; (iii) discussed the past and current operations and
financial condition and the prospects of USWeb, including information relating
to certain strategic, financial and operational benefits anticipated from the
Merger, with senior executives of USWeb; (iv) discussed the past and current
operations and financial condition and the prospects of CKS Group, including
information relating to certain strategic, financial and operational benefits
anticipated from the Merger, with senior executives of CKS Group; (v) reviewed
the pro forma impact of the Merger on the earnings per share of USWeb; (vi)
reviewed the reported prices and trading activity for the USWeb Common Stock
and CKS Group Common Stock; (vii) compared the financial performance of USWeb
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and CKS Group and the prices and trading activity of the USWeb Common Stock
and CKS Group Common Stock with that of certain other publicly-traded
companies and their securities; (viii) reviewed the financial terms, to the
extent publicly available, of certain comparable acquisition transactions;
(ix) reviewed and discussed with the senior managements of USWeb and CKS Group
their strategic rationales for the Merger; (x) participated in discussions and
negotiations among representatives of USWeb and CKS Group and their financial
and legal advisors; (xi) reviewed the draft Merger Agreement and certain
related agreements; and (xii) performed such other analyses as Morgan Stanley
deemed appropriate.
Morgan Stanley assumed and relied upon, without independent verification,
the accuracy and completeness of the information reviewed by it for the
purposes of its opinion. With respect to the internal financial statements and
other financial and operating data and discussions relating to strategic,
financial and operational benefits anticipated from the Merger provided by
USWeb and CKS Group, Morgan Stanley assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the prospects of USWeb and CKS Group, respectively. Morgan
Stanley relied upon the assessment by the managements of USWeb and CKS Group
of their ability to retain key employees of USWeb and CKS Group. Morgan
Stanley also relied upon, without independent verification, the assessment by
the managements of USWeb and CKS Group of the strategic and other benefits
expected to result from the Merger. Morgan Stanley also relied upon, without
independent verification, the assessment by the managements of USWeb and CKS
Group of USWeb's and CKS Group's technologies, products, and services, the
timing and risks associated with the integration of CKS Group with USWeb, the
timing and risks associated with USWeb's ongoing acquisition program, and the
validity of, and risks associated with, USWeb's and CKS Group's existing and
future technologies, products, and services. Morgan Stanley did not make any
independent valuation or appraisal of the assets or liabilities or
technologies of USWeb or CKS Group, nor have we been furnished with any such
appraisals. In addition, Morgan Stanley assumed that the Merger will be
accounted for as a "pooling-of-interests" business combination in accordance
with U.S. Generally Accepted Accounting Principles and the Merger will be
treated as a tax-free reorganization and/or exchange pursuant to the Code and
will be consummated in accordance with the terms set forth in the
Reorganization Agreement. Morgan Stanley's opinion was necessarily based on
economic, market and other conditions as in effect on, and the information
made available to it as of, the date of the opinion.
The following is a brief summary of certain of the analyses performed by
Morgan Stanley in connection with its oral opinion and the preparation of its
opinion letter dated August 30, 1998.
Comparative Stock Price Performance. Morgan Stanley reviewed the recent
stock price performance of USWeb and CKS Group and compared such performance
with that of three groups of companies. The first group included International
Network Services, Exodus Communications and Doubleclick (collectively, the
"Internet Services Index"). The second group included Omnicom Group,
Interpublic Group, WPP Group, Snyder Communications, Young & Rubicam, Cordiant
Communications Group, True North Communications, TMP Worldwide and Think New
Ideas (collectively, the "Marketing Index"). The third group included
Electronic Data Systems, Computer Sciences, Keane, Cambridge Technology
Partners, Sapient, Computer Horizons, Renaissance Worldwide, Answerthink
Consulting Group, Technology Solutions, Whittman Hart and Diamond Technology
Partners (collectively, the "Systems Index"). Morgan Stanley observed that
over the period from August 28, 1997 to August 28, 1998, the market price of
USWeb Common Stock increased 81%, compared with a decrease of 49% for CKS
Group Common Stock, an increase of 47% for the Internet Services Index, an
increase of 44% for the Marketing Index and an increase of 20% for the Systems
Index.
Peer Group Comparison. Morgan Stanley compared certain financial information
of USWeb and CKS Group with publicly available information for the companies
comprising the Internet Services Index, the Marketing Index and the Systems
Index, respectively. Such analysis showed that as of August 28, 1998, the CKS
Group Common Stock price to calendar year 1998 earnings, based on estimates
from securities research analysts, was 23.9 times, compared to a median of
60.6 times for the Internet Services Index, 27.7 times for the Marketing Index
and 34.3 times for the Systems Index. Morgan Stanley noted that securities
research
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analysts report earnings estimates for USWeb based upon cash earnings, defined
as earnings excluding non-cash depreciation, amortization and compensation
charges ("Cash Earnings"). The USWeb Common Stock price to calendar year 1998
Cash Earnings, based on estimates from securities research analysts, was
negative and did not allow for a meaningful comparison. The CKS Group Common
Stock price to calendar year 1998 Cash Earnings based on estimates from
securities research analysts was 19.5 times. The CKS Group Common Stock price
to calendar year 1999 earnings and the USWeb and CKS Group Common Stock prices
to calendar year 1999 Cash Earnings, based on estimates from securities
research analysts, were 17.3, 41.6 and 14.8 times, respectively, compared to a
median of 41.8 times for the Internet Services Index, 23.2 times for the
Marketing Index and 25.4 times for the Systems Index. In addition, USWeb's and
CKS Group's aggregate values were 17.4 and 1.6 times, respectively, last
twelve months of revenue, compared to a median of 8.6 times for the Internet
Services Index, 2.1 times for the Marketing Index and 3.7 times for the
Systems Index. The analysis also showed that as of August 28, 1998, the CKS
Group Common Stock price to calendar year 1999 earnings ratio and the USWeb
and CKS Group Common Stock prices to calendar year 1999 Cash Earnings ratios,
based on estimates of securities research analysts, divided by the estimated
long term growth rates, based on median estimates of securities research
analysts, were 0.45, 0.51 and 0.39, respectively, compared to 0.84 for the
Internet Services Index, 1.14 times for the Marketing Index and 0.79 times for
the Systems Index.
No company utilized in the peer group comparison analysis as a comparison is
identical to USWeb or CKS Group. In evaluating the peer groups, Morgan Stanley
made judgments and assumptions with regard to industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond control of USWeb or CKS Group, such as the impact of
competition on the business of USWeb or CKS Group and the industry generally,
industry growth and the absence of any adverse material change in the
financial condition and prospects of USWeb or CKS Group or the industry or in
the financial markets in general. Mathematical analysis (such as determining
the average or median) is not in itself a meaningful method of using peer
group data.
Analysis of Selected Precedent Transactions. As part of its analysis, Morgan
Stanley reviewed a number of technology services and Internet-related
transactions (collectively, the "Technology Services and Internet-Related
Transactions") and compared certain statistics for the Technology Services and
Internet-Related Transactions to the relevant financial statistics for CKS
Group based on the value of CKS Group implied by the Exchange Ratio and the
closing price for USWeb Common Stock as of August 28, 1998. The analysis of
the Technology Services and Internet-Related Transactions showed a high,
median and low multiple of latest twelve months' earnings of 158.8, 32.0 and
5.0 times, respectively a high, median and low multiple of next twelve months'
earnings of 210.4, 28.5 and 4.8 times, respectively, a high, median and low
multiple of latest twelve months' revenue of 17.7, 3.4 and 0.1 times,
respectively and a high, median and low multiple of latest twelve months'
EBITDA (as defined herein under "Financial Analysis--Analysis of Selected
Publicly Traded Companies") of 129.6, 31.1 and 8.3 times, respectively. These
statistics compared to a multiple of 49.9 times latest twelve months'
earnings, 30.9. times next twelve months' earnings, 3.6 times latest twelve
months' revenue and 25.9 times latest twelve months' EBITDA based on the value
of CKS Group implied by the merger. In addition, the analysis showed in
Technology Services and Internet-Related Transactions implied offer price
median premia of 26% to one day prior to transaction announcement, 30% to one
month prior to transaction announcement, exchange ratio median premia of 30%
to the 30 day average exchange ratio prior to transaction announcement and 37%
to the 60 day average exchange ratio prior to transaction announcement. These
compared in the case of the consideration to be received by holders of the
shares of CKS Group Common Stock to an implied offer price premia of 47%, 30%,
58% and 62%, respectively.
No company utilized in the precedent transactions analysis as a comparison
is identical to USWeb or CKS Group. In evaluating the precedent transactions,
Morgan Stanley made judgments and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond control of USWeb and CKS Group, such
as the impact of competition on the business of USWeb and CKS Group and the
industry generally, industry growth and the absence of any adverse material
change in the financial condition and prospects of USWeb and CKS Group or the
industry
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or in the financial markets in general. Mathematical analysis (such as
determining the average or median) is not in itself a meaningful method of
using precedent transactions data.
Relative Contribution Analysis. Morgan Stanley analyzed the pro forma
contribution of each of USWeb and CKS Group to the combined company assuming
consummation of the Merger and based on estimates from securities research
analysts for both companies. The analysis showed, among other things, that in
terms of calendar year 1998 projected revenue and gross profit, USWeb would
contribute 50.2% and 44.5%, respectively, to the combined company. In terms of
calendar year 1999 projected revenue, gross profit, EBITDA and earnings, USWeb
would contribute 62.6%, 61.3%, 55.3%, and 57.2%, respectively, to the combined
company. These figures, adjusted to reflect each company's respective capital
structure, were compared to the pro forma fully-diluted ownership of the
combined company by USWeb shareholders of 66.1% implied by the Merger.
Exchange Ratio Analysis. Morgan Stanley reviewed the ratios of the closing
prices of CKS Group Common Stock divided by the corresponding prices of USWeb
over various periods during the twelve month period ending August 28, 1998 and
computed the premia represented by the Exchange Ratio over the averages of
these daily ratios over various periods. The averages of these ratios of the
closing prices of USWeb and CKS Group were 0.941 for the previous 10 calendar
days, 0.965 for the previous 20 calendar days, 0.947 for the previous 30
calendar days, 0.928 for the previous 60 calendar days, 0.937 for the previous
90 calendar days and 1.019 for the 185 calendar days since the IPO of USWeb.
The Exchange Ratio represented premia of 59%, 55%, 58%, 62%, 60% and 47%,
respectively, over the aforementioned average exchange ratios of the USWeb and
CKS Group stock prices. The Exchange Ratio represented a 47% premium to the
exchange ratio based on closing prices of USWeb and CKS Group on August 28,
1998.
Discounted Equity Value. Morgan Stanley performed an analysis of the present
value per share of the implied value of CKS Group on a stand-alone basis based
on CKS Group's future trading price. Morgan Stanley observed that, based on a
range of earnings per share estimates for the calendar years 2000 and 2001,
illustrative multiples of earnings per share ranging from 14.0 times to 20.0
times and illustrative discount rates ranging from 15.0% to 17.5%, the present
value per share of CKS Group Common Stock on a stand-alone basis ranged from
$15.29 to $38.81. Morgan Stanley also performed an analysis of the present
value per share of the implied value of USWeb on a stand-alone basis based on
USWeb's future trading price. Morgan Stanley observed that, based on a range
of earnings per share estimates for the calendar years 2000 and 2001,
illustrative multiples of earnings per share ranging from 35.0 times to 47.5
times and illustrative discount rates ranging from 15.0% to 17.5%, the present
value per share of USWeb Common Stock on a standalone basis ranged from $14.49
to $47.16. Morgan Stanley compared the results of the stand-alone analysis to
an analysis of the present value per share of the implied value of USWeb based
on USWeb's future trading price assuming consummation of the Merger and based
on a range of earnings per share estimates for both companies for calendar
years 2000 and 2001 prior to any synergies resulting from the merger,
multiples of earnings per share ranging from 30.0 times to 42.5 times and
discount rates of 12.4% and 15.0%. Based on this analysis, Morgan Stanley
estimated a present value per equivalent share of USWeb Common Stock ranging
from $20.50 to $42.15.
Pro Forma Merger Analysis. Morgan Stanley analyzed the pro forma impact of
the Merger on USWeb's projected earnings per share for the calendar years 1999
and 2000. Such analysis was based on earnings projections by securities
research analysts for both companies. Morgan Stanley observed that, assuming
that the Merger was treated as a pooling transaction, the Merger would result
in earnings per share accretion for USWeb stockholders of 25.7% and 20.7% for
calendar years 1999 and 2000, respectively, before taking into account one-
time charges or synergies.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In
arriving at its opinion, Morgan Stanley considered the results of all of its
analyses as a whole and did not attribute any particular weight to any
analysis or factor considered by it. Furthermore, Morgan Stanley believes that
selecting any portion of its analyses, without considering all
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analyses, would create an incomplete view of the process underlying its
opinion. In addition, Morgan Stanley may have given various analyses and
factors more or less weight than other analyses and factors, and may have
deemed various assumptions more or less probable than other assumptions, so
that the ranges of valuations resulting from any particular analysis described
above should not be taken to be Morgan Stanley's view of the actual value of
USWeb or CKS Group. In performing its analyses, Morgan Stanley made numerous
assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
USWeb or CKS Group. Any estimates contained in Morgan Stanley's analyses are
not necessarily indicative of future results or actual values, which may be
significantly more or less favorable than those suggested by such estimates.
The analyses performed were prepared solely as part of Morgan Stanley's
analysis of the fairness of the Exchange Ratio pursuant to the Reorganization
Agreement from a financial point of view to USWeb and were conducted in
connection with the delivery of the Morgan Stanley opinion. The analyses do
not purport to be appraisals or to reflect the prices at which USWeb or CKS
Group might actually be sold. The Exchange Ratio pursuant to the
Reorganization Agreement was determined through arm's-length negotiations
between USWeb and CKS Group and was approved by the USWeb Board of Directors.
Morgan Stanley provided advice to USWeb during such negotiations; however,
Morgan Stanley did not recommend any specific exchange ratio to USWeb or that
any specific exchange ratio constituted the only appropriate exchange ratio
for the Merger. In addition, as described above, Morgan Stanley's opinion and
presentation to the USWeb Board of Directors was one of many factors taken
into consideration by the USWeb Board in making its decision to approve the
Merger. Consequently, the Morgan Stanley analyses as described above should
not be viewed as determinative of the opinion of the USWeb Board of Directors
with respect to the Exchange Ratio or of whether the USWeb Board of Directors
would have been willing to agree to a different exchange ratio.
The USWeb Board of Directors retained Morgan Stanley based upon Morgan
Stanley's qualifications, experience and expertise. Morgan Stanley is an
internationally recognized investment banking and advisory firm. Morgan
Stanley, as part of its investment banking business, is continuously engaged
in the valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate, estate and other purposes. In the ordinary course of
Morgan Stanley's trading and brokerage activities, Morgan Stanley or its
affiliates may at any time hold long or short positions, may trade or
otherwise effect transactions, for its own account or for the account of
customers in the equity securities of USWeb or CKS Group.
Pursuant to the Engagement Letter, Morgan Stanley provided financial
advisory services in connection with the Merger, and USWeb agreed to pay
Morgan Stanley a transaction fee of approximately $5.0 million in connection
therewith. USWeb has also agreed to reimburse Morgan Stanley for reasonable
expenses as incurred. In addition, USWeb has also agreed to indemnify Morgan
Stanley and its affiliates, their respective directions, officers, agents and
employees and each person, if any controlling Morgan Stanley or any of its
affiliates against certain liabilities and expenses, including certain
liabilities under the federal securities laws, related to Morgan Stanley's
engagement.
OPINION OF CKS GROUP'S FINANCIAL ADVISOR
Goldman Sachs has acted as financial advisor to CKS Group in connection with
the Merger. Goldman Sachs is a nationally recognized investment banking firm
and was selected by CKS Group based on the firm's reputation and experience in
investment banking in general, its recognized expertise in the valuation of
businesses, and its historical relationship with CKS Group. Goldman Sachs, as
part of its investment banking business, is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. In addition to acting as
CKS Group's financial advisor in connection with the Merger, Goldman Sachs has
provided certain investment banking services to CKS Group from time to time,
including having acted as managing underwriter of CKS Group's initial public
offering in December 1995 and its follow-on offering in June 1996.
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At the special meeting of the CKS Group Board held on August 30, 1998,
Goldman Sachs presented a summary of financial analyses relating to the
Merger. At the CKS Group Board special meeting held on September 1, 1998,
Goldman Sachs delivered to the CKS Group Board its oral opinion (which was
subsequently confirmed in a written opinion dated September 1, 1998) to the
effect that, as of such date and based upon and subject to the matter set
forth therein, the Exchange Ratio was fair from a financial point of view to
the holders of CKS Group Common Stock.
THE FULL TEXT OF GOLDMAN SACHS' WRITTEN OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS ON THE
REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED AS ANNEX C TO
THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS HEREBY INCORPORATED HEREIN BY
REFERENCE. STOCKHOLDERS OF CKS GROUP ARE URGED TO, AND SHOULD, READ THE
OPINION IN ITS ENTIRETY.
In connection with rendering its opinion, Goldman Sachs, among other things,
(i) reviewed the Reorganization Agreement; (ii) reviewed Annual Reports to
Stockholders and Annual Reports on Form 10-K of CKS Group for the two fiscal
years ended November 30, 1997 and of USWeb for the year ended December 31,
1997, certain interim reports to stockholders and Quarterly Reports on Form
10-Q of CKS Group and USWeb and certain other communications from CKS Group
and USWeb to their respective stockholders; (iii) reviewed certain internal
financial analyses and forecasts (the "Forecasts") for CKS Group and USWeb
prepared by the management of CKS Group and certain analyses and forecasts of
cost savings and operating synergies anticipated to result from the Merger
prepared by the managements of CKS Group and USWeb (the "Synergies"); (iv)
held discussions with members of the senior management of CKS Group and USWeb
regarding the strategic rationale for, and potential benefits of, the Merger,
and the past and current business operations, financial condition and future
prospects of CKS Group and USWeb; (v) reviewed the reported price and trading
activity for the common stock of CKS Group and of USWeb; (vi) compared certain
financial and stock market information for CKS Group with similar information
for certain other companies the securities of which are publicly traded; and
(vi) performed such other studies and analyses as it considered appropriate.
As set forth more fully in its opinion, Goldman Sachs relied upon the
accuracy and completeness of all the financial and other information discussed
with and reviewed by it, and, for purposes of rendering its opinion, assumed
such accuracy and completeness. Goldman Sachs has assumed, with the consent of
CKS Group, that the Synergies have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
managements of CKS Group and USWeb, and that such Synergies will be realized
in the amounts and at the times contemplated thereby. Goldman Sachs has been
advised by CKS Group, and has, for the purpose of rendering its opinion,
assumed that CKS Group faces uncertainties in achieving its Forecasts. Goldman
Sachs did not receive projections of USWeb's expected future performance
prepared by USWeb's management; consequently, Goldman Sachs' review of such
information was limited to discussions with management of CKS Group of
projections by CKS Group and publicly available research analyst estimates of
USWeb's future financial performance. Goldman Sachs did not make, nor was it
furnished with, an independent evaluation or appraisal of the assets and
liabilities of CKS Group or USWeb or any of their subsidiaries.
The opinion of Goldman Sachs was provided for the information and assistance
of the CKS Group Board in connection with its consideration of the Merger and
does not constitute a recommendation as to how any holder of CKS Group Common
Stock should vote with respect to the transaction.
FINANCIAL ANALYSIS
The following is a summary of the material financial analyses prepared by
Goldman Sachs and presented to the CKS Group Board at a special meeting of the
CKS Group Board on August 30, 1998.
Indexed Stock Price Histories. Goldman Sachs reviewed the daily indexed
common stock price history for both companies from December 8, 1997 to August
24, 1998. The analysis indicated that the shares of the
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two companies had tended to trade roughly in parallel during this period, and
that, at the time the CKS Group Board approved the Reorganization Agreement,
the shares of USWeb Common Stock were not trading at an historic high.
Analysis of Selected Publicly Traded Companies. Goldman Sachs compared
certain financial market and operating information and commonly used valuation
measurements for CKS Group and USWeb with corresponding data for two groups of
publicly held companies: a group of traditional advertising companies,
consisting of Interpublic Group, Omnicom Group, True North Communications, WPP
Group and Young & Rubicam, and a group of high end consulting companies,
consisting of Cambridge Technology, Diamond Technology, Keane, International
Network Services, Sapient, Technology Solutions and Whittman-Hart. Such
financial information and valuation measurements consisted of (i) per share
market price as a percentage of the 52-week high for the stock; (ii) leveraged
market capitalization as a multiple of revenue, earnings before interest and
taxes ("EBIT") and earnings before interest, taxes, depreciation and
amortization ("EBITDA"); (iii) per share price as a multiple of earnings
("P/E") based on earnings estimates reported by the Institutional Brokers'
Estimates System ("IBES"); (iv) compound annual growth rate ("CAGR") for the
next five years based on IBES; and (v) the estimated 1999 P/E divided by the
CAGR. IBES is a data service that monitors and publishes compilations of
earnings estimates by selected research analysts regarding companies of
interest to institutional investors.
The August 28, 1998 closing prices of CKS Group and USWeb common stock were
37.3% and 43.5% of their 52-week highs; the stock prices of traditional
advertising companies ranged from 68.8% to 92.0% of their 52-week highs, with
a mean of 82.8% and a median of 88.2%; the stock prices of high end consulting
companies ranged from 52.5% to 78.3% of their 52-week highs, with a mean of
69.0% and a median of 71.8%. Leveraged market capitalization as a multiple of
annualized last quarter revenues, 1998 estimated revenues and 1999 estimated
revenues (excluding pass-through revenues) were 2.0x, 1.9x and 1.6x,
respectively, for CKS Group and 6.7x, 6.1x and 2.8x, respectively, for USWeb.
The corresponding multiples for the traditional advertising companies ranged
from 1.0x to 2.3x, 0.4x to 2.6x and 0.8x to 2.3x, with means of 1.6x, 1.6x and
1.5x and medians of 1.4x, 1.4x and 1.2x. For the high end consulting
companies, the multiples ranged from 1.7x to 6.9x, 1.3x to 6.9x and 1.0x to
4.5x, with means of 4.0x, 3.8x and 2.7x and medians of 3.3x, 3.4x and 2.6x.
Leveraged market capitalization as a multiple of last quarter annualized
EBIT, 1998 estimated EBIT and 1999 estimated EBIT were 11.8x, 12.2x and 8.2x,
respectively, for CKS Group and not meaningful for USWeb after giving effect
to acquisition-related amortization and other non-cash charges. For the
traditional advertising companies, the corresponding multiples ranged from
9.3x to 13.6x, 9.1x to 19.6x, and 7.5x to 16.8x, with means of 11.1x, 13.1x
and 11.0x and medians of 11.3x, 13.3x and 11.0x. For the high-end consulting
companies, the multiples ranged from 13.0x to 42.4x, 10.4x to 36.6x and 7.5x
to 24.4x, with means of 26.6x, 25.2x and 17.6x and medians of 22.0x, 22.0x and
18.5x. Leveraged market capitalization as a multiple of last quarter
annualized EBITDA, 1998 estimated EBITDA and 1999 estimated EBITDA were 9.8x,
10.1x and 7.0x, respectively, for CKS Group. This measure was meaningful for
USWeb only with respect to 1999 estimated EBITDA, and was 21.1x. For the
traditional advertising companies, the corresponding multiples ranged from
6.8x to 11.3x, 6.7x to 16.2x and 5.8x to 14.1x, with means of 9.0x, 10.6x and
9.3x, and medians of 8.9x, 9.9x and 8.3x. For the high end consulting
companies, leveraged market capitalization as a multiple of last quarter
annualized EBITDA ranged from 10.9x to 35.2x, with a mean of 23.2x and a
median of 19.9x; figures were not available in publicly available research
reports for estimated 1998 and 1999 EBITDA.
Goldman Sachs calculated the P/E multiple of CKS Group, based on 1998
estimated earnings, at 24.6x; the P/E for USWeb for 1998 is not meaningful.
The P/E for the traditional advertising companies for 1998 ranged from 16.4x
to 32.0x, with a mean of 24.6x and a median of 27.3x, and, for the high-end
consulting companies, ranged from 32.3x to 58.6x, with a mean of 44.6x, and a
median of 37.7x. Goldman Sachs did the same calculation based on 1999
estimated earnings, calculating P/E multiples of 17.3x and 42.2x for CKS Group
and USWeb (using USWeb's EPS before the after-tax effect of non-cash charges),
respectively. The P/E for the traditional advertising companies for 1999
ranged from 14.1x to 27.8x, with a mean of 21.1x and a median of 23.8x, and,
for the high-end consulting companies, ranged from 24.2x to 43.1x, with a mean
of 32.0x
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and a median of 28.3x. The IBES five year CAGR for CKS Group was 37.5%; for
USWeb, 50.0%; for the traditional advertising companies, it ranged from 14.0%
to 21.3% with a mean of 16.1% and a median of 15.0%; and, for the high-end
consulting companies, it ranged from 35.0% to 50.0% (based on August 28, 1998
First Call estimates), with a mean of 41.4% and a median of 40.0%. Goldman
Sachs calculated 1999 P/E divided by the growth rate to be 0.5x for CKS Group
and 0.8x for USWeb; for the traditional advertising companies, to range from
1.0x to 1.8x, with a mean of 1.3x and a median of 1.1x; and, for the high-end
consulting companies, to range from 0.5x to 1.0x, with a mean of 0.8x and a
median of 0.8x.
Implied Market Exchange Ratio History. Goldman Sachs reviewed the implied
market exchange ratio for shares of USWeb and CKS Group Common Stock for the
period from December 8, 1997 to August 28, 1998, determined by dividing the
per share trading price for CKS Group common stock by the per share trading
price for USWeb Common Stock. The daily implied market exchange ratio ranged
from approximately 1.9 to 0.6 during this period. The average exchange ratio
during this period was 0.91, 0.96, 0.93 and 0.92 for the most recent 10 days,
one month, three months and six months, respectively, and 1.03 for the period
since USWeb's initial public offering.
Contribution Analysis. Goldman Sachs analyzed the percentage contribution of
CKS Group to pro forma combined results following the Merger, using projected
financial information furnished by CKS Group management. Goldman Sachs
calculated that CKS Group's percentage contribution to combined revenues would
be 51.2% for 1998, 34.1% for 1999 and 29.9% for 2000; CKS Group's contribution
to combined EBITDA would be 100% for 1998, 47.2% for 1999 and 41.3% for 2000;
and that CKS Group's contribution to net income before the after-tax effect of
non-cash charges would be 100% for 1998, 46.7% for 1999 and 41.8% for 2000.
Goldman Sachs also analyzed the percentage contributions of CKS Group on the
assumption that CKS Group's operating margin will be 15% in 1999 and 2000.
Under this assumption, CKS Group's percentage contribution to combined revenue
remains unchanged; its percentage contribution to combined EBITDA would be
42.3% in 1999 and 34.2% in 2000; and its percentage contribution to net income
before the after-tax effect of non-cash charges would be 42.5% in 1999 and
35.6% in 2000.
In addition, Goldman Sachs calculated CKS Group's percentage contribution to
combined estimated net income before the after-tax effect of non-cash charges
for the years 2001 through 2004, based on a range of assumed growth rates of
each of the two companies for these years, from 10% to 35% for CKS Group and
from 30% to 70% for USWeb. Under this analysis, CKS Group's percentage
contribution to estimated combined net income before the after-tax effect of
non-cash charges would range, based on the assumptions with respect to USWeb's
and CKS Group's growth rates, from 32.7% to 43.3% in 2001, from 24.5% to 44.7%
in 2002, from 17.6% to 46.1% in 2003, and from 12.2% to 47.3% in 2004.
Performing the same analysis on the assumption that CKS Group's operating
margin will be 15% in 1999 and 2000, Goldman Sachs calculated that CKS Group's
pro-forma contribution to net income before the after-tax effect of non-cash
charges would range, based on the assumptions with respect to USWeb's and CKS
Group's growth rates, from 27.3% to 37.1% in 2001, from 20.0% to 38.4% in
2002, from 14.1% to 39.7% in 2003, and from 9.7% to 40.9% in 2004.
Under the Exchange Ratio of 1.5, CKS Group stockholders would receive 31.3%,
on a diluted basis, of the stock of the Combined Company.
Pro Forma Transaction Analysis. Goldman Sachs also analyzed certain pro
forma effects of the Merger on earnings per share of USWeb Common Stock based
on financial information furnished by CKS Group management. Goldman Sachs
calculated that, without taking into account any synergies from the Merger,
the Merger would be 33.6% accretive to estimated 1999 earnings before the
after-tax effect of non-cash charges and 24.8% accretive to estimated 2000
earnings before the after-tax effect of non-cash charges. After giving effect
to projected synergies provided to Goldman Sachs by CKS Group and USWeb
management, which amounted to $37.7 million ($2.4 million in after-tax
earnings) in 1999 and $70.0 million ($4.5 million in after-tax earnings) in
2000, Goldman Sachs calculated that the Merger would be 41.0% accretive in
1999 and 33.5% accretive in 2000.
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Revenue Trading Analysis. For illustrative purposes only, Goldman Sachs
calculated the revenue multiple (estimated 1999 market capitalization divided
by estimated 1999 revenues, based on publicly available equity research
analyst estimates) for four companies: Cambridge Technology, International
Network Services, Sapient, and Whittman-Hart. The revenue multiples ranged
from 2.5x to 5.6x. Goldman Sachs then calculated the implied market
capitalization and the implied 1999 share price of the combined company, using
a range of revenue multiples from 2.0x to 3.2x. Based on this revenue multiple
range and on estimated 1999 revenues without synergies of $388 million, the
implied market capitalization of the combined company ranged from $776 million
to $1,242 million ($9.56 to $15.30 per share), and, based on estimates
furnished by management of CKS Group of 1999 revenue plus combined synergies
(as estimated by the managements of CKS Group and USWeb) of $426 million, the
implied market capitalization of the combined company ranged from $851 million
to $1,362 million ($10.49 to $16.79 per share).
The summaries set forth above describe the material analyses that Goldman
Sachs presented to the CKS Group board on August 30, 1998, but is not a
comprehensive description of all analyses performed and factors considered by
Goldman Sachs in connection with preparing its opinion. The preparation of a
fairness opinion is a complex process involving the application of subjective
business judgment in determining the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances, and is not readily susceptible to summary description. No
company used in the above analyses as a comparison is directly comparable with
CKS Group or with USWeb. The analyses summarized above do not purport to be
appraisals or to reflect the prices at which shares of CKS Group or of USWeb
will actually trade. Analyses based on forecasts of future results are not
necessarily indicative of actual future results, which may be significantly
more or less favorable than suggested by such analyses.
Pursuant to a letter agreement dated as of June 18, 1998, CKS Group has
agreed to pay Goldman Sachs for its financial advisory services in connection
with the Merger an aggregate fee equal to one percent of the total
consideration paid in the Merger. CKS Group has also agreed to reimburse
Goldman Sachs for reasonable out-of-pocket expenses incurred by Goldman Sachs
in performing its services, including the fees and expenses of legal counsel,
and to indemnify Goldman Sachs against certain liabilities, including certain
liabilities under the federal securities laws.
Goldman Sachs is a full service securities firm and in the normal course of
its trading activities may from time to time effect transactions and hold
positions in the securities or options on securities of CKS Group and/or USWeb
for its own account and for the account of its customers.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of CKS
Group Common Stock. This discussion does not deal with all income tax
considerations that may be relevant to particular CKS Group stockholders in
light of their particular circumstances, such as stockholders who are dealers
in securities, foreign persons, stockholders who acquired their shares in
connection with previous mergers involving CKS Group or an affiliate, or
stockholders who acquired their shares in connection with stock option or
stock purchase plans or in other compensatory transactions. In addition, the
following discussion does not address the tax consequences of transactions
effectuated prior to or after the Merger (whether or not such transactions are
in connection with the Merger), including without limitation transactions in
which shares of CKS Group Common Stock were or are acquired or shares of USWeb
Common Stock were or are disposed of. Furthermore, no foreign, state or local
tax considerations are addressed herein. ACCORDINGLY, CKS GROUP STOCKHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
The following discussion is based upon the interpretation of the Code,
applicable Treasury Regulations, judicial authority and administrative rulings
and practice, all as of the date hereof. The Internal Revenue
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Service (the "IRS") is not precluded from adopting a contrary position. In
addition, there can be no assurance that future legislative, judicial or
administrative changes or interpretations will not adversely affect the
accuracy of the statements and conclusions set forth herein. Any such changes
or interpretations could be applied retroactively and could affect the tax
consequences of the Merger to USWeb, Merger Sub, CKS Group and/or CKS Group
stockholders.
USWeb and CKS Group will have received opinions (the "Tax Opinions") from
their respective counsel to the effect that the Merger will be treated as a
"reorganization" within the meaning of Section 368(a) of the Code (a
"Reorganization") prior to closing. The Tax Opinions are subject to certain
assumptions, limitations and qualifications, are based on the truth and
accuracy of certain factual representations of USWeb, Merger Sub and CKS Group
and have been filed as exhibits to the Registration Statement of which this
Joint Proxy Statement/Prospectus is a part. In addition, the closing of the
Merger is conditioned upon the delivery at the closing of the Merger of
opinions to like effect (the "Closing Tax Opinions") from counsel to both
USWeb and CKS Group substantially similar to the Tax Opinions and based on
representations of USWeb, Merger Sub and CKS Group as of the date of the
closing of the Merger. Assuming the Merger is a Reorganization, then, subject
to the assumptions, limitations and qualifications referred to herein and in
the Tax Opinions, the Merger should result in the following federal income tax
consequences:
(a) No gain or loss will be recognized by holders of CKS Group Common Stock
solely upon their receipt of USWeb Common Stock in the Merger in exchange
therefor;
(b) The aggregate tax basis of the USWeb Common Stock received in the Merger
by a CKS Group stockholder will be the same as the aggregate tax basis of CKS
Group Common Stock surrendered in exchange therefor;
(c) The holding period of the USWeb Common Stock received in the Merger by a
CKS Group stockholder will include the period during which the stockholder
held the CKS Group Common Stock surrendered in exchange therefor, provided
that the CKS Group Common Stock is held as a capital asset at the time of the
Merger;
(d) Cash payments received by holders of CKS Group Common Stock in lieu of a
fractional share will be treated as if a fractional share of USWeb Common
Stock has been issued in the Merger and then redeemed by USWeb. A stockholder
of CKS Group receiving such cash will generally recognize gain or loss upon
such payment, equal to the difference (if any) between such stockholder's
basis in the fractional share and the amount of cash received; and
(e) None of USWeb, Merger Sub or CKS Group will recognize gain or loss
solely as a result of the Merger.
No ruling has been obtained from the IRS in connection with the Merger. CKS
Group stockholders should be aware that neither the Tax Opinion nor the
Closing Tax Opinions bind the IRS and that the IRS is not precluded from
successfully asserting a contrary position. In addition, the Tax Opinions and
the Closing Tax Opinions are subject to certain assumptions and qualifications
and are based on the truth and accuracy of certain representations made by
USWeb, Merger Sub and CKS Group, including representations in certificates
delivered to counsel by the respective managements of USWeb, Merger Sub and
CKS Group.
A successful IRS challenge to the reorganization status of the Merger would
result in a CKS Group stockholder recognizing gain or loss with respect to
each share of CKS Group Common Stock surrendered equal to the difference
between the stockholder's basis in such share and the fair market value, as of
the Effective Time, of the USWeb Common Stock received in exchange therefor.
In such event, a stockholder's aggregate basis in the USWeb Common Stock so
received would equal such fair market value and his holding period for such
stock would begin the day after the Merger.
Even if the Merger qualifies as a reorganization, a CKS Group stockholder
would recognize gain to the extent the stockholder received (directly or
indirectly) consideration other than USWeb Common Stock in
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exchange for the stockholder's CKS Group Common Stock or to the extent that
the USWeb Common Stock was considered to be received in exchange for services
or property other than solely for CKS Group Common Stock. All or a portion of
such gain may be taxable as ordinary income.
CKS Group stockholders will be required to attach a statement to their tax
returns for the year of the Merger that contains the information listed in
Treasury Regulation Section 1.368-3(b). Such statement must include the
stockholder's tax basis in the stockholder's CKS Group Common Stock and a
description of the USWeb Common Stock received.
GOVERNMENTAL AND REGULATORY APPROVALS
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger cannot be consummated until notifications have been given and certain
information has been furnished to the FTC or the Antitrust Division and the
specified waiting period has been satisfied. Consummation of the Merger is
subject to compliance with 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 the FTC and the Antitrust Division. At
any time before or after consummation of the Merger, and notwithstanding that
the HSR Act waiting period has expired, the Antitrust Division, the FTC or any
state or foreign governmental authority could take such action under the
antitrust laws as it deems necessary or desirable in the public interest. Such
action could include seeking to enjoin the consummation of the Merger or
seeking divestiture of CKS Group or businesses of USWeb or CKS Group by USWeb.
Private parties may also seek to take legal action under the antitrust laws
under certain circumstances.
Based on information available to them, USWeb and CKS Group believe that the
Merger will be effected in compliance with all material federal, state and
foreign antitrust laws. However, there can be no assurance that a challenge to
the consummation of the Merger on antitrust grounds will not be made or that,
if such a challenge were made, USWeb and CKS Group would prevail.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for financial
reporting purposes in accordance with generally accepted accounting
principles. Consummation of the Merger is conditioned upon receipt at the
closing of the Merger by USWeb and CKS Group of letters from
PricewaterhouseCoopers LLP, USWeb's independent accountants, and KPMG Peat
Marwick LLP, CKS Group's independent auditors, respectively, regarding the
respective accounting firms' concurrence with USWeb's management's and CKS
Group's management's conclusions, respectively, as to the appropriateness of
pooling of interests accounting for the Merger under APB No. 16, if
consummated in accordance with the Reorganization Agreement.
NO APPRAISAL RIGHTS
Section 262 of the DGCL provides appraisal rights (sometimes referred to as
"dissenters' rights") to stockholders of Delaware corporations in certain
situations. However, Section 262 appraisal rights are not available to
stockholders of a corporation, such as CKS Group, (a) whose securities are
listed on a national securities exchange or are designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. ("NASD") and (b) whose stockholders
are not required to accept in exchange for their stock anything other than
stock of another corporation listed on a national securities exchange or on an
interdealer quotation system by the NASD and cash in lieu of fractional
shares. Because CKS Group's Common Stock is traded on such a system, Nasdaq,
and because the CKS Group stockholders are being offered stock of USWeb, which
is also traded on Nasdaq, and cash in lieu of fraction shares, stockholders of
CKS Group will not have appraisal rights with respect to the Merger. The DGCL
does not provide appraisal rights to stockholders of a corporation, such as
USWeb, which issues shares in connection with a merger but is not itself a
constituent corporation in the Merger.
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TERMS OF THE MERGER
The following is a brief summary of the material provisions of the
Reorganization Agreement, a copy of which is attached as Annex A to this Joint
Proxy Statement/Prospectus and is incorporated herein by reference. This
summary is qualified in its entirety by reference to the full and complete
text of the Reorganization Agreement.
EFFECTIVE TIME
Subject to the provisions of the Reorganization Agreement, USWeb, CKS Group
and Merger Sub shall cause the Merger to be consummated by filing a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the relevant provisions of the DGCL on the Closing Date. The
closing of the Merger (the "Closing") shall take place at the offices of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, at a time and date
to be specified by the parties, which shall be no later than the second
business day after the satisfaction or waiver of the conditions set forth in
the Reorganization Agreement, or at such other time, date and location as the
parties agree in writing. The Closing is anticipated to occur on or about
December 16, 1998.
MANNER AND BASIS OF CONVERTING SECURITIES
At the Effective Time, by virtue of the Merger and without any action on the
part of Merger Sub, CKS Group or the holders of any of the following
securities:
(a) each share of CKS Group Common Stock issued and outstanding immediately
prior to the Effective Time, other than any shares of CKS Group Common Stock
to be canceled pursuant to the Reorganization Agreement, will be canceled and
extinguished and automatically converted into the right to receive 1.5 validly
issued, fully paid and nonassessable shares of USWeb Common Stock upon
surrender of the certificate representing such share of CKS Group Common
Stock;
(b) each share of CKS Group Common Stock held by CKS Group or owned by
Merger Sub, USWeb or any direct or indirect wholly owned subsidiary of CKS
Group or of USWeb immediately prior to the Effective Time shall be canceled
and extinguished without any conversion thereof;
(c) all options to purchase CKS Group Common Stock then outstanding under
CKS Group's 1995 Series B Common Stock Plan, 1995 Stock Plan, 1995 Director
Option Plan and 1996 Supplemental Stock Plan and the SiteSpecific, Inc. 1996
Stock Option Plan, in each case as amended (collectively, the "CKS Group Stock
Plans") shall be assumed by USWeb in accordance with the Reorganization
Agreement;
(d) each share of Common Stock, par value $0.001 per share, of Merger Sub
(the "Merger Sub Common Stock") issued and outstanding immediately prior to
the Effective Time shall be converted into one validly issued, fully paid and
nonassessable share of Common Stock, par value $0.001 per share, of the
surviving corporation; and
(e) in accordance with the terms of CKS Group's 1995 Employee Stock Purchase
Plan and 1997 Employee Stock Purchase Plan, as the case may be (collectively,
the "CKS Group ESPPs") 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 two thousand five hundred (2500) multiplied 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 a share of CKS Common Stock on the
first day of the 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, USWeb shall assume the CKS
Group ESPPs.
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The Exchange Ratio shall be adjusted to reflect appropriately the effect of
any stock split, reverse stock split, stock dividend (including any dividend
or distribution of securities convertible into USWeb Common Stock or CKS Group
Common Stock), reorganization, recapitalization, or other like change with
respect to USWeb Common Stock or CKS Group Common Stock occurring on or after
September 1, 1998 and prior to the Effective Time.
No fraction of a share of USWeb Common Stock will be issued by virtue of the
Merger, but in lieu thereof each holder of shares of CKS Group Common Stock
who would otherwise be entitled to a fraction of a share of USWeb Common Stock
(after aggregating all fractional shares of USWeb Common Stock to be received
by such holder) shall receive from USWeb an amount of cash (rounded to the
nearest whole cent) equal to the product of (i) such fraction, multiplied by
(ii) the average closing price of one share of USWeb Common Stock for the ten
most recent days that USWeb Common Stock has traded ending on the trading day
immediately prior to the Effective Time, as reported by Nasdaq.
Promptly (and in no event later than the fifth business day) after the
Effective Time, USWeb shall make available to the Exchange Agent for exchange
the shares of USWeb Common Stock issuable pursuant to the Reorganization
Agreement in exchange for outstanding shares of CKS Group Common Stock, and
cash in an amount sufficient for payment in lieu of fractional shares pursuant
to the Reorganization Agreement and any dividends or distributions to which
holders of shares of CKS Group Common Stock may be entitled pursuant to the
Reorganization Agreement.
Promptly (and in no event later than the fifth business day) after the
Effective Time, USWeb shall cause the Exchange Agent to mail to each CKS Group
stockholder of record as of the Effective Time a letter of transmittal with
instructions to be used by such stockholder in surrendering certificates
which, prior to the 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. OPTION AGREEMENTS SHOULD NOT BE SURRENDERED.
STOCK OWNERSHIP FOLLOWING THE 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 Merger, and USWeb
will assume CKS Group options in exchange for options to purchase up to
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 CKS Group Common Stock
outstanding immediately prior to the Merger would be converted into, and have
voting power with respect to, approximately 33.9% of the Combined Company's
total issue and outstanding shares, the holders of former CKS Group Options
would hold options exercisable for approximately 6.4% of the Combined
Company's total issued and outstanding shares (assuming the exercise of only
such former CKS Group 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 of the Combined
Company at any time following the Effective Time.
CONDUCT FOLLOWING THE MERGER
At the Effective Time, Merger Sub will cease to exist as a corporation and
will be merged with and into CKS Group, with CKS Group remaining as the
surviving corporation.
Pursuant to the Reorganization Agreement, the Certificate of Incorporation
of Merger Sub in effect immediately prior to the Effective Time will become
the Certificate of Incorporation of the surviving
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corporation, provided, however, that at the Effective Time the Certificate of
Incorporation of the surviving corporation shall be amended so that the name
of the surviving corporation shall be CKS Group. The Bylaws of Merger Sub in
effect immediately prior to the Effective Time will become the Bylaws of the
surviving corporation. The Board of Directors of the surviving corporation
will initially consist of the directors who are serving as directors of Merger
Sub immediately prior to the Effective Time together with Pierre Lamond,
Alexandre Balkianski, Barry Linsky and Michael Slade. The officers of Merger
Sub immediately prior to the Effective Time will remain as officers of the
surviving corporation, until their successors are duly appointed.
Pursuant to the Reorganization Agreement, the USWeb Board will take all
actions within its power to cause the USWeb Board, effective no later than one
day following the Effective Time, to consist of ten persons, eight of whom
shall have served on the Board of Directors of USWeb immediately prior to the
Effective Time, and two of whom shall have served on the Board of Directors of
CKS Group immediately prior to the Effective Time (Mark Kvamme and Thomas
Suiter, the Chief Executive Officer and the Chief Creative Officer,
respectively, of CKS Group as of September 1, 1998). If, prior to the
Effective Time, any of the CKS Group or USWeb designees shall decline or be
unable to serve as a CKS Group or USWeb director, CKS Group (if such person
was designated by CKS Group) or USWeb (if such person was designated by USWeb)
shall designate another person to serve in such person's stead, which person
shall be reasonably acceptable to the other party.
Pursuant to the Reorganization Agreement at the Effective Time, Mark Kvamme
and Thomas Suiter will be offered the positions of Chairman of the Board of
USWeb/CKS and the Chief Creative Officer of USWeb/CKS, respectively. It is
contemplated that the Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer of USWeb shall remain in such positions after the
Effective Time and that following the Effective Time an executive committee
comprised of senior management from both CKS Group and USWeb would be formed
to jointly determine the management of USWeb following the Effective Time; the
executive committee would meet regularly to review the overall strategy,
product direction and operations of the new Combined Company.
CONDUCT OF CKS GROUP'S AND USWEB'S BUSINESSES PRIOR TO THE MERGER
Pursuant to the Reorganization Agreement, until the earlier of the
termination of the Reorganization Agreement pursuant to its terms or the
Effective Time, CKS Group and USWeb (and each of their subsidiaries) shall,
except to the extent that the other shall otherwise consent in writing, carry
on its business diligently and in accordance with good commercial practice and
to carry on its business in the usual, regular and ordinary course, in
substantially the same manner as heretofore 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 (i) preserve intact its
present business organization, (ii) keep available the services of its present
officers and employees and (iii) preserve its relationships with customers,
suppliers, distributors, licensors, licensees, and others with which it has
business dealings. In addition, each of CKS Group and USWeb will promptly
notify the other of any material event involving its business or operations.
CKS Group and USWeb agree that USWeb may continue to execute its acquisition
program in the usual, regular and ordinary course, in substantially the same
manner as heretofore conducted without CKS Group's consent; provided, however,
that USWeb must 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 5,000,000. Furthermore, CKS
Group and USWeb agree that during the period prior to the Effective Time they
will exchange monthly summary financial data and
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that their respective senior management groups will participate in
informational meetings on a monthly basis, at such time and place as shall be
mutually agreeable. No information or knowledge obtained in any investigation
will affect or be deemed to modify any representation or warranty contained
herein or the conditions to the obligations of the parties to consummate the
Merger.
In addition, except as permitted by the terms of the Reorganization
Agreement, and except in the case of CKS Group as provided in CKS Group's
disclosure schedule, and except in the case of USWeb as provided in USWeb's
disclosure schedules, without the prior written consent of the other, during
the period from the date of the Reorganization Agreement and continuing until
the earlier of the termination of the Reorganization Agreement pursuant to its
terms or the Effective Time, neither CKS Group nor USWeb shall do any of the
following and neither CKS Group nor USWeb shall permit their subsidiaries to
do any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant or director stock plans or authorize
cash payments in exchange for any options granted under any of such plans;
(b) Grant any severance or termination pay to any officer or employee except
payments in amounts consistent with policies and past practices or pursuant to
written agreements outstanding, or policies existing, on the date hereof and
as previously disclosed in writing to the other, or adopt any new severance
plan;
(c) Transfer or license to any person or entity or otherwise extend, amend
or modify in any material respect any rights to the CKS Group intellectual
property or USWeb intellectual property, as the case may be, or enter into
grants to future patent rights, other than in the ordinary course of business;
(d) Declare or pay any dividends on or make any other distributions (whether
in cash, stock or property) in respect of any capital stock or split, combine
or reclassify any capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for any capital
stock;
(e) Repurchase or otherwise acquire, directly or indirectly, any shares of
capital stock except pursuant to rights of repurchase of any such shares under
any employee, consultant or director stock plan existing on the date hereof;
(f) Issue, deliver, sell, authorize or propose the issuance, delivery or
sale of, any shares of capital stock or any securities convertible into shares
of capital stock, or subscriptions, rights, warrants or options to acquire any
shares of capital stock or any securities convertible into shares of capital
stock, or enter into other agreements or commitments of any character
obligating it to issue any such shares or convertible securities, other than
(x) shares of CKS Group Common Stock or USWeb Common Stock, as the case may
be, pursuant to the exercise of stock options therefor outstanding as of
September 1, 1998, (ii) options to purchase shares of CKS Group Common Stock
or USWeb Common Stock, as the case may be, to be granted at fair market value
in the ordinary course of business, consistent with past practice and in
accordance with stock option plans existing on September 1, 1998, (iii) shares
of CKS Group Common Stock or USWeb Common Stock, as the case may be, issuable
upon the exercise of the options referred to in clause (ii), (iv) shares of
CKS Group Common Stock or USWeb Common Stock, as the case may be, issuable to
participants in the USWeb Employee Stock Purchase Plan or the CKS Group ESPPs
consistent with past practice and the terms thereof, and (v) shares of USWeb
Common Stock and options to purchase USWeb Common Stock in connection with (x)
one or more acquisitions by USWeb, provided that the business acquired,
without taking any other acquisition into account, would not 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 and provided further that, (y) the aggregate number
of shares of USWeb Common Stock issued in connection with all acquisitions
after the date of the Reorganization Agreement and prior to the Effective Time
shall not exceed 5,000,000;
(g) Except as contemplated in the Reorganization Agreement, cause, permit or
propose any amendments to any charter document or bylaw (or similar governing
instruments of any subsidiaries);
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(h) Except for one or more acquisitions by USWeb of a business where (i) the
business acquired, without taking any other acquisition into account, would
not 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 issued by USWeb in connection with all acquisitions from the date of
the Reorganization Agreement and prior to the Effective Time would not exceed
5,000,000, acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a material portion of the assets of, or
by any other manner, any business or any corporation, partnership interest,
association or other business organization or division thereof, or otherwise
acquire or agree to acquire any assets which are material, individually or in
the aggregate, to the business of CKS Group or USWeb, as the case may be, or
enter into any material joint ventures, strategic partnerships or alliances;
(i) Sell, lease, license, encumber or otherwise dispose of any properties or
assets which are material, individually or in the aggregate, to the business
of CKS Group or USWeb, as the case may be, except in the ordinary course of
business consistent with past practice;
(j) Incur any indebtedness for borrowed money (other than ordinary course
trade payables or pursuant to existing credit facilities in the ordinary
course of business) or guarantee any such indebtedness or issue or sell any
debt securities or warrants or rights to acquire debt securities of CKS Group
or USWeb, as the case may be, or guarantee any debt securities of others;
(k) Adopt or amend any employee benefit or employee stock purchase or
employee option plan, or enter into any employment contract, pay any special
bonus or special remuneration to any director or employee, or increase the
salaries or wage rates of its officers or employees other than in the ordinary
course of business, consistent with past practice, or change in any material
respect any management policies or procedures;
(l) Pay, discharge or satisfy any claim, liability or obligation (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business;
(m) Make any grant of exclusive rights to any third party, other than in the
ordinary course of business consistent with past practice;
(n) Take any action that would be reasonably likely to interfere with
USWeb's ability to account for the Merger as a pooling of interests; or
(o) Agree in writing or otherwise to take any of the actions described in
paragraphs (a) through (n) above.
REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains representations and warranties by
USWeb, Merger Sub and CKS Group relating to a number of matters, including:
(i) the due organization of USWeb, CKS Group and their respective
subsidiaries; (ii) the capital structure of USWeb and CKS Group; (iii) the
obligations with respect to capital stock of USWeb and CKS Group; (iv) the
authorization, execution, delivery and enforceability of the Reorganization
Agreement and related matters; (v) the inapplicability of Section 203 of the
DGCL to the Reorganization Agreement and the transactions contemplated
thereby; (vi) the filing of documents and financial statements by USWeb and
CKS Group with the SEC and the accuracy of information contained therein;
(vii) the absence of undisclosed liabilities which in the aggregate would be
material and the absence of certain material adverse changes or events; (viii)
taxes, tax returns and tax deficiencies; (ix) intellectual property rights;
(x) compliance with laws; (xi) material litigation; (xii) brokers' and
finders' fees; (xiii) employee matters and benefits plans; (xiv) absence of
liens and encumbrances on leased properties and assets; (xv) certain
environmental matters including hazardous materials, hazardous material
activities and environmental permits; (xvi) labor matters; (xvii) agreements,
contracts and commitments; (xviii) the ability to account for the Merger as a
pooling of interests; (xix) change of control payments; (xx) the accuracy of
information provided for this Joint Proxy Statement/Prospectus; (xxi) board
approval of the Reorganization Agreement and related matters; and (xxii)
receipt of written fairness opinions from the investment bankers.
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NO SOLICITATION
Obligations of CKS Group. From and after September 1, 1998, until the
earlier of the Effective Time or termination of the Reorganization Agreement
pursuant to its terms, CKS Group and its subsidiaries will not, nor will they
authorize or permit any of their respective officers, directors or employees
or any investment banker, attorney or other advisor or representative retained
by any of them to, directly or indirectly, (x) solicit, initiate or encourage
the submission of any CKS Group Alternative Proposal (as hereinafter defined)
or (y) participate in any discussions or negotiations regarding, or furnish to
any person any non-public information with respect to, or take any other
action to facilitate any inquiries or the making of any proposal that
constitutes or would reasonably be expected to lead to, any CKS Group
Alternative Proposal; provided, however, that if, at any time prior to
obtaining the approval of the stockholders of CKS Group of the Reorganization
Agreement and the Merger by the requisite vote under applicable law (the "CKS
Group Stockholder Approval"), the CKS Group Board determines in good faith,
after consultation with outside legal counsel, that it is necessary to do so
in order to comply with its fiduciary duties to CKS Group's stockholders under
applicable law, CKS Group may, in response to a CKS Group Alternative Proposal
that was unsolicited or that did not otherwise result from a breach of the
Reorganization Agreement, and subject to compliance with the Reorganization
Agreement, furnish information with respect to CKS Group and participate in
negotiations regarding such CKS Group Alternative Proposal. The Reorganization
Agreement provides that CKS Group and its subsidiaries shall immediately cease
any and all existing activities, discussions or negotiations with any parties
conducted theretofore with respect to any CKS Group Alternative Proposal.
Without limiting the foregoing, it is understood that any violation of the
restrictions set forth in the preceding two sentences by any officer, director
or employee of CKS Group or any of its subsidiaries or any investment banker,
attorney or other advisor or representative of CKS Group or any of its
subsidiaries shall be deemed to be a breach of the Reorganization Agreement by
CKS Group. A "CKS Group Alternative Proposal" means any inquiry, proposal or
offer from any person or "group" (as defined under Section 13(d) of the
Exchange Act and the rules and regulations thereunder) relating to any direct
or indirect acquisition or purchase of a substantial amount of assets of CKS
Group or any of its subsidiaries (other than the purchase of CKS Group's
products or services in the ordinary course of business) or more than a 15%
interest in the total outstanding voting securities of CKS Group or any of its
subsidiaries or any tender offer or exchange offer that if consummated would
result in any person or "group" (as defined under Section 13(d) of the
Exchange Act and the rules and regulations thereunder) beneficially owning 15%
or more of the total outstanding voting securities of CKS Group or any of its
subsidiaries or any merger, consolidation, business combination, sale of
substantially all the assets, recapitalization, liquidation, dissolution or
similar transaction involving CKS Group or any of its subsidiaries, other than
the transactions contemplated by the Reorganization Agreement.
Pursuant to the Reorganization Agreement, neither the CKS Group Board nor
any committee thereof shall (x) withdraw or modify, or propose publicly to
withdraw or modify, in a manner adverse to USWeb or Merger Sub, the approval
or recommendation by the CKS Group Board or any such committee of the
Reorganization Agreement or the Merger or (y) cause CKS Group to enter into
any letter of intent, agreement in principle, acquisition agreement or other
similar agreement (an "Acquisition Agreement") with respect to any CKS Group
Alternative Proposal. In addition, subject to the other provisions of the
Reorganization Agreement, from and after September 1, 1998, until the earlier
of the Effective Time and termination of the Reorganization Agreement pursuant
to its terms, CKS Group and its subsidiaries will not, nor will they authorize
or permit any of their respective officers, directors or employees or any
investment banker, attorney or other advisor or representative retained by any
of them to, directly or indirectly, make or authorize any public statement,
recommendation or solicitation in support of any CKS Group Alternative
Proposal. Notwithstanding the foregoing or anything else contained in the
Reorganization Agreement, prior to obtaining the CKS Group Stockholder
Approval, the CKS Group Board, to the extent it determines in good faith,
after consultation with outside legal counsel, that it is necessary to do so
in order to comply with its fiduciary duties to CKS Group stockholders under
applicable law, may withdraw or modify its approval or recommendation of the
Reorganization Agreement or the Merger (and, to the extent it does so, CKS
Group may refrain from soliciting proxies to secure the vote of its
stockholders) or approve or recommend any CKS Group Superior
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Proposal (as hereinafter defined), in each case at any time after the third
business day following USWeb's receipt of bona fide written notice (a "Notice
of CKS Group Superior Proposal") advising USWeb that the CKS Group Board has
received a CKS Group Superior Proposal, specifying the material terms and
conditions of the CKS Group Superior Proposal and identifying the person
making such CKS Group Superior Proposal (it being understood that any
amendment to the price or material terms of a CKS Group Superior Proposal
shall require an additional Notice of CKS Group Superior Proposal and an
additional three business day period thereafter to the extent permitted under
applicable law); provided, that unless the Reorganization Agreement is
terminated pursuant to its terms, nothing contained in the section of the
Reorganization Agreement summarized here shall limit CKS Group's obligation to
hold and convene the CKS Group Special Meeting (regardless of whether the
recommendation of the CKS Group Board shall have been withdrawn, modified or
not yet made) or to provide CKS Group stockholders with material information
relating to such meeting. For purposes of the Reorganization Agreement, a
"CKS Group Superior Proposal" means any bona fide proposal made by a third
party to acquire, directly or indirectly, including pursuant to a tender
offer, exchange offer, merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction, for
consideration consisting of cash and/or securities, more than 50% of the
voting power of CKS Group Common Stock or all or substantially all the assets
of CKS Group and otherwise on terms which the CKS Group Board determines in
its good faith judgment (after consultation with a financial advisor of
nationally recognized reputation) to be more favorable to CKS Group
stockholders than the Merger and for which financing, to the extent required,
is then committed or which, in the good faith judgment of the CKS Group Board,
is capable of being obtained by such third party.
In addition, pursuant to the Reorganization Agreement, CKS Group is required
to advise USWeb as promptly as practicable, orally and in writing of any
request for non-public information which CKS Group reasonably believes would
lead to a CKS Group Alternative Proposal or of any CKS Group Alternative
Proposal, the material terms and conditions of such request or CKS Group
Alternative Proposal, and the identity of the person making any such request,
CKS Group Alternative Proposal or inquiry. CKS Group will keep USWeb informed
of all material changes regarding the terms of the CKS Group Alternative
Proposal and all material changes in the status of the CKS Alternative
Proposal.
Nothing contained in the Reorganization Agreement shall prohibit CKS Group
from (x) taking and disclosing to its stockholders a position contemplated by
Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act or (y) making any
disclosure to CKS Group stockholders if, in the good faith judgment of the
majority of the members of the CKS Group Board, after consultation with
independent legal counsel, failure to so disclose would be inconsistent with
applicable laws; provided that none of CKS Group nor CKS Group Board nor any
committee thereof shall, except in accordance with the Reorganization
Agreement, withdraw or modify, or publicly propose to withdraw or modify, its
position with respect to the Reorganization Agreement or the Merger or approve
or recommend, or propose to approve or recommend, a CKS Group Alternative
Proposal.
Notwithstanding anything to the contrary in the Reorganization Agreement,
CKS Group will not provide any non-public information to a third party unless:
(x) CKS Group provides such non-public information pursuant to a nondisclosure
agreement with terms regarding the protection of confidential information at
least as restrictive as such terms in the confidentiality agreement between
USWeb and CKS Group; and (y) such non-public information has been previously
or is contemporaneously delivered to USWeb.
Obligations of USWeb. From and after September 1, 1998 until the earlier of
the Effective Time or termination of the Reorganization Agreement pursuant to
its terms, USWeb and its subsidiaries will not, nor will they authorize or
permit any of their respective officers, directors or employees or any
investment banker, attorney or other advisor or representative retained by any
of them to, directly or indirectly, (x) solicit, initiate or encourage the
submission of any USWeb Alternative Proposal (as hereinafter defined) or (y)
participate in any discussions or negotiations regarding, or furnish to any
person any non-public information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes or
would
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reasonably be expected to lead to, any USWeb Alternative Proposal; provided,
however, that if, at any time prior to obtaining the approval of the
stockholders of USWeb of the issuance of USWeb Common Stock by virtue of the
Merger (the "USWeb Stockholder Approval") the USWeb Board determines in good
faith, after consultation with outside legal counsel, that it is necessary to
do so in order to comply with its fiduciary duties to USWeb's stockholders
under applicable law, USWeb may, in response to a USWeb Alternative Proposal
that was unsolicited or that did not otherwise result from a breach of the
Reorganization Agreement, and subject to compliance with the Reorganization
Agreement, furnish information with respect to USWeb and participate in
negotiations regarding such USWeb Alternative Proposal. USWeb and its
subsidiaries will immediately cease any and all existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any USWeb Alternative Proposal. Without limiting the foregoing, it is
understood that any violation of the restrictions set forth in the preceding
two sentences by any officer, director or employee of USWeb or any of its
subsidiaries or any investment banker, attorney or other advisor or
representative of USWeb or any of its subsidiaries shall be deemed to be a
breach of the Reorganization Agreement by USWeb. For purposes of the
Reorganization Agreement, "USWeb Alternative Proposal" means any inquiry,
proposal or offer from any person or "group" (as defined under Section 13(d)
of the Exchange Act and the rules and regulations thereunder) relating to any
direct or indirect acquisition or purchase of a substantial amount of assets
of USWeb or any of its subsidiaries (other than the purchase of USWeb's
products in the ordinary course of business) or more than a 15% interest in
the total outstanding voting securities of USWeb or any of its subsidiaries or
any tender offer or exchange offer that if consummated would result in any
person or "group" (as defined under Section 13(d) of the Exchange Act and the
rules and regulations thereunder) beneficially owning 15% or more of the total
outstanding voting securities of USWeb or any of its subsidiaries or any
merger, consolidation, business combination, sale of substantially all the
assets, recapitalization, liquidation, dissolution or similar transaction
involving USWeb or any of its subsidiaries, other than (i) the transactions
contemplated by the Reorganization Agreement and (ii) any acquisition by
USWeb, provided that the business to be acquired, without taking any other
acquisition into account, would not 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.
Pursuant to the Reorganization Agreement, neither the USWeb Board nor any
committee thereof shall (x) withdraw or modify, or propose publicly to
withdraw or modify, in a manner adverse to CKS Group, the approval or
recommendation by the USWeb Board or any such committee of the Reorganization
Agreement or the Merger or (y) cause USWeb to enter into any letter of intent,
agreement in principle, acquisition agreement or other similar agreement (a
"USWeb Acquisition Agreement") with respect to any USWeb Alternative Proposal.
In addition, subject to the other provisions of the Reorganization Agreement,
from and after the date of the Reorganization Agreement until the earlier of
the Effective Time and termination of the Reorganization Agreement pursuant to
its terms, USWeb and its subsidiaries will not, nor will they authorize or
permit any of their respective officers, directors or employees or any
investment banker, attorney or other advisor or representative retained by any
of them to, directly or indirectly, make or authorize any public statement,
recommendation or solicitation in support of any USWeb Alternative Proposal.
Notwithstanding the foregoing or anything else contained in the Reorganization
Agreement, prior to obtaining the USWeb Stockholder Approval, the USWeb Board,
to the extent it determines in good faith, after consultation with outside
legal counsel, that it is necessary to do so in order to comply with its
fiduciary duties to USWeb's stockholders under applicable law, may withdraw or
modify its approval or recommendation of the Reorganization Agreement or the
Merger (and, to the extent it does so, USWeb may refrain from soliciting
proxies to secure the vote of its stockholders as may otherwise be required by
the Reorganization Agreement) or approve or recommend any USWeb Superior
Proposal (as hereinafter defined), in each case at any time after the third
business day following CKS Group's receipt of bona fide written notice (a
"Notice of USWeb Superior Proposal") advising CKS Group that the Board of
Directors of USWeb has received a USWeb Superior Proposal, specifying the
material terms and conditions of the USWeb Superior Proposal and identifying
the person making such USWeb Superior Proposal (it being understood that any
amendment to the price or material terms of a USWeb Superior Proposal shall
require an additional Notice of USWeb Superior Proposal and an additional
three business day period thereafter to the extent permitted under
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applicable law); provided, that unless the Reorganization Agreement is
terminated pursuant to its terms, nothing contained in the Reorganization
Agreement shall limit USWeb's obligation to hold and convene the USWeb Special
Meeting (regardless of whether the recommendation of the USWeb Board shall
have been withdrawn, modified or not yet made) or to provide USWeb
stockholders with material information relating to such meeting. For purposes
of the Reorganization Agreement, a "USWeb Superior Proposal" means any bona
fide proposal made by a third party to acquire, directly or indirectly,
including pursuant to a tender offer, exchange offer, merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction, for consideration consisting of cash and/or securities, more than
50% of the voting power of USWeb Common Stock or all or substantially all the
assets of USWeb and otherwise on terms which the USWeb Board determines in its
good faith judgment (after consultation with a financial advisor of nationally
recognized reputation) to be more favorable to USWeb's stockholders than the
Merger and for which financing, to the extent required, is then committed or
which, in the good faith judgment of the USWeb Board, is capable of being
obtained by such third party.
In addition to the obligations of USWeb set forth in the Reorganization
Agreement, USWeb as promptly as practicable shall advise CKS Group orally and
in writing of any request for non-public information which USWeb reasonably
believes would lead to a USWeb Alternative Proposal or of any USWeb
Alternative Proposal, the material terms and conditions of such request or
USWeb Alternative Proposal, and the identity of the person making any such
request, USWeb Alternative Proposal or inquiry. USWeb will keep CKS Group
informed of all material changes regarding the terms of the USWeb Alternative
Proposal and all material changes in the status of the USWeb Alternative
Proposal.
Nothing contained in the Reorganization Agreement prohibits USWeb from (x)
taking and disclosing to its stockholders a position contemplated by Rules
14d-9 and 14e-2(a) promulgated under the Exchange Act or (y) making any
disclosure to USWeb's stockholders if, in the good faith judgment of the
majority of the members of the USWeb Board, after consultation with
independent legal counsel, failure to so disclose would be inconsistent with
applicable securities laws; provided that none of USWeb nor the USWeb Board
nor any committee thereof shall, except in accordance with the provisions of
the Reorganization Agreement, withdraw or modify, or publicly propose to
withdraw or modify, its position with respect to the Reorganization Agreement
or the Merger or approve or recommend, or propose to approve or recommend, a
USWeb Alternative Proposal.
Notwithstanding anything to the contrary in the Reorganization Agreement,
USWeb will not provide any non-public information to a third party unless: (x)
USWeb provides such non-public information pursuant to a nondisclosure
agreement with terms regarding the protection of confidential information at
least as restrictive as such terms in the confidentiality agreement between
USWeb and CKS Group; and (y) such non-public information has been previously
or is contemporaneously delivered to CKS Group.
STOCK OPTIONS AND EMPLOYEE BENEFITS
At the Effective Time, each CKS Group Option under the CKS Group Stock
Plans, whether or not exercisable, will be assumed by USWeb. Each CKS Group
Stock Option so assumed by USWeb under the Reorganization Agreement will
continue to have, and be subject to, the same terms and conditions set forth
in the applicable CKS Group Stock Option Plan immediately prior to the
Effective Time (including, without limitation, any repurchase rights), except
that (i) each CKS Group Option will be exercisable (or will become exercisable
in accordance with its terms) for that number of whole shares of USWeb Common
Stock equal to the product of the number of shares of CKS Group Common Stock
that were issuable upon exercise of such CKS Group Option immediately prior to
the Effective Time multiplied by the Exchange Ratio, with the result rounded
down to the nearest whole number of shares of USWeb Common Stock, and (ii) the
per share exercise price for the shares of USWeb Common Stock issuable upon
exercise of such assumed CKS Group 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 Option was exercisable immediately prior to the
Effective Time by the Exchange Ratio, with the result rounded up to the
nearest whole cent.
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At the Effective Time, each outstanding ESPP Options will be assumed by
USWeb. Each CKS Group ESPP Option assumed by USWeb will continue to have, and
be subject to, the same terms and conditions set forth in the CKS Group ESPPs,
as the case may be, immediately prior to the Effective Time, except that
(i) each CKS Group ESPP Option will become exercisable for shares of USWeb
Common Stock, (ii) the limit on number of shares of USWeb Common Stock that an
employee may purchase pursuant to an assumed CKS Group ESPP Option shall be
three thousand seven hundred fifty (3,750), which is equal to two thousand
five hundred (2,500) multiplied by the Exchange Ratio, and (iii) the purchase
price per share of USWeb Common Stock shall be equal to eighty-five percent
(85%) of the lesser of (A) the quotient of the closing price of a share of CKS
Common Stock on the first day of the 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.
It is intended that CKS Group Options assumed by USWeb shall qualify
following the Effective Time as incentive stock options as defined in Section
422 of the Code to the extent CKS Group Options qualified as incentive stock
options immediately prior to the Effective Time. It also is intended that the
ESPP Options assumed by USWeb shall qualify, following the Effective Time as
options granted under an employee stock purchase plan as defined in Section
423 of the Code to the extent the CKS Group ESPP Options qualified as such
immediately prior to the Effective Time.
USWeb will file a registration statement on Form S-8 registering the shares
of USWeb Common Stock issuable with respect to assumed CKS Group Options and
CKS Group ESPP Options within two business days after the Closing Date.
USWeb will, or will cause CKS Group or the appropriate subsidiary of CKS
Group to give individuals who are employed by CKS Group or any of its
subsidiaries as of the Effective Time and who remain employees of CKS Group or
such subsidiary following the Effective Time (each such employee, an "Affected
Employee") full credit to the extent each such Affected Employee has been
credited with service under each comparable employee benefit plan or
arrangement maintained by CKS Group immediately prior to the Effective Time
for purposes of eligibility, vesting, benefit, accrual and determination of
the level of benefits under each employee benefit plan or arrangement
maintained by USWeb, CKS Group or any such subsidiary for such Affected
Employees' service with CKS Group or any affiliate thereof.
USWeb will make commercially reasonable best efforts to, or will cause CKS
Group or the appropriate subsidiary of CKS Group to (i) waive all limitations
as to pre-existing conditions exclusions and waiting periods with respect to
participation and coverage requirements applicable to the Affected Employees
under any welfare benefit plans that such Affected Employees may be eligible
to participate in after the Effective Time, other than limitations or waiting
periods that are already in effect with respect to such Affected Employees and
that have not been satisfied as of the Effective Time under any welfare plan
maintained for the Affected Employees immediately prior to the Effective Time,
and (ii) provide each Affected Employee with credit for the remaining short
plan year for any co-payments and deductibles paid under each comparable
welfare plan maintained by CKS Group prior to the Effective Time in satisfying
any applicable deductible or co-payment requirements under any welfare plans
that such Affected Employees are eligible to participate in after the
Effective Time.
As of the Effective Time, USWeb shall expressly assume and agree to perform
in accordance with their terms, all employment, stay-put and other
compensation agreements then existing between CKS Group or any subsidiary with
any director, officer or employee thereof, provided such agreements are
described in CKS Group's disclosure schedule.
USWeb shall make its commercially reasonable best efforts to adopt, maintain
and sponsor for the Affected Employees each employee welfare benefit plan
(excluding any reimbursement policies, arrangements or programs and any
severance plans) that are maintained and sponsored by CKS Group as of the
Effective Time, that are set forth on the CKS Group's disclosure schedule (the
"CKS Group Benefits Plans"), for one
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(1) year following September 1, 1998 (the "Benefit Period"); provided,
however, that (i) such plans have been established and maintained in
substantial compliance with all applicable laws, rules and regulations, up to
and including the Effective Time, (ii) that the costs of such plans are not
substantially in excess of their historical costs (as adjusted for price
increases reasonably in line with price increases affecting such products
generally), and (iii) the insurance carriers of the CKS Group Benefits Plans
permit USWeb to adopt, maintain and sponsor such plans. In the event that the
insurance carriers of the CKS Group Benefits Plans do not permit USWeb to
adopt such plans, or to extend such plans (and related contracts) for the
Affected Employees for the outstanding portion of the Benefit Period which
extends beyond the current plan (contract) year on substantially similar terms
as currently in effect, then USWeb shall not be obligated to maintain such
plans beyond the current plan (contract) year, but shall use commercially
reasonable best efforts to offer a comparable plan (or as reasonably close to
comparable as possible while remaining in line with historical costs).
Subject to the foregoing, from and after the Effective Time, the Affected
Employees shall be eligible to participate in USWeb's employee benefit plans
and arrangements in which similarly situated employees of USWeb or affiliates
of USWeb participate, to the same extent as such similarly situated employees
of USWeb or affiliates of USWeb.
INTERESTS OF CERTAIN PERSONS
CKS Group Outside Director Options
Under the CKS Group 1995 Director Option Plan, in the event a director of
CKS Group or a director of any successor corporation of CKS Group is
terminated as a director of such entity following the Merger, other than upon
a voluntary resignation, then such director's options under the 1995 Director
Option Plan will become exercisable in full.
Change of Control Agreements
CKS Group has employment agreements with change of control provisions with
the following executive officers: Messrs. Clarkson, Baab and Small and Ms.
Johnson. The employment agreements provide that upon the effectiveness of the
Merger, one-half of the shares subject to options held by such employee which
were not otherwise vested at the Effective Time shall accelerate and become
exercisable in full. Furthermore, if following the Merger the employee's
employment is involuntarily terminated or if there is a "constructive
termination" of the employee's employment, such employee will receive (i) a
lump sum payment equal to 12 months salary, plus the amount paid to or earned
by the employee as incentive compensation or bonus payments during the
preceding 12 months, whichever is greater; (ii) 12 months of COBRA coverage;
(iii) 12 months of continued car allowance, professional association dues; and
(iv) accelerated vesting and immediate exercisability of all stock options
granted by CKS Group to such employee to the extent such options remain
outstanding and unexercised and, in the case of Mr. Clarkson, with two years
following the date of termination to exercise any options held by the
employee. The positions to be held by each of Messrs. Clarkson, Baab and Small
and Ms. Johnson with the Combined Company constitute a "constructive
termination" under each of their respective employment agreements and
therefore trigger the items referenced in (i) through (iv) above. There can be
no assurances that the Combined Company and such officers will reach
employment agreements or that such officers will stay in the employ of the
Combined Company through the completion of the transition.
Indemnification
From and after the Effective Time, USWeb will fulfill and honor and will
cause the surviving corporation to fulfill and honor in all respects the
obligations of CKS Group pursuant to any indemnification agreements between
CKS Group and its directors and officers as of the Effective Time (the
"Indemnified Parties") and any indemnification provisions under the CKS Group
Certificate or the CKS Group Bylaws as in effect on the date of the
Reorganization Agreement. The Certificate of Incorporation and Bylaws of the
surviving
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corporation will contain provisions with respect to exculpation and
indemnification that are at least as favorable to the Indemnified Parties as
those contained in the CKS Group Certificate and the CKS Group Bylaws as in
effect on the date of the Reorganization Agreement, which provisions will not
be amended, repealed or otherwise modified for a period of ten years from the
Effective Time in any manner that would adversely affect the rights thereunder
of individuals who, immediately prior to the Effective Time, were directors,
officers, employees or agents of CKS Group, unless such modification is
required by law.
For a period of six years after the Effective Time, USWeb will maintain or
cause the surviving corporation to maintain in effect, if available,
directors' and officers' liability insurance covering those persons who are
currently covered by CKS Group's directors' and officers' liability insurance
policy on terms comparable to those applicable to the current directors and
officers of CKS Group; provided, however, that in no event will USWeb or the
surviving corporation be required to expend in excess of 200% of the annual
premium currently paid by CKS Group for such coverage (or such coverage as is
available for such 200% of such annual premium).
Other Interests
Mr. Pierre Lamond, a director of CKS Group, is the father-in-law of Mr.
Kvamme, CKS Group's Chairman and Chief Executive Officer.
HOLDER AGREEMENTS
This summary is qualified in its entirety by reference to the forms of USWeb
Holder Agreement and CKS Group, Inc. Holder Agreement, incorporated herein by
reference. Stockholders of USWeb and CKS Group are urged to read the Holder
Agreements in their entireties for a more complete description of the rights
and obligations thereunder.
Each executive officer and director and certain significant stockholders of
USWeb (collectively, the "USWeb Holders") has entered into a USWeb Holder
Agreement restricting sales, dispositions or other transactions reducing their
risk of investment in respect of the shares of USWeb Common Stock held by them
to help ensure that the 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 (collectively, the "CKS
Group Holders") has entered into a CKS 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
Merger and the shares of USWeb Common Stock received by them in the Merger so
as to comply with the requirements of applicable federal securities and tax
laws and to help ensure that the Merger will be treated as a pooling of
interests for accounting and financial reporting purposes.
STOCK OPTION AGREEMENTS
The following is a brief summary of certain provisions of the Stock Option
Agreements, copies of which are attached as Exhibits A and B, respectively, to
Annex A to this Joint Proxy Statement/Prospectus and incorporated herein by
this reference. This summary is qualified in its entirety by reference to the
Stock Option Agreements. Stockholders of USWeb and CKS Group are urged to read
the Stock Option Agreements in their entirety for a more complete description
of the rights and obligations of the parties thereunder.
Pursuant to the CKS Group Stock Option Agreement, CKS Group granted USWeb an
option to acquire, under certain circumstances, a number of newly-issued
shares of CKS Common Stock equal to 19.9% of the issued an outstanding shares
of CKS Group Common Stock as of the date of exercise of such option. Pursuant
to the USWeb Stock Option Agreement, USWeb granted CKS Group an option to
acquire, 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. With the exception of
certain terms relating to the applicable exercise price, the terms of the CKS
Stock Option Agreement and the USWeb Stock Option Agreement are substantially
parallel.
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The per-share exercise price under the CKS Group Stock Option Agreement is
payable in cash and is equal to the lower of (i) the Exchange Ratio times 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 on the five trading days immediately prior to the first
public announcement of an alternative business combination proposal involving
CKS Group. The per-share exercise price under the USWeb Stock Option Agreement
is payable in cash and is equal to the lower of (i) the closing price of USWeb
Common Stock on the last trading day prior to the date of the USWeb Stock
Option Agreement or (ii) the average closing price of USWeb Common Stock on
the five trading days immediately prior to the first public announcement of an
alternative business combination proposal involving USWeb.
Subject to certain limitations, the USWeb Stock Option Agreement is
exercisable, in whole or in part, at any time or from time to time after the
occurrence of certain events (a "USWeb Stock Option Exercise Event"). A USWeb
Stock Option Exercise Event will be deemed to have occurred and the USWeb
Stock Option Agreement will become exercisable only under the following
circumstances:
(1) from and after the commencement of a tender or exchange offer for
twenty-five percent (25%) or more of any class of USWeb outstanding capital
stock;
(2) from and after the failure to obtain the required vote of USWeb
stockholders contemplated by the Reorganization Agreement upon a vote taken at
a meeting of USWeb stockholders duly convened therefor (or any adjournment
thereof) if at the time of such failure a USWeb Alternative Proposal shall
have been publicly announced or otherwise publicly disclosed;
(3) upon termination of the Reorganization Agreement by CKS Group if (i) the
USWeb Board or any committee thereof shall have withdrawn or modified in a
manner adverse to CKS Group its recommendation of approval of the issuance of
shares of USWeb Common Stock pursuant to the Merger, (ii) USWeb shall have
failed to include in the Proxy Statement (as defined in the Reorganization
Agreement) the recommendation of the USWeb Board in favor of approval of the
issuance of shares of USWeb Common Stock pursuant to the Merger, (iii) in
connection with a Rule 14d-9 disclosure, the USWeb Board has taken an action
other than a rejection of the Rule 14d-9 proposal, (iv) the USWeb Board or any
committee thereof has recommended any USWeb Alternative Proposal, or (v) the
USWeb Board or any committee thereof resolved to do any of the foregoing;
(4) upon termination of the Reorganization Agreement by USWeb prior to
approval of the Merger by the USWeb stockholders, if the USWeb Board
recommends a USWeb Superior Proposal to the stockholders of USWeb.
A "USWeb Alternative Proposal" means any inquiry, proposal or offer from any
person or "group" (as defined under Section 13(d) of the Exchange Act and the
rules and regulations thereunder) relating to any direct or indirect
acquisition or purchase of a substantial amount of assets of USWeb or any of
its subsidiaries (other than the purchase of USWeb's products or services in
the ordinary course of business) or more than a 15% interest in the total
outstanding voting securities of USWeb or any of its subsidiaries or any
tender offer or exchange offer that if consummated would result in any person
or "group" (as defined under Section 13(d) of the Exchange Act and the rules
and regulations thereunder) beneficially owning 15% or more of the total
outstanding voting securities of USWeb or any of its subsidiaries or any
merger, consolidation, business combination, sale of substantially all the
assets, recapitalization, liquidation, dissolution or similar transaction
involving USWeb or any of its subsidiaries, other than (i) the transactions
contemplated by the Reorganization Agreement and (ii) any acquisition by
USWeb, provided that the business to be acquired, without taking any other
acquisition into account, would not 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, and
provided further 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 does not exceed 5,000,000. A "USWeb Superior Proposal" means
any bona fide proposal made by a third party to acquire, directly or
indirectly, including pursuant to a tender offer, exchange offer, merger,
consolidation, business
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combination, recapitalization, liquidation, dissolution or similar
transaction, for consideration consisting of cash and/or securities, more than
50% of the voting power of USWeb Common Stock or all or substantially all of
the assets of USWeb and otherwise on terms which the Board of Directors of
USWeb determines in its good faith judgment (after consultation with a
financial advisor of nationally recognized reputation) to be more favorable to
USWeb's stockholders than the Merger and for which financing, to the extent
required, is then committed or which, in the good faith judgment of the Board
of Directors of USWeb, is capable of being obtained by such third party.
Subject to certain limitations, the CKS Group Stock Option Agreement is
exercisable, in whole or in part, at any time or from time to time after the
occurrence of certain events (a "CKS Group Stock Option Exercise Event"). A
CKS Group Stock Option Exercise Event will be deemed to have occurred and the
CKS Group Stock Option Agreement will become exercisable only under the
following circumstances:
(1) from and after the commencement of a tender or exchange offer for
twenty-five percent (25%) or more of any class of CKS Group outstanding
capital stock;
(2) from and after the failure to obtain the required vote of CKS Group
stockholders contemplated by the Reorganization Agreement upon a vote taken at
a meeting of CKS Group stockholders duly convened therefor (or any adjournment
thereof) if at the time of such failure a CKS Group Alternative Proposal shall
have been publicly announced or otherwise publicly disclosed;
(3) upon termination of the Reorganization Agreement by USWeb if (i) the CKS
Group Board or any committee thereof shall have withdrawn or modified in a
manner adverse to USWeb its recommendation of approval of the Merger, (ii) CKS
Group shall have failed to include in the Proxy Statement (as defined in the
Reorganization Agreement) the recommendation of the CKS Group Board in favor
of approval of the Merger, (iii) in connection with a Rule 14d-9 disclosure,
the CKS Group Board take an action other than a rejection of the Rule 14d-9
proposal, (iv) the CKS Group Board or any committee thereof has recommended
any CKS Group Alternative Proposal, or (v) the CKS Group Board or any
committee thereof resolved to do any of the foregoing; and
(4) upon termination of the Reorganization Agreement by CKS Group prior to
approval of the Merger by the CKS Group stockholders, if the CKS Group Board
recommends a CKS Group Superior Proposal to the stockholders of CKS Group.
A "CKS Group Alternative Proposal" means any inquiry, proposal or offer from
any person or "group" (as defined under Section 13(d) of the Exchange Act and
the rules and regulations thereunder) relating to any direct or indirect
acquisition or purchase of a substantial amount of assets of CKS Group or any
of its subsidiaries (other than the purchase of CKS Group's products or
services in the ordinary course of business) or more than a 15% interest in
the total outstanding voting securities of CKS Group or any of its
subsidiaries or any tender offer or exchange offer that if consummated would
result in any person or "group" (as defined under Section 13(d) of the
Exchange Act and the rules and regulations thereunder) beneficially owning 15%
or more of the total outstanding voting securities of CKS Group or any of its
subsidiaries or any merger, consolidation, business combination, sale of
substantially all the assets, recapitalization, liquidation, dissolution or
similar transaction involving CKS Group or any of its subsidiaries, other than
the transactions contemplated by the Reorganization Agreement. A "CKS Group
Superior Proposal" means any bona fide proposal made by a third party to
acquire, directly or indirectly, including pursuant to a tender offer,
exchange offer, merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction, for consideration consisting
of cash and/or securities, more than 50% of the voting power of Common Stock
or all or substantially all of the assets of CKS Group and otherwise on terms
which the CKS Group Board determines in its good faith judgment (after
consultation with a financial advisor of nationally recognized reputation) to
be more favorable to CKS Group's stockholders than the Merger and for which
financing, to the extent required, is then committed or which, in the good
faith judgment of the CKS Group Board, is capable of being obtained by such
third party.
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With certain exceptions, the options granted under the Stock Option
Agreements terminate upon the occurrence of the earlier of the following: (i)
the Effective Time, (ii) sixty (60) days following the termination of the
Reorganization Agreement if an Exercise Event (as defined in the
Reorganization Agreement) shall have occurred on or prior to the date of such
termination, (iii) the termination of the Reorganization Agreement under
circumstances which do not constitute an Exercise Event, (iv) termination of
the Reorganization Agreement by mutual consent duly authorized by the Boards
of Directors of USWeb and CKS Group, and (v) termination of the Reorganization
Agreement if a Governmental Entity (as defined in the Reorganization
Agreement) shall have issued an Order (as defined in the Reorganization
Agreement) having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger, which Order is final and nonappealable;
provided, however, that with respect to the preceding clause (ii) to this
sentence, the Stock Option Agreement's exercise periods are automatically
extended for up to ten (10) business days if exercise of the options is
prohibited or restrained for certain legal reasons. The options may not be
exercised by the optionholder if the optionholder is in material breach of
covenants or agreements in the Reorganization Agreement.
Under certain circumstances when an option is exercisable, the option holder
has the right to "put" any or all shares purchased under the Stock Option
Agreement back to the option grantor. Under these stock "put" provisions, the
option holder has the right to require the option grantor to repurchase any or
all shares purchased by the option holder under the option, at a price per
share equal to the greater of the exercise price and the fair market value of
a single share of the option grantor's common stock.
At any time following the first occurrence of an exercise event and prior to
the expiration of the option, each of the Stock Option Agreements gives the
option grantor certain "first refusal" rights with respect to the shares of
the option grantor's common stock acquired by the option holder under the
applicable Stock Option Agreement. Under these "first refusal" rights if the
option holder proposes to sell any of the option grantor's shares issued to
the option holder under the Stock Option Agreement, then the option grantor
has the right to repurchase all, but not less than all, of the shares proposed
to be transferred, at a per-share price equal to that price which the option
holder would have received from the third party purchaser whose offer gave
rise to the right of first refusal.
The aggregate amount payable by either party under both the Reorganization
Agreement and the Stock Option Agreements is capped, as are the aggregate net
proceeds receivable by either party from sales of shares received upon
exercise of such options. In general, the aggregate proceeds that may be
retained by each of CKS Group and USWeb under the termination fees provisions
of the Reorganization Agreement and as a result of sales of shares acquired
upon exercise of the options granted under the Stock Option Agreements may not
exceed a total of $18 million. The aggregate proceeds that may be retained by
each of CKS Group and USWeb under the termination fees provision of the
Reorganization Agreement (see "--Termination of the Reorganization Agreement;
Termination Fees") pursuant to the exercise of the "put" provisions under the
Stock Option Agreements is capped at the aggregate of $12 million.
VOTING AGREEMENTS
Each executive officer and director and certain significant stockholders of
USWeb (all of whom in the aggregate own 11,542,571 shares of USWeb Common
Stock as of the USWeb Record Date and options and warrants exercisable within
60 days of the USWeb Record Date to purchase 1,034,137 shares of USWeb Common
Stock, representing 27.0% of the votes entitled to be cast by holders of
shares of USWeb Common Stock issued and outstanding as of the USWeb Record
Date, assuming exercise of all vested options held by all such persons) has
entered into a USWeb Voting Agreement with CKS Group. Pursuant to the USWeb
Voting Agreements, the foregoing persons have agreed to vote all shares of
USWeb Common Stock they have beneficial ownership of and any USWeb Common
Stock they acquire beneficial ownership of prior to the termination of the
USWeb Voting Agreements in favor of approval of the issuance of shares of
USWeb Common Stock by virtue of the Merger. In addition, such persons have
granted irrevocable proxies to the
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CKS Group Board to vote such persons' USWeb Common Stock in favor of approval
of the issuance of shares of USWeb Common Stock pursuant to the Reorganization
Agreement and the Merger.
Each executive officer and director and one significant stockholder of CKS
Group (all of whom in the aggregate own 4,748,520 shares of CKS Group Common
Stock as of the CKS Group Record Date and options exercisable within 60 days
of the CKS Group Record Date to purchase 250,541 shares of CKS Group Common
Stock, representing approximately 31.7% of the votes entitled to be cast by
holders of CKS Group Common Stock issued and outstanding as of the CKS Group
Record Date, assuming exercise of all vested options held by all such persons
that will be vested within 60 days of the CKS Group Record Date) has entered
into a CKS Group Voting Agreement with USWeb. Pursuant to the CKS Group Voting
Agreements, the foregoing persons have agreed to vote all shares of CKS Group
Common Stock they have beneficial ownership of and any CKS Group Common Stock
they acquire beneficial ownership of prior to the termination of the CKS Group
Voting Agreements in favor of approval and adoption of the Reorganization
Agreement and the Merger. In addition, such persons have granted irrevocable
proxies to the USWeb Board to vote such persons' CKS Group Common Stock in
favor of approval of the Reorganization Agreement and the Merger.
MATERIAL ADVERSE EFFECT
When used in connection with USWeb, the term "Material Adverse Effect"
means, for purposes of the Reorganization Agreement, any change, event, or
effect that is materially adverse to the business, assets (including
intangible assets), financial condition or results of operations of USWeb and
its subsidiaries taken as a whole (except for those changes, events and
effects that are directly caused by (i) conditions affecting national,
regional or world economies, (ii) conditions affecting the Internet-related
professional services industry as a whole, (iii) the pendency or announcement
of the Reorganization Agreement or the transactions contemplated thereby,
including changes, events or effects resulting from employee attrition or a
delay of, reduction in or cancellation or change in the terms of customer
engagements, to the extent attributable to the pendency or announcement of the
Reorganization Agreement or the transactions contemplated thereby,
(iv) failure of USWeb's and its subsidiaries' results of operations to meet
any internal or external predictions, projections, estimates or expectations,
or (v) changes in the market price or trading volume of USWeb capital stock,
which conditions (in the case of clauses (i) and (ii)) do not affect USWeb in
a disproportionate manner).
When used in connection with CKS Group, the term "Material Adverse Effect"
means, for purposes of the Reorganization Agreement, any change, event or
effect that is materially adverse to the business, assets (including
intangible assets), financial condition or results of operations of CKS Group
and its subsidiaries taken as a whole (except for those changes, events and
effects that are directly caused by (i) conditions affecting national,
regional or world economies, (ii) conditions affecting the integrated
marketing communications services and internet services industries as a whole,
(iii) the pendency or announcement of the Reorganization Agreement, or the
transactions contemplated thereby, including changes, events or effects
resulting from employee attrition or a delay of, reduction in or cancellation
or change in the terms of customer engagements, to the extent attributable to
the pendency or announcement of the Reorganization Agreement or the
transactions contemplated thereby, (iv) failure of CKS Group's and its
subsidiaries' results of operations to meet any internal or external
predictions, projections, estimates or expectations, or (v) changes in the
market price or trading volume of CKS Group capital stock, which conditions
(in the case of clause (i) and (ii)) do not affect CKS Group in a
disproportionate manner).
Subsequent to the signing of the Reorganization Agreement, in early November
1998, USWeb and CKS Group executives discussed Mr. Firmage's role in the
Combined Company and personal interests he was pursuing. After several
discussions, and after consultation with and concurrence of directors from
each company, Mr. Firmage and other USWeb executives and directors determined
to extend an offer to Robert Shaw to join USWeb as Chief Executive Officer and
Chairman of the Board of USWeb. Mr. Shaw accepted that offer in early November
1998. In connection with this change in management, on November 4, 1998 USWeb
and CKS Group entered into a Waiver and Consent Agreement consenting to
USWeb's management
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change, the change in the Combined Company's board size and acknowledging that
certain related events, including the change in management, the addition of a
director to the USWeb Board, the anticipated addition of a director to the the
Combined Company's Board, Mr. Shaw's compensation package and Mr. Firmage's
pursuit of personal projects, would not constitute a Material Adverse Effect
with respect to either party. See "USWeb Corporation--USWeb Management" and
"--USWeb Certain Transactions."
CONDITIONS TO THE MERGER
The obligations of USWeb and CKS Group to consummate the Merger are subject
to the satisfaction at or prior to the Effective Time of the following
conditions: (i) certain approvals by the stockholders of USWeb and CKS Group
shall have been obtained; (ii) the SEC shall have declared the Registration
Statement effective and no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose, and no similar proceeding in respect of the Joint
Proxy Statement/Prospectus shall have been initiated or threatened in writing
by the SEC; (iii) no Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger, and all waiting
periods, if any, under the HSR Act relating to the transactions contemplated
in the Reorganization Agreement will have expired or terminated early; (iv)
USWeb and CKS Group shall each have received written opinions from their
respective tax counsel (WSGR and GCW&F, respectively) to the effect that the
Merger will constitute a reorganization within the meaning of Section 368(a)
of the Code; provided, however, that if counsel to either USWeb or CKS Group
does not render such opinion, this condition shall nonetheless be deemed to be
satisfied with respect to such party if counsel to the other party renders
such opinion to such party, and USWeb and CKS Group agree to make such
reasonable representations as requested by such counsel for the purpose of
rendering such opinions; (v) each of USWeb and CKS Group shall have received
letters from each of PricewaterhouseCoopers LLP and KPMG Peat Marwick LLP,
respectively, dated within two business days prior to the Effective Time,
regarding each firm's respective concurrence with USWeb's management's and CKS
Group's management's conclusions as to the appropriateness of pooling of
interest accounting for the Merger under APB Opinion No. 16, if the Merger is
consummated in accordance with the Reorganization Agreement; and (vi) the
shares of USWeb Common Stock to be issued to CKS Group stockholders pursuant
to the Merger shall have been authorized for listing on Nasdaq upon notice of
issuance.
In addition, the obligation of CKS Group to consummate and effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of each
of the following conditions, any of which may be waived, in writing,
exclusively by CKS Group: (i) the representations and warranties of USWeb and
Merger Sub contained in the Reorganization Agreement shall have been true and
correct in all material respects as of the date of the Reorganization
Agreement and shall be true and correct in all material respects on and as of
the Effective Time except for changes contemplated by the Reorganization
Agreement and except for those representations and warranties which address
matters only as of a particular date (which shall have been true and correct
as of such particular date), with the same force and effect as if made on and
as of the Effective Time, except in certain cases for breaches, inaccuracies
and omissions of such representations and warranties which have neither had
nor reasonably would be expected to have a Material Adverse Effect on USWeb,
and CKS Group shall have received a certificate with respect to the foregoing
signed on behalf of USWeb by the Chief Executive Officer and the Chief
Financial Officer of USWeb; (ii) USWeb and Merger Sub shall have performed or
complied in all material respects with all agreements and covenants required
by the Reorganization Agreement to be performed or complied with by them on or
prior to the Effective Time, and CKS Group shall have received a certificate
to such effect signed on behalf of USWeb by the Chief Executive Officer and
Chief Financial Officer of USWeb; (iii) Goldman Sachs shall have delivered an
opinion to the CKS Group Board dated September 1, 1998 to the effect that, as
of such date, the Exchange Ratio is fair to CKS Group's stockholders from a
financial point of view; (iv) no Material Adverse Effect with respect to
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USWeb shall have occurred since the date of the Reorganization Agreement; (v)
each of the USWeb Holders shall have entered into the USWeb Holder Agreement
and each of such agreements will be in full force and effect as of the
Effective Time.
Further, the obligations of USWeb and Merger Sub to consummate and effect
the Merger shall be subject to the satisfaction at or prior to the Effective
Time of each of the following conditions, any of which may be waived, in
writing, exclusively by USWeb: (i) the representations and warranties of CKS
Group contained in the Reorganization Agreement shall have been true and
correct in all material respects as of the date of the Reorganization
Agreement and shall be true and correct in all material respects at and as of
the Effective Time except for changes contemplated by the Reorganization
Agreement and except for those representations and warranties which address
matters only as of a particular date (which shall have been true and correct
as of such particular date), with the same force and effect as if made at and
as of the Effective Time, except in certain cases for breaches, inaccuracies
and omissions of such representations and warranties which have neither had
nor reasonably would be expected to have a Material Adverse Effect on CKS
Group, and USWeb shall have received a certificate with respect to the
foregoing signed on behalf of CKS Group by the Chief Executive Officer and
Chief Financial Officer of CKS Group; (ii) CKS Group shall have performed or
complied in all material respects with all agreements and covenants required
by the Reorganization Agreement to be performed or complied with by it at or
prior to the Effective Time, and USWeb shall have received a certificate to
such effect signed on behalf of CKS Group by the Chief Executive Officer and
the Chief Financial Officer of CKS Group; (iii) Morgan Stanley shall have
delivered an opinion to the USWeb Board as of September 1, 1998, to the effect
that, as of such date, the Exchange Ratio is fair to USWeb's stockholders from
a financial point of view; (iv) Mr. Kvamme and Mr. Suiter shall have entered
into a non-competition agreement with USWeb or Merger Sub, and such agreements
shall be in full force and effect; (v) certain individuals listed in CKS
Group's schedules to the Reorganization Agreement shall have entered into a
voting agreement with USWeb, and such agreements shall be in full force and
effect; (vi) no Material Adverse Effect with respect to CKS Group shall have
occurred since September 1, 1998; (vii) each of the CKS Group Holders shall
have entered into the CKS Group Holder Agreement and each of such agreements
will be in full force and effect as of the Effective Time.
TERMINATION OF THE REORGANIZATION AGREEMENT; TERMINATION FEES
The Reorganization Agreement may be terminated at any time prior to the
Effective Time, whether before or after the requisite approvals of the
stockholders of CKS Group or USWeb: (i) by mutual written consent duly
authorized by the Boards of Directors of USWeb and CKS Group; (ii) by either
CKS Group or USWeb if the Merger shall not have been consummated by February
28, 1999; provided, however, that the right to terminate the Reorganization
Agreement shall not be available to any party whose action or failure to act
has been a principal cause of or resulted in the failure of the Merger to
occur on or before such date and such action or failure to act constitutes a
breach of the Reorganization Agreement; provided further that such date may be
extended by up to 90 days by either party by written notice to the other party
if the 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; (iii)
by either CKS Group or USWeb if a governmental entity shall have issued an
order, decree or ruling or taken any other action, in any case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger, which order, decree or ruling is final and nonappealable; (iv) by
either CKS Group or USWeb if the required approvals of the stockholders of CKS
Group contemplated by the Reorganization Agreement shall not have been
obtained by reason of the failure to obtain the required vote at a meeting of
CKS Group stockholders duly convened therefor or at any adjournment thereof
(except that this right to terminate the Reorganization Agreement shall not be
available to CKS Group where the failure to obtain stockholder approval of CKS
Group shall have been caused by the action or failure to act of CKS Group and
such action or failure to act constitutes a material breach by CKS Group of
the Reorganization Agreement); (v) by either CKS Group or USWeb if the
required approval of the stockholders of USWeb contemplated by the
Reorganization Agreement shall not
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have been obtained by reason of the failure to obtain the required vote at a
meeting of USWeb stockholders duly convened therefor or at any adjournment
thereof (except that the right to terminate the Reorganization Agreement shall
not be available to USWeb where the failure to obtain USWeb stockholder
approval shall have been caused by the action or failure to act of USWeb and
such action or failure to act constitutes a material breach by USWeb of the
Reorganization Agreement); (vi) by USWeb if (a) the CKS Group Board or any
committee thereof shall have withdrawn or modified in a manner adverse to
USWeb its approval or recommendation of the Merger or the Reorganization
Agreement, (b) CKS Group shall have failed to include in the Joint Proxy
Statement/Prospectus the recommendation of the CKS Group Board in favor of
approval of the Merger and the Reorganization Agreement, (c) in connection
with a Rule 14d-9 disclosure, the CKS Group Board shall have taken any action
other than a rejection of a Rule 14d-9 proposal, (d) the CKS Group Board or
any committee thereof shall have recommended any CKS Group Alternative
Proposal, or (e) the CKS Group Board or any committee thereof shall have
resolved to do any of the foregoing; (vii) by CKS Group if (a) the USWeb Board
or any committee thereof shall have withdrawn or modified in a manner adverse
to CKS Group its recommendation of approval of the issuance of shares of USWeb
Common Stock pursuant to the Merger, (b) USWeb shall have failed to include in
the Joint Proxy Statement/Prospectus the recommendation of the USWeb Board in
favor of approval of the issuance of shares of USWeb Common Stock pursuant to
the Merger, (c) in connection with a Rule 14d-9 disclosure, the USWeb Board
shall have taken any action other than a rejection of the Rule 14d-9 proposal,
(d) the USWeb Board or any committee thereof shall have recommended any USWeb
Alternative Proposal or (e) the USWeb Board or any committee thereof shall
have resolved to do any of the foregoing; (viii) by CKS Group at any time
prior to the approval of the Merger by CKS Group's stockholders and, in the
case of any CKS Group Superior Proposal other than a CKS Group Superior
Proposal involving the filing of a Registration Statement on Form S-4,
following the earlier of (a) three days following the date the Registration
Statement is declared effective pursuant to the Securities Act by the SEC or
(b) sixty days following the date of the Reorganization Agreement, if the CKS
Group Board recommends a CKS Group Superior Proposal to the stockholders of
CKS Group; (ix) by CKS Group, upon a breach of any representation, warranty,
covenant or agreement on the part of USWeb set forth in the Reorganization
Agreement, or if any representation or warranty of USWeb shall have become
untrue, in either case such that the conditions set forth in the
Reorganization Agreement would not be satisfied as of the time of such breach
or as of the time such representation or warranty shall have become untrue,
provided that CKS Group may not terminate the Reorganization Agreement
pursuant to this provision if such inaccuracy in USWeb's representations and
warranties or breach by USWeb is curable by USWeb through the exercise of its
commercially reasonable best efforts prior to February 28, 1999, provided
USWeb continues to exercise commercially reasonable best efforts to cure such
breach (it being understood that CKS Group may so not terminate the
Reorganization Agreement if it shall have materially breached the
Reorganization Agreement or if such breach by USWeb is cured prior to February
28, 1999); or (x) by USWeb, upon a breach of any representation, warranty,
covenant or agreement on the part of CKS Group set forth in the Reorganization
Agreement, or if any representation or warranty of CKS Group shall have become
untrue, in either case such that the conditions set forth in the
Reorganization Agreement would not be satisfied as of the time of such breach
or as of the time such representation or warranty shall have become untrue,
provided that USWeb may not terminate the Reorganization Agreement pursuant to
this provision if such inaccuracy in CKS Group's representations and
warranties or breach by CKS Group is curable by CKS Group through the exercise
of its commercially reasonable best efforts prior to February 28, 1999,
provided CKS Group continues to exercise commercially reasonable best efforts
to cure such breach (it being understood that USWeb may not so terminate the
Reorganization Agreement if it shall have materially breached the
Reorganization Agreement or if such breach by CKS Group is cured prior to
February 28, 1999); or (xi) by USWeb at any time prior to the approval of the
Merger by USWeb stockholders and, in the case of any USWeb Superior Proposal
other than a USWeb Superior Proposal involving the filing of a Registration
Statement on Form S-4, following the earlier of (a) three days following the
date the Registration Statement is declared effective pursuant to the
Securities Act by the SEC or (b) sixty days following the date of the
Reorganization Agreement, if the Board of Directors of USWeb recommends a
USWeb Superior Proposal to the stockholders of USWeb.
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USWeb and CKS Group have agreed that all fees and expenses incurred in
connection with the Reorganization Agreement shall be paid by the party
incurring such expenses whether or not the Merger is consummated.
In the event that the Reorganization Agreement is terminated by USWeb
pursuant to (vi) above or CKS Group pursuant to (viii) above, CKS Group shall
promptly, but in no event later than two (2) days after the date of such
termination, pay USWeb a fee equal to $12 million in immediately available
funds (the "CKS Group Termination Fee"). If the Reorganization Agreement shall
be terminated by any party hereto pursuant to (iv) above and prior to such
termination an Alternative Proposal shall have been publicly announced or
otherwise publicly disclosed, and prior to the date twelve (12) months
following the date of the termination of the Reorganization Agreement either
(a) a CKS Group Acquisition (as hereinafter defined) shall be consummated or
(b) CKS Group shall enter into an acquisition agreement providing for a CKS
Group Acquisition, then CKS Group shall pay to USWeb the CKS Group Termination
Fee in immediately available funds in the case of clause (a) concurrently with
the consummation of such CKS Group Acquisition or in the case of clause (b)
one half of the CKS Group Termination Fee concurrently with the execution of
such acquisition agreement and the remaining half of the CKS Group Termination
Fee upon the consummation of any CKS Group Acquisition occurring with twelve
(12) months following such execution. "CKS Group Acquisition" shall mean any
of the following transactions or series of related transactions: (i) a merger,
consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving CKS Group pursuant to which the
stockholders of CKS Group immediately preceding such transaction or series of
related transactions hold less than 50% of the equity interests in the
surviving or resulting entity of such transaction or transactions (without
respect to any overlap in the companies' stockholder bases) (other than the
transactions contemplated by the Reorganization Agreement); (ii) a sale or
other disposition by CKS Group of assets (excluding inventory and used
equipment sold in the ordinary course of business) representing in excess of
50% of the fair market value of CKS Group's business immediately prior to such
sale; or (iii) the acquisition by any person or group (including by way of a
tender offer or an exchange offer or issuance by CKS Group), directly or
indirectly, of beneficial ownership or a right to acquire beneficial ownership
of 50% or more of the then outstanding shares of capital stock of CKS Group.
In the event that the Reorganization Agreement is terminated by CKS Group
pursuant to (vii) above or by USWeb pursuant to (xi) above, USWeb shall
promptly, but in no event later than two (2) days after the date of such
termination, pay CKS Group a fee equal to $12 million in immediately available
funds (the "USWeb Termination Fee"). If the Reorganization Agreement shall be
terminated by any party hereto pursuant to (v) above and prior to the time of
the occurrence of the event entitling such party to terminate the
Reorganization Agreement pursuant to such provision a USWeb Contingent
Proposal shall have been publicly announced or otherwise publicly disclosed,
and prior to the date twelve (12) months following the date of the termination
of the Reorganization Agreement either (a) the transaction contemplated by
such USWeb Contingent Proposal shall be consummated or (b) USWeb shall enter
into a written agreement providing for the consummation of the transaction
contemplated by such USWeb Contingent Proposal, then USWeb shall pay to CKS
Group the USWeb Termination Fee in immediately available funds, in the case of
clause (a) concurrently with the consummation of the transaction contemplated
by such USWeb Contingent Proposal and in the case of clause (b) one half of
the USWeb Termination Fee concurrently with the execution of such agreement
and the remaining half of the USWeb Termination Fee upon the consummation of
the transaction contemplated by such agreement. "USWeb Contingent Proposal"
shall mean a USWeb proposal, which is and is publicly disclosed to be
contingent upon the issuance of shares of USWeb Common Stock pursuant to the
Merger not being approved by the stockholders of USWeb or the Merger otherwise
not being consummated.
Payment of fees described above shall not be in lieu of damages incurred in
the event of material and willful breach of the Reorganization Agreement.
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COMPARISON OF CAPITAL STOCK
DESCRIPTION OF USWEB CAPITAL STOCK
The authorized Common Stock of USWeb consists of 100,000,000 shares of
Common Stock, par value $0.001 per share, and 1,000,000 shares of Preferred
Stock, par value $0.001 per share. At the USWeb Special Meeting, stockholders
will be asked to consider and vote upon a proposal to approve an amendment to
the USWeb Certificate to increase the authorized USWeb Common Stock by
100,000,000 shares to 200,000,000 shares. See "Additional Matters Being
Submitted to a Vote of Only USWeb Stockholders--Proposal Three--Amendment to
Amended and Restated Certificate of Incorporation-- Increase to Authorized
Common Stock."
USWeb Common Stock
As of the USWeb Record Date, there were 45,451,382 shares of USWeb Common
Stock outstanding. USWeb Common Stock is listed on Nasdaq under the symbol
USWB. As of the USWeb Record Date, the outstanding USWeb Common Stock was held
of record by approximately 853 stockholders. The holders of USWeb Common Stock
are entitled to one vote per share on all matters to be voted upon by 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. The holders of USWeb Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the USWeb
Board out of funds legally available therefor. In the event of a liquidation,
dissolution or winding up of USWeb, the holders of USWeb Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to the rights of holders of Preferred Stock that may be
then outstanding. The USWeb Common Stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the USWeb Common Stock. All outstanding shares of
USWeb Common Stock are fully paid and non-assessable, and the shares of USWeb
Common Stock to be issued and outstanding upon completion of the Merger will
be fully paid and non-assessable.
USWeb Preferred Stock
USWeb has 1,000,000 shares of undesignated Preferred Stock authorized, none
of which were issued or outstanding as of the USWeb Record Date. The USWeb
Board has the authority to issue shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions granted
to or imposed upon any unissued and undesignated shares of Preferred Stock and
to fix the number of shares constituting any series and the designations of
such series, without any further vote or action by the stockholders. Although
it presently has no intention to do so, the USWeb Board, without stockholder
approval, can issue Preferred Stock with voting and conversion rights that
could adversely affect the voting power or other rights of the holders of
USWeb Common Stock. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of USWeb. See "Risk
Factors--Risks Related to the Combined Company, USWeb and CKS Group--Effect of
Certain Provisions; Anti-Takeover Effects of Certificate 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.
DESCRIPTION OF CKS GROUP CAPITAL STOCK
The authorized capital stock of CKS Group consists of 30,000,000 shares of
Common Stock, par value $0.001 per share, and 2,000,000 shares of Preferred
Stock, par value $0.001 per share.
CKS Group Common Stock
As of the CKS Group Record Date, there were 15,537,941 shares of CKS Group
Common Stock outstanding held of record by approximately 126 stockholders. CKS
Group Common Stock is listed on Nasdaq
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under the symbol CKSG. Holders of CKS Group Common Stock are entitled to one
vote per share on all matters to be voted upon by the stockholders. Pursuant
to the CKS Group Certificate, the stockholders may not take action by written
consent in lieu of a meeting. The holders of CKS Group Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the CKS Group Board out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of CKS Group, the
holders of CKS Group Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to the rights of holders of
Preferred Stock that may be then outstanding. The CKS Group Common Stock has
no preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the CKS Group Common
Stock. All outstanding shares of CKS Group Common Stock are fully paid and
nonassessable.
CKS Group Preferred Stock
CKS Group has 2,000,000 shares of undesignated Preferred Stock authorized,
none of which were issued or outstanding as of the CKS Group Record Date. The
CKS Group Board has the authority to issue the undesignated shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any unissued and
undesignated shares of Preferred Stock and to fix the number of shares
constituting any series and the designations of such series, without any
further vote or action by the stockholders. Although it presently has no
intention to do so, the CKS Group Board, without stockholder approval, can
issue Preferred Stock with voting and conversion rights which could adversely
affect the voting power or other rights of the holders of CKS Group Common
Stock and the issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of CKS Group. See "Risk Factors--
Risks Related to the Combined Company, USWeb and CKS Group--Effect of Certain
Provisions; Anti-Takeover Effects of Certificate of Incorporation, Bylaws and
Delaware Law."
Transfer Agent and Registrar
The Transfer Agent and Registrar of the CKS Group Common Stock is
ChaseMellon Shareholder Services L.L.C. and its telephone number is (415) 743-
1423.
COMPARISON OF RIGHTS OF CKS GROUP AND USWEB STOCKHOLDERS
After consummation of the Merger, the holders of CKS Group Common Stock who
receive USWeb Common Stock under the terms of the Reorganization Agreement
will become stockholders of the Combined Company. As stockholders of CKS
Group, their rights are presently governed by Delaware law and by the CKS
Group Certificate and the CKS Group Bylaws. As stockholders of the Combined
Company, their rights will be governed by Delaware law and by the USWeb
Certificate and USWeb's Bylaws, as amended (the "USWeb Bylaws"). The following
discussion summarizes the material differences between the rights of holders
of CKS Group Common Stock and holders of USWeb Common Stock and differences
between the charters and bylaws of CKS Group and USWeb. This summary does not
purport to be complete and is qualified in its entirety by reference to the
CKS Group Certificate and CKS Group Bylaws, the USWeb Certificate and the
USWeb Bylaws and the relevant provisions of Delaware law.
Special Meeting of the Stockholders
Under the DGCL, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the
certificate of incorporation or the bylaws. The CKS Group Bylaws provide that
special meetings of the stockholders may be called by the CKS Group Board, by
a committee of the CKS Group Board authorized to call such meetings or by one
or more stockholders holding shares in the aggregate entitled to cast not less
than 10% of the votes cast at that meeting. The USWeb Bylaws provide that
special meetings of the stockholders may be called by the USWeb Board, by the
chairman of the USWeb Board, by the president, or by one or more stockholders
holding shares in the aggregate entitled to cast not less than 10% of the
votes at that meeting.
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Action by Consent of Stockholders
Under the DGCL, unless the certificate of incorporation provides otherwise,
any action to be taken by stockholders may be taken without a meeting, without
prior notice, and without a vote, if the stockholders having the number of
votes that would be necessary to take such action at a meeting at which all
stockholders were present and voted consent to the action in writing. Neither
the USWeb Certificate nor the CKS Group Certificate allows for action by
written consent of the stockholders.
Cumulative Voting
Delaware law does not provide for cumulative voting by stockholders unless
provided for in the certificate of incorporation. Neither the USWeb
Certificate nor the CKS Group Certificate provides for cumulative voting.
Classification of the Board of Directors
The CKS Group Bylaws provide that the authorized number of directors shall
be initially seven, and thereafter may be changed by a duly adopted amendment
to the CKS Group Bylaws adopted by resolution of the CKS Group Board. Pursuant
to applicable board resolutions, the CKS Group Board currently consists of six
directors. The CKS Group Certificate provides for division of the CKS Group
Board into three classes, as nearly equal in size as possible, with staggered
terms. The USWeb Certificate and USWeb Bylaws provide that the authorized
number of directors shall be initially six and, thereafter, may be changed by
a duly adopted amendment to the USWeb Certificate or by an amendment to the
USWeb Bylaws adopted by a majority of the stockholders or by a resolution
adopted by a majority of the USWeb Board. Pursuant to applicable resolutions,
the USWeb Board currently consists of eleven directors.
The Combined Company Board following the Merger will initially consist of
ten members. In early November 1998, USWeb and CKS Group entered into a
Consent and Waiver Agreement providing for, among other things, an increase in
the size of the Board of Directors of the Combined Company from nine to ten
members to allow for the appointment of Robert Shaw as a director.
Removal of Directors
The USWeb Bylaws provide that any director or the entire USWeb Board may be
removed, with or without cause, by the holders of a majority of the shares
then entitled to vote at an election of directors. Under the DGCL, the
stockholders of a corporation that has a classified board of directors, such
as CKS Group, may remove directors only for cause unless the corporation's
certificate of incorporation provides otherwise. The CKS Group Certificate
does not provide for removal of directors by stockholders for other than
cause.
Exculpation of Directors
Each of USWeb and CKS Group has included in its Certificate of Incorporation
a provision which eliminates the personal liability of its directors from
monetary damages resulting from a breach of fiduciary duty as a director to
the fullest extent permitted by the DGCL.
Indemnification of Directors, Officers and Others
The USWeb Bylaws and the CKS Group Bylaws require indemnification of their
respective directors and officers, and give each of the companies the power to
indemnify each of its employees and agents to the maximum extent and in the
manner permitted by the DGCL.
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ADDITIONAL MATTER BEING SUBMITTED TO A
VOTE OF ONLY USWEB STOCKHOLDERS
PROPOSAL TWO--AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION--
INCREASE TO AUTHORIZED COMMON STOCK
On August 30, 1998, the USWeb Board approved 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. Under such amendment, subject to
stockholder approval, the first paragraph of Article FOURTH of the USWeb
Certificate would be amended and restated to read as follows:
"FOURTH. The Corporation is authorized to issue two classes of capital stock
to be designated respectively "Common Stock" and "Preferred Stock." The total
number of shares of all classes of stock which the Corporation shall have the
authority to issue is Two Hundred One Million (201,000,000) shares. The total
number of shares of Common Stock that the Corporation shall have authority to
issue is Two Hundred Million (200,000,000) shares, $0.001 par value per share.
The total number of shares of Preferred Stock that the Corporation shall have
authority to issue is One Million (1,000,000) shares, $0.001 par value per
share."
As of November 16, 1998, there were 100,000,000 shares of USWeb Common Stock
authorized, of which approximately 45,543,660 shares were issued and
outstanding and approximately 30,678,120 of which were reserved for issuance
under USWeb's stock benefit plans, leaving only approximately 23,870,498
authorized shares available for future issuance. The issuance of USWeb Common
Stock to the stockholders and option holders of CKS Group pursuant to Proposal
One herein would require up to approximately 28,049,324 shares of USWeb Common
Stock.
In addition, although USWeb has no specific plans to use the additional
authorized shares of USWeb Common Stock other than as described above, the
USWeb Board believes that it is prudent to increase the number of authorized
shares of USWeb Common Stock to the proposed level in order to provide a
reserve of shares available for issuances in connection with possible future
actions. Such actions may include, but are not limited to, stock splits or
stock dividends if the USWeb Board were to determine that such would be
desirable to facilitate a broader base of stockholders. The USWeb Board also
believes that the increased number of shares will provide the flexibility to
effect other possible actions such as financings, corporate mergers,
acquisitions of property, employee benefit plans and other general corporate
purposes. Having such additional authorized shares available for issuance in
the future would allow the USWeb Board to issue shares of USWeb Common Stock
without the delay and expense associated with seeking stockholder approval.
Elimination of such delays and expense occasioned by the necessity of
obtaining stockholder approval will better enable USWeb (or, after the Merger,
the Combined Company), among other things, to engage in financing transactions
and acquisitions as well as to take advantage of changing market and financial
conditions on a more competitive basis as determined by the USWeb Board (or,
after the Merger, the Combined Company Board).
The increase in authorized USWeb Common Stock will not have any immediate
effect on the rights of existing stockholders. To the extent that the
additional authorized shares are issued in the future, they will decrease the
existing stockholders' percentage equity ownership and, depending on the price
at which they are issued, could be dilutive to the existing stockholders.
The increase in the authorized number of shares of USWeb Common Stock could
have an anti-takeover effect. Shares of authorized and unissued USWeb Common
Stock could (within the limits imposed by applicable law) be issued in one or
more transactions that would make a takeover of USWeb more difficult, and
therefore less likely. Any such issuance of additional stock could have the
effect of diluting the earnings per share and book value per share of
outstanding shares of USWeb Common Stock, and such additional shares could be
used to dilute the stock ownership or voting rights of persons seeking to
obtain control of USWeb. See "Risk Factors--Risks Related to the Combined
Company, USWeb and CKS Group--Effect of Certain Provisions; Anti-Takeover
Effects of Certificate of Incorporation, Bylaws and Delaware Law."
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The USWeb stockholders are being asked to approve such amendment. The
affirmative vote of a majority of the votes entitled to be cast by holders of
outstanding shares of USWeb securities (including USWeb Common Stock and other
securities entitled to vote together with the USWeb Common Stock) will be
required to approve this amendment to the USWeb Certificate. The effect of a
broker non-vote or an abstention is the same as that of a vote against the
proposal.
THE USWEB BOARD UNANIMOUSLY RECOMMENDS THAT USWEB STOCKHOLDERS VOTE "FOR"
THE AMENDMENT OF THE USWEB CERTIFICATE TO INCREASE THE AUTHORIZED USWEB COMMON
STOCK FROM 100 MILLION TO 200 MILLION SHARES. APPROVAL OF THIS AMENDMENT IS
NOT CONTINGENT UPON CONSUMMATION OF THE MERGER.
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USWEB CORPORATION
USWEB BUSINESS
The following Information Concerning USWeb sections provide information on
the business of USWeb on a stand-alone basis and does not describe the
business of USWeb if the Merger is consummated. 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, USWeb'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 Joint Proxy Statement/ Prospectus. See
"Forward-Looking Statements."
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. USWeb has built a
national 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.
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.
USWeb 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. USWeb's
services include strategy consulting; analysis and design; technology
development; implementation and integration; audience development; and
maintenance.
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USWeb delivers value to its clients through the application of its Internet
strategy and solutions methodology. Through its focus on Internet
technologies, USWeb 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
USWeb 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. USWeb 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, USWeb
believes that its aggregation and deployment of the accumulated experience and
expertise of its network of offices provides clients with enhanced business
solutions. Second, USWeb's ability to leverage central technology and
operational resources enables USWeb 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, USWeb'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 USWeb's ability to
access and influence key client decision makers.
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STRATEGY
USWeb's objective is to become and remain the leading global Internet
professional services firm. USWeb's strategy to achieve this objective
includes the following elements:
Continue to Expand Network of Company-Owned Offices. USWeb is continuing to
build its network of Company-owned offices through acquisitions and internal
growth. Acquisition efforts are focused on strategic and international
opportunities. USWeb believes that in the fragmented market for providing
Internet solutions, rapidly building a critical mass of strategic, technical
and creative talent through both internal growth and acquisitions will provide
USWeb with a substantial competitive advantage. As of 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. USWeb 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. USWeb
is continuing to strengthen its position as a leading Internet professional
services firm in order to provide clients with superior Internet solutions.
USWeb 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. USWeb 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.
USWeb's consulting offices intend to continue leveraging USWeb'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. USWeb also intends to remain focused on
delivering the Internet solution best suited to a client's needs.
Develop Additional Strategic Relationships. USWeb 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. USWeb 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. USWeb intends
to leverage its relationships with leading technology companies to offer
clients a variety of Internet application modules, which USWeb will customize
to the needs of each client. USWeb further intends to maintain a data center
where the client systems can be operated with high reliability and efficiency.
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SERVICES
USWeb 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. USWeb bills most of its engagements on a time and materials
basis, although it has delivered several solutions on a fixed-price basis and
intends to increase the percentage of engagements provided on such a basis.
INTERNET SOLUTION DEVELOPMENT AND DEPLOYMENT. USWeb'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.
USWeb 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,
USWeb 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, USWeb'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. USWeb'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, USWeb builds a testable
version of the client's solution based on the blueprint produced in the
analysis and design phase. USWeb 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. USWeb delivers the system to the client, installs it,
converts and initializes all necessary data, performs acceptance testing and
puts the system into operation. USWeb 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. USWeb 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. USWeb provides
online media planning and purchasing services and advice regarding online
public relations. USWeb 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. USWeb's technical staff can
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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
USWeb's Internet solution development capabilities.
Ingram Micro E-Commerce Extranet. Ingram Micro Inc. ("Ingram Micro"), a
leading wholesale distributor of technology products and services, teamed with
USWeb to build and deploy an e-Commerce Extranet for on-line distribution. The
business-to-business commerce solution, called Auction Block, is a real-time,
on-line bidding service that allows resellers to purchase new, unopened
products that are not returnable to the manufacturer. USWeb developed a
customized Java-based inventory auction system that automates inventory
negotiation processes in real-time and integrated it with Ingram Micro's back-
end database to facilitate user authentication and inventory tracking. This
new Internet distribution channel has become a new source of revenues for
Ingram Micro.
Harley-Davidson Dealer Extranet. Harley-Davidson, a motorcycle manufacturer,
was seeking ways to streamline two specific business processes: technical
documentation distribution and warranty claims processing. To obtain
instruction sheets, service bulletins or other technical documentation,
dealers previously had to request the appropriate documents by telephone and
then wait for Harley-Davidson to process the request manually and fax the
documents back to the dealership. To process warranty claims, dealers
previously 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 USWeb's Internet solutions show the breadth of
USWeb'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
USWeb's clients to realize the intended benefits of a project. Promoting and
positioning the USWeb brand will depend largely
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on the success of USWeb's marketing efforts and the ability of USWeb 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 USWeb's solutions or services as meeting their needs, or if USWeb
fails to market those solutions or services effectively, USWeb will be
unsuccessful in maintaining and strengthening its brand, which could have a
material adverse effect on USWeb's business, results of operations and
financial condition. See "Risk Factors--Risks Related to the Merger--Uncertain
Market Acceptance of the Combined Company's Brands," "--Potential Liability to
Clients" and "USWeb's Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CONSULTING OFFICE NETWORK DEVELOPMENT
USWeb has established and is continuing to expand a network of consulting
offices. As of September 30, 1998, USWeb 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. USWeb 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. USWeb promotes internal growth
through expansion and improvement of the Strategy and Solutions Center, new
and existing strategic partnerships, and rigorous management of business
fundamentals.
USWeb is pursuing a selective acquisition program, particularly in strategic
and international opportunities. USWeb 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. USWeb 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.
USWeb has a team of professionals dedicated to identifying potential
acquisition candidates and implementing USWeb'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. USWeb stresses to each desired
candidate the advantages of merging with USWeb, including 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, USWeb 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, USWeb's secure Intranet, and delivering a thorough orientation
to all employees.
USWeb 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 USWeb and its stockholders, USWeb may proceed with such
acquisitions. USWeb expects most of its future acquisitions to include the
issuance of additional shares of USWeb's Common Stock. USWeb filed a "shelf"
Registration Statement on Form S-4 to register 16,666,667 shares of its Common
Stock for use in future acquisitions. See "Risk Factors--Risks Related to
Acquisitions," "Risk Factors--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 "USWeb
Corporation--USWeb's 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, USWeb had acquired the following companies:
<TABLE>
<CAPTION>
MONTH OF
OFFICE CONSOLIDATION
NAME LOCATIONS (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, LLC......................... Phoenix, AZ June 1997
Electronic Images, Inc. ............. Pittsburgh, PA July 1997
Multimedia Marketing & Design Inc. .. Chicago, IL July 1997
DreamMedia, Inc. (2)................. Hollywood, CA August 1997
KandH, Inc. (2)...................... Hollywood, CA August 1997
Internet Cybernautics, Inc........... Sausalito, CA September 1997
Synergetix Systems Integration,
Inc. ............................... Long Island, NY September 1997
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. (3).... Memphis, TN March 1998
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
</TABLE>
- ---------------------
(1) USWeb 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 USWeb upon the consummation of the
acquisitions. The combined entity had an aggregate of 26 employees. 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 USWeb upon the
consummation of the acquisitions. The combined entity had an aggregate of
46 employees.
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USWeb believes that there are many other potential acquisition candidates in
the U.S. and abroad that satisfy its acquisition criteria. USWeb is currently
discussing on a non-binding basis the acquisitions of several companies in the
U.S. and abroad. To penetrate foreign markets, USWeb 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. USWeb's acquisition strategy involves
a number of risks and uncertainties, and there can be no assurance that USWeb
will be able to identify suitable acquisition candidates, acquire such
companies on acceptable terms or integrate their operations successfully with
those of USWeb. As USWeb issues stock to complete future acquisitions, there
will be ownership dilution to existing stockholders. In addition, to the
extent USWeb chooses to pay cash consideration for such acquisitions, USWeb
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 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 USWeb's
intellectual property and proprietary information, including USWeb brands,
USWeb's Internet solution development methodology and the Strategy and
Solutions Center. In exchange for these rights, most Affiliates paid USWeb an
initial fee and all Affiliates make monthly royalty payments to USWeb. 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 USWeb's total revenues. See "--USWeb's 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.
USWeb selected a franchise business model as the first phase of its
corporate development strategy because it enabled USWeb 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. USWeb 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. USWeb last enrolled an Affiliate in March 1997 and does not
intend to enter into any additional Affiliate agreements. USWeb 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 USWeb's business. See "Risk Factors--
Risks Related to the Combined Company, USWeb and CKS Group--Risks of
Franchising."
CLIENTS
USWeb markets its services to medium-sized and large companies, which it
defines as those with over 100 employees or $10 million in annual revenues.
Such companies have several desirable characteristics as potential clients: a
need for Internet solutions ranging from basic Web sites to complex and highly
functional Intranets, substantial budgets devoted to information technology
expenditures, and a relatively high willingness to adopt Internet-based
strategies and solutions. USWeb tailors its professional services to meet the
specific needs of these clients. No individual customer accounted for more
than 10% of USWeb's total
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revenues for the year ended December 31, 1997 and the nine months ended
September 30, 1998. USWeb's top 10 clients accounted for 31% and 14% of
USWeb's total revenues during such respective periods.
USWeb 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.
<TABLE>
<S> <C> <C>
Amgen Harley-Davidson Real Estate Tax Services
Bantam Doubleday Dell Ingram Micro Silicon Graphics
Barnes & Noble Marcus & Millichap Thomasville Furniture
Catalina Marketing Microsoft Time
Charles Schwab New York Magazine Toshiba
Chevron Polk Audio World Economic Forum
</TABLE>
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.
USWeb's strategy is to provide clients with services at all stages of their
adoption of Internet solutions. USWeb targets clients whose Internet
technology consulting needs will result in contracts ranging from $150,000 to
$3,000,000 per engagement. USWeb'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 USWeb'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. USWeb 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, USWeb'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. USWeb
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 USWeb'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.
In each area where methodologies, technologies and content are aggregated,
USWeb 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.
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MARKETING
USWeb'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.
USWeb 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. USWeb's marketing programs are
also highly scalable because most advertising campaigns and marketing tools
are developed by USWeb's corporate marketing group and can be delivered to all
of the consulting offices without requiring significant additional expenses.
USWeb's marketing program includes the following initiatives:
Enhance USWeb Brands. The continued strengthening of USWeb's brands is
crucial to the achievement of USWeb's objective of becoming the most
recognized provider of Internet professional services to medium-sized and
large business clients. USWeb'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. USWeb 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. USWeb's marketing campaigns are intended to generate
client leads for its consulting offices in several ways. In addition, USWeb
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. USWeb 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 USWeb's consulting offices
by providing them with centralized expert advice and consistent, professional
marketing tools.
STRATEGIC RELATIONSHIPS
USWeb has entered into, and intends to continue entering into, strategic
relationships with a limited number of leading Internet hardware, software and
content companies. USWeb 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 USWeb 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.
USWeb also believes that these relationships are important because they
leverage the strong brand and technology positions of these market leaders.
USWeb has strategic relationships with the following companies:
Intel. In November 1997, USWeb entered into a Relationship
Agreement with Intel pursuant to which USWeb 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 USWeb's Common Stock in a private placement transaction which
closed contemporaneously with USWeb's initial public offering.
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[LOGO OF MICROSOFT] Microsoft. USWeb and Microsoft have entered into a joint
marketing and technical information sharing agreement. The
companies are engaging in a jointly branded marketing campaign designed to
increase demand for Microsoft's Internet software products and USWeb's
professional services. Microsoft is also providing USWeb consulting offices
with education and support in the use of Microsoft's Internet products, and
the USWeb consulting offices are providing Microsoft with product feedback and
customer reactions.
[LOGO OF HEWLETT
PACKARD] Hewlett-Packard. USWeb and Hewlett-Packard have entered into
an agreement to launch collaborative marketing and technical
support programs to offer business clients a complete set of Internet
solutions. The companies are engaging in a joint branded marketing campaign
designed to increase demand for Hewlett-Packard's Internet systems and USWeb's
professional services. Hewlett-Packard is also providing USWeb consulting
offices with education and support in the use of Hewlett-Packard's Internet
systems and USWeb consulting offices are providing Hewlett-Packard with
product feedback and client reactions.
[LOGO OF
PANDESIC(TM)] Pandesic. Intel and SAP have formed Pandesic LLC to deliver
a comprehensive hardware, software and service solution for
managing Internet-based electronic commerce. USWeb and
Pandesic have entered into a letter agreement regarding
plans to implement a joint systems integration program,
develop joint marketing and sales programs, build field development programs
and conduct ongoing technical exchanges to ensure the proper deployment and
efficient utilization of the Pandesic electronic commerce platform.
[LOGO OF SUN
MICROSYSTEMS] Sun Microsystems. USWeb and Sun Microsystems have entered
into an agreement enabling USWeb consulting offices to
become authorized resellers of Sun NETRA network servers
after having filed the appropriate documentation and
attended required training classes. This marketing program enables USWeb
affiliates to deliver a complete UNIX Intranet solution to a customers.
[LOGO OF REUTERS] Reuters. USWeb and Reuters have entered into a letter
agreement regarding plans to develop USWeb Business
Solutions that will integrate Reuters data feeds into
corporate Intranet environments. The two parties also intend to develop joint
sales and marketing programs.
The contractual agreements regarding these strategic relationships do not
cover the entire scope of the strategic relationship and are typically
terminable at will by either party. In the event that any strategic
relationship is discontinued, either in connection with termination of an
agreement or otherwise, USWeb's business, results of operations and financial
condition may be materially adversely affected. See "Risk Factors--Risks
Related to the Combined Company, USWeb and CKS Group--Reliance Upon Key
Strategic Relationships."
In early 1998, USWeb 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 USWeb and USWeb contributed certain training materials it has created. In
April 1998, USWeb made a minority equity investment in USWeb Learning and
added management experience through board representation.
OPERATIONS
USWeb'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,
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and staffing decisions for that office. However, USWeb's executive officers
take an active role in directing the activities of all consulting offices.
USWeb headquarters manages the Strategy and Solutions Center, USWeb's
marketing campaigns, the strategic relationships with partner companies and
the acquisition program. USWeb'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, USWeb 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, USWeb's Intranet and USWeb's
primary channel for enterprise-wide interaction and communication. USWeb
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 USWeb's centrally managed
resources, such as the Strategy and Solutions Center libraries, sales and
marketing tools, vendor information and operational assistance. USWeb 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 USWeb 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. USWeb
expects competition to persist, intensify and increase in the future. USWeb'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 Group, 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.
USWeb 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 USWeb'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 USWeb and could decide at any time to increase their resource
commitments to USWeb'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 USWeb's competitors may better position them to
compete in this market as it matures. Competition of the type described above
could materially adversely affect USWeb's business, results of operations and
financial condition.
There are relatively low barriers to entry into USWeb's business. For
example, USWeb has no patented technology that would preclude or inhibit
competitors from entering the Internet professional services market. USWeb
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 USWeb,
which could have a material adverse effect on USWeb's business, results of
operations and financial condition. Moreover, in pursuing acquisition
opportunities USWeb may compete with other companies with similar growth
strategies,
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certain of which competitors may be larger and have greater financial and
other resources than USWeb. 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 Combined Company, USWeb and CKS Group--Competition; Low Barriers to
Entry."
EMPLOYEES
As of September 30, 1998 USWeb had 1,217 employees, of which 77 were located
at USWeb'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 USWeb's employees is represented by a labor union.
USWeb has experienced no work stoppages and believes its relationship with its
employees is good. Competition for qualified personnel in the industry in
which USWeb competes is intense. USWeb 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 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
USWeb'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. USWeb
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 USWeb 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
USWeb's business, financial condition, cash flows, or results of operations.
Inventa Corporation filed a complaint on September 25, 1998 in the United
States District Court for the Northern District of California naming both
USWeb and CKS Group as defendants and alleging that the names "Reinvent" and
"Reinvent Communications," the name formerly proposed to be the name of the
Combined Company infringe the plaintiff's name and should therefore be
enjoined from use. On November 18, 1998, the judge in the case issued a
limited injunction to apply during the pendency of the litigation restricting
the style of presentation of the name Reinvent until resolution of the
lawsuit. Inventa is also seeking treble damages, as well as exemplary and
punitive damages in the amount of $5,000,000. USWeb believes that the
complaint is without merit and intends to defend itself vigorously; however,
USWeb and CKS Group no longer intend that the Combined Company adopt the name
"Reinvent Communications."
Larmark Inc. filed a complaint on June 10, 1998 in the Superior Court of
California for the County of Los Angeles naming USWeb as a defendant and
alleging, among other claims, breach of contract against USWeb's former
Affiliate, SystemLogic, in Santa Monica, California, and that USWeb is liable
for the acts of this former franchisee. USWeb believes the claims against it
are without merit and intends to defend itself vigorously against the claims
made.
For potential litigation against the Combined Company, see "CKS Group,
Inc.--CKS Group Business--Legal Proceedings."
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USWEB 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 USWeb's
Consolidated Financial Statements, including the Notes thereto, included
elsewhere in this Joint Proxy Statement/Prospectus. The discussion in USWeb
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 USWeb's plans, objectives, expectations
and intentions, as well as financial trends. The cautionary statements made in
USWeb 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. USWeb'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. See "Forward-Looking
Statements."
OVERVIEW
USWeb is a leading Internet professional services firm that provides
Intranet, Extranet and Web site solutions and services to businesses. 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; 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. USWeb markets its services
to medium and large companies.
From December 6, 1995 (inception) to March 31, 1997, USWeb'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, USWeb entered into its last
Affiliate agreement and does not expect to enter into any additional Affiliate
agreements. In the first quarter of 1997, USWeb initiated the second phase of
its corporate development strategy and began to acquire Internet professional
services firms, starting with certain qualified Affiliates. To date, USWeb 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. Because of this transition in business
strategy, USWeb believes that its historical financial statements for periods
ending on or before March 31, 1997 are not indicative of future operating
results.
USWeb has only a limited operating history upon which to base an evaluation
of its business and prospects. USWeb 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 USWeb include, but are not limited to, an evolving business model and the
management of both internal and acquisition-based growth. To address these
risks, USWeb must, among other things, continue to expand its network of
consulting offices, continue to develop the strength and quality of its
operations, maximize the value delivered to clients, enhance the USWeb brand,
respond to competitive developments and continue to attract, retain and
motivate qualified employees. There can be no assurance that USWeb will be
successful in meeting these challenges and addressing such risks, and the
failure to do so could have a material adverse effect on USWeb's business,
results of operations and financial condition. USWeb has incurred net losses
since inception, and as of
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September 30, 1998 had an accumulated deficit of $187.9 million. Although
USWeb has experienced revenue growth in recent months, such growth rates may
not be sustainable or indicative of future operating results. USWeb expects to
continue to incur substantial operating losses through at least 1999, and
there can be no assurance that USWeb will achieve or sustain profitability.
See "Risk Factors--Risks Related to the Combined Company, USWeb and CKS
Group--Limited Operating History; Accumulated Deficit."
RECENT EVENTS
USWeb filed a Registration Statement on Form S-1 (Registration No. 333-
36827) and registered 5,000,000 shares of USWeb's Common Stock plus an
additional 750,500 shares of USWeb's Common Stock solely to cover over-
allotments that were issued on December 5, 1997 in connection with USWeb's
initial public offering. USWeb also filed another Registration Statement on
Form S-1 (Registration No. 333-46821), and on April 7, 1998, completed the
follow-on offering whereby 1,581,216 and 5,261,284 shares of Common Stock were
sold by USWeb and existing stockholders, respectively. Net proceeds to USWeb
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 USWeb from the exercise of stock options and common
stock warrants aggregated approximately $2.7 million. At USWeb'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, respectively.
ACQUISITION OF INTERNET PROFESSIONAL SERVICES FIRMS AND STRATEGIC ALLIANCE
USWeb began to acquire selected Internet professional services firms in the
first quarter of 1997. USWeb 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.
USWeb typically determines the purchase price of each acquisition candidate
based on strategic fit, geographic coverage, historical revenues,
profitability, financial condition and contract backlog, and USWeb's
qualitative evaluation of the candidate's management team, operational
scalability and customer base. USWeb 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. USWeb expects to continue using this
valuation and payment methodology for future acquisitions; however, in certain
situations USWeb may use other methodologies as appropriate. The Company may
increasingly use cash to pay for acquisitions and, in particular, intends to
increase its use of cash in international acquisitions. USWeb's acquisition
program will result in further substantial ownership dilution to investors
participating in this offering. See "Risk Factors--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 both (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
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estimated useful life of the technology of six months to one year, (iii)
amounts allocated to workforce in place are amortized on a straight-line basis
over the estimated period of benefit, which ranges from 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 USWeb as of the date USWeb acquires effective
control of the entity, which generally occurs prior to the formal legal
closing of the transaction and the physical exchange of acquisition
consideration.
To determine the amounts to be allocated to acquired in-process technology
the Company used two distinct approaches. For all acquisitions except Gray
Peak, the Company performed an internal detailed 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 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 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,
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the Consultant estimated the in-process value of network operating service 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 the Company 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
USWeb'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.
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 USWeb Common
Stock. All target company employees that become employees of USWeb and non-
employee shareholders that enter into consulting agreements with USWeb, are
granted options to purchase shares of USWeb Common Stock. The exercise price
of each option is equal to at least the fair market value of a share of USWeb
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.
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In May 1998, USWeb 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, USWeb 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, USWeb
issued warrants to NBC allowing them to purchase 1,600,000 and 500,000 shares
of USWeb'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 USWeb 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, USWeb 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, USWeb 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 Operation--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 USWeb's inception. In
addition, USWeb 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. USWeb expects these acquisition-related non-
cash expenses to continue on a basis corresponding with operation of the
acquisition program.
To capitalize on the growth opportunities for a newly acquired consulting
office, USWeb generally hires a number of additional Internet professionals
during the three-month period following the office's integration into the
USWeb network. The capacity utilization rates of these new employees are
initially not as high as those of seasoned employees because of the time spent
on training and professional development. Consequently, USWeb 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. USWeb believes that this investment in training and professional
development will contribute to its ability to meet its growth targets.
As of September 30, 1998, USWeb 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 Technologies, Inc., Tucker Network Technologies, Inc. and Metrix
Communications, Inc. See "Pro Forma Consolidated Financial Information--
Overview." The total number of shares USWeb 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.
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The successful implementation of USWeb's acquisition strategy depends on
USWeb's ability to identify suitable acquisition candidates, acquire such
companies on acceptable terms and integrate their operations successfully with
those of USWeb. There can be no assurance that USWeb will be able to do so.
Moreover, in pursuing acquisitions USWeb may compete with companies with
similar acquisition strategies, certain of which competitors may be larger and
have greater financial and other resources than USWeb. 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 USWeb'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 USWeb as a whole, and any
acquired subsidiary could significantly under-perform relative to USWeb's
expectations. For all of these reasons, USWeb's pursuit of an overall
acquisition strategy or any individual completed, pending or future
acquisition may have a material adverse effect on USWeb's business, results of
operations and financial condition. To the extent USWeb chooses to use cash
consideration in the future to pay for all or part of any acquisitions, USWeb
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 Combined Company, USWeb and CKS Group--Risks
Related to Future Acquisitions," "--Future Capital Needs; Uncertainty of
Additional Financing" and Note 1 to Consolidated Financial Statements.
SOURCES OF REVENUES
USWeb consolidates the financial statements of acquired entities beginning
on the date USWeb 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 USWeb
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, USWeb
intends to increase the percentage of its engagements that are based on a
fixed-price. The pricing, management and execution of individual engagements
are the responsibility of the consulting office that performs or coordinates
the services.
USWeb 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 USWeb 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.
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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 USWeb 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 USWeb did not have any
Company-owned offices and instead derived its revenues from initial fees and
monthly royalties from Affiliates. USWeb 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. USWeb anticipates that cost of revenues will increase in
absolute dollars as service fees generated by USWeb-owned offices and the
level of services increases, and as a result of acquisitions of additional
Internet professional service firms.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased to $20.7 million for the year ended December 31, 1997 from $12.8
million for the year ended December 31, 1996. 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 USWeb throughout
1997, $3.7 million was due to increases in personnel to support the growth in
USWeb's operations and $1.3 million was due to USWeb 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, USWeb recognized a non-cash charge of $1.3 million associated with the
discounted sale of Common Stock to Intel Corporation. USWeb anticipates that
marketing, sales and support expenses will increase in future periods in
absolute dollars as it continues to pursue an aggressive brand building
strategy and continues to acquire and consolidate the results of Internet
professional service firms.
General and Administrative Expenses. General and administrative expenses
increased to $10.3 million for the year ended December 31, 1997, from $2.8
million for the year ended December 31, 1996. This increase was primarily
attributable to $3.7 million related to the consolidation of the results of
operations of acquired Internet professional services firms with those of
USWeb throughout 1997, $2.2 million of increases in personnel and overhead
costs to support the internal growth in USWeb's operations and a non-cash
severence related compensation charge of $1.1 million during the quarter ended
September 30, 1997 related to USWeb's decision to end its program for
attracting new Affiliates. USWeb 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 USWeb.
Acquired In-Process Technology. USWeb recognized the cost of acquired in-
process technology totaling $9.5 million during the year ended December 31,
1997. USWeb did not record any such expenses for the year ended December 31,
1996, because USWeb 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.
USWeb 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.
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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. USWeb did not record any such expenses for the year
ended December 31, 1996 because USWeb did not acquire any entities during such
period. USWeb 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. USWeb did not record any such expenses
for the year ended December 31, 1996 because USWeb did not acquire any
entities during such period. USWeb 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, USWeb 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, USWeb 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 USWeb
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
USWeb'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 USWeb's acquisition
program, which began in the first quarter of 1997, combined with the increased
number and relative size of client engagements. USWeb 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 USWeb'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 USWeb'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
USWeb's contract with NBC, stock compensation resulting from USWeb's
acquisition program and depreciation and amortization of fixed assets and
leasehold improvements. USWeb 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, USWeb 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.
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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
USWeb 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. USWeb 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 USWeb during each period and increases in personnel and
overhead costs to support the internal growth in USWeb 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. USWeb 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, USWeb entered into an employment arrangement with an
individual who will serve as USWeb's Chief Executive Officer. As part of the
employment arrangement, USWeb granted the individual options to purchase 1.2
million shares of USWeb'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.
USWeb 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 USWeb's
various acquisitions. USWeb anticipates that stock compensation expense will
vary in future periods.
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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 USWeb's
acquisitions completed prior to September 30, 1998. USWeb 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 USWeb's public equity offerings, completed
in December 1997 and April 1998, offset by interest expense incurred on
USWeb'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 USWeb incurred
net operating losses in each of those periods.
Impairment of Investee. During June 1997, USWeb 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
USWeb'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,
USWeb 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.
LIQUIDITY AND CAPITAL RESOURCES
USWeb invests predominantly in instruments that are highly liquid,
investment grade, and have maturities of less than one year, with the intent
to make such funds readily available for operating purposes. At September 30,
1998, USWeb had approximately $53.7 million in cash, cash equivalents and
short-term investments compared to $44.1 million at December 31, 1997.
Cash used in operating activities was $29.2 million for the nine months
ended September 30, 1998, and was primarily due to the net loss of $111.5
million, offset by non-cash charges of $109.2 million (which includes
primarily a provision for loss on contract, stock compensation, acquired in-
process technology, amortization of intangible assets, and depreciation and
amortization of fixed assets and leasehold improvements), and an increase in
accounts receivable of $16.4 million resulting from an increase in the number
and size of client engagements being entered into. Cash used in operating
activities was $16.6 million for the nine months ended September 30, 1997, and
was primarily due to the net loss from operations of $39.3 million, offset by
non-cash charges of $16.3 million, and an impairment provision of
$4.0 million, representing the cost basis in Utopia, Inc.
Cash used in investing activities was $34.0 million for the nine months
September 30, 1998. Purchases (net of sales and maturities) of investments in
marketable securities during the period were $29.8 million and capital
expenditures totaled $5.1 million. Capital expenditures have generally been
comprised of purchases of computer hardware and software as well as leasehold
improvements related to leased facilities, and are expected to increase in
future periods. Cash used in investing activities was $1.8 million for the
nine months ended September 30, 1997, and was primarily due to capital
expenditures of $1.7 million.
Cash provided by financing activities was $42.9 million for the nine months
ended September 30, 1998. In April 1998, USWeb completed a follow-on public
offering of its Common Stock, resulting in net proceeds of $31.2 million.
Additionally, various stock option, employee stock purchase and common stock
warrant holders exercised or purchased their stock options, employee shares
and common stock warrants, offset by
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common stock repurchases resulting in net proceeds of $11.0 million. Cash
provided by financing activities was $17.1 million for the nine months ended
September 30, 1997, and was primarily due to the issuance of Mandatorily
Redeemable Preferred Stock (which converted to shares of Common Stock upon the
close of USWeb's initial public offering in December 1997), resulting in net
proceeds of $16.3 million.
USWeb currently has no material commitments other than those under operating
lease agreements and costs incurred in connection with the pending merger with
CKS Group, including investment banking fees. USWeb has experienced a
substantial increase in its capital expenditures and operating lease
arrangements since its inception, which is consistent with increased staffing,
and anticipates that this will continue in the future. Also, the Company has
announced that its board of directors approved the repurchase of up to one
million shares of the Company's common stock depending on certain market
conditions. Additionally, USWeb will continue to evaluate possible
acquisitions of or investments in businesses, products, and technologies that
are complementary to those of USWeb, which may require the use of cash. USWeb
believes that existing cash, investments, and borrowings available under its
credit facilities will be sufficient to fund its requirements for working
capital and capital expenditures for at least the next 12 months; however,
USWeb may sell additional equity or debt securities or seek additional credit
facilities if it believes such actions would be a better way to fund
acquisition-related or other costs. Sales of additional equity or convertible
debt securities would result in additional dilution to USWeb's stockholders.
USWeb may need to raise additional funds sooner in order to support more rapid
expansion, develop new or enhanced services and products, respond to
competitive pressures, acquire complementary businesses or technologies or
take advantage of unanticipated opportunities. USWeb's future liquidity and
capital requirements will depend upon numerous factors, including the success
of USWeb's existing and new service offerings and competing technological and
market developments. See "Risk Factors--Risks Related to the Combined Company,
USWeb and CKS Group--Future Capital Needs; Uncertainty of Additional
Financing."
Pursuant to Section 7.3 of the Reorganization Agreement, the Reorganization
Agreement may be terminated by either party under certain circumstances. Each
of CKS Group and USWeb has agreed that if the Merger is not consummated as a
result of certain specified events, it will pay to the other party a
termination fee of $12 million. Payment of the fees described in this
paragraph shall not be in lieu of damages incurred in the event of material
and willful breach of the Reorganization Agreement.
If the Merger is not consummated, expenses incurred in connection with the
proposed combination (including the possible "break-up" fees described above)
could have a material adverse effect on USWeb's results of operations.
USWeb believes that its available cash and anticipated cash flow from
operations will be sufficient to fund USWeb's working capital and capital
expenditure requirements for at least the next twelve months.
FACTORS AFFECTING OPERATING RESULTS
USWeb's operating results may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside USWeb's control.
These factors include the level of demand for Intranet, Extranet and Web site
development; the productivity of USWeb's consulting offices; USWeb's success
in finding and acquiring suitable acquisition candidates; USWeb'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 USWeb's operations; the introduction of new products or services
by USWeb 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, USWeb 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 USWeb's business, results of operations and financial condition.
USWeb may also experience seasonality in its
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business in the future, resulting in diminished revenues to USWeb 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 USWeb's operating results may fall below the
expectations of securities analysts and investors. In such event, the trading
price of USWeb'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
USWeb adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" in the nine months ended
September 30, 1998. SFAS No. 130 requires USWeb to report in its financial
statements, in addition to its net income (loss), comprehensive income (loss),
which includes all changes in equity during a period from non-owner sources
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. During the nine months September 30, 1998, such items were
not significant, and USWeb's comprehensive loss approximated its net loss.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
adoption of SFAS No. 131 is required for fiscal years beginning after December
15, 1997. SFAS No. 131 requires that companies report separately in their
financial statements certain financial and descriptive information about
operating segments, if applicable. USWeb does not expect the adoption of SFAS
No. 131 to have any impact on USWeb's consolidated financial results and is
currently assessing the disclosure requirements of the new pronouncement.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software
and on accounting for the proceeds of computer software originally developed
or obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use. USWeb has not yet determined
the impact, if any, of adopting SOP 98-1, which will be effective for USWeb's
year ending December 31, 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. SFAS 133 requires that all
derivatives be recognized in the balance sheet at their fair market value and
the corresponding derivative gains or losses be either reported in the
statement of operations or as a deferred item depending on the type of hedge
relationship that exists with respect to such derivatives. The Company has not
yet determined the effect, if any, of adopting SFAS 133, which will be
effective for the Company's fiscal year 2000.
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
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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 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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USWEB MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of USWeb, 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
Joseph 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 USWeb 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 USWeb in May 1998 as USWeb'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 USWeb 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 USWeb 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 USWeb in December 1995 and has served as a
Director since that time. Since May 1998 Mr. Heffernan has also served as a
consultant to USWeb. From December 1995 to May 1998, Mr. Heffernan served as
USWeb's Executive Vice President, Chief Financial Officer and Secretary. From
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May 1993 to July 1994, he worked as an independent consultant and then joined
Interlink Computer Sciences, Inc. in July 1994 as Chief Financial Officer,
where he served until January 1996. From March 1992 to May 1993, Mr. Heffernan
served as Chief Financial Officer and Chief Operating Officer of Serius.
Mr. Heffernan has also served as an officer of several other technology
companies, including Software Publishing Corp., Zital Inc. and Measurex Corp.
Mr. Heffernan is a director of Savoir Technology Group, Inc.
Mr. Robert Hoff has served as a Director of USWeb 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 USWeb 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 USWeb 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 Zurich; the University of Fribourg;
and at Harvard University. Degrees include doctorates in Mechanical
Engineering and Economics (summa cum laude).
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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 USWeb are appointed by the USWeb Board and serve at the
discretion of the USWeb Board. There are no family relationships among any of
the directors or executive officers of USWeb.
BOARD COMMITTEES
The USWeb 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 USWeb Board of
Directors, reviews the scope and results of the audit and other services
provided by USWeb's independent accountants, and reviews USWeb's accounting
practices and its systems of internal accounting controls (the "USWeb Audit
Committee").
The compensation committee, consisting of Mr. Hoff and Mr. Rieschel, reviews
and approves the salaries, bonuses and other compensation payable to USWeb's
executive officers and administers and makes recommendations concerning USWeb
employee benefit plans (the "USWeb Compensation Committee").
DIRECTOR COMPENSATION
USWeb reimburses its directors for all out-of-pocket expenses incurred in the
performance of their duties as directors of USWeb. USWeb currently does not pay
fees to its directors for attendance at meetings. USWeb also grants stock
options to directors. See "--Employee Benefit Plans."
USWEB COMPENSATION COMMITTEE INTERLOCKS GROUP AND INSIDER PARTICIPATION
No member of the USWeb Compensation Committee of USWeb 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 USWeb's Board of Directors
or USWeb Compensation Committee. See "Certain Transactions" for a description
of transactions between USWeb and entities affiliated with members of the USWeb
Compensation Committee.
MANAGEMENT CONTINUITY AGREEMENTS
USWeb 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 USWeb (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), USWeb shall provide
severance pay to him equal to his 12 months' base compensation or (b) if USWeb
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,
USWeb 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, USWeb 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, USWeb 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
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control), any repurchase rights of USWeb 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 USWeb 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), USWeb 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, USWeb 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, USWeb 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, USWeb 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 USWeb 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 USWeb.
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 employment 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
USWeb's Certificate of Incorporation, USWeb's Bylaws, Section 145 of the
DGCL and the form of indemnification agreement entered into between USWeb and
certain of its directors and officers, subject to certain conditions,
authorize USWeb to indemnify, or indemnify by their terms, as the case may be,
the directors and officers of USWeb against certain liabilities and expenses
incurred by such persons in connection with claims made by reason of their
being such a director or officer.
USWeb has obtained directors' and officers' insurance providing
indemnification for certain of USWeb's directors, officers, affiliates,
partners or employees for certain liabilities.
USWeb has entered into agreements to indemnify its directors and executive
officers, in addition to indemnification provided for in USWeb's Bylaws. These
agreements, among other things, indemnify USWeb'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 USWeb, arising out of
such person's services as a director or executive officer of USWeb, any
subsidiary of USWeb or any other company or enterprise to which the person
provides services at the request of USWeb. USWeb 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 USWeb where indemnification is
expected to be required or permitted. USWeb is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification.
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USWEB EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by USWeb during the fiscal years ended December 31, 1996 and 1997 to USWeb's
Chief Executive Officer and each of USWeb's four other executive officers
(collectively, the "USWeb 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 base 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 Merger.
(8) 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. The annual base salary for Mr. Campbell was $220,000. The figure
listed represents payment for actual employment during 1997, which was
slightly less than seven months.
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OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
The following table sets forth the stock options granted during the fiscal
year ended December 31, 1997 to each of the USWeb Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1)
------------------------------------------- POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE OPTION TERM (3)
GRANTED FISCAL PRICE EXPIRATION ---------------------
NAME (#)(1) YEAR (2) ($/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 USWeb 1996 Equity Compensation Plan.
Options granted under the USWeb 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 USWeb's Common Stock on the date of
grant. The USWeb 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 USWeb
1996 Equity Plan.
(2) Based on options to purchase an aggregate of 1,635,653 shares granted to
employees during 1997 under the USWeb 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
USWeb'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 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 USWeb Named Executive
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
UNDERLYING UNEXERCISED IN-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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<PAGE>
EMPLOYEE BENEFIT PLANS
USWeb 1996 Stock Option Plan
USWeb's 1996 Stock Option Plan (the "USWeb 1996 Plan") was adopted by the
USWeb Board of Directors in December 1995 and approved by the stockholders in
December 1996. The USWeb 1996 Plan will terminate in December 2005 unless
terminated earlier by the USWeb Board of Directors. The USWeb 1996 Plan
provides for grants of options to employees and consultants (including
officers and directors) of USWeb and its subsidiaries. A total of 600,000
shares of USWeb Common Stock were reserved for issuance pursuant to the USWeb
1996 Plan. The USWeb 1996 Plan may be administered by the USWeb Board of
Directors or by a committee appointed by the USWeb Board of Directors, in a
manner that satisfies the legal requirements relating to the administration of
stock plans under all applicable laws (the "USWeb 1996 Plan Administrator").
The USWeb 1996 Plan is currently administered by the USWeb Board of Directors.
USWeb does not intend to issue any additional options under the USWeb 1996
Plan.
The exercise price of options granted under the USWeb 1996 Plan is
determined by the USWeb 1996 Plan Administrator. With respect to incentive
stock options granted under the USWeb 1996 Plan, the exercise price must be at
least equal to the fair market value per share of the USWeb 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 USWeb's outstanding capital stock must be equal to at least 110% of
fair market value of the USWeb Common Stock on the date of grant. The maximum
term of an option granted under the USWeb 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 USWeb'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 USWeb 1996 Plan are not generally
transferable by the optionee, and may be exercised during the life of the
optionee only by the optionee.
The USWeb 1996 Plan provides that in the event of a merger of USWeb with or
into another corporation, or a sale of substantially all of USWeb'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 USWeb 1996
Plan 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 USWeb 1996 Plan provides that in the event of a proposed dissolution or
liquidation, the USWeb 1996 Plan 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
USWeb 1996 Plan Administrator makes an option exercisable in full in the event
of a proposed dissolution or liquidation, the USWeb 1996 Plan 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, USWeb had outstanding options to purchase 42,792
shares of USWeb Common Stock under the USWeb 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 USWeb Common Stock under the USWeb
1996 Plan had been exercised.
USWeb 1996 Equity Compensation Plan
USWeb's 1996 Equity Compensation Plan (the "USWeb 1996 Equity Plan")
provides for the granting to employees of incentive stock options within the
meaning of Section 422 of the Code, and for the granting to
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<PAGE>
employees and consultants of nonstatutory stock options and stock purchase
rights ("SPRs"). The USWeb 1996 Equity Plan was approved by the USWeb Board of
Directors in October 1996 and by the stockholders in December 1996 and amended
in September and November 1997. Unless terminated sooner by the USWeb Board of
Directors, the USWeb 1996 Equity Plan will terminate automatically in December
2006. A total of 7,000,000 shares of USWeb 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 USWeb Board of Directors are
currently reserved for issuance pursuant to the USWeb 1996 Equity Plan.
The USWeb 1996 Equity Plan may be administered by the USWeb Board of
Directors or a committee thereof (the "USWeb 1996 Equity Plan Administrator"),
which USWeb 1996 Equity Plan 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 USWeb 1996 Equity Plan
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 USWeb 1996 Equity Plan
Administrator has the authority to amend, suspend or terminate the USWeb 1996
Equity Plan, provided that no such action may impair the rights of any
optionee under the USWeb 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
USWeb 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 USWeb Common Stock in any fiscal year. The USWeb 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 USWeb 1996 Equity Plan Administrator,
options and SPRs granted under the USWeb 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
USWeb 1996 Equity Plan must generally be exercised within three months of the
end of the optionee's status as an employee or consultant of USWeb, 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 USWeb 1996 Equity Plan Administrator determines otherwise,
the restricted stock purchase agreement pursuant to which the SPR is exercised
shall grant USWeb a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's employment with USWeb 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 USWeb. The repurchase option shall lapse at a
rate determined by the USWeb 1996 Equity Plan Administrator. The exercise
price of all incentive stock options granted under the USWeb 1996 Equity Plan
must be at least equal to the fair market value of the USWeb Common Stock on
the date of grant. The exercise price of nonstatutory stock options and SPRs
granted under the USWeb 1996 Equity Plan is determined by the USWeb 1996
Equity Plan 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 USWeb 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 USWeb'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 USWeb 1996
Equity Plan may not exceed ten years.
The USWeb 1996 Equity Plan provides that in the event of a merger of USWeb
with or into another corporation, a sale of substantially all of USWeb's
assets or a like transaction involving USWeb, each option shall be assumed or
an equivalent option substituted by the successor corporation. If the
outstanding options
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<PAGE>
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.
The USWeb 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, USWeb had outstanding options to purchase 4,403,137
shares of USWeb Common Stock under the USWeb 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 USWeb Common Stock under the USWeb 1996
Equity Plan had been exercised.
USWeb 1997 Acquisition Stock Option Plan
USWeb's 1997 Acquisition Stock Option Plan (the "USWeb 1997 Plan") was
approved by the USWeb Board of Directors in February 1997 and amended in July
and November 1997. The USWeb 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 USWeb Board of Directors, the USWeb 1997 Plan will
terminate automatically in February 2007. A total of 20,000,000 shares of
USWeb 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 USWeb Board of Directors, are currently reserved for issuance pursuant
to the USWeb 1997 Plan.
The USWeb 1997 Plan may be administered by the USWeb Board of Directors or a
committee of the USWeb Board of Directors (the "USWeb 1997 Plan
Administrator"). The USWeb 1997 Plan 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 USWeb 1997 Plan Administrator has the authority to
amend, suspend or terminate the USWeb 1997 Plan, provided that such action may
not impair the rights of any optionee under the USWeb 1997 Plan unless
mutually agreed.
Options and SPRs granted under the USWeb 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
USWeb 1997 Plan must generally be exercised within three months after the end
of optionee's status as an employee, director or consultant of USWeb, 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 USWeb 1997 Plan Administrator determines
otherwise, the restricted stock purchase agreement shall grant USWeb a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with USWeb 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 USWeb. The repurchase option shall lapse at a rate determined by the USWeb
1997 Plan Administrator.
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<PAGE>
The exercise price of all incentive stock options granted under the USWeb
1997 Plan must be at least equal to the fair market value of the USWeb Common
Stock on the date of grant. The exercise price of nonstatutory stock options
and SPRs granted under the USWeb 1997 Plan is determined by the USWeb 1997
Plan 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 USWeb 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 USWeb, 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 USWeb 1997 Plan may not exceed ten years.
The USWeb 1997 Plan provides that in the event of a merger of USWeb with or
into another corporation, or a sale of substantially all of USWeb'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 USWeb 1997 Plan 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 USWeb 1997 Plan provides that in the event of a proposed dissolution or
liquidation, the USWeb 1997 Plan 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
USWeb 1997 Plan Administrator makes an option or SPR exercisable in full in
the event of a proposed dissolution or liquidation, the USWeb 1997 Plan
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, USWeb had outstanding options to purchase 11,019,244
shares of USWeb Common Stock under the USWeb 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 USWeb Common Stock under the USWeb 1997 Plan had
been exercised.
USWeb 1997 Employee Stock Purchase Plan
USWeb's 1997 Employee Stock Purchase Plan (the "USWeb ESPP") was adopted by
the USWeb Board of Directors in September 1997. A total of 3,000,000 shares of
USWeb Common Stock has been reserved for issuance under the USWeb 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
USWeb Board of Directors.
The USWeb 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
USWeb 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 USWeb 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
USWeb, or (ii) whose rights to purchase stock under all employee stock
purchase plans of USWeb accrues at a rate which exceeds $25,000 worth of stock
for each calendar
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<PAGE>
year. The USWeb ESPP permits participants to purchase USWeb 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 they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with USWeb.
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 USWeb with or into another corporation or a sale
of substantially all of USWeb's assets, each outstanding option may be assumed
or substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering
period then in progress will be shortened and a new exercise date will be set.
The ESPP will terminate by its own terms in September 2007. The Board of
Directors has the authority to amend or terminate the ESPP, except that no
such action may adversely affect any outstanding rights to purchase stock
under the ESPP.
Affiliate Warrant Program
In June 1996, USWeb 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 USWeb'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 USWeb. A total of 333,333 shares of
Common Stock has been reserved for issuance under the Program, and USWeb does
not intend to increase this amount. As of October 20, 1998, USWeb 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>
USWEB CERTAIN TRANSACTIONS
Since its inception, USWeb has issued, in private placement transactions,
shares of USWeb 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,
USWeb 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 USWeb Preferred Stock converted into one share of
USWeb Common Stock upon the closing of USWeb's initial public offering in
December 1997. The holders of such shares of converted USWeb Preferred Stock
are entitled to certain registration rights with respect to the USWeb Common
Stock issued upon conversion thereof. See "Comparison of Capital Stock--
Description of USWeb Capital Stock." The following table sets forth the number
of shares of USWeb Preferred Stock, Series C Warrants and USWeb Common Stock
purchased by USWeb's directors, five percent stockholders and their respective
affiliates:
<TABLE>
<CAPTION>
USWEB
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 USWeb Board.
(2) Jeffrey Ballowe and Gary Rieschel, Executive Managing Director of SOFTBANK
Holdings, an affiliate of SOFTVEN No. 2 Investment Enterprise Partnership,
serve on the USWeb Board.
(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 USWeb Board, 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.
In December 1995, USWeb entered into Restricted Stock Purchase Agreements
with each of Joseph Firmage, Tobin Corey, James Heffernan and Kenneth
Campbell. In January 1996, USWeb 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 USWeb Common Stock set forth opposite their names in the table
below:
<TABLE>
<CAPTION>
SHARES OF
USWEB 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>
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<PAGE>
The shares of USWeb Common Stock subject to the Restricted Stock Purchase
Agreements were issued in exchange for cash. The Restricted Stock Purchase
Agreements provide USWeb the right to repurchase at the original purchase
price all shares of USWeb 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 USWeb's right of repurchase each month
after the date of purchase. Further, USWeb 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.
USWeb has entered into indemnification agreements with each of its directors
and executive officers. These agreements require USWeb to indemnify such
individuals for certain liabilities to which they may be subject as a result
of their affiliation with USWeb, to the fullest extent allowed by Delaware
law. See USWeb "Management--Limitation on Liability and Indemnification
Matters."
USWeb has entered into Management Continuity Agreements with Messrs.
Firmage, Corey, Heffernan and Laube. See "USWeb Management--Management
Continuity Agreements."
In January 1996, USWeb 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, USWeb forgave the
Corey Loan, together with accrued interest and a tax gross-up, for a total
amount forgiven of $139,000.
In August 1997, USWeb 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,
USWeb 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, USWeb 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. USWeb repurchased the remaining 349,502 shares
of Common Stock held by Mr. Campbell at a price of $0.0003 per share.
In November 1997, USWeb granted the following options to USWeb 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 to
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>
USWEB 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
EXECUTIVE OFFICERS, 5% NUMBER OF SHARES PERCENT OF PRO FORMA PRO FORMA
STOCKHOLDERS AND ALL BENEFICIALLY OWNED SHARES NUMBER OF SHARES PERCENT OF SHARES
USWEB EXECUTIVE OFFICERS PRIOR TO THE BENEFICIALLY BENEFICIALLY OWNED BENEFICIALLY OWNED
AND DIRECTORS AS A GROUP MERGER(1) OWNED (1)(2) POST MERGER(1) POST 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
SEC. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of USWeb 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 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 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.
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(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.
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<PAGE>
CKS GROUP, INC.
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
Merger is consummated. 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, 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 Joint Proxy Statement/ 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 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
utilize 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.
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. Increasing complexity of sophisticated digital delivery, storage and
multimedia enhancement tools and technologies designed to improve the
effectiveness of new media communications.
. 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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. 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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<PAGE>
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. See "Risk Factors--Risks Related to the
Combined Company, USWeb and CKS Group--Competition; Low Barriers to Entry."
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. See "Risk Factors--Risks Related to
the Combined Company, USWeb and CKS Group--Recruitment and Retention of
Consulting Professionals."
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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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CKS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data," "Pro Forma Selected Consolidated
Financial Data," "Pro Forma Consolidated Financial Information" and CKS Group
Consolidated Financial Statements, including the Notes thereto, included
elsewhere in this Joint Proxy Statement/Prospectus. The discussion in CKS
Group 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 CKS Group's plans, objectives,
expectations and intentions, as well as financial trends. The cautionary
statements made in CKS Group 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.
CKS Group'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. See
"Forward-Looking Statements."
OVERVIEW
CKS Group was originally founded in 1987 as Cleary Communications and
initially concentrated on the development and implementation of marketing
plans and programs. Over the last several years, CKS Group has developed its
vision as an integrated marketing communications company utilizing both
traditional marketing disciplines, such as product branding and advertising,
as well as advanced technology solutions and new media including Internet
development, Intranet development, database architecture and enterprise
systems integration. CKS Group hires personnel with the appropriate skills and
acquires companies with the appropriate marketing focus to expand its service
offerings to encompass a full range of marketing communications including
strategic corporate and product positioning, corporate identity and product
branding, new media, systems integration, environmental design, packaging,
electronic commerce, collateral systems, advertising, direct mail, consumer
promotions, trade promotions and media placement services.
CKS Group defines new media as media that delivers content to the end user
in digital form, including the World Wide Web, the Internet, proprietary
online services, CD-ROMs, laptop PC presentations and interactive kiosks. New
media services represented approximately 26%, 25% and 16% of CKS Group's
revenues for fiscal years 1997, 1996 and 1995, respectively and approximately
27% and 26% for the nine months ended August 30, 1998 and August 31, 1997,
respectively. The balance of CKS Group's revenues for such periods were
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,
collateral systems, advertising, direct mail, consumer promotions, trade
promotions and media placement services.
ACQUISITION OF BUSINESSES
Pursuant to a strategic growth strategy, CKS Group has acquired businesses
that offer complementary marketing communications services, products and
technologies.
On August 1, 1996, CKS Group acquired Schell/Mullaney. The acquisition of
Schell/Mullaney was accounted for as a purchase with the results of
Schell/Mullaney included in CKS Group's results from the acquisition date. The
purchase agreement provided for an initial payment in CKS Group Common Stock
of $5.0 million, and additional future consideration of up to $9.0 million in
CKS Group Common Stock if certain operating results were achieved in 1997 and
1998. Of the latter amount, $4.5 million in CKS Group Common Stock was paid in
April 1998 based on the operating results achieved in 1997.
On January 3, 1997, CKS Group acquired the assets and assumed substantially
all the liabilities of D&G. The acquisition of D&G was accounted for as a
purchase, with the results of D&G included in CKS Group's results from the
acquisition date. The purchase agreement provided for initial payments to D&G
of $5.1
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million. CKS Group also made guaranteed payments to D&G of $3.3 million in
cash and CKS Group Common Stock on April 18, 1997 and $1.0 million in cash and
CKS Group Common Stock on April 18, 1998. In addition, D&G will receive
additional guaranteed payments totaling $0.5 million in cash and CKS Group
Common Stock over the next fiscal year. D&G will also have the right to
receive additional payments of up to $3.0 million in cash and stock if it
attains certain earnings goals during the fiscal years 1998, 1999 and 2000.
On January 31, 1997, CKS Group issued 841,291 shares of CKS Group Common
Stock for all of the partnership units and residual partnership interests of
M&S. The combination was accounted for as a pooling of interests and,
accordingly, CKS Group's consolidated financial statements have been restated
for all periods prior to the combination to include the results of operations,
financial position and cash flows of M&S.
On March 10, 1997, CKS Group acquired all of the capital stock of CKS Group
GmbH (formerly Elektronische Publikationen GmbH), a German corporation, and
its results of operations have been included in the CKS Group's consolidated
financial statements from such date. In consideration for the sale of their
shares in CKS Group GmbH, the former shareholders of CKS Group GmbH received
$2.9 million in cash and 86,603 shares of CKS Group Common Stock. The
acquisition of the capital stock of CKS Group GmbH was accounted for as a
purchase. Also, under the original purchase agreement, CKS Group was required
to make a guaranteed payment of $0.7 million in cash and CKS Group Common
Stock in fiscal 1998. In addition, the former shareholders of CKS Group GmbH
had the right to receive up to an additional $10.0 million in cash and
additional shares of CKS Group Common Stock during fiscal 1998, 1999, and 2000
upon attainment of certain earnings goals by CKS Group GmbH. On April 27,
1998, CKS Group and the former shareholders of CKS Group GmbH terminated the
original purchase agreement with respect to the right of the former
shareholders of CKS Group GmbH to receive additional cash and CKS Group Common
Stock in future years and negotiated the terms of a new purchase agreement.
Under the new purchase agreement, CKS Group paid to the former shareholders of
CKS Group GmbH $6.2 million in cash in April 1998 and granted the former
shareholders of CKS Group GmbH the right to receive an additional cash payment
on September 20, 1998 of up to approximately $0.3 million if the subsidiary
attains a certain earnings goal during the six month period ending August 31,
1998.
On March 12, 1997, CKS Group acquired certain assets of Gormley, a
Connecticut corporation, in a transaction accounted for as a purchase. The
purchase agreement provided for an initial payment of $3.2 million in cash and
40,206 shares of CKS Group Common Stock to Gormley and an additional $1.5
million in cash and CKS Group Common Stock paid on April 15, 1998. Gormley
will have the right to receive additional payments if it attains certain
earnings goals over the next three fiscal years.
On June 17, 1997, CKS Group issued 241,108 shares of its Common Stock for
all of the outstanding capital stock of SiteSpecific, and granted options to
purchase 18,884 shares of CKS Common Stock under an option plan. The
combination has been accounted for as a pooling of interests and, accordingly,
CKS Group's consolidated financial statements have been restated for all
periods prior to the combination to include the results of operations,
financial position and cash flows of SiteSpecific.
SOURCES OF REVENUES
CKS Group generates a significant portion of its revenues through project
fees on a fixed fee for service basis and contract based retainer fees. When
CKS Group prepares to bid on a new project, CKS Group develops internal
estimates for the number of hours required to complete various segments of the
project, based in large part on CKS Group's database of similar projects
archived in CKS Group's proprietary project management software, the
Electronic Job Jacket. CKS Group's policy is generally to bill 50% of project
fees at the commencement of the project, with the balance billed upon
completion.
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COST STRUCTURE
CKS Group recognizes revenues related to fixed fee for service projects
using the percentage of completion method based on the ratio of costs incurred
to total estimated project costs. CKS Group updates its estimated costs on
each project monthly. 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 is recorded as an asset. Billings in excess of
fees and expenditures represent amounts billed in excess of costs incurred and
estimated profits earned, and is recorded as a liability. To the extent costs
incurred and anticipated costs to complete projects in progress exceed
anticipated billings, a loss is accrued for the excess.
CKS Group generates higher profit margins when a greater percentage of its
services are performed by full time employees rather than independent
consultants. Accordingly, CKS Group actively monitors and manages its level of
full time and temporary employees as compared to independent consultants to
ensure that future projects are adequately staffed. CKS Group has made a
strategic decision to incur the incremental costs of independent consultants
to staff growth in projects rather than increase the number of full time
employees until CKS Group has determined that the increased revenue levels are
sustainable.
RESULTS OF OPERATIONS
INTRODUCTION
In reviewing CKS Group's consolidated financial statements and the
discussion of the Consolidated Results of Operations that appears below, the
following should be taken into consideration. During fiscal 1997, CKS Group
acquired M&S and SiteSpecific. These business combinations were accounted for
under the pooling-of-interests method. Prior to acquisition by CKS Group, M&S
and SiteSpecific prepared their financial statements on a calendar year basis.
In accordance with generally accepted accounting principles ("GAAP"), after
CKS Group acquired M&S and SiteSpecific, CKS Group restated its financial
results to include the financial results of M&S and SiteSpecific for all
periods presented. Pursuant to GAAP, M&S's and SiteSpecific's results for the
period from January 1, 1996 through December 31, 1996 and January 1, 1995
through December 31, 1995 were included in CKS Group's results for the period
from December 1, 1995 through November 30, 1996 and December 1, 1994 through
November 30, 1995, respectively. Beginning with fiscal 1997, M&S' and
SiteSpecific's fiscal years were conformed to CKS Group's fiscal year.
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The following table sets forth the percentage of revenue of certain items
included in CKS Group's statements of operations for the periods indicated:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
----------------------------
YEARS ENDED NOVEMBER 30,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues....................................... 100.0% 100.0% 100.0%
Operating expenses:
Direct salaries and related expenses......... 26.0 26.0 26.4
Other direct operating expenses.............. 41.3 41.2 42.5
General & administrative expenses............ 22.3 19.9 19.8
Merger costs................................. 1.8 -- --
-------- -------- --------
Total operating expenses................... 91.4 87.1 88.7
-------- -------- --------
Operating income............................... 8.6 12.9 11.3
Other income, net.............................. 1.1 2.4 0.5
-------- -------- --------
Income before taxes............................ 9.7 15.3 11.8
Income taxes................................... 4.0 3.5 1.9
-------- -------- --------
Net income..................................... 5.7% 11.8% 9.9%
======== ======== ========
UNAUDITED PRO FORMA NET INCOME:
Income before tax, as reported................. 9.7% 15.3% 11.8%
Pro forma income taxes......................... 4.2 5.8% 4.9
-------- -------- --------
Pro forma net income........................... 5.5% 9.5% 6.9%
======== ======== ========
</TABLE>
FISCAL YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
Revenues. CKS Group generates a significant portion of its revenues through
project fees on a fixed fee for service basis and contract based retainer
fees. Revenues increased to $133.6 million in fiscal 1997 from $88.2 million
in fiscal 1996, representing an increase of 51.4%. This increase in revenues
was due to an increase in the number and value of projects undertaken for
existing clients of CKS Group, the establishment of new client relationships,
and the inclusion of Schell/Mullaney, D&G, CKS GmbH and Gormley revenues in
CKS Group's consolidated results for the year ending November 30, 1997.
Revenues from new media projects increased to $34.5 million for fiscal year
1997 from $22.3 million in fiscal year 1996, representing an increase of
approximately 55.0%. New media revenues represented approximately 26% of total
revenues in fiscal 1997 compared to 25% for fiscal 1996 (after giving effect
to the restatement to include M&S and SiteSpecific). In CKS Group's annual
report on Form 10-K for fiscal 1996, CKS Group reported that revenues from new
media projects were approximately 35.8% of total revenues for fiscal 1996,
without giving effect to the restatement to include M&S and SiteSpecific. M&S
historically has not had any significant new media revenues, so the effect of
the restatement was to reduce new media revenues as a percentage of total
revenues for fiscal 1996 from 36% to 25%.
Revenues increased to $88.2 million in fiscal 1996 from $58.4 million in
fiscal 1995, representing an increase of 51.2%. This increase in revenues was
due to an increase in the value of creative and design projects undertaken for
existing clients of CKS Group, the establishment of new client relationships,
and the inclusion of Schell/Mullaney revenues in CKS Group's consolidated
results for the year ending November 30, 1996. Revenues from new media
projects increased to $22.3 million for fiscal year 1996 from $9.1 million in
fiscal year 1995, representing an increase of approximately 145.8%. New media
revenues represented approximately
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25% of total revenues in fiscal 1996 compared to 16% for fiscal 1995 (after
giving effect to the restatement to include M&S and SiteSpecific). In CKS
Group's annual report on Form 10-K for fiscal 1996, CKS Group reported that
revenues from new media projects were approximately 25% of total revenues for
fiscal 1995 without giving effect to the restatement to include M&S and
SiteSpecific.
Direct Salaries and Related Expenses. Direct salaries and related expenses
consist primarily of wages for regular and temporary employees, as well as
incentive bonus payments and benefits for regular employees. CKS Group's
direct salaries and related expenses increased approximately 51.2% to $34.7
million in fiscal 1997 from $23.0 million during fiscal 1996, representing
26.0% of revenues in both fiscal 1997 and fiscal 1996. The increase in
absolute dollars was primarily attributable to an increase in salaries and
related expenses necessary to support CKS Group's growth. As a percentage of
revenues, direct salaries and related expenses remained unchanged.
CKS Group's direct salaries and related expenses increased approximately
48.7% to $23.0 million in fiscal 1996 from $15.4 million during fiscal 1995,
representing 26.0% and 26.4% of revenues in fiscal 1996 and fiscal 1995,
respectively. The increase in absolute dollars was primarily attributable to
an increase in salaries and related expenses necessary to support CKS Group's
growth. As a percentage of revenue, direct salaries and related expenses
remained relatively unchanged.
Other Direct Operating Expenses. Other direct operating expenses include
materials, contract freelance talent (independent consultants and
contractors), facilities and equipment expenses necessary to provide services
to CKS Group's clients. Other direct operating expenses increased
approximately 52.3% to $54.0 million in fiscal 1997 from $35.4 million during
fiscal 1996, representing 40.4% and 40.1% of revenues in fiscal 1997 and
fiscal 1996, respectively. The increase in absolute dollars was primarily
attributable to increases in material costs, production costs and freelance
talent costs necessary to support the higher level of revenues. As a
percentage of revenues, other direct operating expenses remained relatively
unchanged.
CKS Group's other direct operating expenses increased 46.2% to $35.4 million
in fiscal 1996 from $24.2 million for fiscal 1995, representing 40.1% and
41.5% of revenues in fiscal 1996 and fiscal 1995, respectively. The increase
in absolute dollars was primarily attributable to increases in material costs
and freelance talent costs necessary to support the higher level of revenues.
As a percentage of revenues, other direct operating expenses decreased as a
result of a more rapid increase in revenues than in other direct operating
expenses.
General and administrative expenses. General and administrative expenses
include headquarters expenses, insurance, personnel costs for finance and
administration, accounting and legal fees, bad debt expense, management
information systems expenses, and employee benefits. General and
administrative expenses increased approximately 64.3% to $28.0 million in
fiscal 1997 from $17.0 million in fiscal 1996, representing 20.9% and 19.2% of
revenues in fiscal 1997 and fiscal 1996, respectively. The period over period
increase in absolute dollars was primarily attributable to increases in
general and administrative payroll, facilities costs, administration expenses,
and business development costs necessary to support CKS Group's growth both
internally and through acquisitions. Fiscal 1997 includes a full year of
Schell/Mullaney expenses and, since acquisition, D&G, CKS GmbH and Gormley
expenses. CKS Group also increased its bad debt reserve to support growth in
total revenues and accounts receivable. As a percentage of revenues, general
and administrative expenses increased primarily as a result of increases in
administrative payroll costs, and facilities costs to provide capacity to
accommodate new business.
General and administrative expenses increased approximately 52.7% to $17.0
million in fiscal 1996 from $11.1 million in fiscal 1995, representing 19.2%
and 19.1% of revenues in fiscal 1996 and 1995, respectively. This period over
period increase in absolute dollars was attributable principally to higher
general and administrative payroll costs, increased general office and
business development costs to support CKS Group's growth, offset in part by
reductions in bad debt expense and management fees paid to the Interpublic
Group of Companies ("IPG"). As a percentage of revenues, general and
administrative expenses remained relatively unchanged.
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Depreciation and Amortization
Depreciation and amortization expenses include depreciation of fixed assets
and amortization of goodwill and other intangible assets. Depreciation and
amortization expenses increased approximately 107.0% to $3.1 million in fiscal
1997 from $1.5 million in fiscal 1996, representing 2.3% and 1.7% of revenues
in fiscal 1997 and fiscal 1996, respectively. The period over period increase
in absolute dollars and as a percentage of revenues was primarily attributable
to goodwill amortization related to CKS Group's acquisitions.
Depreciation and amortization expenses increased approximately 49.6% to $1.5
million in fiscal 1996 from $1.0 million in fiscal 1995. The period over
period increase in absolute dollars and as a percentage of revenues was
attributable to higher depreciation expenses and goodwill amortization related
to CKS Group's acquisition of Schell/Mullaney.
Merger Costs. In connection with the acquisition of M&S and SiteSpecific,
CKS Group recorded a nonrecurring charge for transaction related costs of
approximately $2.5 million for the twelve month period ended November 30,
1997. The costs consisted primarily of investment banking, accounting,
consulting and legal fees, financial printing and other related costs.
Other Income, Net. Other income, net consists primarily of interest earned
on CKS Group's holdings in cash, cash equivalents and marketable securities,
offset by interest expense incurred due to the amortization of imputed
interest on guaranteed cash payments related to certain subsidiary
acquisitions. Other income, net decreased to approximately $1.5 million in
fiscal 1997 from $2.1 million in fiscal 1996. The decrease was primarily
attributable to a reduction in interest income due to the use of cash for
acquisitions, and the amortization of imputed interest on guaranteed payments
related to acquisitions, partially offset by interest income earned by
subsidiaries. In addition, other income decreased year over year due to a
nonrecurring gain in fiscal 1996 from the sale of client stock accepted in
lieu of fees.
Other income, net increased by approximately $1.8 million during fiscal 1996
over fiscal 1995 primarily due to an increase in interest income related to
higher average cash, cash equivalent and marketable securities balances.
Income Taxes. Combined actual federal and state income tax rates were 41.0%
in fiscal 1997, 22.5% in fiscal 1996 and 15.5% in fiscal 1995. These rates do
not include a provision for income taxes for M&S prior to January 31, 1997,
which was a general partnership prior to its acquisition by CKS Group.
Combined pro forma federal and state income tax rates were 43.4% for fiscal
1997, 37.9% for fiscal 1996 and 41.1% for fiscal 1995. Pro forma tax rates
include a tax provision to reflect M&S income as if M&S had been a taxable
"C" corporation for all periods presented.
The effective tax rate was higher for fiscal 1997 primarily due to the
nondeductible merger costs incurred in connection with the acquisition of
SiteSpecific, nondeductible goodwill amortization and a decrease of tax exempt
interest as a percentage of total revenue. The effective tax rate was lower
for fiscal 1996 primarily due to the effect of income generated by CKS Group's
investments in tax-advantaged money market instruments.
NINE MONTHS ENDED AUGUST 30, 1998 AND AUGUST 31, 1997
Revenues. CKS Group generates a significant portion of its revenues through
project fees on a fixed fee for service basis and contract based retainer
fees. Revenues increased to $118.6 million during the nine month period ended
August 30, 1998 from $100.0 million in the same period of fiscal 1997,
representing an increase of approximately 18.7%. This increase in revenues was
due to an increase in the number and value of projects undertaken for existing
clients of CKS Group, the establishment of new client relationships, and the
inclusion of D&G, CKS GmbH and Gormley revenues in CKS Group's consolidated
results for the full nine month period ended August 30, 1998. Revenues from
new media projects increased to $32.0 million for the nine months ended August
30, 1998 from $26.2 million in the same period of fiscal 1997, representing an
increase of approximately 22.1%. New media revenues represented approximately
27% of revenues for the nine month period ended August 30, 1998, compared to
approximately 26% for the nine month period ended August 30, 1997.
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Direct Salaries and Related Expenses. Direct salaries and related expenses
consist primarily of wages for regular and temporary employees and benefits
for regular employees. CKS Group's direct salaries and related expenses
increased approximately 22.1% to $29.7 million during the nine month period
ended August 30, 1998, from $24.3 million during the same period of fiscal
1997, representing 25.0% and 24.3% of revenues for the nine month periods
ended August 30, 1998 and August 31, 1997, respectively. The increase in
absolute dollars was primarily attributable to an increase in salaries and
related expenses necessary to support CKS Group's growth. The increase in
these expenses as a percentage of revenues during the nine month period ended
August 30, 1998 reflects an increase in engineering group payroll costs
necessary to support the increasingly technical nature of CKS Group's new
media projects.
Other Direct Operating Expenses. Other direct operating expenses include
materials, contract freelance (independent consultants and contractors),
facilities and equipment expenses necessary to provide services to CKS Group's
clients. Other direct operating expenses increased approximately 30.7% to
$52.6 million during the nine month period ended August 30, 1998 from $40.2
million in the same period of fiscal 1997, representing 44.3% and 40.2% of
revenues for the nine month periods ended August 30, 1998 and August 31, 1997,
respectively. The increase in absolute dollars was primarily attributable to
increases in material costs and contract freelance costs necessary to support
the higher level of production revenues. The increase in other direct
operating expenses as a percentage of revenues reflects an increase in
material cost and contract freelance necessary to support a higher level of
production revenue and the increasingly technical nature of CKS Group's
projects.
General and Administrative Expenses. General and administrative expenses
include headquarters expenses, insurance, personnel costs for finance and
administration, accounting and legal fees, bad debt expense, management
information systems expenses, and employee benefits. General and
administrative expenses increased approximately 5.7% to $21.9 million during
the nine month period ended August 30, 1998 from $20.7 million in the same
period of fiscal 1997, representing 18.5% and 20.8% of revenues for the nine
month periods ended August 30, 1998 and August 31, 1997, respectively. This
increase in absolute dollars was primarily attributable to an increase in
administrative and facilities expenses necessary to support CKS Group's
growth. The decrease in general and administrative expenses as a percentage of
revenues reflects a more rapid increase in revenues than in general and
administrative expenses.
Depreciation and Amortization. Depreciation and amortization expenses
include depreciation of fixed assets and amortization of goodwill and other
intangible assets. Depreciation and amortization expenses increased
approximately 34.1% to $3.0 million during the nine month period ended August
30, 1998 from $2.2 million in the same period of fiscal 1997, representing
approximately 2.5% and 2.2% of revenues for the nine month period ended August
30, 1998 and August 31, 1997, respectively. The increase in depreciation and
amortization was primarily attributable to goodwill amortization related to
CKS Group's acquisitions and amortization of additional goodwill resulting
from earnout and buyout payments made to Schell/Mullaney and CKS GmbH during
fiscal 1998. As a percentage of revenues, depreciation and amortization
expenses remained relatively unchanged.
Merger Costs. In connection with the acquisitions of M&S and Site Specific,
CKS Group recorded nonrecurring charges for transaction related costs of
approximately $2.5 million for the nine month period ended August 31, 1997.
The costs consisted primarily of investment banking, accounting, consulting
and legal fees, financial printing and other related costs.
Other Income, Net. Other income, net consists primarily of interest earned
on CKS Group's holdings in cash, cash equivalents and marketable securities,
offset by interest expense incurred due to the amortization of imputed
interest on guaranteed cash payments related to subsidiary acquisitions and
interest expense related to debt recorded by CKS Group's subsidiaries. Other
income, net increased approximately 17.2% to $1.2 million during the nine
month period ended August 30, 1998, from $1.0 million for the nine month
period ended August 31, 1997. The increase in absolute dollars was primarily
attributable to an increase in interest income due to a higher average cash,
cash equivalents and marketable securities balances.
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Income Taxes. Combined actual federal and state income tax rates were 41.3%
for the nine month period ended August 30, 1998 and 41.2% for the nine month
period ended August 31, 1997. These rates do not include a provision for
income taxes for M&S prior to January 31, 1997, which was a general
partnership prior to its acquisition by CKS Group. The Combined pro forma
federal and state income tax rate was 44.1% for the nine months ended August
31, 1997. Pro forma tax rates include a tax provision to reflect M&S income as
if M&S had been a taxable "C" corporation for all periods presented. The
actual effective tax rate remained relatively unchanged for the nine month
periods ended August 30, 1998 and August 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, CKS Group has financed its operations and investments in
property and equipment through cash generated from operations, bank
borrowings, equity financing and capital lease financing arrangements. At
August 30, 1998 and November 30, 1997, CKS Group owed approximately $0.9
million and $1.5 million, respectively, in bank borrowings and capital lease
financing arrangements.
Cash, cash equivalents and marketable securities, consisting primarily of
high-quality municipal bonds and tax-advantaged money market instruments,
totaled $47.1 million and $42.3 million at August 30, 1998 and November 30,
1997, respectively. The increase in cash, cash equivalents and marketable
securities during this period was primarily due to $12.3 million provided by
operating activities and $2.6 million in proceeds from the sale of common
stock, partially offset by $8.3 million used to fund buyout and guaranteed
payments related to subsidiary acquisitions, $0.6 million used to repay debt
and approximately $1.5 million used for capital expenditures.
Net cash provided by operating activities was approximately $12.3 million in
the nine month period ended August 30, 1998, reflecting $7.4 million in net
income and $4.9 million provided by working capital fluctuations.
Net cash used in investing activities was approximately $0.9 million in the
nine month period ended August 30, 1998, and included approximately $7.0
million of proceeds from the sale of marketable securities and other assets in
excess of marketable securities purchased, partially offset by approximately
$6.5 million paid to the former shareholders of CKS GmbH under a renegotiated
purchase agreement, and $1.5 million used for capital expenditures.
Net cash provided by financing activities was approximately $0.2 million in
the nine month period ended August 30, 1998, reflecting $2.6 million in
proceeds from the sale of Common Stock through CKS Group's Employee Stock
Purchase Plan and the exercise of employee stock options, partially offset by
$1.8 million in guaranteed payments to subsidiaries and $0.6 million in
repayment of debt.
In recording the business combinations with M&S and SiteSpecific, CKS
Group's balance sheet as of November 30, 1996 was combined with M&S's and
SiteSpecific's balance sheets as of December 31, 1996. Subsequent to November
30, 1996, M&S and SiteSpecific changed their fiscal year ends to conform to
CKS Group's fiscal year end. The net decrease in cash and cash equivalents for
the three month period ended March 2, 1997 has been adjusted to eliminate the
effect of including M&S's and SiteSpecific's net income and cash flows for the
month ended December 31, 1996. The cash adjustment amounted to $4.3 million,
primarily as a result of a substantial payment received by M&S in December
1996 from a client for media placement, for which related costs were not paid
until January 1997.
As of August 30, 1998, CKS Group and its subsidiaries had $3.7 million in
credit facilities available under revolving lines of credit. The credit
facilities were secured by all the assets of CKS Group and bear interest at
rates of prime to prime plus 1%. At August 30, 1998, there was $0.2 million of
indebtedness outstanding under these credit facilities. These credit
agreements, which are scheduled to expire between October 30, 1998 and
November 30, 1998, require compliance with various financial covenants and
restrictions, including maintenance of minimum levels of net worth and
profitability, and restrict CKS Group's ability to pay dividends or to effect
mergers or acquisitions without the bank's consent.
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Pursuant to Section 7.3 of the Reorganization Agreement, the Reorganization
Agreement may be terminated by either party under certain circumstances. Each
of CKS Group and USWeb has agreed that if the Merger is not consummated as a
result of certain specified events, it will pay to the other party a
termination fee of $12 million. Payment of the fees described in this
agreement shall not be in lieu of damages incurred in the event of material
and willful breach of the Reorganization Agreement. If the Merger is not
consummated, expenses incurred with the proposed combination (including the
possible "break-up" fees described above) could have a material adverse effect
on CKS Group's results of operations.
CKS Group believes that its cash, cash equivalents and marketable
securities, together with existing credit facilities and cash flows from
operations, if any, will be sufficient to meet CKS Group's cash requirements
for at least the next twelve months.
FACTORS AFFECTING OPERATING RESULTS
CKS Group's operating results and the market price of CKS Group's Common
Stock may be affected by numerous factors, many of which are beyond CKS
Group's control. See "Risk Factors--Risks Related to the Combined Company,
USWeb and CKS Group Fluctuations in Quarterly Operating Results and Margins;
Seasonality of Business."
YEAR 2000--CKS GROUP
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 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.
CKS Group has been informed by most of its 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 Combined Company.
CKS Group has not 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 CKS Group's ability to carry on its business as well as
disrupt the business of CKS Group's customers.
To date, CKS Group has spent an immaterial amount to remediate its Year 2000
issues. CKS Group presently estimates that the total cost of addressing its
Year 2000 and leap year issues will be immaterial. These estimates were
derived utilizing numerous assumptions, including the assumption that its has
already identified its 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 CKS Group. However, these assumptions may not be
accurate, and actual results could differ materially from those anticipated.
Failure to provide Year 2000 and leap year compliant business solutions to
its customers or to receive such business solutions from its suppliers could
result in liability to CKS Group or otherwise have a material adverse effect
on CKS Group's business, results of operations, financial condition and
prospects. CKS Group 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 CKS Group, which
could result in a material adverse effect on CKS Group's business, results of
operations and financial condition. CKS Group could be affected through
disruptions in the operation of the enterprises with which CKS Group interacts
or from general widespread problems or an economic crisis resulting from
noncompliant Year 2000 systems. CKS Group has 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 expects the Task Force
to develop such a plan. See "Risk Factors--Risks Related to the Combined
Company, USWeb and CKS Group--Year 2000 Compliance" and "USWeb Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000--USWeb and Combined Company."
141
<PAGE>
CKS GROUP MANAGEMENT
CKS GROUP EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by CKS Group for services rendered during the fiscal year ended November
30, 1997 by the Chief Executive Officer of CKS Group and each of the four
other most highly compensated executive officers of CKS Group who were serving
executive officers as of November 30, 1997 ("CKS Group Named Executive
Officers"), based upon salary and bonus earned by such executive officers in
fiscal 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------- ---------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION OPTIONS/SARS(1) COMPENSATION
--------------------------- ---- ---------- --------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mark D. Kvamme............... 1997 $243,950 $ -- $8,344(2) 40,000 $ --
Chief Executive Officer 1996 187,917 159,922 3,344(2) -- --
1995 165,000 116,370 3,236(2) -- 1,268(3)
Carlton H. Baab.............. 1997 220,833 -- 6,386(2) 17,500 2,665(3)
Executive Vice President and 1996 173,751 121,607 3,614(2) 40,000 2,665(3)
Chief Financial Officer 1995 137,600 75,774 7,464(2) 40,000 2,665(3)
Thomas K. Suiter............. 1997 224,417 -- 6,939(2) 30,000 --
Chief Creative Officer 1996 183,334 143,983 2,668(2) -- 107,000(4)
1995 165,000 74,517 2,668(2) -- --
Robert T. Clarkson(5)........ 1997 199,115 -- 6,000(2) 150,000 --
Executive Vice President of
Operations, CKS Technology
Group, CKS International,
and Business Development,
and Secretary
Richard Villante(6).......... 1997 136,379 -- -- 75,000 --
Executive Vice President of
Operations, CKS East
</TABLE>
- ---------------------
(1) All options were granted pursuant to CKS Group's 1995 Stock Plan and are
subject to vesting. See "--Employee Benefit Plans."
(2) Consists of automobile allowance and life insurance premiums paid by the
Company.
(3) Consists of forgiveness of interest due on loans payable to CKS Group.
(4) Consists of a gift of an original artwork from CKS Group.
(5) Mr. Clarkson joined CKS Group in February 1997.
(6) Mr. Villante joined CKS Group in May 1997.
142
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
granted to the CKS Group Named Executive Officers in the fiscal year ended
November 30, 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERMS(5)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------------
NAME GRANTED(1) FISCAL YEAR(2) SHARE(3) DATE(4) 5% ($) 10% ($)
- ---- ---------- -------------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Mark D. Kvamme.......... 40,000 2.6% $26.875 12/18/2006 $ 676,062 $1,713,273
Carlton H. Baab......... 17,500 1.2 26.00 12/17/2006 286,147 725,153
Thomas K. Suiter........ 30,000 2.0 26.875 02/18/2006 507,046 1,284,955
Robert T. Clarkson(6)... 150,000 9.8 13.5625 12/06/2006 1,279,408 3,242,270
Richard Villante(7)..... 75,000 4.9 13.5625 04/01/2007 639,704 1,621,135
</TABLE>
- ---------------------
(1) This option to purchase shares of Common Stock was granted under the CKS
Group 1995 Stock Plan and provides for vesting as to 25% of the underlying
Common Stock one year after the date of grant, then ratably over 36 months
thereafter.
(2) Options to purchase an aggregate of 1,517,556 shares of CKS Group Common
Stock were granted to employees during the fiscal year ended November 30,
1997.
(3) Options were granted at an exercise price equal to 100% of the fair market
value of CKS Group's Common Stock on the date of grant, as determined by
the closing price on the Nasdaq National Market on the date of grant.
(4) Options may terminate before their expiration dates if the optionee's
status as an employee or consultant is terminated, upon the optionee's
death or disability or upon an acquisition of CKS Group.
(5) This column shows the hypothetical gains or option spreads for the option
granted based on assumed annual compound stock appreciation rates of 5%
and 10% over the full ten-year term of the option. The assumed rates of
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent CKS Group's estimate or projection of
future CKS Group Common Stock prices.
(6) This option was originally granted with an exercise price of $21.25 and
subsequently repriced in December 1997. The option is subject to a one-
year prohibition on exercise beginning on the date of the repricing. See
"--Stock Plans--Option Repricing."
(7) This option was originally granted with an exercise price of $21.75 and
subsequently repriced in December 1997. The option is subject to a one-
year prohibition on exercise beginning on the date of the repricing. See
"--Stock Plans--Option Repricing."
AGGREGATE STOCK OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END VALUES
The following table sets forth information regarding the value of options to
purchase shares of CKS Group's Common Stock that were exercised or held by the
CKS Group Named Executive Officers during fiscal 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT NOVEMBER 30, 1997 AT NOVEMBER 30, 1997
ACQUIRED ON VALUE -------------------------------- -------------------------
NAME EXERCISE REALIZED ((1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark D. Kvamme.......... -- -- -- 40,000 -- --
Carlton H. Baab......... 34,165 $809,071 3,334 60,001 $20,421 $2,246,013
Thomas K. Suiter........ -- -- -- 30,000 -- --
Robert T. Clarkson...... -- -- -- 150,000 -- --
Richard Villante........ -- -- -- 75,000 -- --
</TABLE>
- ---------------------
(1) This column represents the difference between the fair market value of CKS
Group Common Stock on the date of exercise of the stock option by the
identified executive officer and the price paid for the shares by the
officer.
(2) Calculated by determining the difference between the closing price of CKS
Group's Common Stock on the Nasdaq National Market on November 28, 1997
($13.250) and the weighted-average exercise price of in-the-money options.
143
<PAGE>
STOCK PLANS
The following is a brief summary of CKS Group's stock plans in effect during
the fiscal year ended November 30, 1997 under which executive officers and
directors of CKS Group received benefit.
CKS Group 1995 Stock Plan
The 1995 Stock Plan of CKS Group (the "CKS Group 1995 Stock Plan") provides
for the grant of stock options and stock purchase rights to employees,
officers and consultants of CKS Group and its subsidiaries. Under the CKS
Group 1995 Stock Plan, CKS Group may grant options that are intended to
qualify as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), options not intended
to qualify as incentive stock options and rights to purchase restricted stock.
Incentive stock options granted under the CKS Group 1995 Stock Plan must be
granted by September 2005. As of October 20, 1998, options to purchase
2,038,861 shares of CKS Group Common Stock were outstanding under to the CKS
Group 1995 Stock Plan and options to purchase 359,280 shares of CKS Group
Common Stock were available for future grant under the CKS Group 1995 Stock
Plan. The CKS Group 1995 Stock Plan was approved by the Board of Directors in
October 1995 and approved by the stockholders of CKS Group in November 1995.
An amendment to the CKS Group 1995 Stock Plan increasing the number of shares
of CKS Group Common Stock available for issuance thereunder by 1,600,000
shares was approved by the Board of Directors in October 1996 and by CKS
Group's stockholders in December 1996.
The CKS Group 1995 Stock Plan is administered by the Board of Directors or a
committee thereof. Subject to the provisions of the CKS Group 1995 Stock Plan,
the 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,
including (i) the number of shares of CKS Group Common Stock covered by the
award, (ii) when the award becomes exercisable, (iii) the exercise price of
the award and (iv) the duration of the option (which may not exceed ten
years). Generally options vest over four years and must be exercised within 10
years. All options are nontransferable other than by will or the laws of
descent and distribution.
The CKS Group 1995 Stock Plan provides that, in the event of a merger of CKS
Group with or into another corporation, the sale of more than fifty persons
(50%) of CKS Group's voting stock, a sale of substantially all of CKS Group's
assets or a liquidation or dissolution of CKS Group ("Transfer of Control"),
the acquiring or successor corporation may assume or substitute substantially
equivalent awards for the awards outstanding. To the extent awards are not
assumed or substituted for, they will vest in full prior to the Transfer of
Control. To the extent options are not assumed, substituted for or exercised
prior to the Transfer of Control, they will terminate.
CKS Group 1995 Employee Stock Purchase Plan
CKS Group's 1995 Employee Stock Purchase Plan (the "CKS Group 1995 Purchase
Plan") provides for the purchase by eligible employees of shares of CKS
Group's Common Stock. The CKS Group 1995 Purchase Plan was adopted by the
Board of Directors in October 1995 and approved by the stockholders in
November 1995. A total of 300,000 shares of CKS Group Common Stock have been
reserved for issuance under the CKS Group 1995 Purchase Plan. The CKS Group
1995 Purchase Plan, which is intended to qualify under Section 423 of the
Code, is administered by the Board of Directors or by a committee appointed by
the Board. Employees (including officers and employee directors) of CKS Group
or any subsidiary of CKS Group designated by the Board for participation in
the CKS Group 1995 Purchase Plan are eligible to participate in the CKS Group
1995 Purchase Plan if they are customarily employed for more than 20 hours per
week and more than five months per year. The CKS Group 1995 Purchase Plan is
implemented during concurrent 24-month offering periods, each of which is
divided into four consecutive six month purchase periods, subject to change by
the Board of Directors. Offering periods generally begin on January 1 and July
1 of each year. The CKS Group 1995 Purchase Plan permits eligible employees to
purchase CKS Group Common Stock through payroll deductions, which may not
exceed 15% of an employee's compensation. Shares are purchased on the
144
<PAGE>
last day of each purchase period. The price at which stock may be purchased
under the CKS Group 1995 Purchase Plan is equal to 85% of the lower of the
fair market value of CKS Group's Common Stock on the first day of the offering
period or the last day of the purchase period. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with CKS Group.
In addition, participants generally may not purchase stock having a value
(measured at the beginning of the offering period) greater than $12,500 in any
purchase period, except the first offering period, during which an employee
may purchase stock having a value of up to $25,000. The CKS Group 1995
Purchase Plan will be terminated after the expiration of the current offering
periods.
CKS Group 1997 Employee Stock Purchase Plan
CKS Group's 1997 Employee Stock Purchase Plan (the "CKS Group 1997 Purchase
Plan") provides for the purchase by eligible employees of shares of CKS Group
Common Stock. The CKS Group 1997 Purchase Plan was adopted by the Board of
Directors on December 18, 1997, and approved by the stockholders of CKS Group
in April 1998. A total of 300,000 shares of CKS Group Common Stock have been
reserved for issuance under the CKS Group 1997 Purchase Plan, plus annual
increases equal to the lesser of (i) 1.75% of the outstanding shares of Common
Stock of CKS Group, (ii) 500,000 shares, and (iii) any lesser amount
determined by the Board of Directors. The CKS Group 1997 Purchase Plan, which
is intended to qualify under Section 423 of the Code, is administered by the
Board of Directors or by a committee appointed by the Board. Employees
(including officers and employee directors) of CKS Group or any subsidiary of
CKS Group designated by the Board for participation in the CKS Group 1997
Purchase Plan are eligible to participate in the CKS Group 1997 Purchase Plan
if they are customarily employed for more than 20 hours per week and more than
five months per year. The CKS Group 1997 Purchase Plan is implemented during
concurrent 24-month offering periods, each of which is divided into four
consecutive six month offering periods. Offering periods commence on or about
April 1 and October 1 of each year. The first offering period will last five
months, commencing on the first trading day on or after June 1, 1998 (subject
to change by the Board of Directors) and ending on the last trading day on or
before September 30, 1998. The CKS Group 1997 Purchase Plan permits eligible
employees to purchase CKS Group 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 CKS Group 1997 Purchase Plan is equal to 85% of the lower of the
fair market value of CKS Group's Common Stock on the first day of the offering
period or the last day of the purchase period. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with CKS Group.
In addition, participants generally may not purchase more than 2,500 shares of
CKS Group Common Stock in any purchase period.
Participation in the CKS Group 1997 Purchase Plan is voluntary and is
dependent on each eligible employee's election to participate and his or her
determination as to the level of payroll deductions. Accordingly, future
purchases under the CKS Group 1997 Purchase Plan are not determinable. The
following table sets forth, as to the Named Executive Officers, all current
executive officers as a group and all other employees who participated in the
CKS Group 1995 Purchase Plan: (i) the number of shares of CKS Group Common
Stock purchased under the CKS Group 1995 Purchase Plan during the last fiscal
year; and (ii) the dollar value of the benefit (see footnote (1) to the
table):
<TABLE>
<CAPTION>
NUMBER OF
NAME OF INDIVIDUAL OR IDENTITY OF GROUP SHARES PURCHASED DOLLAR VALUE(1)
- --------------------------------------- ---------------- ---------------
<S> <C> <C>
Mark D. Kvamme................................ -- --
Carlton H. Baab............................... 1,222 $ 8,098
Thomas K. Suiter.............................. -- --
Robert T. Clarkson............................ 199 2,149
Richard Villante.............................. -- --
All current executive officers as a group (8
persons)..................................... 4,419 59,086
All other employees as a group................ 100,126 1,540,648
</TABLE>
- ---------------------
(1) This column represents the market value of the shares on date of purchase,
minus the purchase price.
145
<PAGE>
CKS Group Director Plan
The CKS Group 1995 Director Option Plan (the "CKS Group Director Plan") was
adopted by the Board of Directors in October 1995, approved by the
stockholders of CKS Group in November 1995 and an amendment to the Plan was
approved in April 1998. A total of 200,000 shares of CKS Group Common Stock
has been reserved for issuance under the CKS Group Director Plan. The CKS
Group Director Plan provides for the grant of nonstatutory stock options to
non-employee directors of CKS Group. The CKS Group Director Plan is designed
to work automatically, without administration; however, to the extent
administration is necessary, it will be provided by the Board of Directors. As
of October 20, 1998, options to purchase 75,000 shares of CKS Group's Common
Stock were outstanding at an average weighted price of $28.60 per share, and
125,000 shares of CKS Group's Common Stock remained available for future
grant.
The CKS Group Director Plan provides that each non-employee director shall
be granted an option to purchase 20,000 shares of CKS Group Common Stock (the
"First Option") on the date upon which the optionee first becomes a director
of CKS Group. Thereafter, each non-employee director will be granted an option
to purchase 5,000 shares of CKS Group Common Stock (a "Subsequent Option")
each year two days following announcement of CKS Group's operating results for
the previous fiscal year. The CKS Group Director Plan provides that each
Option shall become exercisable as to 25% of the shares subject to such Option
on each of the four anniversaries of the date of grant of such Option. Each
Option will become exercisable in full on the fourth anniversary of its date
of grant. The exercise price of all Options granted under the CKS Group
Director Plan will be equal to the fair market value of a share of CKS Group
Common Stock on the date of grant of the Option. Options granted under the CKS
Group Director Plan have a term of 10 years.
In the event of a merger of CKS Group or the sale of substantially all of
the assets of CKS Group, each option may be assumed or an equivalent option
substituted by the successor corporation. If an option is assumed or
substituted for, the option or equivalent option shall continue to be
exercisable for so long as the optionee serves as a director of CKS Group or
the successor corporation. Following such assumption or substitution, if the
optionee's status as a director of CKS Group or the successor corporation, as
applicable, is terminated other than upon a voluntary resignation by the
optionee, the option shall become fully exercisable, including as to shares
for which it would not otherwise be exercisable. If the successor does not
agree to assume or substitute the option, each option shall also become fully
exercisable for a period of thirty days from the date the Board notifies the
optionee of the option's full exercisability, after which period the option
shall terminate.
CKS Group Executive Bonus Program
Certain officers and employees of CKS Group are eligible to receive
quarterly bonus compensation under an Executive Bonus Program maintained by
CKS Group. Bonus compensation payments under the Executive Bonus Program are
based on attainment of sales revenue and profitability targets during the
fiscal year to date, and are keyed to each eligible employee's base salary. No
bonuses were paid under the Executive Bonus Program in fiscal 1997. The
financial performance targets on which bonus payments are based are set on an
annual basis by CKS Group's Chief Executive Officer and approved by the
Compensation Committee of the Board of Directors.
Option Repricing
In December 1997, the CKS Group Compensation Committee authorized the
reduction of the exercise price under options granted to employees, including
executives, which had an exercise price higher than the current market price
of CKS Group's Common Stock at the time of the repricing ($13.5625). The
options granted to employees were designed to provide incentive to the
employees to work to achieve long term success for CKS Group. The decline in
the market price of CKS Group's Common Stock since the date the options were
granted frustrated the purpose of the options and the Committee deemed it to
be in the best
146
<PAGE>
interests of CKS Group to allow the amendment of the options to reduce the
exercise price to the market price at the time of the reissue. All repriced
options are subject to a six-month (one-year in the case of certain employees,
including all executive officers) prohibition on exercise beginning on the
date of the repricing. The other terms of such options remained unchanged.
The following table sets forth information with respect to the repricing of
those options held by executive officers of CKS Group.
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF MARKET ORIGINAL
SECURITIES PRICE OF EXERCISE OPTION TERM
UNDERLYING STOCK AT PRICE AT NEW REMAINING AT
REPRICING OPTIONS TIME OF TIME OF EXERCISE DATE OF
NAME DATE REPRICED REPRICING REPRICING PRICE REPRICING
---- --------- ---------- --------- --------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Carlton H. Baab......... 11/18/96 40,000 $ 20.00 $32.00 $ 20.00 9 yrs, 172 days
Executive Vice
President and Chief
Financial Officer
Kimberly A. Johnson..... 12/18/97 10,000 13.5625 26.00 13.5625 8 yrs, 364 days
Executive Vice
President
Fergus O'Daly........... 12/18/97 100,000 13.5625 23.50 13.5625 4 yrs, 153 days
President CKS East
Ian Small............... 12/18/97 10,000 13.5625 20.00 13.5625 8 yrs, 142 days
Executive Vice 12/18/97 35,000 13.5625 21.75 13.5625 9 yrs, 104 days
President
and Chief Technology
Officer
Robert T. Clarkson...... 12/18/97 150,000 13.5625 21.25 13.5625 8 yrs, 353 days
Executive Vice
President and Secretary
Richard Villante........ 12/18/97 75,000 13.5626 21.75 13.5625 9 yrs, 104 days
Executive Vice
President
</TABLE>
EMPLOYMENT AGREEMENTS AND CHANGE-IN CONTROL AGREEMENTS
CKS Group has agreed to employ Mr. Baab as Executive Vice President of
Finance and Chief Financial Officer at a salary of $225,000 per year, subject
to periodic review, and Mr. Clarkson as Executive Vice President of Business
Development at a salary of $220,000 per year, subject to periodic review. Each
officer is eligible for an annual personal bonus of up to 50% of his base
salary in addition to bonus received pursuant to CKS Group's Executive Bonus
Program. Neither individual received any bonus payments under the Executive
Bonus Plan or pursuant to their respective employment agreements during fiscal
1997. In the event such officer's employment is terminated without Cause (as
defined in the employment agreement) and not in connection with a Change of
Control (as defined in the employment agreement) or if the officer terminates
his employment for Good Reason (as defined in the employment agreement), such
officer shall receive (i) continuation of his base salary for a period of
twelve months, (ii) an amount equal to total bonus and incentive compensation
received or earned during the preceding twelve months, (iii) continued
benefits and perquisites for a period of twelve months and (iv) an additional
twelve months vesting on all options held by such officer. On the
effectiveness of any Change of Control, the vesting of all options granted to
each officer by CKS Group shall be accelerated so that one half of the
unvested shares shall become vested. If, following a Change of Control, the
officer's employment is terminated involuntarily or by Constructive
Termination (as defined in the employment agreement), such officer shall
receive (i) a lump sum equal to twelve months' base salary plus total bonus
and incentive compensation received or earned during the twelve months
preceding the Change of Control or date of termination, whichever is greater,
(ii) continued benefits and perquisites for a period of twelve months and (iv)
accelerated vesting on all options held by such officer. In December 1997, CKS
Group and Mr. Clarkson orally agreed that he would assume operational
responsibility for CKS Group's technology and international operations, in
addition to his business development responsibilities, with the title of
Executive Vice President of Operations, CKS Technology Group and
International, in addition to his title of Executive Vice President of
Business Development.
147
<PAGE>
CKS GROUP CERTAIN TRANSACTIONS
RELATIONSHIP WITH THE INTERPUBLIC GROUP OF COMPANIES, INC.
CKS Group and IPG have entered into a Shareholder Rights Agreement pursuant
to which IPG agreed to limit its ownership of CKS capital stock to no more
than 37% of all outstanding voting shares of CKS and to vote its shares for
election of the slate of nominees for the Board of Directors of CKS Group
selected by CKS Group, provided that such slate includes a nominee selected by
IPG. These provisions terminate in January 2002.
INDEMNIFICATION AGREEMENTS
CKS Group has entered into indemnification agreements with each of its
directors and executive officers. Such agreements require CKS Group to
indemnify such individuals to the fullest extent permitted by law.
CKS Group has agreed to employ Mr. Villante as President of Global
Communications Company at a salary of $225,000 per year, subject to periodic
review. Based on an annual performance review, Mr. Villante is entitled to
bonus compensation, which may be in the form of options to purchase shares of
CKS Group's Common Stock. If Mr. Villante's employment agreement is terminated
prior to May 2002, Mr. Villante will be entitled to severance benefits in an
amount equal to six months salary. In December 1997, CKS Group and Mr.
Villante orally agreed that he would assume operational responsibility for CKS
Group's operations in the eastern United States, with the title of Executive
Vice President of Operations, CKS East.
CKS Group does not currently have any employment contracts in effect with
the Chief Executive Officer or any of the other Named Executive Officers.
148
<PAGE>
CKS GROUP PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of CKS Group Common
Stock as of October 20, 1998, (i) each person, to the knowledge of CKS Group
to beneficially own more than 5% of CKS Group's Common Stock, such knowledge
being based on filings effected on Schedule 13G or 13D under the Securities
Exchange Act of 1934, (ii) each CKS Group director, (iii) each of CKS Group
Named Executive Officers and (iv) all directors and executive officers of CKS
Group as a group:
<TABLE>
<CAPTION>
SHARES OF CKS COMMON STOCK
BENEFICIALLY OWNED(1)
--------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OF TOTAL
- ------------------------ --------- ----------------
<S> <C> <C>
The Interpublic Group of Companies, Inc.(2)........ 1,795,065 11.6%
1271 Avenue of the Americas
New York, NY 10020
Mark D. Kvamme(3).................................. 1,554,337 10.0
10441 Bandley Drive
Cupertino, CA 95014
Thomas K. Suiter(4)................................ 1,141,835 7.3
10441 Bandley Drive
Cupertino, CA 95014
Waddell & Reed, Inc................................ 867,700 5.6
6300 Lamar
Shawnee Mission, KS 66201
The Capital Group Companies, Inc................... 785,500 5.1
333 South Hope Street
Los Angeles, CA 90071
Carlton H. Baab(5)................................. 37,770 *
Robert T. Clarkson................................. 72,715 *
Alexandre Balkanski(6)............................. 3,750 *
Pierre R. Lamond(7)................................ 318,685 2.1
Barry R. Linsky(8)................................. 6,250 *
Michael B. Slade(9)................................ 12,250 *
All Executive Officers and Directors as a Group (10
persons)(10)...................................... 3,203,996 20.3
</TABLE>
- ---------------------
* Less than 1%.
(1) Except pursuant to applicable community property laws or as indicated in
the footnotes to this table, to CKS Group's knowledge, each stockholder
identified in the table possesses sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
stockholder.
(2) Includes 209,470 shares held by Ammirati & Puris/Lintas, Inc. and 131,770
shares held by Lowe & Partners, both of which are wholly-owned
subsidiaries of IPG. Also includes 2,500 shares held by Mr. Barry R.
Linsky, who is a director of CKS Group and an officer of IPG, and options
to purchase 3,750 shares exercisable within 60 days of the Record Date
held by Mr. Linsky.
(3) Includes 159,888 shares held by trusts for the benefit of Mr. Kvamme's
children and options to purchase 40,000 shares exercisable within 60 days
of the Record Date.
(4) Includes 280,000 shares held by trusts for the benefit of Mr. Suiter's
children and options to purchase 30,000 shares exercisable within 60 days
of the Record Date.
(5) Includes options to purchase 37,770 shares exercisable within 60 days of
the Record Date.
(6) Consists of options to purchase 3,750 shares exercisable within 60 days
of the Record Date.
(7) Includes 310,935 shares held by the Pierre R. and Christine E. Lamond
Trust dated 11/22/85. Includes options to purchase 3,750 shares
exercisable within 60 days of the Record Date. Also includes 4,000 shares
held by David Lamond, Pierre R. Lamond's son, as to which Pierre R.
Lamond disclaims beneficial ownership.
(8) Does not include 1,788,815 shares held by IPG and its subsidiaries, of
which Mr. Linsky is a Senior Vice President. Includes options to purchase
3,750 shares exercisable within 60 days of the Record Date.
(9) Includes options to purchase 6,250 shares exercisable within 60 days of
the Record Date.
(10) Includes options to purchase 254,296 shares exercisable within 60 days of
the Record Date.
149
<PAGE>
LEGAL MATTERS
The validity of the shares of USWeb Common Stock to be issued pursuant to
the Reorganization Agreement and the federal income tax consequences of the
Merger will be passed upon for USWeb by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Certain legal matters in
connection with the Reorganization Agreement and the federal income tax
consequences of the Merger will be passed upon for CKS Group by Gray Cary Ware
& Freidenrich LLP, Palo Alto, California.
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 Joint
Proxy Statement/Prospectus in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting. Representatives of PricewaterhouseCoopers LLP are
expected to be present at the USWeb Special Meeting and will have the
opportunity to make a statement and are expected to be available to respond to
appropriate questions.
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 in this Joint Proxy Statement/Prospectus
in reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
and upon the authority of said firm as experts auditing and accounting.
Representatives of KPMG Peat Marwick LLP are expected to be present at the CKS
Group Special Meeting and said representatives will have the opportunity to
make a statement if they should desire to do so and they are expected to be
available to respond to appropriate questions.
The financial statements of McKinney & Silver as of December 31, 1995 and
1996 and for the years ended December 31, 1995 and 1996 incorporated by
reference in this Joint Proxy Statement/Prospectus have been audited by
Ernst & Young LLP, independent auditors, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
150
<PAGE>
STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, USWeb stockholders may
present proper proposals for inclusion in USWeb's proxy statement and for
consideration at the next annual meeting of its stockholders by submitting
such proposals to USWeb in a timely manner. As noted in USWeb's proxy
statement relating to its 1998 Annual Meeting of Stockholders, in order to be
so included for the 1999 annual meeting, stockholder proposals must be
received by USWeb no later than January 27, 1999, and must otherwise comply
with the requirements of Rule 14a-8.
Pursuant to Rule 14a-4 under the Exchange Act, proposals of USWeb
stockholders that are intended to be presented by such stockholders at the
USWeb's 1999 Annual Meeting of Stockholders and that are not eligible for
inclusion in the proxy statement and form of proxy relating to that meeting
must be received by USWeb no later than March 14, 1999. If such stockholders
fail to comply with the foregoing notice provision, then the proxy holders
will be allowed to use their discretionary voting authority when the proposal
is raised at the 1999 Annual Meeting.
Pursuant to Rule 14a-8 under the Exchange Act, CKS Group stockholders may
present proper proposals for inclusion in CKS Group's proxy statement and for
consideration at the next annual meeting of its stockholders by submitting
such proposals to CKS Group in a timely manner. As noted in CKS Group's proxy
statement relating to its 1998 Annual Meeting of Stockholders, in order to be
so included for the 1999 annual meeting, in the event that the Merger has not
been consummated prior thereto, stockholder proposals must have been received
by CKS Group no later than November 15, 1998, and must otherwise have complied
with the requirements of Rule 14a-8.
Pursuant to Rule 14a-4 of the Exchange Act, proposals of CKS Group
stockholders that are intended to be presented by such stockholders at the CKS
Group's 1999 Annual Meeting of Stockholders and that are not eligible for
inclusion in the proxy statement and form of proxy relating to that meeting
must be received by CKS Group no later than March 14, 1999. If such
stockholders fail to comply with the foregoing notice provision, then the
proxy holders will be allowed to use their discretionary voting authority when
the proposal is raised at the 1999 Annual Meeting.
151
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<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
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
</TABLE>
F-1
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
USWEB PITTSBURGH (FORMERLY ELECTRONIC IMAGES, INC.)
Report of Independent Accountants......................................... F-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
Statement of Cash Flows................................................... F-130
Notes to Financial Statements............................................. F-131
</TABLE>
F-2
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
USWEB DETROIT (FORMERLY ONLINE MARKETING COMPANY)
Report of Independent Accountants......................................... F-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
-----
<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.
Report of Independent Auditors'........................................... F-233
Report of Independent Auditors'........................................... F-234
Balance Sheet............................................................. 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.
F-5
<PAGE>
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 balance sheet combines
the unaudited consolidated balance sheet of USWeb as of September 30, 1998 and
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 in-process tech-
nology.................. -- -- 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 in-process
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
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
hares 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, 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
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 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.
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.
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 periods 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 periods 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
F-13
<PAGE>
USWEB CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
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.
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>
F-14
<PAGE>
USWEB CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
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 historical 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.
(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 41,509
------- ------- -------
$59,580 $44,685 $57,253
======= ======= =======
</TABLE>
F-15
<PAGE>
USWEB CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
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) 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, $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) $ (4.77)
Weighted average shares outstanding.................. 6,175,000 17,795,000
</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 reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
F-27
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
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.
F-28
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 vesting period
as a cost of revenues. The fair value of warrants to be granted upon the
achievement of future
F-29
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 and that the remaining purchase
rights on Restricted Shares will lapse upon the continued employment by
F-30
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 $15,073
(unaudited) for the year ended December 31, 1997, and the six-months ended
June 30, 1998, respectively. Of these amounts, $2,420 and $5,299,
respectively, have been recorded in cost of revenues, with the remainder
recorded in stock compensation.
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)
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)
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)
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)
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>
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)
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.
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.
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>
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)
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.
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.
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)
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>
INDEX OF ANNEXES
<TABLE>
<C> <S>
ANNEX A-- Agreement and Plan of Reorganization, dated as of September 1, 1998,
among USWeb Corporation, CKS Group, Inc. and USWeb Acquisition
Corporation 134.
ANNEX B-- Opinion of Morgan Stanley & Co. Incorporated
ANNEX C-- Opinion of Goldman Sachs & Co.
</TABLE>
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 134
AND
CKS GROUP, INC.
DATED AS OF SEPTEMBER 1, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I................................................................ 2
1.1 The Merger...................................................... 2
1.2 Effective Time; Closing......................................... 2
1.3 Effect of the Merger............................................ 2
1.4 Certificate of Incorporation; Bylaws............................ 2
1.5 Directors and Officers.......................................... 2
1.6 Effect on Capital Stock......................................... 3
1.7 Surrender of Certificates....................................... 3
1.8 No Further Ownership Rights in CKS Common Stock................. 5
1.9 Lost, Stolen or Destroyed Certificates.......................... 5
1.10 Tax and Accounting Consequences................................. 5
1.11 Taking of Necessary Action; Further Action...................... 5
ARTICLE II............................................................... 5
2.1 Organization of CKS............................................. 5
2.2 CKS Capital Structure........................................... 6
2.3 Obligations With Respect to Capital Stock....................... 6
2.4 Authority....................................................... 7
2.5 Section 203 of the Delaware General Corporation Law Not 7
Applicable......................................................
2.6 SEC Filings; CKS Financial Statements........................... 8
2.7 Absence of Certain Changes or Events............................ 8
2.8 Taxes........................................................... 8
2.9 Intellectual Property........................................... 10
2.10 Compliance; Permits; Restrictions............................... 10
2.11 Litigation...................................................... 11
2.12 Brokers' and Finders' Fees...................................... 11
2.13 Employee Matters and Benefit Plans.............................. 11
2.14 Absence of Liens and Encumbrances............................... 12
2.15 Environmental Matters........................................... 12
2.16 Labor Matters................................................... 13
2.17 Agreements, Contracts and Commitments........................... 13
2.18 International Employee Plan..................................... 14
2.19 Pooling of Interests............................................ 14
2.20 Change of Control Payments...................................... 14
2.21 Statements; Proxy Statement/Prospectus.......................... 14
2.22 Board Approval.................................................. 15
2.23 Fairness Opinion................................................ 15
ARTICLE III.............................................................. 15
3.1 Organization of USWeb........................................... 15
3.2 USWeb and Merger Sub Capital Structure.......................... 16
3.3 Obligations With Respect to Capital Stock....................... 17
3.4 Authority....................................................... 17
3.5 Section 203 of the Delaware General Corporation Law Not 18
Applicable......................................................
3.6 SEC Filings; USWeb Financial Statements......................... 18
3.7 Absence of Certain Changes or Events............................ 19
3.8 Taxes........................................................... 19
3.9 Intellectual Property........................................... 20
3.10 Compliance; Permits; Restrictions............................... 21
3.11 Litigation...................................................... 21
3.12 Brokers' and Finders' Fees...................................... 21
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
3.13 Employee Benefit Plans.......................................... 21
3.14 Absence of Liens and Encumbrances............................... 23
3.15 Environmental Matters........................................... 23
3.16 Labor Matters................................................... 23
3.17 Agreements, Contracts and Commitments........................... 24
3.18 Pooling of Interests............................................ 25
3.19 Change of Control Payments...................................... 25
3.20 Statements; Proxy Statement/Prospectus.......................... 25
3.21 Board Approval.................................................. 25
3.22 Fairness Opinion................................................ 25
ARTICLE IV............................................................... 25
4.1 Conduct of Business............................................. 25
ARTICLE V................................................................ 28
5.1 Proxy Statement/Prospectus; Registration Statement; Other
Filings; Board Recommendations.................................. 28
5.2 Meetings of Stockholders........................................ 28
5.3 Confidentiality................................................. 29
5.4 No Solicitation................................................. 29
5.5 Public Disclosure............................................... 33
5.6 Legal Requirements.............................................. 33
5.7 Third Party Consents............................................ 34
5.8 FIRPTA.......................................................... 34
5.9 Notification of Certain Matters ................................ 34
5.10 Regulatory Filings; Reasonable Efforts.......................... 34
5.11 Stock Options and Employee Benefits............................. 34
5.12 Form S-8........................................................ 36
5.13 Indemnification and Insurance................................... 36
5.14 Nasdaq Listing.................................................. 37
5.15 USWeb Holder Agreement.......................................... 37
5.16 CKS Holder Agreement............................................ 37
5.17 INTENTIONALLY OMITTED........................................... 37
5.18 Board of Directors of the Combined Company...................... 37
5.19 Officers of Combined Company; Executive Committee............... 37
5.20 Change of Name; Increase in Authorized Shares................... 38
5.21 Voting Agreements............................................... 38
5.22 Tax-Free Reorganization......................................... 38
ARTICLE VI............................................................... 38
6.1 Conditions to Obligations of Each Party to Effect the Merger.... 38
6.2 Additional Conditions to Obligations of CKS..................... 39
6.3 Additional Conditions to the Obligations of USWeb and Merger 40
Sub.............................................................
ARTICLE VII.............................................................. 40
7.1 Termination..................................................... 40
7.2 Notice of Termination; Effect of Termination.................... 42
7.3 Fees and Expenses............................................... 42
7.4 Amendment....................................................... 43
7.5 Extension; Waiver............................................... 44
ARTICLE VIII............................................................. 44
8.1 Non-Survival of Representations and Warranties.................. 44
8.2 Notices......................................................... 44
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
8.3 Interpretation; Knowledge........................................... 45
8.4 Counterparts........................................................ 45
8.5 Entire Agreement; Third Party Beneficiaries......................... 45
8.6 Severability........................................................ 45
8.7 Other Remedies; Specific Performance................................ 45
8.8 Governing Law....................................................... 45
8.9 Rules of Construction............................................... 46
8.10 Assignment.......................................................... 46
</TABLE>
INDEX OF EXHIBITS
Exhibit A Form of CKS Stock Option Agreement
Exhibit B Form of USWeb Stock Option Agreement
Exhibit C Form of Certificate of Merger
Exhibit D Form of USWeb Holder Agreement
Exhibit E Form of CKS Holder Agreement
Exhibit F Form of Non-Competition Agreement
Exhibit G Form of CKS Voting Agreement
Exhibit H Form of USWeb Voting Agreement
iii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of
September 1, 1998 among USWeb Corporation, a Delaware corporation ("USWeb"),
USWeb Acquisition Corporation 134, a Delaware corporation and a wholly owned
subsidiary of USWeb ("Merger Sub"), and CKS Group, Inc., a Delaware
corporation ("CKS").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement (as
defined in Section 1.2 below) and in accordance with the Delaware General
Corporation Law ("Delaware Law"), USWeb and CKS intend to enter into a
business combination transaction to pursue their long-term business
strategies.
B. The combination of USWeb and CKS shall be effected by the terms of this
Agreement through a transaction in which Merger Sub will merge with and into
CKS, CKS will become a wholly owned subsidiary of USWeb and the stockholders
of CKS will become stockholders of USWeb.
C. The combined company following the Merger (as defined in Section 1.1)
will be called Reinvent Communications, Inc. In addition, immediately upon the
effectiveness of the Merger, the Board of Directors of the combined company
would consist of nine members, with designees of USWeb to hold seven of such
seats and designees of CKS to hold two of such seats. The senior management of
the combined company will consist of senior management from both USWeb and
CKS.
D. The Board of Directors of CKS (i) has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of CKS
and fair to, and in the best interests of, CKS and its stockholders, (ii) has
approved this Agreement, the Merger and the other transactions contemplated by
this Agreement and (iii) has determined to recommend that the stockholders of
CKS adopt and approve this Agreement and approve the Merger.
E. The Board of Directors of USWeb (i) has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of USWeb
and fair to, and in the best interests of, USWeb and its stockholders, (ii)
has approved this Agreement, the Merger and the other transactions
contemplated by this Agreement and (iii) has determined to recommend that the
stockholders of USWeb vote to approve the issuance of shares of USWeb Common
Stock (as defined below) to the stockholders of CKS pursuant to the terms of
the Merger.
F. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code").
G. It is also intended by the parties hereto that the Merger shall qualify
for accounting treatment as a pooling of interests.
H. Concurrently with the execution of this Agreement, and as a condition and
inducement to CKS's and USWeb's willingness to enter into this Agreement, CKS
shall execute and deliver a stock option agreement in favor of USWeb in
substantially the form attached hereto as Exhibit A (the "CKS Stock Option
Agreement"), and USWeb shall execute and deliver a stock option agreement in
favor of CKS in substantially the form attached as Exhibit B (the "USWeb Stock
Option Agreement" and, together with the CKS Stock Option Agreement, the
"Stock Option Agreements"). The Board of Directors of each of CKS and USWeb
have approved the Stock Option Agreements.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
A-1
<PAGE>
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of Delaware Law, Merger Sub shall be merged with and
into CKS (the "Merger"), the separate corporate existence of Merger Sub shall
cease, and CKS shall continue as the surviving corporation. CKS as the
surviving corporation after the Merger is hereinafter sometimes referred to as
the "Surviving Corporation."
1.2 Effective Time; Closing. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing a
Certificate of Merger, substantially in the form of Exhibit C hereto (the
"Certificate of Merger"), with the Secretary of State of the State of Delaware
in accordance with the relevant provisions of Delaware Law (the time of such
filing (or such later time as may be agreed in writing by the parties and
specified in the Certificate of Merger) being the "Effective Time") on the
Closing Date (as herein defined). Unless the context otherwise requires, the
term "Agreement" as used herein refers collectively to this Agreement and Plan
of Reorganization. The closing of the Merger (the "Closing") shall take place
at the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation
at a time and date to be specified by the parties, which shall be no later
than the second business day after the satisfaction or waiver of the
conditions set forth in Article VI, or at such other time, date and location
as the parties hereto agree in writing (the "Closing Date").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and in Section 261 of Delaware Law and
other applicable provisions of Delaware Law. Without limiting the generality
of the foregoing, and subject thereto, from and after the Effective Time, the
Surviving Corporation shall possess all the rights, privileges, powers and
franchises of a public as well as of a private nature, and be subject to all
the restrictions, disabilities and duties of each of CKS and Merger Sub; and
all and singular, the rights, privileges, powers and franchises of each of CKS
and Merger Sub, and all property, real, personal and mixed, and all debts due
to either of CKS and Merger Sub on whatever account, as well as for stock
subscriptions and all other things in action or belonging to each of CKS and
Merger Sub, shall be vested in the Surviving Corporation; and all property,
rights, privileges, powers and franchises, and all and every other interest
shall be thereafter as effectually the property of the Surviving Corporation
as they were of CKS and Merger Sub, and the title to any real estate vested by
deed or otherwise under the laws of the State of Delaware, in either of CKS
and Merger Sub, shall not revert or be in any way impaired; but all rights of
creditors and all liens upon any property of either of CKS and Merger Sub
shall be preserved unimpaired, and all debts, liabilities and duties of CKS
and Merger Sub shall thereafter attach to the Surviving Corporation, and may
be enforced against it to the same extent as if such debts and liabilities had
been incurred or contracted by it.
1.4 Certificate of Incorporation; Bylaws.
(a) The Certificate of Incorporation of Merger Sub, as in effect immediately
prior to the Effective Time, shall be, at the Effective Time, the Certificate
of Incorporation of the Surviving Corporation until thereafter amended as
provided by law and such Certificate of Incorporation; provided, however, that
at the Effective Time the Certificate of Incorporation of the Surviving
Corporation shall be amended so that the name of the Surviving Corporation
shall be CKS Group.
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be, at the Effective Time, the Bylaws of the Surviving
Corporation until thereafter amended as provided by law and such Bylaws.
1.5 Directors and Officers. The directors of Merger Sub immediately prior to
the Effective Time, together with Pierre Lamond, Alexandre Balkanski, Barry
Linsky, and Michael Slade, the four outside directors of CKS as of the date of
this Agreement, shall be the initial directors of the Surviving Corporation.
A-2
<PAGE>
The officers of Merger Sub immediately prior to the Effective Time shall be
the initial officers of the Surviving Corporation, until their respective
successors are duly appointed.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of Merger Sub, CKS or the holders of any of
the following securities:
(a) Conversion of CKS Common Stock. Each share of Common Stock, $0.001 par
value, of CKS (the "CKS Common Stock") issued and outstanding immediately
prior to the Effective Time (other than any shares of CKS Common Stock to be
canceled pursuant to Section 1.6(b)) will be canceled and extinguished and
automatically converted (subject to Sections 1.6(e) and (f)) into the right to
receive 1.5 (the "Exchange Ratio") validly issued, fully paid and
nonassessable shares of Common Stock, $0.001 par value per share, of USWeb
(the "USWeb Common Stock") upon surrender of the certificate representing such
share of CKS Common Stock in the manner provided in Section 1.7 (or in the
case of a lost, stolen or destroyed certificate, upon delivery of an affidavit
(and bond, if required) in the manner provided in Section 1.9).
(b) Cancellation of USWeb-Owned Stock. Each share of CKS Common Stock held
by CKS or owned by Merger Sub, USWeb or any direct or indirect wholly owned
subsidiary of CKS or of USWeb immediately prior to the Effective Time shall be
canceled and extinguished without any conversion thereof.
(c) Stock Options; Employee Stock Purchase Plans. At the Effective Time, all
options to purchase CKS Common Stock then outstanding under CKS's 1995 Series
B Common Stock Plan, 1995 Stock Plan, 1995 Director Option Plan, and 1996
Supplemental Stock Plan and the Site Specific, Inc. 1996 Stock Option Plan, in
each case as amended (collectively, the "CKS Stock Plans"), shall be assumed
by USWeb in accordance with Section 5.11 hereof. At the Effective Time, in
accordance with the terms of CKS's 1995 Employee Stock Purchase Plan and 1997
Employee Stock Purchase Plan, as the case may be, (collectively, the "CKS
ESPPs"), and in accordance with Section 5.11 hereof, USWeb shall assume the
CKS ESPPs.
(d) Capital Stock of Merger Sub. Each share of Common Stock, $0.001 par
value, of Merger Sub (the "Merger Sub Common Stock") issued and outstanding
immediately prior to the Effective Time shall be converted into one validly
issued, fully paid and nonassessable share of Common Stock, $0.001 par value,
of the Surviving Corporation. Each certificate evidencing ownership of shares
of Merger Sub Common Stock shall continue to evidence ownership of such shares
of capital stock of the Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to
reflect appropriately the effect of any stock split, reverse stock split,
stock dividend (including any dividend or distribution of securities
convertible into USWeb Common Stock or CKS Common Stock), reorganization,
recapitalization or other like change with respect to USWeb Common Stock or
CKS Common Stock occurring on or after the date of this Agreement and prior to
the Effective Time.
(f) Fractional Shares. No fraction of a share of USWeb Common Stock will be
issued by virtue of the Merger, but in lieu thereof each holder of shares of
CKS Common Stock who would otherwise be entitled to a fraction of a share of
USWeb Common Stock (after aggregating all fractional shares of USWeb Common
Stock to be received by such holder) shall receive from USWeb an amount of
cash (rounded to the nearest whole cent) equal to the product of (i) such
fraction, multiplied by (ii) the average closing price of one share of USWeb
Common Stock for the ten most recent days that USWeb Common Stock has traded
ending on the trading day immediately prior to the Effective Time, as reported
by the Nasdaq Stock Market.
1.7 Surrender of Certificates.
(a) Exchange Agent. ChaseMellon Shareholder Services LLP shall act as the
exchange agent (together with any successor exchange agent as may be
appointed, the "Exchange Agent") in the Merger pursuant to an exchange agency
agreement with USWeb which shall be in a form reasonably acceptable to CKS.
(b) USWeb to Provide Common Stock. Promptly (and in no event later than the
fifth business day) after the Effective Time, USWeb shall make available to
the Exchange Agent for exchange in accordance with this
A-3
<PAGE>
Article I, the shares of USWeb Common Stock issuable pursuant to Section 1.6
in exchange for outstanding shares of CKS Common Stock, and cash in an amount
sufficient for payment in lieu of fractional shares pursuant to Section 1.6(f)
and any dividends or distributions which holders of shares of CKS Common Stock
may be entitled pursuant to Section 1.7(d).
(c) Exchange Procedures. Promptly (and in no event later than the fifth
business day) after the Effective Time, USWeb shall cause the Exchange Agent
to mail to each holder of record (as of the Effective Time) of a certificate
or certificates (the "Certificates") which immediately prior to the Effective
Time represented outstanding shares of CKS Common Stock whose shares were
converted into the right to receive shares of USWeb Common Stock pursuant to
Section 1.6, cash in lieu of any fractional shares pursuant to Section 1.6(f)
and any dividends or other distributions pursuant to Section 1.7(d), (i) a
letter of transmittal (which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon delivery
of the Certificates to the Exchange Agent and shall be in such form and have
such other provisions as USWeb, in consultation with CKS prior to the
Effective Time, may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing shares of USWeb Common Stock, cash in lieu of any fractional
shares pursuant to Section 1.6(f) and any dividends or other distributions
pursuant to Section 1.7(d). Upon surrender of Certificates for cancellation to
the Exchange Agent, together with such letter of transmittal, duly completed
and validly executed in accordance with the instructions thereto, the holders
of such Certificates shall be entitled to receive in exchange therefor
certificates representing the number of whole shares of USWeb Common Stock,
payment in lieu of fractional shares which such holders have the right to
receive pursuant to Section 1.6(f) and any dividends or distributions payable
pursuant to Section 1.7(d), and the Certificates so surrendered shall
forthwith be canceled. Until so surrendered, outstanding Certificates will be
deemed from and after the Effective Time, for all corporate purposes, subject
to Section 1.7(d) as to the payment of dividends, to evidence the ownership of
the number of full shares of USWeb Common Stock into which such shares of CKS
Common Stock shall have been so converted and the right to receive an amount
in cash in lieu of the issuance of any fractional shares in accordance with
Section 1.6(f) and any dividends or distributions payable pursuant to Section
1.7(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the date of this Agreement with respect
to USWeb Common Stock with a record date after the Effective Time will be paid
to the holders of any unsurrendered Certificates with respect to the shares of
USWeb Common Stock represented thereby until the holders of record of such
Certificates shall surrender such Certificates. Subject to applicable law,
following surrender of any such Certificates, the Exchange Agent shall
promptly deliver to the record holders thereof, without interest, certificates
representing whole shares of USWeb Common Stock issued in exchange therefor
along with payment in lieu of fractional shares pursuant to Section 1.6(f)
hereof and the amount of any such dividends or other distributions with a
record date after the Effective Time payable with respect to such whole shares
of USWeb Common Stock.
(e) Transfers of Ownership. If certificates for shares of USWeb Common Stock
are to be issued in a name other than that in which the Certificates
surrendered in exchange therefor are registered, it will be a condition of the
issuance thereof that the Certificates so surrendered will be properly
endorsed and otherwise in proper form for transfer and that the persons
requesting such exchange will have paid to USWeb or any agent designated by it
any transfer or other taxes required by reason of the issuance of certificates
for shares of USWeb Common Stock in any name other than that of the registered
holder of the Certificates surrendered, or established to the satisfaction of
USWeb or any agent designated by it that such tax has been paid or is not
payable.
(f) No Liability. Notwithstanding anything to the contrary in this Section
1.7, none of the Exchange Agent, USWeb, the Surviving Corporation and CKS and
none of their respective directors, officers, employees or agents hereto shall
be liable to a holder of shares of USWeb Common Stock or CKS Common Stock for
any amount properly paid to a public official pursuant to any applicable
abandoned property, escheat or similar law.
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1.8 No Further Ownership Rights in CKS Common Stock. All shares of USWeb
Common Stock issued upon the surrender for exchange of shares of CKS Common
Stock in accordance with the terms hereof (including any cash paid in respect
thereof pursuant to Section 1.6(f) and 1.7(d)) shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of CKS
Common Stock, and there shall be no further registration of transfers on the
records of the Surviving Corporation of shares of CKS Common Stock which were
outstanding immediately prior to the Effective Time. If after the Effective
Time Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of
an affidavit of that fact by the holder thereof, such shares of USWeb Common
Stock, cash for fractional shares, if any, as may be required pursuant to
Section 1.6(f) and any dividends or distributions payable pursuant to Section
1.7(d); provided, however, that USWeb may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
USWeb, CKS or the Exchange Agent with respect to the Certificates alleged to
have been lost, stolen or destroyed.
1.10 Tax and Accounting Consequences.
(a) It is intended by the parties hereto that the Merger shall constitute a
reorganization within the meaning of Section 368(a) of the Code. The parties
hereto adopt this Agreement as a "plan of reorganization" within the meaning
of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury
Regulations.
(b) It is intended by the parties hereto that the Merger shall qualify for
accounting treatment as a pooling of interests.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges,
powers and franchises of CKS and Merger Sub, the officers and directors of CKS
and Merger Sub will take all such further action to the extent lawful and
necessary, as long as such action is consistent with this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF CKS
CKS represents and warrants to USWeb and Merger Sub, subject to the
exceptions specifically disclosed in writing in the disclosure letter supplied
by CKS to USWeb dated as of the date hereof and certified by a duly authorized
officer of CKS (the "CKS Schedules"), as follows:
2.1 Organization of CKS.
(a) CKS and each of its subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation; has the corporate power and authority to own, lease and
operate its assets and property and to carry on its business as now being
conducted and as proposed to be conducted; and is duly qualified or licensed
to do business and is in good standing in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature of
its activities makes such qualification or licensing necessary, except where
the failure to be so qualified would not have a Material Adverse Effect (as
defined below) on CKS.
(b) CKS has delivered to USWeb a true and complete list of all of CKS's
subsidiaries, indicating the jurisdiction of incorporation of each subsidiary
and CKS's equity interest therein.
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(c) CKS has delivered or made available to USWeb a true and correct copy of
the Certificate of Incorporation and Bylaws of CKS and equivalent governing
instruments of each of its subsidiaries, each as amended to date, and each
such instrument is in full force and effect. Neither CKS nor any of its
subsidiaries is in violation of any of the provisions of its Certificate of
Incorporation or Bylaws or equivalent governing instruments.
(d) When used in connection with CKS, the term "Material Adverse Effect"
means, for purposes of this Agreement, any change, event or effect that is
materially adverse to the business, assets (including intangible assets),
financial condition or results of operations of CKS and its subsidiaries taken
as a whole (except for those changes, events and effects that are directly
caused by (i) conditions affecting national, regional or world economies, (ii)
conditions affecting the integrated marketing communications services and
internet services industries as a whole, (iii) the pendency or announcement of
this Agreement or the transactions contemplated hereby, including changes,
events or effects resulting from employee attrition or a delay of, reduction
in or cancellation or change in the terms of customer engagements, to the
extent attributable to the pendency or announcement of this Agreement or the
transactions contemplated hereby, (iv) failure of CKS's and its subsidiaries'
results of operations to meet any internal or external predictions,
projections, estimates or expectations, or (v) changes in the market price or
trading volume of CKS capital stock, which conditions (in the case of clauses
(i) and (ii)) do not affect CKS in a disproportionate manner).
2.2 CKS Capital Structure. The authorized capital stock of CKS consists of
30,000,000 shares of Common Stock, $0.001 par value, of which there were
15,312,037 shares issued and outstanding as of May 31, 1998 and 2,000,000
shares of Preferred Stock, $0.001 par value, of which no shares are issued or
outstanding. All outstanding shares of CKS Common Stock are duly authorized,
validly issued, fully paid and nonassessable and are not subject to preemptive
rights created by statute, the Certificate of Incorporation or Bylaws of CKS
or any agreement or document to which CKS is a party or by which it is bound.
As of August 28, 1998, CKS had reserved an aggregate of 750,000 shares,
2,600,000 shares, 200,000 shares and 1,000,000 shares, respectively, of CKS
Common Stock for issuance to employees, consultants and non-employee directors
pursuant to CKS's 1995 Series B Common Stock Plan, 1995 Stock Plan, 1995
Director Option Plan, and 1996 Supplemental Stock Plan. In addition, there are
options to purchase shares of CKS Common Stock pursuant to the Site Specific,
Inc. 1996 Stock Option Plan assumed by CKS in connection with CKS's
acquisition of Site Specific, Inc. All shares of CKS Common Stock subject to
issuance as aforesaid, upon issuance on the terms and conditions specified in
the instruments pursuant to which they are issuable, would be duly authorized,
validly issued, fully paid and nonassessable. CKS has provided a list of
options to acquire shares of CKS Common Stock on or about August 28, 1998, the
name of the holder of such option, the exercise price of such option, the
number of shares as to which such option will have vested at such date and
whether the exercisability of such option will be accelerated in any way by
the transactions contemplated by this Agreement, and indicate the extent of
acceleration, if any. As of August 28, 1998 an aggregate of 300,000 shares of
CKS Common Stock were reserved for issuance pursuant to the CKS 1995 Employee
Stock Purchase Plan.
2.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 2.2, there are no equity securities, partnership interests or similar
ownership interests of any class of CKS, or any securities exchangeable or
convertible into or exercisable for such equity securities, partnership
interests or similar ownership interests, issued, reserved for issuance or
outstanding. Except for securities CKS owns, directly or indirectly through
one or more subsidiaries, there are no equity securities, partnership
interests or similar ownership interests of any class of any subsidiary of
CKS, or any security exchangeable or convertible into or exercisable for such
equity securities, partnership interests or similar ownership interests,
issued, reserved for issuance or outstanding. Except as set forth in Section
2.2, there are no options, warrants, equity securities, partnership interests
or similar ownership interests, calls, rights (including preemptive rights),
commitments or agreements of any character to which CKS or any of its
subsidiaries is a party or by which it is bound obligating CKS or any of its
subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, or repurchase, redeem or otherwise acquire, or cause the repurchase,
redemption or acquisition, of any shares
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of capital stock, partnership interests or similar ownership interests of CKS
or any of its subsidiaries or obligating CKS or any of its subsidiaries to
grant, extend, accelerate the vesting of or enter into any such option,
warrant, equity security, call, right, commitment or agreement. There are no
registration rights and, to the knowledge of CKS, as of the date of this
Agreement, there are no voting trusts, proxies or other agreements or
understandings with respect to any equity security of any class of CKS or with
respect to any equity security, partnership interest or similar ownership
interest of any class of any of its subsidiaries.
2.4 Authority.
(a) CKS has all requisite corporate power and authority to enter into this
Agreement and the CKS Stock Option Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the CKS Stock Option Agreement and the consummation of the
transactions contemplated hereby and thereby, have been duly authorized by all
necessary corporate action on the part of CKS, subject only to the approval
and adoption of this Agreement and the approval of the Merger by CKS's
stockholders and the filing of the Certificate of Merger pursuant to Delaware
Law. A vote of the holders of at least a majority of the outstanding shares of
the CKS Common Stock is required for CKS's stockholders to approve and adopt
this Agreement and approve the Merger. This Agreement has been duly executed
and delivered by CKS and, assuming the due authorization, execution and
delivery by USWeb and, if applicable, Merger Sub, constitutes a valid and
binding obligation of CKS, enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy and other similar laws and general
principles of equity. The execution and delivery of this Agreement and the CKS
Stock Option Agreement by CKS do not, and the performance of this Agreement
and the CKS Stock Option Agreement by CKS will not, (i) conflict with or
violate the Certificate of Incorporation or Bylaws of CKS or the equivalent
organizational documents of any of its subsidiaries, (ii) subject to obtaining
the approval and adoption of this Agreement and the approval of the Merger by
CKS's stockholders as contemplated in Section 5.2 and compliance with the
requirements set forth in Section 2.4(b) below, conflict with or violate any
law, rule, regulation, order, judgment or decree applicable to CKS or any of
its subsidiaries or by which its or any of their respective properties is
bound or affected, or (iii) result in any breach of or constitute a default
(or an event that with notice or lapse of time or both would become a default)
under, or impair CKS's rights or alter the rights or obligations of any third
party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of CKS or any of its
subsidiaries pursuant to, any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which CKS or any of its subsidiaries is a party or by which CKS
or any of its subsidiaries or its or any of their respective properties are
bound or affected. The CKS Schedules list all material consents, waivers and
approvals under any of CKS's or any of its subsidiaries' material agreements,
contracts, licenses or leases required to be obtained in connection with the
consummation of the transactions contemplated hereby.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any court, administrative agency or commission or
other governmental authority or instrumentality, foreign or domestic
("Governmental Entity"), is required to be obtained or made by CKS in
connection with the execution and delivery of this Agreement or the
consummation of the Merger, except for (i) the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware, (ii) the filing
of the Proxy Statement (as defined in Section 2.21) with the Securities and
Exchange Commission ("SEC") in accordance with the Securities Exchange Act of
1934, as amended (the "Exchange Act"), (iii) such consents, approvals, orders,
authorizations, registrations, declarations and other filings as may be
required under applicable federal and state securities laws and the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act")
and the securities or antitrust laws of any foreign country, and (iv) such
other consents, authorizations, filings, approvals and registrations which if
not obtained or made would not be material to CKS or USWeb or have a material
adverse effect on the ability of the parties to consummate the Merger.
2.5 Section 203 of the Delaware General Corporation Law Not Applicable. The
Board of Directors of CKS has taken all actions so that the restrictions
contained in Section 203 of the Delaware Law applicable to
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a "business combination" (as defined in such Section 203) will not apply to
the execution, delivery or performance of this Agreement or to the
consummation of the Merger or the other transactions contemplated by this
Agreement.
2.6 SEC Filings; CKS Financial Statements.
(a) CKS has filed all forms, reports and documents required to be filed with
the SEC since December 1, 1995, and has made available to USWeb such forms,
reports and documents in the form filed with the SEC. All such required forms,
reports and documents (including those that CKS may file subsequent to the
date hereof) are referred to herein as the "CKS SEC Reports." As of their
respective dates, the CKS SEC Reports (i) were prepared in accordance with the
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
or the Exchange Act, as the case may be, and the rules and regulations of the
SEC thereunder applicable to such CKS SEC Reports, and (ii) did not at the
time they were filed (or if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. None of
CKS's subsidiaries is required to file any forms, reports or other documents
with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in CKS SEC Reports (the "CKS
Financials"), including any CKS SEC Reports filed after the date hereof until
the Closing, (x) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (y) was
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved (except as may
be indicated in the notes thereto or, in the case of unaudited interim
financial statements, as may be permitted by the SEC on Form 10-Q under the
Exchange Act) and (z) fairly presented the consolidated financial position of
CKS and its subsidiaries as at the respective dates thereof and the
consolidated results of CKS's operations and cash flows for the periods
indicated, except that the unaudited interim financial statements were or are
subject to normal and recurring year-end adjustments. The balance sheet of CKS
contained in CKS SEC Reports as of May 31, 1998 is hereinafter referred to as
the "CKS Balance Sheet." Except as disclosed in the CKS Financials, since the
date of the CKS Balance Sheet neither CKS nor any of its subsidiaries has
incurred any liabilities (absolute, accrued, contingent or otherwise) of a
nature required to be disclosed on a balance sheet or in the related notes to
the consolidated financial statements prepared in accordance with GAAP which
are, individually or in the aggregate, material to the business, results of
operations or financial condition of CKS and its subsidiaries taken as a
whole, except liabilities (i) provided for in the CKS Balance Sheet, or (ii)
incurred since the date of the CKS Balance Sheet in the ordinary course of
business consistent with past practices and immaterial in the aggregate.
(c) CKS has heretofore furnished to USWeb a complete and correct copy of any
amendments or modifications, which have not yet been filed with the SEC but
which are required to be filed, to agreements, documents or other instruments
which previously had been filed by CKS with the SEC pursuant to the Securities
Act or the Exchange Act.
2.7 Absence of Certain Changes or Events. Since the date of the CKS Balance
Sheet through the date of this Agreement, there has not been: (i) any Material
Adverse Effect on CKS, (ii) any material change by CKS in its accounting
methods, principles or practices, except as required by concurrent changes in
GAAP, or (iii) any material revaluation by CKS of any of its assets,
including, without limitation, writing down the value of capitalized inventory
or writing off notes or accounts receivable other than in the ordinary course
of business.
2.8 Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax" or
"Taxes" refers to any and all federal, state, local and foreign taxes,
assessments and other governmental charges, duties, impositions and
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liabilities relating to taxes, including those based upon or measured by gross
receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and additions
imposed with respect to such amounts and any obligations under any agreements
or arrangements with any other person with respect to such amounts and
including any liability for taxes of a predecessor entity.
(b) Tax Returns and Audits.
(i) CKS and each of its subsidiaries have timely filed all federal,
state, local and foreign returns, estimates, information statements and
reports ("Returns") relating to Taxes required to be filed by CKS and each
of its subsidiaries, except such Returns which are not material to CKS, and
have paid all Taxes shown to be due on such Returns.
(ii) Except as is not material to CKS, CKS and each of its subsidiaries
as of the Effective Time will have withheld with respect to its employees
all federal and state income taxes, FICA, FUTA and other Taxes required to
be withheld.
(iii) Except as is not material to CKS, neither CKS nor any of its
subsidiaries has been delinquent in the payment of any Tax other than Taxes
not yet due and payable nor is there any Tax deficiency outstanding,
proposed or assessed against CKS or any of its subsidiaries, nor has CKS or
any of its subsidiaries executed any waiver of any statute of limitations
on or extending the period for the assessment or collection of any Tax.
(iv) Except as is not material to CKS, no audit or other examination of
any Return of CKS or any of its subsidiaries is presently in progress, nor
has CKS or any of its subsidiaries been notified of any request for such an
audit or other examination.
(v) Except as is not material to CKS, no adjustment relating to any
Returns filed by CKS or any of its subsidiaries has been proposed formally
or informally by any Tax authority to CKS or any of its subsidiaries or any
representative thereof and, to the knowledge of CKS, no basis exists for
any such adjustment which would be material to CKS.
(vi) Neither CKS nor any of its subsidiaries has any material liability
for unpaid Taxes other than Taxes not yet due which has not been accrued
for or reserved on the CKS Balance Sheet, whether asserted or unasserted,
contingent or otherwise, which is material to CKS.
(vii) None of CKS's assets are treated as "tax-exempt use property"
within the meaning of Section 168(h) of the Code.
(viii) There is no contract, agreement, plan or arrangement, including
but not limited to the provisions of this Agreement, covering any employee
or former employee of CKS or any of its subsidiaries that, individually or
collectively, could give rise to the payment of any amount that would not
be deductible pursuant to Sections 280G, 404 or 162 of the Code.
(ix) Neither CKS nor any of its subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as defined in Section 341(f)(4) of the Code) owned by CKS.
(x) CKS is not, and has not been at any time, a "United States real
property holding corporation" within the meaning of Section 897(c)(2) of
the Code.
(xi) No power of attorney that is currently in force has been granted
with respect to any matter relating to Taxes payable by CKS or any of its
subsidiaries.
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(xii) Neither CKS nor any of its subsidiaries is party to or affected by
any tax-sharing or allocation agreement or arrangement.
(xiii) The CKS Schedules list (y) any Tax exemption, Tax holiday or other
Tax-sharing arrangement that CKS or any of its subsidiaries has in any
jurisdiction, including the nature, amount and lengths of such Tax
exemption, Tax holiday or other Tax-sharing arrangement and (z) any
expatriate tax programs or policies affecting CKS or any of its
subsidiaries. Each of CKS and its subsidiaries is in compliance with all
terms and conditions required to maintain any material Tax exemption, Tax
holiday or other Tax-sharing arrangement or order of any Governmental
Entity and the consummation of the transactions contemplated hereby will
not have any adverse effect in any material respects on the continued
validity and effectiveness of any such Tax exemption, Tax holiday or other
Tax-sharing arrangement or order.
2.9 Intellectual Property.
(a) CKS and its subsidiaries own, or have the right to use, sell or license
all intellectual property necessary or required for the conduct of their
respective businesses as presently conducted (such intellectual property and
the rights thereto are collectively referred to herein as the "CKS IP
Rights").
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
material breach of any instrument or agreement governing any CKS IP Rights,
will not cause the forfeiture or termination or give rise to a right of
forfeiture or termination of any CKS IP Rights or materially impair the right
of CKS, the Surviving Corporation or USWeb to use, sell or license any CKS IP
Rights or portion thereof.
(c) Neither the manufacture, marketing, license, sale or intended use of any
product or technology currently licensed or sold or under development by CKS
or any of its subsidiaries violates in any material respect any license or
agreement between any third party and CKS or any of its subsidiaries or, to
the knowledge of CKS, infringes in any material respect any intellectual
property right of any other party; and there is no pending or, to the
knowledge of CKS, threatened claim or litigation contesting the validity,
ownership or right to use, sell, license or dispose of any CKS IP Rights, nor
has CKS received any written notice asserting that any CKS IP Rights or the
proposed use, sale, license or disposition thereof conflicts or will conflict
with the rights of any other party.
(d) CKS has taken reasonable and practicable steps designed to safeguard and
maintain the secrecy and confidentiality of, and its proprietary rights in,
all CKS IP Rights.
(e) There are no royalties, honoraria, fees or other payments payable by CKS
to any person by reason of the ownership, use, license, purchase, sale or
disposition or acquisition of the CKS IP Rights.
2.10 Compliance; Permits; Restrictions.
(a) Neither CKS nor any of its subsidiaries is, in any material respect, in
conflict with, or in default or violation of (i) any law, rule, regulation,
order, judgment or decree applicable to CKS or any of its subsidiaries or by
which CKS or any of its subsidiaries or any of their respective properties is
bound or affected, or (ii) any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which CKS or any of its subsidiaries is a party or by which CKS
or any of its subsidiaries or its or any of their respective properties is
bound or affected. To the knowledge of CKS, no investigation or review by any
Governmental Entity is pending or threatened against CKS or any of its
subsidiaries, nor has any Governmental Entity indicated an intention to
conduct the same. There is no material agreement, judgment, injunction, order
or decree binding upon CKS or any of its subsidiaries which has or could
reasonably be expected to have the effect of prohibiting or materially
impairing any business practice of CKS or any of its subsidiaries, any
acquisition of material property by CKS or any of its subsidiaries or the
conduct of business by CKS as currently conducted.
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(b) CKS and its subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals from governmental authorities which are
material to the operation of the business of CKS (collectively, the "CKS
Permits"). CKS and its subsidiaries are in compliance in all material respects
with the terms of the CKS Permits.
2.11 Litigation. There is no action, suit, proceeding, claim, arbitration or
investigation pending or as to which CKS or any of its subsidiaries has
received any notice of assertion, nor, to CKS's knowledge, is there a
threatened action, suit, proceeding, claim, arbitration or investigation
against CKS or any of its subsidiaries which reasonably would be likely to be
material to CKS, or which in any manner challenges or seeks to prevent,
enjoin, alter or delay any of the transactions contemplated by this Agreement.
2.12 Brokers' and Finders' Fees. Except for fees payable to Goldman, Sachs &
Co. pursuant to an engagement letter dated June 18, 1998, CKS has not
incurred, nor will it incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
2.13 Employee Matters and Benefit Plans.
(a) The CKS Schedules contain a complete and accurate list of each plan,
program, policy, practice, contract, agreement or other arrangement providing
for employment, compensation, severance, relocation, repatriation,
expatriation, visas, work permits, termination pay, deferred compensation,
performance awards, stock or stock-related awards, fringe benefits or other
employee benefits, whether written or unwritten or otherwise, funded or
unfunded, including without limitation, each "employee benefit plan," within
the meaning of Section 3(3) of Employee Retirement Income Security Act of
1974, as amended ("ERISA") which is current, contributed to, or required to be
contributed to, by CKS or any person or entity under common control with CKS
within the meaning of Section 414(b), (c), (m) or (o) of the Code and the
regulations issued thereunder (an "ERISA Affiliate") for the benefit of any
current or former employee, consultant, director of CKS or any ERISA Affiliate
(the "CKS Employees"), or with respect to which CKS or any Affiliate has or
may have any liability or obligation (the "CKS Employee Plans"). CKS does not
have any plan or commitment to establish any new CKS Employee Plan, to modify
any CKS Employee Plan (except to the extent required by law or to conform any
such CKS Employee Plan to the requirements of any applicable law, in each case
as previously disclosed to USWeb in writing, or as required by this
Agreement), or to enter into any CKS Employee Plan.
(b) Documents. CKS has made available to USWeb correct and complete copies
of all documents relating to each CKS Employee Plan including (without
limitation) any and all amendments thereto and all related trust documents;
the most recent actuarial valuations, if any, prepared for each CKS Employee
Plan and any material contracts or agreements relating to each CKS Employee
Plan.
(c) Employee Plan Compliance. Except as otherwise set forth on CKS
Schedules: (i) CKS has performed in all material respects all obligations
required to be performed by it under, is not in default or violation of, and
has no knowledge of any default or violation by any other party to each CKS
Employee Plan, and each CKS Employee Plan has been established and maintained
in all material respects in accordance with its terms and in compliance with
all applicable laws, rules and regulations; (ii) each CKS Employee Plan
intended to qualify under Section 401(a) of the Code and each trust intended
to qualify under Section 501(a) of the Code has either received a favorable
determination, opinion, notification or advisory letter from the Internal
Revenue Service ("IRS") with respect to each such CKS Employee Plan as to its
qualified status under the Code, including all amendments to the Code effected
by the Tax Reform Act of 1986 and subsequent legislation, or has remaining a
period of time under applicable Treasury regulations or IRS pronouncements in
which to apply for such a letter and make any amendments necessary to obtain a
favorable determination as to the qualified status of each such CKS Employee
Plan; (iii) no "prohibited transaction," within the meaning of Section 4975 of
the Code or Sections 406 and 407 of ERISA, and not otherwise exempt under
Section 408 of ERISA, has occurred with respect to any CKS Employee Plan; (iv)
there are no actions,
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suits or claims pending, or, to the knowledge of CKS, threatened or reasonably
anticipated (other than routine claims for benefits) against any CKS Employee
Plan or against the assets of any CKS Employee Plan; (v) each CKS Employee
Plan can be amended, terminated or otherwise discontinued after the Effective
Time in accordance with its terms, without liability to USWeb, CKS or any of
its ERISA Affiliates (other than ordinary administration expenses); (vi) there
are no audits, inquiries or proceedings pending or, to the knowledge of CKS or
any ERISA Affiliates, threatened by the IRS or Department of Labor with
respect to any CKS Employee Plan; and (vii) neither CKS nor any ERISA
Affiliate is subject to any penalty or tax with respect to any CKS Employee
Plan under Section 502(i) of ERISA or Sections 4975 through 4980 of the Code.
(d) Pension Plan. Neither CKS nor any ERISA Affiliate has ever maintained,
established, sponsored, participated in, or contributed to, any "employee
pension benefit plan" within the meaning of Section 3(2) of ERISA which is
subject to Title IV of ERISA or Section 412 of the Code.
(e) Multiemployer Plans. At no time has CKS or any ERISA Affiliate
contributed to or been required to contribute to any "multiemployer plan" as
defined in Section 3(37) of ERISA.
(f) COBRA; HIPAA; FMLA. Neither CKS nor any ERISA Affiliate has, prior to
the Effective Time and in any material respect, violated any of the health
care continuation requirements of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"), the requirements of the
Health Insurance Portability and Accountability Act of 1996, the requirements
of Family Medical Leave Act of 1993, as amended, or any similar provisions of
state law applicable to CKS Employees.
(g) No Post-Employment Obligations. Except as set forth in Section 2.13(g)
of the CKS Schedules, no CKS Employee Plan provides, or reflects or represents
any liability to provide, retiree life insurance, retiree health or other
retiree employee welfare benefits to any person for any reason, except as may
be required by COBRA or other applicable statute, and CKS has never
represented, promised or contracted (whether in oral or written form) to any
CKS Employee (either individually or to CKS Employees as a group) or any other
person that such CKS Employee(s) or other person would be provided with
retiree life insurance, retiree health or other retiree employee welfare
benefit, except to the extent required by statute.
(h) Effect of Transaction. The execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an
event under any CKS Employee Plan, trust, loan or other arrangements that will
or may result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase in
benefits or obligation to fund benefits with respect to any CKS Employee.
2.14 Absence of Liens and Encumbrances. CKS and each of its subsidiaries has
good and valid title to, or, in the case of leased properties and assets,
valid leasehold interests in, all of its material tangible properties and
assets, real, personal and mixed, used in its business, free and clear of any
liens or encumbrances except as reflected in the CKS Financials and except for
liens for Taxes not yet due and payable and such imperfections of title and
encumbrances, if any, which would not be material to CKS.
2.15 Environmental Matters.
(a) Hazardous Material. No underground storage tanks and no amount of any
substance that has been designated by any Governmental Entity or by applicable
federal, state or local law to be radioactive, toxic, hazardous or otherwise a
danger to health or the environment, including, without limitation, PCBs,
asbestos, petroleum, urea-formaldehyde and all substances listed as hazardous
substances pursuant to the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, or defined as a hazardous waste
pursuant to the United States Resource Conservation and Recovery Act of 1976,
as amended, and the regulations promulgated pursuant to said laws, (a
"Hazardous Material"), but excluding office and janitorial supplies, are
present, as a result of the actions of CKS or any of its subsidiaries or any
affiliate of CKS, or, to CKS's knowledge, as a result of any actions of any
third party or otherwise, in, on or
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under any property, including the land and the improvements, ground water and
surface water thereof, that CKS or any of its subsidiaries has at any time
owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Neither CKS nor any of its subsidiaries
has transported, stored, used, manufactured, disposed of, released or exposed
its employees or others to Hazardous Materials in material violation of any
law in effect on or before the Closing Date, nor has CKS or any of its
subsidiaries disposed of, transported, sold, used, released, exposed its
employees or others to or manufactured any product containing a Hazardous
Material (collectively "Hazardous Materials Activities") in material violation
of any rule, regulation, treaty or statute promulgated by any Governmental
Entity in effect prior to or as of the date hereof to prohibit, regulate or
control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. CKS and its subsidiaries currently hold all environmental
approvals, permits, licenses, clearances and consents (the "CKS Environmental
Permits") necessary for the conduct of CKS's and its subsidiaries' Hazardous
Material Activities and other businesses of CKS and its subsidiaries as such
activities and businesses are currently being conducted.
(d) Environmental Liabilities. No material action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to
CKS's knowledge, threatened concerning any CKS Environmental Permit, Hazardous
Material or any Hazardous Materials Activity of CKS or any of its
subsidiaries. CKS is not aware of any fact or circumstance which could involve
CKS or any of its subsidiaries in any material environmental litigation or
impose upon CKS any material environmental liability.
2.16 Labor Matters. CKS (i) is and has been in compliance in all respects
with all applicable laws, rules and regulations respecting employment,
employment practices, terms and conditions of employment and wages and hours,
in each case, with respect to CKS Employees; (ii) has withheld and reported
all amounts required by law or by agreement to be withheld and reported with
respect to wages, salaries and other payments to CKS Employees; (iii) is not
liable for any arrears of wages or any taxes or any penalty for failure to
comply with any of the foregoing; and (iv) is not liable for any payment to
any trust or other fund governed by or maintained by or on behalf of any
governmental authority, with respect to unemployment compensation benefits,
social security or other benefits or obligations for CKS Employees (other than
routine payments to be made in the normal course of business and consistent
with past practice). No work stoppage or labor strike against CKS is pending,
threatened or reasonably anticipated. CKS does not know of any activities or
proceedings of any labor union to organize any CKS Employees. There are no
actions, suits, claims, labor disputes or grievances pending, or, to the
knowledge of CKS, threatened or reasonably anticipated relating to any labor,
safety or discrimination matters involving any CKS Employee, including,
without limitation, charges of unfair labor practices or discrimination
complaints, which, if adversely determined, would, individually or in the
aggregate, result in any material liability to CKS. Neither CKS nor any ERISA
Affiliate has engaged in any unfair labor practices under applicable law. CKS
is not presently, nor has it been in the past, a party to, or bound by, any
collective bargaining agreement or union contract with respect to CKS
Employees and no collective bargaining agreement is being negotiated by CKS.
2.17 Agreements, Contracts and Commitments. Except as set forth in the CKS
Schedules, as of the date hereof, neither CKS nor any of its subsidiaries is a
party to or is bound by:
(a) any employment or consulting agreement, contract or commitment with any
officer or director level employee or member of CKS's Board of Directors,
other than those that are terminable by CKS or any of its subsidiaries on no
more than thirty days notice without liability or financial obligation, except
to the extent general principles of wrongful termination law may limit CKS's
or any of its subsidiaries' ability to terminate employees at will;
(b) any agreement or plan, including, without limitation, any stock option
plan, stock appreciation right plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of benefits of which will
be accelerated, by the occurrence of any of the transactions contemplated by
this Agreement or the value
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of any of the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement;
(c) any agreement of indemnification or guaranty not entered into in the
ordinary course of business other than indemnification agreements between CKS
or any of its subsidiaries and any of its officers or directors;
(d) any agreement, contract or commitment containing any covenant limiting
the freedom of CKS or any of its subsidiaries to engage in any line of
business or compete with any person or granting any exclusive distribution
rights;
(e) any agreement, contract or commitment currently in force relating to the
disposition or acquisition of assets not in the ordinary course of business or
any ownership interest in any corporation, partnership, joint venture or other
business enterprise; or
(f) any material joint marketing or development agreement.
Neither CKS nor any of its subsidiaries, nor to CKS's knowledge any other
party to a CKS Contract (as defined below), has breached, violated or
defaulted under, or received notice that it has breached, violated or
defaulted under, any of the material terms or conditions of any of the
agreements, contracts or commitments to which CKS or any of its subsidiaries
is a party or by which it is bound of the type described in clauses (a)
through (f) above (any such agreement, contract or commitment, a "CKS
Contract") in such a manner as would permit any other party to cancel or
terminate any such CKS Contract, or would permit any other party to seek
damages, which would be reasonably likely to be material to CKS.
2.18 International Employee Plan. Each CKS Employee Plan that has been
adopted or maintained by CKS or any ERISA Affiliate, whether informally or
formally, or with respect to which CKS or any ERISA Affiliate will or may have
any liability, for the benefit of CKS Employees who perform services outside
the United States (the "International Employee Plans") has been established,
maintained and administered in compliance with its terms and conditions and
with the requirements prescribed by any and all statutory or regulatory laws
that are applicable to such International Employee Plan. Furthermore, no
International Employee Plan has unfunded liabilities, that as of the Effective
Time, will not be offset by insurance or fully accrued. Except as required by
law, no condition exists that would prevent USWeb, CKS or any ERISA Affiliate
from terminating or amending any International Employee Plan at any time for
any reason without liability to USWeb, CKS or any ERISA Affiliate (other than
ordinary administration expenses).
2.19 Pooling of Interests. To the knowledge of CKS, based on consultation
with its independent accountants, neither CKS nor any of its directors,
officers, affiliates or stockholders has taken any action or agreed to take
any action which would preclude USWeb's ability to account for the Merger as a
pooling of interests.
2.20 Change of Control Payments. The CKS Schedules set forth each plan or
agreement pursuant to which any material amounts may become payable (whether
currently or in the future) to current or former officers and directors of CKS
as a result of or in connection with the Merger. No benefit payable or which
may become payable by CKS or any of the CKS Subsidiaries pursuant to any CKS
Employee Plan or any CKS Benefit Arrangement or as a result of or arising
under this Agreement shall constitute an "excess parachute payment" (as
defined in Section 280G(b)(1) of the Code) which is subject to the imposition
of an excise Tax under Section 4999 of the Code or which would not be
deductible by reason of Section 280G of the Code.
2.21 Statements; Proxy Statement/Prospectus. The information supplied by CKS
for inclusion in the Registration Statement (as defined in Section 3.4(b))
shall not at the time the Registration Statement is filed with the SEC and at
the time it becomes effective under the Securities Act, contain any untrue
statement of a
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material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading. The
information supplied by CKS for inclusion in the proxy statement/prospectus to
be sent to the stockholders of CKS and stockholders of USWeb in connection
with the meeting of CKS's stockholders to consider the approval and adoption
of this Agreement and the approval of the Merger (the "CKS Stockholders'
Meeting") and in connection with the meeting of USWeb's stockholders to
consider the approval of (i) the amendment of USWeb's Certificate of
Incorporation to increase its authorized share capital to allow for the
issuance of shares of USWeb Common Stock by virtue of the Merger, (ii) the
issuance of shares of USWeb Common Stock by virtue of the Merger, and (iii)
the amendment of USWeb's Certificate of Incorporation to change USWeb's
corporate name (subject to and conditional upon the effectiveness of the
Merger) (the "USWeb Stockholders' Meeting") (such proxy statement/prospectus
as amended or supplemented is referred to herein as the "Proxy Statement")
shall not, on the date the Proxy Statement is first mailed to CKS's
stockholders and USWeb's stockholders, at the time of the CKS Stockholders'
Meeting or the USWeb Stockholders' Meeting and at the Effective Time, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not false or
misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the CKS Stockholders' Meeting or the USWeb Stockholders' Meeting
which has become false or misleading. The Proxy Statement will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder. If at any time prior to the Effective Time,
any event relating to CKS or any of its affiliates, officers or directors
should be discovered by CKS which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement, CKS shall
promptly inform USWeb. Notwithstanding the foregoing, CKS makes no
representation or warranty with respect to any information supplied by USWeb
or Merger Sub which is contained in any of the foregoing documents.
2.22 Board Approval. The Board of Directors of CKS has, as of the date of
this Agreement, determined (i) that the Merger is fair to, and in the best
interests of CKS and its stockholders, and (ii) to recommend that the
stockholders of CKS approve and adopt this Agreement and approve the Merger.
2.23 Fairness Opinion. The Board of Directors of CKS has received an oral
opinion from Goldman, Sachs & Co. (to be confirmed in writing) to the effect
that as of the date hereof, the Exchange Ratio is fair to CKS's stockholders
from a financial point of view.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF USWEB AND MERGER SUB
USWeb and Merger Sub represent and warrant to CKS, subject to the exceptions
specifically disclosed in writing in the disclosure letter supplied by USWeb
to CKS dated as of the date hereof and certified by a duly authorized officer
of USWeb (the "USWeb Schedules"), as follows:
3.1 Organization of USWeb.
(a) USWeb and each of its subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation; has the corporate power and authority to own, lease and
operate its assets and property and to carry on its business as now being
conducted and as proposed to be conducted; and is duly qualified or licensed
to do business and is in good standing in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature of
its activities makes such qualification or licensing necessary, except where
the failure to be so qualified would not have a Material Adverse Effect (as
defined below) on USWeb.
(b) USWeb has delivered to CKS a true and complete list of all of USWeb's
subsidiaries, indicating the jurisdiction of incorporation of each subsidiary
and USWeb's equity interest therein. USWeb has no equity
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interest in Cloudbreak Consulting LLC. To the knowledge of USWeb, no officer
or director of USWeb has an equity interest in Cloudbreak Consulting LLC.
(c) USWeb has delivered or made available to CKS a true and correct copy of
the Certificate of Incorporation and Bylaws of USWeb and equivalent governing
instruments of each of its subsidiaries, each as amended to date, and each
such instrument is in full force and effect. Neither USWeb nor any of its
subsidiaries is in violation of any of the provisions of its Certificate of
Incorporation or Bylaws or equivalent governing instruments.
(d) When used in connection with USWeb, the term "Material Adverse Effect"
means, for purposes of this Agreement, any change, event or effect that is
materially adverse to the business, assets (including intangible assets),
financial condition or results of operations of USWeb and its subsidiaries
taken as a whole (except for those changes, events and effects that are
directly caused by (i) conditions affecting national, regional or world
economies, (ii) conditions affecting the Internet-related professional
services industry as a whole, (iii) the pendency or announcement of this
Agreement, or the transactions contemplated hereby, including changes or
effects resulting from employee attrition or a delay of, reduction in or
cancellation or change in the terms of customer engagements, to the extent
attributable to the pendency or announcement of this Agreement or the
transactions contemplated hereby, (iv) failure of USWeb's and its
subsidiaries' results of operations to meet any internal or external
predictions, projections, estimates or expectations, or (v) changes in the
market price or trading volume of USWeb capital stock, which conditions (in
the case of clause (i) and (ii)) do not affect USWeb in a disproportionate
manner).
3.2 USWeb and Merger Sub Capital Structure. The authorized capital stock of
USWeb consists of 100,000,000 shares of Common Stock, par value $0.001 per
share ("Common Stock") of which there were 45,176,418 shares issued and
outstanding as of August 28, 1998, including 1,000,000 shares of Preferred
Stock, par value $0.001 per share, of which no shares are issued or
outstanding. The authorized capital stock of Merger Sub consists of 1,000
shares of Common Stock, no par value, all of which, as of the date hereof, are
issued and outstanding and are held by USWeb. Merger Sub was formed on July
15, 1998, for the purpose of consummating the Merger and has no material
assets or liabilities except as necessary for such purpose. All outstanding
shares of USWeb Common Stock are duly authorized, validly issued, fully paid
and nonassessable and are not subject to preemptive rights created by statute,
the Certificate of Incorporation or Bylaws of USWeb or any agreement or
document to which USWeb is a party or by which it is bound. As of August 28,
1998, USWeb had reserved an aggregate of 600,000 shares, 7,000,000 shares and
20,000,000 shares, respectively, of USWeb Common Stock for issuance to
employees, consultants and non-employee directors pursuant to the USWeb 1996
Stock Option Plan, the 1996 Equity Compensation Plan, and the 1997 Acquisition
Stock Option Plan under which options are outstanding for an aggregate of
68,367 shares, 3,680,468 shares and 11,026,976 shares, respectively, and under
which no shares, 3,257,523 shares and 7,678,672 shares, respectively, are
available for grant as of August 28, 1998. In addition, there are options to
purchase shares of USWeb Common Stock pursuant to the Ikonic Interactive, Inc.
1997 Stock Option Plan assumed by USWeb in connection with its acquisition of
Ikonic Interactive, Inc. USWeb has reserved for issuance 333,333 shares,
2,000,000 shares (registered on Form S-8 currently commitments for
approximately 8,000,000 shares at current stock prices) and 55 shares,
respectively, under (i) USWeb's Affiliate Warrant Program, (ii) in connection
with acquisition-related employee stock bonuses, and (iii) upon exercise of
consultant warrants, respectively. USWeb has also issued warrants for
approximately 2,728,916 shares to venture capital investors and NBC
Multimedia, Inc. All shares of USWeb Common Stock subject to issuance as
aforesaid, upon issuance on the terms and conditions specified in the
instruments pursuant to which they are issuable, would be duly authorized,
validly issued, fully paid and nonassessable. USWeb has provided a list of
options to acquire 10,000 or more shares of USWeb Common Stock as of August
28, 1998, the name of the holder of such option, the number of shares subject
to such option, the exercise price of such option, the number of shares as to
which such option will have vested at such date, and whether the
exercisability of such option will be accelerated in any way by the
transactions contemplated by this Agreement, with an indication of the extent
of acceleration, if any. As of August 28, 1998, there were an aggregate of
3,000,000 shares of
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USWeb Common Stock reserved for issuance pursuant to USWeb's Employee Stock
Purchase Plan (the "USWeb Employee Stock Purchase Plan").
3.3 Obligations With Respect to Capital Stock. Except as set forth in the
USWeb Schedules and in Section 3.2, there are no equity securities,
partnership interests or similar ownership interests of any class of USWeb, or
any securities exchangeable or convertible into or exercisable for such equity
securities, partnership interests or similar ownership interests, issued,
reserved for issuance or outstanding. Except for securities USWeb owns,
directly or indirectly through one or more subsidiaries, there are no equity
securities, partnership interests or similar ownership interests of any class
of any subsidiary of USWeb, or any security exchangeable or convertible into
or exercisable for such equity securities, partnership interests or similar
ownership interests, issued, reserved for issuance or outstanding. Except as
set forth in Schedule 3.3 and in Section 3.2, there are no options, warrants,
equity securities, partnership interests or similar ownership interests,
calls, rights (including preemptive rights), commitments or agreements of any
character to which USWeb or any of its subsidiaries is a party or by which it
is bound obligating USWeb or any of its subsidiaries to issue, deliver or
sell, or cause to be issued, delivered or sold, or repurchase, redeem or
otherwise acquire, or cause the repurchase, redemption or acquisition, of any
shares of capital stock, partnership interests or similar ownership interests
of USWeb or any of its subsidiaries or obligating USWeb or any of its
subsidiaries to grant, extend, accelerate the vesting of or enter into any
such option, warrant, equity security, call, right, commitment or agreement.
There are no registration rights and, to the knowledge of USWeb, as of the
date of this Agreement, there are no voting trusts, proxies or other
agreements or understandings with respect to any equity security of any class
of USWeb or with respect to any equity security, partnership interest or
similar ownership interest of any class of any of its subsidiaries.
3.4 Authority.
(a) Each of USWeb and Merger Sub has all requisite corporate power and
authority to enter into this Agreement and the USWeb Stock Option Agreement
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the USWeb Stock Option Agreement
and the consummation of the transactions contemplated hereby and thereby, have
been duly authorized by all necessary corporate action on the part of USWeb
and, in the case of this Agreement, Merger Sub, subject only to the filing and
recordation of the Certificate of Merger pursuant to Delaware Law and the
approval by USWeb's stockholders of (i) the amendment of USWeb's Certificate
of Incorporation to increase its authorized shares to allow for the issuance
of shares of USWeb Common Stock by virtue of the Merger, (ii) the issuance of
shares of USWeb Common Stock by virtue of the Merger, and (iii) the amendment
of USWeb's Certificate of Incorporation to change USWeb's corporate name
(subject to and conditional upon the effectiveness of the Merger). A vote of
the holders of at least a majority of the outstanding shares of the USWeb
Common Stock is required for USWeb's stockholders to approve each of (i) the
amendment of USWeb's Certificate of Incorporation to increase its authorized
shares to allow for the issuance of shares of USWeb Common Stock by virtue of
the Merger, (ii) the issuance of shares of USWeb Common Stock by virtue of the
Merger, and (iii) the amendment of USWeb's Certificate of Incorporation to
change USWeb's corporate name (subject to and conditional upon the
effectiveness of the Merger). This Agreement has been duly executed and
delivered by each of USWeb and Merger Sub and, assuming the due authorization,
execution and delivery by CKS, constitutes the valid and binding obligation of
USWeb, enforceable in accordance with its terms, except as enforceability may
be limited by bankruptcy and other similar laws and general principles of
equity. The execution and delivery of this Agreement by each of USWeb and
Merger Sub do not, and the performance of this Agreement by each of USWeb and
Merger Sub will not, (i) conflict with or violate the Certificate of
Incorporation or Bylaws of USWeb or the Articles of Incorporation or Bylaws of
Merger Sub or the equivalent organizational documents of any of USWeb's other
subsidiaries, (ii) subject to obtaining the approval of USWeb's stockholders
of (x) the amendment of USWeb's Certificate of Incorporation to increase its
authorized shares to allow for the issuance of shares of USWeb Common Stock by
virtue of the Merger, (y) the issuance of shares of USWeb Common Stock by
virtue of the Merger, and (z) the amendment of USWeb's Certificate of
Incorporation to change USWeb's corporate name (subject to
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and conditional upon the effectiveness of the Merger) as contemplated in
Section 5.2 and compliance with the requirements set forth in Section 3.4(b)
below, conflict with or violate any law, rule, regulation, order, judgment or
decree applicable to USWeb or any of its subsidiaries (including Merger Sub)
or by which its or any of their respective properties is bound or affected, or
(iii) result in any breach of or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or impair
USWeb's rights or alter the rights or obligations of any third party under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of USWeb or any of its subsidiaries (including Merger
Sub) pursuant to, any material note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which USWeb or any of its subsidiaries (including Merger Sub) is a party or
by which USWeb or any of its subsidiaries or its or any of their respective
properties are bound or affected. The USWeb Schedules list all consents,
waivers and approvals under any of USWeb's or any of its subsidiaries'
material agreements, contracts, licenses or leases required to be obtained in
connection with the consummation of the transactions contemplated hereby.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required to be obtained
or made by USWeb or Merger Sub in connection with the execution and delivery
of this Agreement or the consummation of the Merger, except for (i) the filing
of a Form S-4 Registration Statement (the "Registration Statement") with the
SEC in accordance with the Securities Act, (ii) the filing of the Certificate
of Merger with the Secretary of State of the State of Delaware, (iii) the
filing of the Proxy Statement with the SEC in accordance with the Exchange
Act, (iv) such consents, approvals, orders, authorizations, registrations,
declarations and other filings as may be required under applicable federal and
state securities laws and the HSR Act and the securities or antitrust laws of
any foreign country, and (v) such other consents, authorizations, filings,
approvals and registrations which if not obtained or made would not be
material to USWeb or CKS or have a material adverse effect on the ability of
the parties to consummate the Merger.
3.5 Section 203 of the Delaware General Corporation Law Not Applicable. The
Board of Directors of USWeb has taken all actions so that the restrictions
contained in Section 203 of the Delaware General Corporation Law applicable to
a "business combination" (as defined in such Section 203) will not apply to
the execution, delivery or performance of this Agreement or to the
consummation of the Merger or the other transactions contemplated by this
Agreement.
3.6 SEC Filings; USWeb Financial Statements.
(a) USWeb has filed all forms, reports and documents required to be filed
with the SEC since October 1, 1997, and has made available to CKS such forms,
reports and documents in the form filed with the SEC. All such required forms,
reports and documents (including those that USWeb may file subsequent to the
date hereof) are referred to herein as the "USWeb SEC Reports." As of their
respective dates, the USWeb SEC Reports (i) were prepared in accordance with
the requirements of the Securities Act or the Exchange Act, as the case may
be, and the rules and regulations of the SEC thereunder applicable to such
USWeb SEC Reports, and (ii) did not at the time they were filed (or if amended
or superseded by a filing prior to the date of this Agreement, then on the
date of such filing) contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading. None of USWeb's subsidiaries is required to
file any forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in USWeb SEC Reports (the "USWeb
Financials"), including any USWeb SEC Reports filed after the date hereof
until the Closing, (x) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (y) was
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited interim financial statements, as may be permitted by the SEC
on Form 10-Q under the Exchange Act) and (z) fairly presented the consolidated
financial position of USWeb and its subsidiaries as at
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the respective dates thereof and the consolidated results of USWeb's
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal and recurring year-
end adjustments. The balance sheet of USWeb contained in USWeb SEC Reports as
of June 30, 1998 is hereinafter referred to as the "USWeb Balance Sheet."
Except as disclosed in the USWeb Financials, since the date of the USWeb
Balance Sheet neither USWeb nor any of its subsidiaries incurred any
liabilities (absolute, accrued, contingent or otherwise) of a nature required
to be disclosed on a balance sheet or in the related notes to the consolidated
financial statements prepared in accordance with GAAP which are, individually
or in the aggregate, material to the business, results of operations or
financial condition of USWeb and its subsidiaries taken as a whole, except
liabilities (i) provided for in the USWeb Balance Sheet, or (ii) incurred
since the date of the USWeb Balance Sheet in the ordinary course of business
consistent with past practices and immaterial in the aggregate.
(c) USWeb has heretofore furnished to CKS a complete and correct copy of any
amendments or modifications, which have not yet been filed with the SEC but
which are required to be filed, to agreements, documents or other instruments
which previously had been filed by USWeb with the SEC pursuant to the
Securities Act or the Exchange Act.
3.7 Absence of Certain Changes or Events. Since the date of the USWeb
Balance Sheet through the date of this Agreement, there has not been: (i) any
Material Adverse Effect on USWeb, (ii) any material change by USWeb in its
accounting methods, principles or practices, except as required by concurrent
changes in GAAP, or (iii) any material revaluation by USWeb of any of its
assets, including, without limitation, writing down the value of capitalized
inventory or writing off notes or accounts receivable other than in the
ordinary course of business.
3.8 Taxes.
(a) Tax Returns and Audits.
(i) USWeb and each of its subsidiaries have timely filed all Returns
relating to Taxes required to be filed by USWeb and each of its
subsidiaries, except such Returns which are not material to USWeb, and have
paid all Taxes shown to be due on such Returns.
(ii) Except as is not material to USWeb, USWeb and each of its
subsidiaries as of the Effective Time will have withheld with respect to
its employees all federal and state income taxes, FICA, FUTA and other
Taxes required to be withheld.
(iii) Except as is not material to USWeb, neither USWeb nor any of its
subsidiaries has been delinquent in the payment of any Tax nor is there any
Tax deficiency outstanding, proposed or assessed against USWeb or any of
its subsidiaries, nor has USWeb or any of its subsidiaries executed any
waiver of any statute of limitations on or extending the period for the
assessment or collection of any Tax.
(iv) Except as is not material to USWeb, no audit or other examination of
any Return of USWeb or any of its subsidiaries is presently in progress,
nor has USWeb or any of its subsidiaries been notified of any request for
such an audit or other examination.
(v) Except as is not material to USWeb, no adjustment relating to any
Returns filed by USWeb or any of its subsidiaries has been proposed
formally or informally by any Tax authority to USWeb or any of its
subsidiaries or any representative thereof and, to the knowledge of USWeb,
no basis exists for any such adjustment which would be material to USWeb.
(vi) Neither USWeb nor any of its subsidiaries has any liability for
unpaid Taxes other than Taxes not yet due and Taxes being contested in good
faith by appropriate proceedings which has not been accrued for or reserved
on the USWeb Balance Sheet, whether asserted or unasserted, contingent or
otherwise, which is material to USWeb.
(vii) None of USWeb's assets are treated as "tax-exempt use property"
within the meaning of Section 168(h) of the Code.
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(viii) There is no contract, agreement, plan or arrangement, including
but not limited to the provisions of this Agreement, covering any employee
or former employee of USWeb or any of its subsidiaries that, individually
or collectively, could give rise to the payment of any amount that would
not be deductible pursuant to Sections 280G, 404 or 162 of the Code.
(ix) Neither USWeb nor any of its subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as defined in Section 341(f)(4) of the Code) owned by USWeb.
(x) USWeb is not, and has not been at any time, a "United States real
property holding corporation" within the meaning of Section 897(c)(2) of
the Code.
(xi) No power of attorney that is currently in force has been granted
with respect to any matter relating to Taxes payable by USWeb or any of its
subsidiaries.
(xii) Neither USWeb nor any of its subsidiaries is party to or affected
by any tax-sharing or allocation agreement or arrangement.
(xiii) The USWeb Schedules list (y) any Tax exemption, Tax holiday or
other Tax-sharing arrangement that USWeb or any of its subsidiaries has in
any jurisdiction, including the nature, amount and lengths of such Tax
exemption, Tax holiday or other Tax-sharing arrangement and (z) any
expatriate tax programs or policies affecting USWeb or any of its
subsidiaries. Each of USWeb and its subsidiaries is in full compliance in
all material respects with all terms and conditions required to maintain
any Tax exemption, Tax holiday or other Tax-sharing arrangement or order of
any Governmental Entity and the consummation of the transactions
contemplated hereby will not have any adverse effect on the continued
validity and effectiveness of any such Tax exemption, Tax holiday or other
Tax-sharing arrangement or order.
3.9 Intellectual Property.
(a) USWeb and its subsidiaries own, or have the right to use, sell or
license all intellectual property necessary or required for the conduct of
their respective businesses as presently conducted (such intellectual property
and the rights thereto are collectively referred to herein as the "USWeb IP
Rights").
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
material breach of any instrument or agreement governing any USWeb IP Rights,
will not cause the forfeiture or termination or give rise to a right of
forfeiture or termination of any USWeb IP Rights or materially impair the
right of USWeb, the Surviving Corporation or CKS to use, sell or license any
USWeb IP Rights or portion thereof.
(c) Neither the manufacture, marketing, license, sale or intended use of any
product or technology currently licensed or sold or under development by USWeb
or any of its subsidiaries violates in any material respect any license or
agreement between any third party and USWeb or any of its subsidiaries and any
third party or, to the knowledge of USWeb, infringes in any material respect
any intellectual property right of any other party; and there is no pending
or, to the knowledge of USWeb, threatened claim or litigation contesting the
validity, ownership or right to use, sell, license or dispose of any USWeb IP
Rights, nor has USWeb received any written notice asserting that any USWeb IP
Rights or the proposed use, sale, license or disposition thereof conflicts or
will conflict with the rights of any other party.
(d) There are no royalties, honoraria, fees or other payments payable by
USWeb to any person by reason of the ownership, use, license, purchase, sale
or disposition or acquisition of the USWeb IP Rights.
(e) USWeb has taken reasonable and practicable steps designed to safeguard
and maintain the secrecy and confidentiality of, and its proprietary rights
in, all USWeb IP Rights.
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3.10 Compliance; Permits; Restrictions.
(a) Neither USWeb nor any of its subsidiaries is, in any material respect,
in conflict with, or in default or violation of (i) any law, rule, regulation,
order, judgment or decree applicable to USWeb or any of its subsidiaries or by
which USWeb or any of its subsidiaries or any of their respective properties
is bound or affected, or (ii) any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which USWeb or any of its subsidiaries is a party or by which
USWeb or any of its subsidiaries or its or any of their respective properties
is bound or affected. To the knowledge of USWeb, no investigation or review by
any Governmental Entity is pending or threatened against USWeb or any of its
subsidiaries, nor has any Governmental Entity indicated an intention to
conduct the same. There is no material agreement, judgment, injunction, order
or decree binding upon USWeb or any of its subsidiaries which has or could
reasonably be expected to have the effect of prohibiting or materially
impairing any business practice of USWeb or any of its subsidiaries, any
acquisition of material property by USWeb or any of its subsidiaries or the
conduct of business by USWeb as currently conducted.
(b) USWeb and its subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals from governmental authorities which are
material to the operation of the business of USWeb (collectively, the "USWeb
Permits"). USWeb and its subsidiaries are in compliance in all material
respects with the terms of the USWeb Permits.
3.11 Litigation. There is no action, suit, proceeding, claim, arbitration or
investigation pending or as to which USWeb or any of its subsidiaries has
received any notice of assertion, nor, to USWeb's knowledge, is there a
threatened action, suit, proceeding, claim, arbitration or investigation
against USWeb or any of its subsidiaries which reasonably would be likely to
be material to USWeb, or which in any manner challenges or seeks to prevent,
enjoin, alter or delay any of the transactions contemplated by this Agreement.
3.12 Brokers' and Finders' Fees. Except for fees payable to Morgan Stanley &
Co. Incorporated pursuant to an engagement letter dated August 7, 1998, USWeb
has not incurred, nor will it incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
3.13 Employee Benefit Plans.
(a) Employee Benefit Plans and Agreements. The USWeb Schedules contain a
complete and accurate list of each plan, program, policy, practice, contract,
agreement or other arrangement providing for employment, compensation,
severance, relocation, repatriation, expatriation, visas, work permits,
termination pay, deferred compensation, performance awards, stock or stock-
related awards, fringe benefits or other employee benefits, whether written or
unwritten or otherwise, funded or unfunded, including without limitation, each
"employee benefit plan," within the meaning of Section 3(3) of Employee
Retirement Income Security Act of 1974, as amended ("ERISA") which is
currently maintained, contributed to, or required to be contributed to, by
USWeb or any person or entity under common control with USWeb within the
meaning of Section 414(b), (c), (m) or (o) of the Code and the regulations
issued thereunder (an "ERISA Affiliate") for the benefit of any current or
former employee, consultant, director of USWeb or any ERISA Affiliate (the
"USWeb Employees"), or with respect to which USWeb or any Affiliate has or may
have any liability or obligation (the "USWeb Employee Plans"). USWeb does not
have any plan or commitment to establish any new USWeb Employee Plan, to
modify any USWeb Employee Plan (except to the extent required by law or to
conform any such USWeb Employee Plan to the requirements of any applicable
law, in each case as previously disclosed to CKS in writing, or as required by
this Agreement), or to enter into any USWeb Employee Plan.
(b) Documents. USWeb has made available to CKS correct and complete copies
of all documents relating to each USWeb Employee Plan including (without
limitation) any and all amendments thereto and
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all related trust documents; the most recent actuarial valuations, if any,
prepared for each USWeb Employee Plan and any material contracts or agreements
relating to each USWeb Employee Plan.
(c) Employee Plan Compliance. Except as otherwise set forth on USWeb
Schedules: (i) USWeb has performed in all material respects all obligations
required to be performed by it under, is not in default or violation of, and
has no knowledge of any default or violation by any other party to each USWeb
Employee Plan, and each USWeb Employee Plan has been established and
maintained in all material respects in accordance with its terms and in
compliance with all applicable laws, rules and regulations; (ii) each USWeb
Employee Plan intended to qualify under Section 401(a) of the Code and each
trust intended to qualify under Section 501(a) of the Code has either received
a favorable determination, opinion, notification or advisory letter from the
Internal Revenue Service ("IRS") with respect to each such USWeb Employee Plan
as to its qualified status under the Code, including all amendments to the
Code effected by the Tax Reform Act of 1986 and subsequent legislation, or has
remaining a period of time under applicable Treasury regulations or IRS
pronouncements in which to apply for such a letter and make any amendments
necessary to obtain a favorable determination as to the qualified status of
each such USWeb Employee Plan; (iii) no "prohibited transaction," within the
meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA, and not
otherwise exempt under Section 408 of ERISA, has occurred with respect to any
USWeb Employee Plan; (iv) there are no actions, suits or claims pending, or,
to the knowledge of USWeb, threatened or reasonably anticipated (other than
routine claims for benefits) against any USWeb Employee Plan or against the
assets of any USWeb Employee Plan; (v) each USWeb Employee Plan can be
amended, terminated or otherwise discontinued after the Effective Time in
accordance with its terms, without liability to CKS, USWeb or any of its ERISA
Affiliates (other than ordinary administration expenses); (vi) there are no
audits, inquiries or proceedings pending or, to the knowledge of USWeb or any
ERISA Affiliates, threatened by the IRS or Department of Labor with respect to
any USWeb Employee Plan; and (vii) neither USWeb nor any ERISA Affiliate is
subject to any penalty or tax with respect to any USWeb Employee Plan under
Section 502(i) of ERISA or Sections 4975 through 4980 of the Code.
(d) Pension Plan. Neither USWeb nor any ERISA Affiliate has ever maintained,
established, sponsored, participated in, or contributed to, any "employee
pension benefit plan" within the meaning of Section 3(2) of ERISA which is
subject to Title IV of ERISA or Section 412 of the Code.
(e) Multiemployer Plans. At no time has USWeb or any ERISA Affiliate
contributed to or been required to contribute to any "multiemployer plan" as
defined in Section 3(37) of ERISA.
(f) COBRA; HIPAA; FMLA. Neither USWeb nor any ERISA Affiliate has, prior to
the Effective Time and in any material respect, violated any of the health
care continuation requirements of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"), the requirements of the
Health Insurance Portability and Accountability Act of 1996, the requirements
of Family Medical Leave Act of 1993, as amended, or any similar provisions of
state law applicable to USWeb Employees.
(g) No Post-Employment Obligations. Except as set forth in Section 3.13(g)
of the USWeb Schedules, no USWeb Employee Plan provides, or reflects or
represents any liability to provide, retiree life insurance, retiree health or
other retiree employee welfare benefits to any person for any reason, except
as may be required by COBRA or other applicable statute, and USWeb has never
represented, promised or contracted (whether in oral or written form) to any
USWeb Employee (either individually or to USWeb Employees as a group) or any
other person that such USWeb Employee(s) or other person would be provided
with retiree life insurance, retiree health or other retiree employee welfare
benefit, except to the extent required by statute.
(h) Effect of Transaction. The execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an
event under any USWeb Employee Plan, trust, loan or other arrangements that
will or may
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result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any USWeb Employee.
(i) International Employee Plan. Each USWeb Employee Plan that has been
adopted or maintained by USWeb or any ERISA Affiliate, whether informally or
formally, or with respect to which USWeb or any ERISA Affiliate will or may
have any liability, for the benefit of USWeb Employees who perform services
outside the United States (the "International Employee Plans") has been
established, maintained and administered in compliance with its terms and
conditions and with the requirements prescribed by any and all statutory or
regulatory laws that are applicable to such International Employee Plan.
Furthermore, no International Employee Plan has unfunded liabilities, that as
of the Effective Time, will not be offset by insurance or fully accrued.
Except as required by law, no condition exists that would prevent CKS, USWeb
or any ERISA Affiliate from terminating or amending any International Employee
Plan at any time for any reason without liability to CKS, USWeb or any ERISA
Affiliate (other than ordinary administration expenses).
3.14 Absence of Liens and Encumbrances. USWeb and each of its subsidiaries
has good and valid title to, or, in the case of leased properties and assets,
valid leasehold interests in, all of its material tangible properties and
assets, real, personal and mixed, used in its business, free and clear of any
liens or encumbrances except as reflected in the USWeb Financials and except
for liens or Taxes not yet due and payable and such imperfections of title and
encumbrances, if any, which would not be material to USWeb.
3.15 Environmental Matters.
(a) Hazardous Material. No underground storage tanks and no amount of any
Hazardous Material, but excluding office and janitorial supplies, are present,
as a result of the actions of USWeb or any of its subsidiaries or any
affiliate of USWeb, or, to USWeb's knowledge, as a result of any actions of
any third party or otherwise, in, on or under any property, including the land
and the improvements, ground water and surface water thereof, that USWeb or
any of its subsidiaries has at any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Neither USWeb nor any of its
subsidiaries has transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials in material
violation of any law in effect on or before the Closing Date, nor has USWeb or
any of its subsidiaries engaged in any Hazardous Materials Activities in
material violation of any rule, regulation, treaty or statute promulgated by
any Governmental Entity in effect prior to or as of the date hereof to
prohibit, regulate or control Hazardous Materials or any Hazardous Material
Activity.
(c) Permits. USWeb and its subsidiaries currently hold all environmental
approvals, permits, licenses, clearances and consents (the "USWeb
Environmental Permits") necessary for the conduct of USWeb's and its
subsidiaries' Hazardous Material Activities and other businesses of USWeb and
its subsidiaries as such activities and businesses are currently being
conducted.
(d) Environmental Liabilities. No material action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to
USWeb's knowledge, threatened concerning any USWeb Environmental Permit,
Hazardous Material or any Hazardous Materials Activity of USWeb or any of its
subsidiaries. USWeb is not aware of any fact or circumstance which could
involve USWeb or any of its subsidiaries in any material environmental
litigation or impose upon USWeb any material environmental liability.
3.16 Labor Matters.
(a) USWeb (i) is and has been in compliance in all respects with all
applicable laws, rules and regulations respecting employment, employment
practices, terms and conditions of employment and wages and hours, in each
case, with respect to USWeb Employees; (ii) has withheld and reported all
amounts required by law or
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by agreement to be withheld and reported with respect to wages, salaries and
other payments to USWeb Employees; (iii) is not liable for any arrears of
wages or any taxes or any penalty for failure to comply with any of the
foregoing; and (iv) is not liable for any payment to any trust or other fund
governed by or maintained by or on behalf of any governmental authority, with
respect to unemployment compensation benefits, social security or other
benefits or obligations for USWeb Employees (other than routine payments to be
made in the normal course of business and consistent with past practice).
(b) No work stoppage or labor strike against USWeb is pending, threatened or
reasonably anticipated. USWeb does not know of any activities or proceedings
of any labor union to organize any USWeb Employees. There are no actions,
suits, claims, labor disputes or grievances pending, or, to the knowledge of
USWeb, threatened or reasonably anticipated relating to any labor, safety or
discrimination matters involving any USWeb Employee, including, without
limitation, charges of unfair labor practices or discrimination complaints,
which, if adversely determined, would, individually or in the aggregate,
result in any material liability to USWeb. Neither USWeb nor any ERISA
Affiliate has engaged in any unfair labor practices under applicable law.
USWeb is not presently, nor has it been in the past, a party to, or bound by,
any collective bargaining agreement or union contract with respect to USWeb
Employees and no collective bargaining agreement is being negotiated by USWeb.
3.17 Agreements, Contracts and Commitments. Except as set forth in the USWeb
Schedules, as of the date hereof, neither USWeb nor any of its subsidiaries is
a party to or is bound by:
(a) any employment or consulting agreement, contract or commitment with any
officer or director level employee or member of USWeb's Board of Directors,
other than those that are terminable by USWeb or any of its subsidiaries on no
more than thirty days notice without liability or financial obligation, except
to the extent general principles of wrongful termination law may limit USWeb's
or any of its subsidiaries' ability to terminate employees at will;
(b) any agreement or plan, including, without limitation, any stock option
plan, stock appreciation right plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of benefits of which will
be accelerated, by the occurrence of any of the transactions contemplated by
this Agreement or the value of any of the benefits of which will be calculated
on the basis of any of the transactions contemplated by this Agreement;
(c) any agreement of indemnification or guaranty not entered into in the
ordinary course of business other than indemnification agreements between
USWeb or any of its subsidiaries and any of its officers or directors;
(d) any agreement, contract or commitment containing any covenant limiting
the freedom of USWeb or any of its subsidiaries to engage in any line of
business or compete with any person or granting any exclusive distribution
rights;
(e) any agreement, contract or commitment currently in force relating to the
disposition or acquisition of assets not in the ordinary course of business or
any ownership interest in any corporation, partnership, joint venture or other
business enterprise; or
(f) any material joint marketing or development agreement.
Neither USWeb nor any of its subsidiaries, nor to USWeb's knowledge any
other party to a USWeb Contract (as defined below), has breached, violated or
defaulted under, or received notice that it has breached, violated or
defaulted under, any of the material terms or conditions of any of the
agreements, contracts or commitments to which USWeb or any of its subsidiaries
is a party or by which it is bound of the type described in clauses (a)
through (f) above (any such agreement, contract or commitment, a "USWeb
Contract") in such a manner as would permit any other party to cancel or
terminate any such USWeb Contract, or would permit any other party to seek
damages, which would be reasonably likely to be material to USWeb.
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3.18 Pooling of Interests. To the knowledge of USWeb, based on consultation
with its independent accountants, neither USWeb nor any of its directors,
officers, affiliates or stockholders has taken any action or agreed to take
any action which would preclude USWeb's ability to account for the Merger as a
pooling of interests.
3.19 Change of Control Payments. The USWeb Schedules set forth each plan or
agreement pursuant to which any material amounts may become payable (whether
currently or in the future) to current or former officers and directors of
USWeb as a result of or in connection with the Merger.
3.20 Statements; Proxy Statement/Prospectus. The information supplied by
USWeb for inclusion in the Registration Statement shall not at the time the
Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. The
information supplied by USWeb for inclusion in the Proxy Statement shall not,
on the date the Proxy Statement is first mailed to USWeb's stockholders and
CKS's stockholders, at the time of the USWeb Stockholders' Meeting or the CKS
Stockholders' Meeting and at the Effective Time, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the USWeb
Stockholders' Meeting or the CKS Stockholders' Meeting which has become false
or misleading. The Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder. If at any time prior to the Effective Time, any event relating to
USWeb or any of its affiliates, officers or directors should be discovered by
USWeb which should be set forth in an amendment to the Registration Statement
or a supplement to the Proxy Statement, USWeb shall promptly inform CKS.
Notwithstanding the foregoing, USWeb makes no representation or warranty with
respect to any information supplied by CKS which is contained in any of the
foregoing documents.
3.21 Board Approval. The Board of Directors of USWeb has, as of the date of
this Agreement, determined (i) that the Merger is fair to, and in the best
interests of USWeb and its stockholders, and (ii) to recommend that the
stockholders of USWeb approve (x) the amendment of USWeb's Certificate of
Incorporation to increase its authorized share capital to allow for the
issuance of shares of USWeb Common Stock by virtue of the Merger (subject to
and conditional upon the effectiveness of the Merger), (y) the issuance of
shares of USWeb Common Stock by virtue of the Merger, and (z) the amendment of
USWeb's Certificate of Incorporation to change USWeb's corporate name (subject
to and conditional upon the effectiveness of the Merger).
3.22 Fairness Opinion. The Board of Directors of USWeb has received an
opinion from Morgan Stanley & Co. Incorporated (to be confirmed in writing) to
the effect that as of the date hereof, the Exchange Ratio is fair to USWeb
from a financial point of view.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business. During the period from the date of this Agreement
and continuing until the earlier of the termination of this Agreement pursuant
to its terms or the Effective Time, each of CKS (which for the purposes of
this Article IV shall include CKS and each of its subsidiaries) and USWeb
(which for the purposes of this Article IV shall include USWeb and each of its
subsidiaries) agree, except (i) in the case of CKS as provided in Article IV
of the CKS Schedules and in the case of USWeb as provided in Article IV of the
USWeb Schedules, or (ii) to the extent that the other of them shall otherwise
consent in writing, to carry on its business diligently and in accordance with
good commercial practice and to carry on its business in the usual, regular
and ordinary course, in substantially the same manner as heretofore conducted
and in
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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. In addition, each of CKS and USWeb will promptly notify the
other of any material event involving its business or operations. CKS and
USWeb agree that USWeb may continue to execute its acquisition program in the
usual, regular and ordinary course, in substantially the same manner as
heretofore conducted without CKS's consent; provided, however, that USWeb must
obtain the written consent of CKS, which shall not be withheld unreasonably,
prior to 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 the date of this Agreement
and prior to the Effective Time shall exceed 5,000,000. Furthermore, CKS and
USWeb agree that during the period prior to the Effective Time they will
exchange monthly summary financial data and that their respective senior
management groups will participate in informational meetings on a monthly
basis, at such time and place as shall be mutually agreeable. No information
or knowledge obtained in any investigation will affect or be deemed to modify
any representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Merger.
In addition, during the period from the date of this Agreement and
continuing until the earlier termination of this Agreement pursuant to its
terms or the Effective Time, except as permitted by the terms of this
Agreement, and except in the case of CKS as provided in Article IV of the CKS
Schedules, and except in the case of USWeb as provided in Article IV of the
USWeb Schedules, without the prior written consent of the other, neither CKS
nor USWeb shall do any of the following, and neither CKS nor USWeb shall
permit its subsidiaries to do any of the following:
(a) waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant or director stock plans or authorize
cash payments in exchange for any options granted under any of such plans;
(b) grant any severance or termination pay to any officer or employee except
payments in amounts consistent with policies and past practices or pursuant to
written agreements outstanding, or policies existing, on the date hereof and
as previously disclosed in writing to the other, or adopt any new severance
plan;
(c) transfer or license to any person or entity or otherwise extend, amend
or modify in any material respect any rights to the CKS IP Rights or the USWeb
IP Rights, as the case may be, or enter into grants to future patent rights,
other than in the ordinary course of business;
(d) declare or pay any dividends on or make any other distributions (whether
in cash, stock or property) in respect of any capital stock or split, combine
or reclassify any capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for any capital
stock;
(e) repurchase or otherwise acquire, directly or indirectly, any shares of
capital stock except pursuant to rights of repurchase of any such shares under
any employee, consultant or director stock plan existing on the date hereof;
(f) issue, deliver, sell, authorize or propose the issuance, delivery or
sale of, any shares of capital stock or any securities convertible into shares
of capital stock, or subscriptions, rights, warrants or options to acquire any
shares of capital stock or any securities convertible into shares of capital
stock, or enter into other agreements or commitments of any character
obligating it to issue any such shares or convertible securities, other than
(i) shares of CKS Common Stock or USWeb Common Stock, as the case may be,
pursuant to the exercise of stock options therefor outstanding as of the date
of this Agreement, (ii) options to purchase shares
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of CKS Common Stock or USWeb Common Stock, as the case may be, to be granted
at fair market value in the ordinary course of business, consistent with past
practice and in accordance with stock option plans existing on the date
hereof, (iii) shares of CKS Common Stock or USWeb Common Stock, as the case
may be, issuable upon the exercise of the options referred to in clause (ii),
(iv) shares of CKS Common Stock or USWeb Common Stock, as the case may be,
issuable to participants in the USWeb Employee Stock Purchase Plan or the CKS
Employee Stock Purchase Plan consistent with past practice and the terms
thereof, and (v) shares of USWeb Common Stock and options to purchase USWeb
Common Stock in connection with (x) one or more acquisitions by USWeb,
provided that the business acquired, without taking any other acquisition into
account, would not 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 and provided further
that, (y) the aggregate number of shares of USWeb Common Stock issued in
connection with all acquisitions after the date of this Agreement and prior to
the Effective Time shall not exceed 5,000,000;
(g) except as contemplated in this Agreement, cause, permit or propose any
amendments to any charter document or Bylaw (or similar governing instruments
of any subsidiaries);
(h) except for one or more acquisitions by USWeb of a business where (i) the
business acquired, without taking any other acquisition into account, would
not 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 issued by USWeb in connection with all acquisitions from the date of
this Agreement and prior to the Effective Time would not exceed 5,000,000,
acquire or agree to acquire by merging or consolidating with, or by purchasing
any equity interest in or a material portion of the assets of, or by any other
manner, any business or any corporation, partnership interest, association or
other business organization or division thereof, or otherwise acquire or agree
to acquire any assets which are material, individually or in the aggregate, to
the business of CKS or USWeb, as the case may be, or enter into any material
joint ventures, strategic partnerships or alliances;
(i) sell, lease, license, encumber or otherwise dispose of any properties or
assets which are material, individually or in the aggregate, to the business
of CKS or USWeb, as the case may be, except in the ordinary course of business
consistent with past practice;
(j) incur any indebtedness for borrowed money (other than ordinary course
trade payables or pursuant to existing credit facilities in the ordinary
course of business) or guarantee any such indebtedness or issue or sell any
debt securities or warrants or rights to acquire debt securities of CKS or
USWeb, as the case may be, or guarantee any debt securities of others;
(k) adopt or amend any employee benefit or employee stock purchase or
employee option plan, or enter into any employment contract, pay any special
bonus or special remuneration to any director or employee, or increase the
salaries or wage rates of its officers or employees other than in the ordinary
course of business, consistent with past practice, or change in any material
respect any management policies or procedures;
(l) pay, discharge or satisfy any claim, liability or obligation (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business;
(m) make any grant of exclusive rights to any third party, other than in the
ordinary course of business consistent with past practice;
(n) take any action that would be reasonably likely to interfere with
USWeb's ability to account for the Merger as a pooling of interests; or
(o) agree in writing or otherwise to take any of the actions described in
Article IV (a) through (n) above.
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ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings; Board
Recommendations.
(a) As promptly as practicable after the execution of this Agreement, CKS
and USWeb will prepare, and file with the SEC, the Proxy Statement and USWeb
will prepare and file with the SEC the Registration Statement in which the
Proxy Statement will be included as a prospectus. Each of CKS and USWeb will
respond to any comments of the SEC, will use commercially reasonable best
efforts to have the Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing and will cause the
Proxy Statement to be mailed to its respective stockholders at the earliest
practicable time after the Registration Statement is declared effective by the
SEC. As promptly as practicable after the date of this Agreement, CKS and
USWeb will prepare and file any other filings required under the Exchange Act,
the Securities Act or any other federal, foreign or state blue sky or related
laws relating to the Merger and the transactions contemplated by this
Agreement (the "Other Filings"). Each of CKS and USWeb will notify the other
promptly upon the receipt of any comments from the SEC or its staff or any
other government officials and of any request by the SEC or its staff or any
other government officials for amendments or supplements to the Registration
Statement, the Proxy Statement or any Other Filing or for additional
information and will supply the other with copies of all correspondence
between such party or any of its representatives, on the one hand, and the
SEC, or its staff or any other government officials, on the other hand, with
respect to the Registration Statement, the Proxy Statement, the Merger or any
Other Filing. Each of CKS and USWeb will cause all documents that it is
responsible for filing with the SEC or other regulatory authorities under this
Section 5.1(a) to comply in all material respects with all applicable
requirements of law and the rules and regulations promulgated thereunder.
Whenever any event occurs which is required to be set forth in an amendment or
supplement to the Proxy Statement, the Registration Statement or any Other
Filing, CKS or USWeb, as the case may be, will promptly inform the other of
such occurrence and cooperate in filing with the SEC or its staff or any other
government officials, and/or mailing to stockholders of CKS or stockholders of
USWeb, such amendment or supplement.
(b) The Proxy Statement will include the recommendation of the Board of
Directors of CKS in favor of adoption and approval of this Agreement and
approval of the Merger, except that the Board of Directors of CKS may
withdraw, modify or refrain from making such recommendation to the extent that
the Board of Directors of CKS shall have withdrawn or modified its approval of
this Agreement or the Merger in accordance with Section 5.4(a)(ii).
(c) The Proxy Statement will include the recommendations of the Board of
Directors of USWeb in favor of (x) the amendment of USWeb's Certificate of
Incorporation to increase its authorized shares to allow for the issuance of
shares of USWeb Common Stock by virtue of the Merger, (y) the issuance of
shares of USWeb Common Stock by virtue of the Merger, and (z) the amendment of
USWeb's Certificate of Incorporation to change USWeb's corporate name, subject
to and conditional upon the effectiveness of the Merger, except that the Board
of Directors of USWeb may withdraw, modify or refrain from making such
recommendations to the extent that the Board of Directors of USWeb shall have
withdrawn or modified its approval of this Agreement or the Merger in
accordance with Section 5.4(b)(ii).
5.2 Meetings of Stockholders. Promptly after the date hereof, CKS will take
all action necessary in accordance with Delaware Law and its Certificate of
Incorporation and Bylaws to convene the CKS Stockholders' Meeting to be held
as promptly as practicable, and in any event (to the extent permissible under
applicable law) within forty-five (45) days after the declaration of
effectiveness of the Registration Statement, for the purpose of voting upon
this Agreement and the Merger. CKS will consult with USWeb and use its
commercially reasonable efforts to hold the CKS Stockholders' Meeting on the
same day and at the same time as the USWeb Stockholders' Meeting. Promptly
after the date hereof, USWeb will take all action necessary in accordance with
the Delaware Law and its Certificate of Incorporation and Bylaws to convene
the USWeb Stockholders' Meeting to be held as promptly as practicable, and in
any event (to the extent
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permissible under applicable law) within forty-five (45) days after the
declaration of effectiveness of the Registration Statement, for the purpose of
(i) amending its Certificate of Incorporation to increase its authorized
shares to allow for the issuance of shares of USWeb Common Stock by virtue of
the Merger, (ii) voting upon the issuance of shares of USWeb Common Stock by
virtue of the Merger, and (iii) amending its Certificate of Incorporation to
change its corporate name (subject to and conditional upon the effectiveness
of the Merger). USWeb will consult with CKS and will use commercially
reasonable best efforts to hold the USWeb Stockholders' Meeting on the same
day and at the same time as the CKS Stockholders' Meeting. CKS will use
commercially reasonable best efforts including, without limitation, the hiring
of a proxy solicitor, to solicit from its stockholders proxies in favor of the
adoption and approval of this Agreement and the approval of the Merger and
will take all other action necessary or advisable to secure the vote or
consent of its stockholders required by the rules of Nasdaq or Delaware Law to
obtain such approvals, except to the extent that the Board of Directors of CKS
shall have withdrawn or modified its approval of this Agreement or the Merger
in accordance with Section 5.4(a)(ii). USWeb will use commercially reasonable
best efforts, including without limitation, the hiring of a proxy solicitor,
to solicit from its stockholders proxies in favor of (i) the amendment of
USWeb's Certificate of Incorporation to increase its authorized shares to
allow for the issuance of shares of USWeb Common Stock by virtue of the
Merger, (ii) the issuance of shares of USWeb Common Stock by virtue of the
Merger, and (iii) the amendment of USWeb's Certificate of Incorporation to
change USWeb's corporate name (subject to and conditional upon the
effectiveness of the Merger) and will take all other action necessary or
advisable to secure the vote or consent of its stockholders required by the
rules of Nasdaq or the Delaware Law to obtain such approvals, except to the
extent that the Board of Directors of USWeb shall have withdrawn or modified
its approval of such matters in accordance with Section 5.4(b)(ii). In the
event that insufficient proxies have been obtained to secure the stockholder
approval for the matters set forth above at the CKS Stockholders' Meeting or
the USWeb Stockholders' Meeting, CKS and USWeb (as the case may be) shall take
all lawful action required to postpone or adjourn such meeting for up to
thirty (30) days to attempt to permit the solicitation of additional proxies
for approval of such matters.
5.3 Confidentiality.
(a) The parties acknowledge that CKS and USWeb have previously executed a
Confidentiality Agreement, dated July 30, 1998 (the "Confidentiality
Agreement"), which Confidentiality Agreement will continue in full force and
effect in accordance with its terms, except that in the event of a termination
of this Agreement pursuant to Section 7.1(h), Section 9 of the Confidentiality
Agreement shall terminate and be of no further force or effect, and in the
event of a termination of this Agreement pursuant to Section 7.1(k), Section
10 of the Confidentiality Agreement shall terminate and be of no further force
or effect.
(b) Each of CKS and USWeb will afford the other and the other's accountants,
counsel and other representatives reasonable access during normal business
hours to its properties, books, records and personnel during the period prior
to the Effective Time to obtain all information concerning its business,
including the status of product development efforts, properties, results of
operations and personnel, as such other party may reasonably request. No
information or knowledge obtained by any party hereto in any investigation
pursuant to this Section 5.3 will affect or be deemed to modify any
representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Merger.
5.4 No Solicitation.
(a) Obligations of CKS.
(i) From and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement pursuant to its terms, CKS
and its subsidiaries will not, nor will they authorize or permit any of
their respective officers, directors or employees or any investment banker,
attorney or other advisor or representative retained by any of them to,
directly or indirectly, (x) solicit, initiate or encourage the submission
of any CKS Alternative Proposal (as hereinafter defined) or (y) participate
in any
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discussions or negotiations regarding, or furnish to any person any non-
public information with respect to, or take any other action to facilitate
any inquiries or the making of any proposal that constitutes or would
reasonably be expected to lead to, any CKS Alternative Proposal; provided,
however, that if, at any time prior to obtaining the approval of the
stockholders of CKS of this Agreement and the Merger by the requisite vote
under applicable law (the "CKS Stockholder Approval") the Board of
Directors of CKS determines in good faith, after consultation with outside
legal counsel, that it is necessary to do so in order to comply with its
fiduciary duties to CKS's stockholders under applicable law, CKS may, in
response to a CKS Alternative Proposal that was unsolicited or that did not
otherwise result from a breach of this Section 5.4(a), and subject to
compliance with Section 5.4(a)(iii) and Section 5.4(a)(v), furnish
information with respect to CKS and participate in negotiations regarding
such CKS Alternative Proposal. CKS and its subsidiaries will immediately
cease any and all existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any CKS Alternative Proposal.
Without limiting the foregoing, it is understood that any violation of the
restrictions set forth in the preceding two sentences by any officer,
director or employee of CKS or any of its subsidiaries or any investment
banker, attorney or other advisor or representative of CKS or any of its
subsidiaries shall be deemed to be a breach of this Section 5.4(a) by CKS.
For purposes of this Agreement, "CKS Alternative Proposal" means any
inquiry, proposal or offer from any person or "group" (as defined under
Section 13(d) of the Exchange Act and the rules and regulations thereunder)
relating to any direct or indirect acquisition or purchase of a substantial
amount of assets of CKS or any of its subsidiaries (other than the purchase
of CKS's products or services in the ordinary course of business) or more
than a 15% interest in the total outstanding voting securities of CKS or
any of its subsidiaries or any tender offer or exchange offer that if
consummated would result in any person or "group" (as defined under Section
13(d) of the Exchange Act and the rules and regulations thereunder)
beneficially owning 15% or more of the total outstanding voting securities
of CKS or any of its subsidiaries or any merger, consolidation, business
combination, sale of substantially all the assets, recapitalization,
liquidation, dissolution or similar transaction involving CKS or any of its
subsidiaries, other than the transactions contemplated by this Agreement.
(ii) Neither the Board of Directors of CKS nor any committee thereof
shall (x) withdraw or modify, or propose publicly to withdraw or modify, in
a manner adverse to USWeb or Merger Sub, the approval or recommendation by
such Board of Directors or any such committee of this Agreement or the
Merger or (y) cause CKS to enter into any letter of intent, agreement in
principle, acquisition agreement or other similar agreement (a "CKS
Acquisition Agreement") with respect to any CKS Alternative Proposal. In
addition, subject to the other provisions of this Section 5.4(a), from and
after the date of this Agreement until the earlier of the Effective Time
and termination of this Agreement pursuant to its terms, CKS and its
subsidiaries will not, nor will they authorize or permit any of their
respective officers, directors or employees or any investment banker,
attorney or other advisor or representative retained by any of them to,
directly or indirectly, make or authorize any public statement,
recommendation or solicitation in support of any CKS Alternative Proposal.
Notwithstanding the foregoing or anything else contained in this Agreement,
prior to obtaining the CKS Stockholder Approval, the Board of Directors of
CKS, to the extent it determines in good faith, after consultation with
outside legal counsel, that it is necessary to do so in order to comply
with its fiduciary duties to CKS's stockholders under applicable law, may
withdraw or modify its approval or recommendation of this Agreement or the
Merger (and, to the extent it does so, CKS may refrain from soliciting
proxies to secure the vote of its stockholders as may otherwise be required
by Section 5.2) or approve or recommend any CKS Superior Proposal (as
hereinafter defined), in each case at any time after the third business day
following USWeb's receipt of bona fide written notice (a "Notice of CKS
Superior Proposal") advising USWeb that the Board of Directors of CKS has
received a CKS Superior Proposal, specifying the material terms and
conditions of the CKS Superior Proposal and identifying the person making
such CKS Superior Proposal (it being understood that any amendment to the
price or material terms of a CKS Superior Proposal shall require an
additional Notice of CKS Superior Proposal and an additional three business
day period thereafter to the extent permitted under applicable law);
provided, that unless this Agreement is terminated pursuant to Section 7.1,
nothing contained in this Section shall limit CKS's obligation to hold and
convene the CKS Stockholders' Meeting
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(regardless of whether the recommendation of the Board of Directors of CKS
shall have been withdrawn, modified or not yet made) or to provide CKS
stockholders with material information relating to such meeting. For
purposes of this Agreement, a "CKS Superior Proposal" means any bona fide
proposal made by a third party to acquire, directly or indirectly,
including pursuant to a tender offer, exchange offer, merger,
consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction, for consideration consisting of cash
and/or securities, more than 50% of the voting power of CKS Common Stock or
all or substantially all the assets of CKS and otherwise on terms which the
Board of Directors of CKS determines in its good faith judgment (after
consultation with a financial advisor of nationally recognized reputation)
to be more favorable to CKS's stockholders than the Merger and for which
financing, to the extent required, is then committed or which, in the good
faith judgment of the Board of Directors of CKS, is capable of being
obtained by such third party.
(iii) In addition to the obligations of CKS set forth in paragraphs (i)
and (ii) of this Section 5.4(a), CKS as promptly as practicable shall
advise USWeb orally and in writing of any request for non-public
information which CKS reasonably believes would lead to a CKS Alternative
Proposal or of any CKS Alternative Proposal, the material terms and
conditions of such request or CKS Alternative Proposal, and the identity of
the person making any such request, CKS Alternative Proposal or inquiry.
CKS will keep USWeb informed of all material changes regarding the terms of
the CKS Alternative Proposal and all material changes in the status of the
CKS Alternative Proposal.
(iv) Nothing contained in this Section 5.4(a) or elsewhere in this
Agreement shall prohibit CKS from (x) taking and disclosing to its
stockholders a position contemplated by Rules 14d-9 and 14e-2(a)
promulgated under the Exchange Act or (y) making any disclosure to CKS's
stockholders if, in the good faith judgment of the majority of the members
of the Board of Directors of CKS, after consultation with independent legal
counsel, failure to so disclose would be inconsistent with applicable
securities laws; provided that none of CKS nor its Board of Directors nor
any committee thereof shall, except in accordance with the provisions of
Section 5.4(a)(ii), withdraw or modify, or publicly propose to withdraw or
modify, its position with respect to this Agreement or the Merger or
approve or recommend, or propose to approve or recommend, a CKS Alternative
Proposal.
(v) Notwithstanding anything to the contrary in this Section 5.4(a), CKS
will not provide any non-public information regarding CKS to a third party
unless: (x) CKS provides such non-public information pursuant to a
nondisclosure agreement with terms regarding the protection of confidential
information at least as restrictive as such terms in the Confidentiality
Agreement; and (y) such non-public information has been previously or is
contemporaneously delivered to USWeb.
(b) Obligations of USWeb.
(i) From and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement pursuant to its terms USWeb
and its subsidiaries will not, nor will they authorize or permit any of
their respective officers, directors or employees or any investment banker,
attorney or other advisor or representative retained by any of them to,
directly or indirectly, (x) solicit, initiate or encourage the submission
of any USWeb Alternative Proposal (as hereinafter defined) or (y)
participate in any discussions or negotiations regarding, or furnish to any
person any non-public information with respect to, or take any other action
to facilitate any inquiries or the making of any proposal that constitutes
or would reasonably be expected to lead to, any USWeb Alternative Proposal;
provided, however, that if, at any time prior to obtaining the approval of
the stockholders of USWeb of the issuance of USWeb Common Stock by virtue
of the Merger (the "USWeb Stockholder Approval") the Board of Directors of
USWeb determines in good faith, after consultation with outside legal
counsel, that it is necessary to do so in order to comply with its
fiduciary duties to USWeb's stockholders under applicable law, USWeb may,
in response to a USWeb Alternative Proposal that was unsolicited or that
did not otherwise result from a breach of this Section 5.4(b), and subject
to compliance with Section 5.4(b)(iii) and Section 5.4(b)(v), furnish
information with respect to USWeb and participate in negotiations regarding
such USWeb Alternative Proposal. USWeb and its subsidiaries will
immediately cease any and all existing
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activities, discussions or negotiations with any parties conducted
heretofore with respect to any USWeb Alternative Proposal. Without limiting
the foregoing, it is understood that any violation of the restrictions set
forth in the preceding two sentences by any officer, director or employee
of USWeb or any of its subsidiaries or any investment banker, attorney or
other advisor or representative of USWeb or any of its subsidiaries shall
be deemed to be a breach of this Section 5.4(b) by USWeb. For purposes of
this Agreement, "USWeb Alternative Proposal" means any inquiry, proposal or
offer from any person or "group" (as defined under Section 13(d) of the
Exchange Act and the rules and regulations thereunder) relating to any
direct or indirect acquisition or purchase of a substantial amount of
assets of USWeb or any of its subsidiaries (other than the purchase of
USWeb's products or services in the ordinary course of business) or more
than a fifteen percent (15%) interest in the total outstanding voting
securities of USWeb or any of its subsidiaries or any tender offer or
exchange offer that if consummated would result in any person or "group"
(as defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) beneficially owning fifteen percent (15%) or more
of the total outstanding voting securities of USWeb or any of its
subsidiaries or any merger, consolidation, business combination, sale of
substantially all the assets, recapitalization, liquidation, dissolution or
similar transaction involving USWeb or any of its subsidiaries, other than
(i) the transactions contemplated by this Agreement and (ii) any
acquisition by USWeb, provided that the business to be acquired, without
taking any other acquisition into account, would not constitute a
"significant subsidiary" of USWeb pursuant to the conditions specified in
Rule 1-02(w) of SEC Regulation S-X, substituting twenty percent (20%) for
ten percent (10%) each place it appears therein, and provided further that
the aggregate number of shares of USWeb Common Stock issued in connection
with all acquisitions after the date of this Agreement and prior to the
Effective Time shall not exceed 5,000,000.
(ii) Neither the Board of Directors of USWeb nor any committee thereof
shall (x) withdraw or modify, or propose publicly to withdraw or modify, in
a manner adverse to CKS, the approval or recommendation by such Board of
Directors or any such committee of this Agreement or the Merger or (y)
cause USWeb to enter into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement (a "USWeb Acquisition
Agreement") with respect to any USWeb Alternative Proposal. In addition,
subject to the other provisions of this Section 5.4(b), from and after the
date of this Agreement until the earlier of the Effective Time and
termination of this Agreement pursuant to its terms, USWeb and its
subsidiaries will not, nor will they authorize or permit any of their
respective officers, directors or employees or any investment banker,
attorney or other advisor or representative retained by any of them to,
directly or indirectly, make or authorize any public statement,
recommendation or solicitation in support of any USWeb Alternative
Proposal. Notwithstanding the foregoing or anything else contained in this
Agreement, prior to obtaining the USWeb Stockholder Approval, the Board of
Directors of USWeb, to the extent it determines in good faith, after
consultation with outside legal counsel, that it is necessary to do so in
order to comply with its fiduciary duties to USWeb's stockholders under
applicable law, may withdraw or modify its approval or recommendation of
this Agreement or the Merger (and, to the extent it does so, USWeb may
refrain from soliciting proxies to secure the vote of its stockholders as
may otherwise be required by Section 5.2) or approve or recommend any USWeb
Superior Proposal (as hereinafter defined), in each case at any time after
the third business day following CKS's receipt of bona fide written notice
(a "Notice of USWeb Superior Proposal") advising CKS that the Board of
Directors of USWeb has received a USWeb Superior Proposal, specifying the
material terms and conditions of the USWeb Superior Proposal and
identifying the person making such USWeb Superior Proposal (it being
understood that any amendment to the price or material terms of a USWeb
Superior Proposal shall require an additional Notice of USWeb Superior
Proposal and an additional three business day period thereafter to the
extent permitted under applicable law); provided, that unless this
Agreement is terminated pursuant to Section 7.1, nothing contained in this
Section shall limit USWeb's obligation to hold and convene the USWeb
Stockholders' Meeting (regardless of whether the recommendation of the
Board of Directors of USWeb shall have been withdrawn, modified or not yet
made) or to provide USWeb stockholders with material information relating
to such meeting. For purposes of this Agreement, a "USWeb Superior
Proposal" means any bona
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fide proposal made by a third party to acquire, directly or indirectly,
including pursuant to a tender offer, exchange offer, merger,
consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction, for consideration consisting of cash
and/or securities, more than 50% of the voting power of USWeb Common Stock
or all or substantially all the assets of USWeb and otherwise on terms
which the Board of Directors of USWeb determines in its good faith judgment
(after consultation with a financial advisor of nationally recognized
reputation) to be more favorable to USWeb's stockholders than the Merger
and for which financing, to the extent required, is then committed or
which, in the good faith judgment of the Board of Directors of USWeb, is
capable of being obtained by such third party.
(iii) In addition to the obligations of USWeb set forth in paragraphs (i)
and (ii) of this Section 5.4(b), USWeb as promptly as practicable shall
advise CKS orally and in writing of any request for non-public information
which USWeb reasonably believes would lead to a USWeb Alternative Proposal
or of any USWeb Alternative Proposal, the material terms and conditions of
such request or USWeb Alternative Proposal, and the identity of the person
making any such request, USWeb Alternative Proposal or inquiry. USWeb will
keep CKS informed of all material changes regarding the terms of the USWeb
Alternative Proposal and all material changes of the status of the USWeb
Alternative Proposal.
(iv) Nothing contained in this Section 5.4(b) or elsewhere in this
Agreement shall prohibit USWeb from (x) taking and disclosing to its
stockholders a position contemplated by Rules 14d-9 and 14e-2(a)
promulgated under the Exchange Act or (y) making any disclosure to USWeb's
stockholders if, in the good faith judgment of the majority of the members
of the Board of Directors of USWeb, after consultation with independent
legal counsel, failure to so disclose would be inconsistent with applicable
securities laws; provided that none of USWeb nor its Board of Directors nor
any committee thereof shall, except in accordance with the provisions of
Section 5.4(b)(ii), withdraw or modify, or publicly propose to withdraw or
modify, its position with respect to this Agreement or the Merger or
approve or recommend, or propose to approve or recommend, a USWeb
Alternative Proposal.
(v) Notwithstanding anything to the contrary in this Section 5.4(b),
USWeb will not provide any non-public information regarding USWeb to a
third party unless: (x) USWeb provides such non-public information pursuant
to a nondisclosure agreement with terms regarding the protection of
confidential information at least as restrictive as such terms in the
Confidentiality Agreement; and (y) such non-public information has been
previously or is contemporaneously delivered to CKS.
5.5 Public Disclosure. USWeb and CKS will consult with each other, and to
the extent practicable, before issuing any press release or otherwise making
any public statement with respect to the Merger, this Agreement or an
Acquisition Proposal and will not issue any such press release without the
approval of the other party, except as may be required by law or any listing
agreement with a national securities exchange or the Nasdaq Stock Market.
5.6 Legal Requirements. Upon the terms and subject to the conditions set
forth in this Agreement, each of the parties agrees to use commercially
reasonable best efforts to take, or cause to be taken, such actions, and to
do, or cause to be done, and to assist and cooperate with the other parties in
doing, such things as are necessary, proper or advisable to consummate and
make effective, as expeditiously as reasonably practicable, the Merger and the
other transactions contemplated by this Agreement, including using reasonable
efforts to accomplish the following: (i) the taking of such reasonable acts as
are necessary to cause the conditions precedent set forth in Article VI to be
satisfied, (ii) the obtaining of all necessary actions or nonactions, waivers,
consents, approvals, orders and authorizations from Governmental Entities and
the making of all necessary registrations, declarations and filings (including
registrations, declarations and filings with Governmental Entities, if any)
and the taking of such reasonable steps as may be necessary to avoid any suit,
claim, action, investigation or proceeding by any Governmental Entity, (iii)
the obtaining of all necessary consents, approvals or waivers from third
parties, (iv) the defending of any suits, claims, actions, investigations or
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, including seeking to
have any stay or temporary restraining order entered by any court or other
Governmental Entity vacated or reversed and (v) the execution or delivery of
any additional instruments necessary to consummate the transactions
contemplated by, and to fully carry out the
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purposes of, this Agreement. In connection with and without limiting the
foregoing, CKS and its Board of Directors shall, if any state takeover statute
or similar statute or regulation is or becomes applicable to the Merger, this
Agreement or any of the transactions contemplated by this Agreement, use
commercially reasonable best efforts to ensure that the Merger and the other
transactions contemplated by this Agreement may be consummated as promptly as
practicable on the terms contemplated by this Agreement and otherwise to
minimize the effect of such statute or regulation on the Merger, this
Agreement and the transactions contemplated hereby. Notwithstanding anything
herein to the contrary, nothing in this Agreement shall be deemed to require
USWeb or CKS or any subsidiary or affiliate thereof to agree to any
divestiture by itself or any of its affiliates of shares of capital stock or
of any business, assets or property, or the imposition of any material
limitation on the ability of any of them to conduct their businesses or to own
or exercise control of such assets, properties and stock.
5.7 Third Party Consents. As soon as practicable following the date hereof,
USWeb and CKS will each use its commercially reasonable best efforts to obtain
all material consents, waivers and approvals under any of its or its
subsidiaries' agreements, contracts, licenses or leases required to be
obtained in connection with the consummation of the transactions contemplated
hereby.
5.8 FIRPTA. At or prior to the Closing, CKS shall deliver to the IRS a
notice that the CKS Common Stock is not a "U.S. Real Property Interest" as
defined and in accordance with the requirements of Treasury Regulation Section
1.897-2(h)(2).
5.9 Notification of Certain Matters. CKS shall give prompt notice to USWeb
of any representation or warranty made by it contained in this Agreement
becoming untrue or inaccurate, or any failure of CKS to comply with or satisfy
in any material respect any covenant, condition or agreement to be complied
with or satisfied by it under this Agreement, in each case, such that, if
uncured, the conditions set forth in Section 6.3(a) or 6.3(b) would not be
satisfied; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement. USWeb shall
give prompt notice to CKS of any representation or warranty made by it or
Merger Sub contained in this Agreement becoming untrue or inaccurate, or any
failure of USWeb or Merger Sub to comply with or satisfy in any material
respect any covenant, condition or agreement to be complied with or satisfied
by it under this Agreement, in each case, such that, if uncured, the
conditions set forth in Section 6.2(a) or 6.2(b) would not be satisfied;
provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement.
5.10 Regulatory Filings; Reasonable Efforts. As soon as may be reasonably
practicable, CKS and USWeb each shall file with the United States Federal
Trade Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice ("DOJ") Notification and Report Forms relating to the
transactions contemplated herein as required by the HSR Act, as well as
comparable pre-merger notification forms required by the merger notification
or control laws and regulations of any applicable jurisdiction, as agreed to
by the parties. CKS and USWeb each shall promptly (a) supply the other with
any information which may be required in order to effectuate such filings and
(b) supply any additional information which reasonably may be required by the
FTC, the DOJ or the competition or merger control authorities of any other
jurisdiction and which the parties may reasonably deem appropriate.
5.11 Stock Options and Employee Benefits.
(a) At the Effective Time, each outstanding option to purchase shares of CKS
Common Stock (each a "CKS Stock Option") under the CKS Stock Plans, whether or
not exercisable, will be assumed by USWeb. Each CKS Stock Option so assumed by
USWeb under this Agreement will continue to have, and be subject to, the same
terms and conditions set forth in the applicable CKS Stock Plan immediately
prior to the Effective Time (including, without limitation, any repurchase
rights), except that (i) each CKS Stock Option will be exercisable (or will
become exercisable in accordance with its terms) for that number of whole
shares
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of USWeb Common Stock equal to the product of the number of shares of CKS
Common Stock that were issuable upon exercise of such CKS Stock Option
immediately prior to the Effective Time multiplied by the Exchange Ratio,
rounded down to the nearest whole number of shares of USWeb Common Stock, and
(ii) the per share exercise price for the shares of USWeb Common Stock
issuable upon exercise of such assumed CKS Stock Option will be equal to the
quotient determined by dividing the exercise price per share of CKS Common
Stock at which such CKS Stock Option was exercisable immediately prior to the
Effective Time by the Exchange Ratio, rounded up to the nearest whole cent.
After the Effective Time, USWeb will issue to each holder of an outstanding
CKS Stock Option a notice describing the foregoing assumption of such CKS
Stock Option by USWeb. At the Effective Time, each outstanding CKS 1997 ESPP
and 1995 Employee Stock Purchase Plan Option (the "ESPP Options") will be
assumed by USWeb. Each ESPP Option assumed by USWeb will continue to have, and
be subject to, the same terms and conditions set forth in the CKS ESPPs, as
the case may be, immediately prior to the Effective Time, except that (i) each
ESPP Option will become exercisable for shares of USWeb Common Stock, (ii) the
limit on number of shares of USWeb Common Stock that an employee may purchase
pursuant to an assumed ESPP Option shall be equal to two thousand five hundred
(2,500) per purchase period multiplied 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 eighty-five percent (85%) of the lesser of (A)
the quotient of the closing price of a share of CKS Common Stock on the first
day of the 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 ESPP Option is exercised rounded
up to the nearest whole cent.
(b) It is the intent of the parties that the CKS Stock Options assumed by
USWeb shall qualify following the Effective Time as incentive stock options as
defined in Section 422 of the Code to the extent CKS Stock Options qualified
as incentive stock options immediately prior to the Effective Time. It is also
the intent of the parties that the ESPP Options shall qualify, following the
Effective Time as options granted under an employee stock purchase plan as
defined in Section 423 of the Code to the extent the ESPP Options qualified as
such immediately prior to the Effective Time.
(c) USWeb will reserve sufficient shares of USWeb Common Stock for issuance
under Section 5.11(a) and under Section 1.6(c) hereof.
(d) USWeb will, or will cause CKS or the appropriate subsidiary of CKS to
give individuals who are employed by CKS or any of its subsidiaries as of the
Effective Time and who remain employees of CKS or such subsidiary following
the Effective Time (each such employee, an "Affected Employee") full credit to
the extent each such Affected Employee has been credited with service under
each comparable employee benefit plan or arrangement maintained by CKS
immediately prior to the Effective Time for purposes of eligibility, vesting,
benefit, accrual and determination of the level of benefits under each
employee benefit plan or arrangement maintained by USWeb, CKS or any such
subsidiary for such Affected Employees' service with CKS or any affiliate
thereof.
(e) USWeb will make commercially reasonable best efforts to, or will cause
CKS or the appropriate subsidiary of CKS to (i) waive all limitations as to
pre-existing conditions, exclusions and waiting periods with respect to
participation and coverage requirements applicable to the Affected Employees
under any welfare benefit plans that such Affected Employees may be eligible
to participate in after the Effective Time, other than limitations or waiting
periods that are already in effect with respect to such Affected Employees and
that have not been satisfied as of the Effective Time under any welfare plan
maintained for the Affected Employees immediately prior to the Effective Time,
and (ii) provide each Affected Employee with credit for the remaining short
plan year for any co-payments and deductibles paid under each comparable
welfare plan maintained by CKS prior to the Effective Time in satisfying any
applicable deductible or co-payment requirements under any welfare plans that
such Affected Employees are eligible to participate in after the Effective
Time.
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(f) As of the Effective Time, USWeb shall expressly assume and agree to
perform in accordance with their terms, all employment, stay-put and other
compensation agreements then existing between CKS or any subsidiary with any
director, officer or employee thereof, provided such agreements are described
in the CKS Schedules.
(g) USWeb shall make its commercially reasonable best efforts to adopt,
maintain and sponsor for the Affected Employees each employee welfare benefit
plan, as defined in Section 3(1) of ERISA, (excluding any reimbursement
policies, arrangements or programs and any severance plans) that are
maintained and sponsored by CKS as of the Effective Time, that are set forth
on the CKS Schedule under a reference to Section 2.13 of this Agreement (the
"CKS Benefits Plans"), for one (1) year following the date of this Agreement
(the "Benefit Period"); provided, however, that (i) such plans have been
established and maintained in substantial compliance with all applicable laws,
rules and regulations, up to and including the Effective Time, (ii) that the
costs of such plans are not substantially in excess of their historical costs
(as adjusted for price increases reasonably in line with price increases
affecting such products generally), and (iii) the insurance carriers of the
CKS Benefits Plans permit USWeb to adopt, maintain and sponsor such plans. In
the event that the insurance carriers of the CKS Benefits Plans do not permit
USWeb to adopt such plans, or to extend such plans (and related contracts) for
the Affected Employees for the outstanding portion of the Benefit Period which
extends beyond the current plan (contract) year on substantially similar terms
as currently in effect, then USWeb shall not be obligated to maintain such
plans beyond the current plan (contract) year, but shall use commercially
reasonable best efforts to offer a comparable plan (or as reasonably close to
comparable as possible while remaining in line with historical costs).
(h) Subject to the foregoing, from and after the Effective Time, the
Affected Employees shall be eligible to participate in USWeb's employee
benefit plans and arrangements in which similarly situated employees of USWeb
or affiliates of USWeb participate, to the same extent as such similarly
situated employees of USWeb or affiliates of USWeb.
(i) CKS hereby agrees to terminate any and all CKS Employee Plans subject to
Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code")
as well as any and all severance or separation pay, policy, plan or
arrangement prior to the Effective Time.
5.12 Form S-8. USWeb agrees to file a registration statement on Form S-8 for
the shares of USWeb Common Stock issuable with respect to assumed CKS Stock
Options and CKS 1997 ESPP Options no later than two (2) business days after
the Closing Date.
5.13 Indemnification and Insurance.
(a) From and after the Effective Time, USWeb will fulfill and honor and will
cause the Surviving Corporation to fulfill and honor in all respects the
obligations of CKS pursuant to any indemnification agreements between CKS and
its directors and officers as of the Effective Time (the "Indemnified
Parties") and any indemnification provisions under CKS's Certificate of
Incorporation or Bylaws as in effect on the date hereof. The Certificate of
Incorporation and Bylaws of the Surviving Corporation will contain provisions
with respect to exculpation and indemnification that are at least as favorable
to the Indemnified Parties as those contained in the Certificate of
Incorporation and Bylaws of CKS as in effect on the date hereof, which
provisions will not be amended, repealed or otherwise modified for a period of
ten (10) years from the Effective Time in any manner that would adversely
affect the rights thereunder of individuals who, immediately prior to the
Effective Time, were directors, officers, employees or agents of CKS, unless
such modification is required by law.
(b) For a period of six (6) years after the Effective Time, USWeb will
maintain or cause the Surviving Corporation to maintain in effect, if
available, directors' and officers' liability insurance covering those persons
who are currently covered by CKS's directors' and officers' liability
insurance policy on terms comparable to those applicable to the current
directors and officers of CKS; provided, however, that in no event will USWeb
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or the Surviving Corporation be required to expend in excess of two hundred
percent (200%) of the annual premium currently paid by CKS for such coverage
(or such coverage as is available for such two hundred percent (200%) of such
annual premium).
5.14 Nasdaq Listing. USWeb agrees to use its commercially reasonable efforts
to authorize for listing on the Nasdaq National Market the shares of USWeb
Common Stock issuable, and those required to be reserved for issuance, in
connection with the Merger, upon official notice of issuance.
5.15 USWeb Holder Agreement. Set forth in Section 5.15 of the USWeb
Schedules is a list of those persons who may be deemed to be, in USWeb's
reasonable judgment, affiliates of USWeb within the meaning of Rule 145
promulgated under the Securities Act (each a "USWeb Holder"). USWeb will
provide CKS with such information and documents as CKS reasonably requests for
purposes of reviewing such list. USWeb will use its best efforts to deliver or
cause to be delivered to CKS, as promptly as practicable on or following the
date hereof, from each USWeb Holder an executed affiliate agreement in
substantially the form attached hereto as Exhibit D (the "USWeb Holder
Agreement"), each of which will be in full force and effect as of the
Effective Time. USWeb will be entitled to place appropriate legends on the
certificates evidencing any USWeb Common Stock to be received by a USWeb
Holder pursuant to the terms of this Agreement, and to issue appropriate stop
transfer instructions to the transfer agent for the USWeb Common Stock,
consistent with the terms of the USWeb Holder Agreement.
5.16 CKS Holder Agreement. Set forth in Section 5.16 of the CKS Schedules is
a list of those persons who may be deemed to be, in CKS's reasonable judgment,
affiliates of CKS within the meaning of Rule 145 promulgated under the
Securities Act (each a "CKS Holder"). CKS will provide USWeb with such
information and documents as USWeb reasonably requests for purposes of
reviewing such list. CKS will use its best efforts to deliver or cause to be
delivered to USWeb, as promptly as practicable on or following the date
hereof, from each CKS Holder an executed holder agreement in substantially the
form attached hereto as Exhibit E (the "CKS Holder Agreement"), each of which
will be in full force and effect as of the Effective Time. USWeb will be
entitled to place appropriate legends on the certificates evidencing any USWeb
Common Stock to be received by a CKS Holder pursuant to the terms of this
Agreement, and to issue appropriate stop transfer instructions to the transfer
agent for the USWeb Common Stock, consistent with the terms of the CKS Holder
Agreement.
5.17 INTENTIONALLY OMITTED.
5.18 Board of Directors of the Combined Company. The Board of Directors of
USWeb will take all actions within its power to cause the Board of Directors
of USWeb, effective no later than one day following the Effective Time, to
consist of nine persons, seven of whom shall have served on the Board of
Directors of USWeb immediately prior to the Effective Time, and two of whom
shall have served on the Board of Directors of CKS immediately prior to the
Effective Time (including the Chief Executive Officer and the Chief Creative
Officer of CKS as of the date of this Agreement). If, prior to the Effective
Time, any of the CKS or USWeb designees shall decline or be unable to serve as
a CKS or USWeb director, CKS (if such person was designated by CKS) or USWeb
(if such person was designated by USWeb) shall designate another person to
serve in such person's stead, which person shall be reasonably acceptable to
the other party.
5.19 Officers of Combined Company; Executive Committee. At the Effective
Time, the Chief Executive Officer and the Chief Creative Officer of CKS as of
the date of this Agreement will be offered positions as the Chairman of the
Board of USWeb and the Chief Creative Officer of USWeb, respectively. It is
contemplated that the Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer of USWeb shall remain in such positions after the
execution and delivery of this Agreement and that following the Effective Time
an executive committee comprised of senior management from both CKS and USWeb
would be formed to jointly determine the management of USWeb following the
Effective Time; the executive committee would meet regularly to review the
overall strategy, product direction and operations of the combined company.
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5.20 Change of Name; Increase in Authorized Shares. Subject to the terms
hereof, at the USWeb Stockholders' Meeting, USWeb shall propose and recommend
that its Certificate of Incorporation be amended at the Effective Time to
change its name to "Reinvent Communications, Inc." In addition, subject to the
terms hereof, at the USWeb Stockholders' Meeting, USWeb shall propose and
recommend that its Certificate of Incorporation be amended to increase the
authorized number of shares of Common Stock thereunder to 200 million shares,
provided that USWeb may propose and recommend an increase of such lesser
number as in good faith it determines (provided that, subject to the terms
hereof, such lesser number is not less than the number required to issue
shares by virtue of the Merger and the other transactions contemplated
hereby).
5.21 Voting Agreements. CKS and USWeb will use reasonable efforts to deliver
or cause to be delivered to the other party, as promptly as practicable on or
following the date hereof, from each individual listed in Section 5.21 of the
CKS Schedules and the USWeb Schedules, voting agreements in substantially the
forms attached hereto as Exhibit G and Exhibit H, respectively, each of which
shall be and remain in full force and effect through and until the last to
occur of (i) the effective date of any written consent controlling any vote
regarding the Merger or (ii) any stockholder meeting (including adjournments)
at which a vote regarding the Merger is taken.
5.22 Tax-Free Reorganization. USWeb and CKS shall each use its best efforts
to cause the Merger to be treated as a reorganization within the meaning of
Section 368(a) of the Code, and to obtain the opinion of its respective
counsel contemplated by Section 6.1(d). Each party shall make, and shall use
all reasonable efforts to cause those of its respective stockholders that
counsel to the parties reasonably request to make, such representations and
certificates as counsel to the parties shall reasonably request to enable them
to render such opinions.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
adopted, and the Merger shall have been duly approved, by the requisite vote
under applicable law, by the stockholders of CKS; and an increase in the
authorized number of shares of USWeb Common Stock so as to permit the issuance
of shares of USWeb Common Stock by virtue of the Merger, as well as such
issuance, shall have been duly approved by the requisite vote under applicable
law and the rules of the Nasdaq by the stockholders of USWeb.
(b) Registration Statement Effective; Proxy Statement. The SEC shall have
declared the Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding in
respect of the Proxy Statement, shall have been initiated or threatened in
writing by the SEC.
(c) No Order; HSR Act. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger. All waiting
periods under the HSR Act relating to the transactions contemplated hereby
will have expired or terminated early.
(d) Tax Opinions. USWeb and CKS shall each have received written opinions
from their respective counsel, Wilson Sonsini Goodrich & Rosati, Professional
Corporation, and Gray Cary Ware & Freidenrich LLP, to the effect that the
Merger will constitute a reorganization within the meaning of Section 368(a)
of
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the Code; provided, however, that if the counsel to either USWeb or CKS does
not render such opinion, this condition shall nonetheless be deemed to be
satisfied with respect to such party if counsel to the other party renders
such opinion to such party. The parties to this Agreement agree to make
reasonable representations as requested by such counsel for the purpose of
rendering such opinions.
(e) Nasdaq Listing. The shares of USWeb Common Stock issuable to
stockholders of CKS pursuant to this Agreement and such other shares required
to be reserved for issuance in connection with the Merger shall have been
authorized for listing on the Nasdaq National Market upon official notice of
issuance.
(f) Opinion of Accountants. Each of USWeb and CKS shall have received a
letter from PricewaterhouseCoopers LLP and KPMG Peat Marwick LLP, each dated
within two (2) business days prior to the Effective Time, regarding that
firm's concurrence with the conclusions of the management of USWeb and the
conclusions of the management of CKS as to the appropriateness of pooling of
interest accounting for the Merger under Accounting Principles Board Opinion
No. 16, if the Merger is consummated in accordance with this Agreement.
6.2 Additional Conditions to Obligations of CKS. The obligation of CKS to
consummate and effect the Merger shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by CKS:
(a) Representations and Warranties. The representations and warranties of
USWeb and Merger Sub contained in this Agreement shall (i) have been true and
correct in all material respects as of the date of this Agreement and (ii) be
true and correct in all material respects on and as of the Effective Time and
except for changes contemplated by this Agreement and except for those
representations and warranties which address matters only as of a particular
date (which shall remain true and correct as of such particular date), with
the same force and effect as if made on and as of the Effective Time, and in
the case of clauses (i) and (ii) in this Section 6.2(a) (other than with
respect to the representations in Sections 3.2, 3.3, 3.18 and 3.22) except for
breaches, inaccuracies and omissions of such representations and warranties
which have neither had nor reasonably would be expected to have a Material
Adverse Effect on USWeb. CKS shall have received a certificate with respect to
the foregoing signed on behalf of USWeb by the Chief Executive Officer and the
Chief Financial Officer of USWeb.
(b) Agreements and Covenants. USWeb and Merger Sub shall have in all
material respects performed or complied with all agreements and covenants
required by this Agreement to be performed or complied with by them on or
prior to the Effective Time, and CKS shall have received a certificate to such
effect signed on behalf of USWeb by the Chief Executive Officer and the Chief
Financial Officer of USWeb.
(c) Fairness Opinion. Goldman Sachs & Co. shall have delivered an opinion to
the Board of Directors of CKS dated as of the date of this Agreement to the
effect that, as of such date, the Exchange Ratio is fair to CKS's stockholders
from a financial point of view.
(d) Material Adverse Effect. Except as set forth in Section 3.7 of the USWeb
Schedules, no Material Adverse Effect (as defined in Section 3.1(d)) with
respect to USWeb shall have occurred since the date of this Agreement.
(e) Holder Agreements. Each of the USWeb affiliates, as "affiliate" is
defined within the meaning of Rule 145 promulgated under the Securities Act,
shall have entered into the USWeb Holder Agreement and each of such agreements
shall be in full force and effect as of the Effective Time.
(f) Consents. USWeb shall have obtained all consents, waivers and approvals
required in connection with the consummation of the transactions contemplated
hereby in connection with the agreements, contracts, licenses or leases set
forth in Section 6.2(f) of the USWeb Schedules.
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6.3 Additional Conditions to the Obligations of USWeb and Merger Sub. The
obligations of USWeb and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction at or prior to the Effective Time of each of
the following conditions, any of which may be waived, in writing, exclusively
by USWeb:
(a) Representations and Warranties. The representations and warranties of
CKS contained in this Agreement shall (i) have been true and correct in all
material respects as of the date of this Agreement, and (ii) be true and
correct in all material respects on and as of the Effective Time except for
changes contemplated by this Agreement and except for those representations
and warranties which address matters only as of a particular date (which shall
remain true and correct as of such particular date), with the same force and
effect as if made on and as of the Effective Time, and in the case of clauses
(i) and (ii) in this Section 6.3(a), (other than the representations in
Sections 2.2, 2.3, 2.19 and 2.23) except for such breaches, inaccuracies or
omissions of such representations and warranties which have neither had nor
reasonably would be expected to have a Material Adverse Effect on CKS. USWeb
shall have received a certificate with respect to the foregoing signed on
behalf of CKS by the Chief Executive Officer and the Chief Financial Officer
of CKS.
(b) Agreements and Covenants. CKS shall have in all material respects
performed or complied with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the Effective
Time, and USWeb shall have received a certificate to such effect signed on
behalf of CKS by the Chief Executive Officer and the Chief Financial Officer
of CKS.
(c) Fairness Opinion. Morgan Stanley & Co. Incorporated shall have delivered
an opinion to the Board of Directors of USWeb as of the date of this
Agreement, to the effect that, as of such date, the Exchange Ratio is fair to
USWeb's stockholders from a financial point of view.
(d) Non-Competition Agreements. Mark D. Kvamme and Thomas K. Suiter shall
have entered into a non-competition agreement with USWeb or Merger Sub in the
form attached hereto as Exhibit F, and such agreements shall be in full force
and effect.
(e) Material Adverse Effect. Except as set forth in Section 2.7 of the CKS
Schedules, no Material Adverse Effect (as defined in Section 2.1(d)) with
respect to CKS shall have occurred since the date of this Agreement.
(f) Holder Agreements. Each of the CKS affiliates, as "affiliate" is defined
within the meaning of Rule 145 promulgated under the Securities Act, shall
have entered into the CKS Holder Agreement and each of such agreements shall
be in full force and effect as of the Effective Time.
(g) Consents. CKS shall have obtained all consents, waivers and approvals
required in connection with the consummation of the transactions contemplated
hereby in connection with the agreements, contracts, licenses or leases set
forth on Section 6.3(g) of the CKS Schedules.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time of the Merger, whether before or after approval of the Merger
by the stockholders of CKS or the approval of the issuance of USWeb Common
Stock in connection with the Merger by the stockholders of USWeb:
(a) by mutual written consent duly authorized by the Boards of Directors of
USWeb and CKS;
(b) by either CKS or USWeb if the Merger shall not have been consummated by
February 28, 1999; provided, however, that the right to terminate this
Agreement under this Section 7.1(b) shall not be available to any party whose
action or failure to act has been a principal cause of or resulted in the
failure of the Merger
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to occur on or before such date and such action or failure to act constitutes
a breach of this Agreement; and provided further, that such date may be
extended by up to ninety (90) days by either party by written notice to the
other party if the 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.
(c) by either CKS or USWeb if a Governmental Entity shall have issued an
order, decree or ruling or taken any other action (an "Order"), in any case
having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger, which order, decree or ruling is final and
nonappealable;
(d) by either CKS or USWeb if the required approvals of the stockholders of
CKS contemplated by this Agreement shall not have been obtained by reason of
the failure to obtain the required vote upon a vote taken at a meeting of the
CKS stockholders, duly convened therefor or at any adjournment thereof
(provided that the right to terminate this Agreement under this Section 7.1(d)
shall not be available to CKS where the failure to obtain CKS Stockholder
Approval of such party shall have been caused by the action or failure to act
of CKS and such action or failure to act constitutes a material breach by CKS
of this Agreement);
(e) by either CKS or USWeb if the required approval of the stockholders of
USWeb contemplated by this Agreement shall not have been obtained by reason of
the failure to obtain the required vote at a meeting of USWeb stockholders
duly convened therefor or at any adjournment thereof (provided that the right
to terminate this Agreement under this Section 7.1(e) shall not be available
to USWeb where the failure to obtain USWeb Stockholder Approval shall have
been caused by the action or failure to act of USWeb and such action or
failure to act constitutes a material breach by USWeb of this Agreement);
(f) by USWeb if (i) the Board of Directors of CKS or any committee thereof
shall have withdrawn or modified in a manner adverse to USWeb its approval or
recommendation of the Merger or this Agreement, (ii) CKS shall have failed to
include in the Proxy Statement the recommendation of the Board of Directors of
CKS in favor of approval of the Merger and this Agreement, (iii) in connection
with a Rule 14d9 disclosure, the Board of Directors of CKS shall have taken
any action other than a rejection of a Rule 14d-9 proposal, (iv) the Board of
Directors of CKS or any committee thereof shall have recommended any CKS
Alternative Proposal or (v) the Board of Directors of CKS or any committee
thereof shall have resolved to do any of the foregoing;
(g) by CKS if (i) the Board of Directors of USWeb or any committee thereof
shall have withdrawn or modified in a manner adverse to CKS its recommendation
of approval of the issuance of shares of USWeb Common Stock pursuant to the
Merger, (ii) USWeb shall have failed to include in the Proxy Statement the
recommendation of the Board of Directors of USWeb in favor of approval of the
issuance of shares of USWeb Common Stock pursuant to the Merger, (iii) in
connection with a Rule 14d-9 disclosure, the Board of Directors of USWeb shall
have taken any action other than a rejection of the Rule 14d-9 proposal, (iv)
the Board of Directors of USWeb or any committee thereof shall have
recommended any USWeb Alternative Proposal or (v) the Board of Directors of
USWeb or any committee thereof shall have resolved to do any of the foregoing;
(h) by CKS at any time prior to the approval of the Merger by CKS
stockholders and, in the case of any CKS Superior Proposal other than a CKS
Superior Proposal involving the filing of a Registration Statement on Form S-
4, following the earlier of (i) three (3) days following the date the
Registration Statement is declared effective pursuant to the Securities Act by
the SEC or (ii) sixty (60) days following the date hereof, if the Board of
Directors of CKS recommends a CKS Superior Proposal to the stockholders of
CKS;
(i) by CKS, upon a breach of any representation, warranty, covenant or
agreement on the part of USWeb set forth in this Agreement, or if any
representation or warranty of USWeb shall have become untrue, in either case
such that the conditions set forth in Section 6.2(a) or Section 6.2(b) would
not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided that
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CKS may not terminate this Agreement under this Section 7.1(i) if such
inaccuracy in USWeb's representations and warranties or breach by USWeb is
curable by USWeb through the exercise of its commercially reasonable best
efforts prior to February 28, 1999, provided USWeb continues to exercise
commercially reasonable best efforts to cure such breach (it being understood
that CKS may not terminate this Agreement pursuant to this paragraph (i) if it
shall have materially breached this Agreement or if such breach by USWeb is
cured prior to February 28, 1999);
(j) by USWeb, upon a breach of any representation, warranty, covenant or
agreement on the part of CKS set forth in this Agreement, or if any
representation or warranty of CKS shall have become untrue, in either case
such that the conditions set forth in Section 6.2(a) or Section 6.2(b) would
not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided that USWeb may
not terminate this Agreement under Section 7.1(k) if such inaccuracy in CKS's
representations and warranties or breach by CKS is curable by CKS through the
exercise of its commercially reasonable best efforts prior to February 28,
1999, provided CKS continues to exercise commercially reasonable best efforts
to cure such breach (it being understood that USWeb may not terminate this
Agreement pursuant to this paragraph (j) if it shall have materially breached
this Agreement or if such breach by CKS is cured prior to February 28, 1999);
or
(k) By USWeb at any time prior to the approval of the Merger by USWeb
stockholders and, in the case of any USWeb Superior Proposal other than a
USWeb Superior Proposal involving the filing of a Registration Statement on
Form S-4, following the earlier of (i) three days following the date the
Registration Statement is declared effective pursuant to the Securities Act by
the SEC or (ii) sixty days following the date hereof, if the Board of
Directors of USWeb recommends a USWeb Superior Proposal to the stockholders of
USWeb.
7.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon the
delivery of written notice of the terminating party to the other parties
hereto. In the event of the termination of this Agreement as provided in
Section 7.1, this Agreement shall be of no further force or effect, except (i)
as set forth in this Section 7.2, Section 7.3 and Article 8 (Miscellaneous),
each of which shall survive the termination of this Agreement, and (ii)
nothing herein shall relieve any party from liability for any breach of this
Agreement. No termination of this Agreement shall affect the obligations of
the parties contained in the Confidentiality Agreement or the Stock Option
Agreements, all of which obligations shall survive termination of this
Agreement in accordance with their terms.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses whether or not the
Merger is consummated; provided, however, that USWeb and CKS shall share
equally all fees and expenses, other than attorneys' and accountants' fees and
expenses, incurred in relation to the printing and filing of the Proxy
Statement (including any preliminary materials related thereto) and the
Registration Statement (including financial statements and exhibits) and any
amendments or supplements thereto.
(b) CKS Payments. In the event that this Agreement is terminated by USWeb
pursuant to Section 7.1(f) or CKS pursuant to Section 7.1(h), CKS shall
promptly, but in no event later than two (2) days after the date of such
termination, pay USWeb a fee equal to $12 million in immediately available
funds (the "CKS Termination Fee"). If this Agreement shall be terminated by
any party hereto pursuant to Section 7.1(d) and prior to such termination an
Alternative Proposal shall have been publicly announced or otherwise publicly
disclosed, and prior to the date twelve (12) months following the date of the
termination of this Agreement either (i) a CKS Acquisition (as hereinafter
defined) shall be consummated or (ii) CKS shall enter into an Acquisition
Agreement providing for a CKS Acquisition, then CKS shall pay to USWeb the CKS
Termination Fee in immediately available funds in the case of clause (i)
concurrently with the consummation of such CKS Acquisition or in the case of
clause (ii) one half of the CKS Termination Fee concurrently with
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the execution of such Acquisition Agreement and the remaining half of the CKS
Termination Fee upon the consummation of any CKS Acquisition occurring with
twelve (12) months following such execution. CKS acknowledges that the
agreements contained in this Section 7.3(b) are an integral part of the
transactions contemplated by this Agreement, and that, without these
agreements, USWeb would not enter into this Agreement; accordingly, if CKS
fails promptly to pay the amounts due pursuant to this Section 7.3(b), and, in
order to obtain such payment, USWeb commences a suit which results in a
judgment against CKS for the amounts set forth in this Section 7.3(b) and such
judgment is not set aside or reversed, CKS shall pay to USWeb its reasonable
costs and expenses (including attorneys' fees and expenses) in connection with
such suit, together with interest on the amounts set forth in this Section
7.3(b) at the prime rate of The Chase Manhattan Bank in effect on the date
such payment was required to be made. "CKS Acquisition" shall mean any of the
following transactions or series of related transactions: (i) a merger,
consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving CKS pursuant to which the
stockholders of CKS immediately preceding such transaction or series of
related transactions hold less than 50% of the equity interests in the
surviving or resulting entity of such transaction or transactions (without
respect to any overlap in the companies' stockholder bases) (other than the
transactions contemplated by this Agreement); (ii) a sale or other disposition
by CKS of assets (excluding inventory and used equipment sold in the ordinary
course of business) representing in excess of 50% of the fair market value of
CKS's business immediately prior to such sale; or (iii) the acquisition by any
person or group (including by way of a tender offer or an exchange offer or
issuance by CKS), directly or indirectly, of beneficial ownership or a right
to acquire beneficial ownership of 50% or more of the then outstanding shares
of capital stock of CKS.
(c) Payment of fees described in Sections 7.3(b) and (d) shall not be in
lieu of damages incurred in the event of material and willful breach of this
Agreement.
(d) USWeb Payments. In the event that this Agreement is terminated by CKS
pursuant to Section 7.1(g) or by USWeb pursuant to Section 7.1(k), USWeb shall
promptly, but in no event later than two (2) days after the date of such
termination, pay CKS a fee equal to $12 million in immediately available funds
(the "USWeb Termination Fee"). If this Agreement shall be terminated by any
party hereto pursuant to Section 7.1(e) and prior to the time of the
occurrence of the event entitling such party to terminate this Agreement
pursuant to such provision a USWeb Contingent Proposal shall have been
publicly announced or otherwise publicly disclosed, and prior to the date
twelve (12) months following the date of the termination of this Agreement
either (i) the transaction contemplated by such USWeb Contingent Proposal
shall be consummated or (ii) USWeb shall enter into a written agreement
providing for the consummation of the transaction contemplated by such USWeb
Contingent Proposal, then USWeb shall pay to CKS the USWeb Termination Fee in
immediately available funds, in the case of clause (i) concurrently with the
consummation of the transaction contemplated by such USWeb Contingent Proposal
and in the case of clause (ii) one half of the USWeb Termination Fee
concurrently with the execution of such agreement and the remaining half of
the USWeb Termination Fee upon the consummation of the transaction
contemplated by such agreement. USWeb acknowledges that the agreements
contained in this Section 7.3(d) are an integral part of the transactions
contemplated by this Agreement, and that, without these agreements, CKS would
not enter into this Agreement; accordingly, if USWeb fails promptly to pay the
amounts due pursuant to this Section 7.3(d), and, in order to obtain such
payment, CKS commences a suit which results in a judgment against USWeb for
the amounts set forth in this Section 7.3(d) and such judgment is not set
aside or reversed, USWeb shall pay to CKS its reasonable costs and expenses
(including attorneys' fees and expenses) in connection with such suit,
together with interest on the amounts set forth in this Section 7.3(d) at the
prime rate of The Chase Manhattan Bank in effect on the date such payment was
required to be made. Payment of the fees described in this Section 7.3(d)
shall not be in lieu of damages incurred in the event of material and willful
breach of this Agreement. "USWeb Contingent Proposal" shall mean a USWeb
Proposal, which proposal is and is publicly disclosed to be contingent upon
the issuance of shares of USWeb Common Stock pursuant to the Merger not being
approved by the stockholders of USWeb or the Merger otherwise not being
consummated.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of the parties hereto.
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7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto
and (iii) waive compliance with any of the agreements or conditions for the
benefit of such party contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. Delay in exercising any
right under this Agreement shall not constitute a waiver of such right.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations and
warranties of CKS, USWeb and Merger Sub contained in this Agreement shall
terminate at the Effective Time, and only the covenants that by their terms
survive the Effective Time shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at
the following addresses or telecopy numbers (or at such other address or
telecopy number for a party as shall be specified by like notice):
(a) if to USWeb or Merger Sub, to:
USWeb Corporation
2880 Lakeside Drive, Suite 300
Santa Clara, California 95054
Attention: Chief Executive Officer
Telephone No.: (408) 987-3200
Telecopy No.: (408) 987-3240
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Mark Bonham
Telephone No.: (650) 493-9300
Telecopy No.: (650) 493-6811
(b) if to CKS, to:
CKS Group, Inc.
10441 Bandley Drive
Cupertino, California 95014
Attention: Chief Executive Officer
Telephone No.: (408) 366-5100
Telecopy No.: (408) 366-5120
with a copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Ave.
Palo Alto, California 94304
Attention: Rod J. Howard
Telephone No.: (650) 833-2496
Telecopy No.: (650) 327-3699
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8.3 Interpretation; Knowledge.
(a) When a reference is made in this Agreement to Exhibits, such reference
shall be to an Exhibit to this Agreement unless otherwise indicated. The words
"include," "includes" and "including" when used herein shall be deemed in each
case to be followed by the words "without limitation." The table of contents
and headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
When reference is made herein to "the business of" an entity, such reference
shall be deemed to include the business of all direct and indirect
subsidiaries of such entity. Reference to the subsidiaries of an entity shall
be deemed to include all direct and indirect subsidiaries of such entity.
(b) For purposes of this Agreement, the term "knowledge" means, with respect
to any matter in question, (i) as to CKS, that any of the Chief Executive
Officer, Chief Operating Officer, Chief Financial Officer, Chief Technology
Officer, Director of Finance, Executive Vice President of West Coast
Operations and Executive Vice President of CKS and (ii) as to USWeb, that any
of the Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer and Chief Technology Officer of USWeb, as the case may be, have actual
knowledge of such matter.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including CKS Schedules and the USWeb
Schedules (a) constitute the entire agreement among the parties with respect
to the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, it being understood that the Confidentiality Agreement
shall continue in full force and effect until the Effective Time and shall
survive any termination of this Agreement; and (b) are not intended to confer
upon any other person any rights or remedies hereunder, except with respect to
the matters set forth in Section 5.13.
8.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions hereof
in any court of the United States or any state having jurisdiction, this being
in addition to any other remedy to which they are entitled at law or in
equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law
thereof; provided that issues involving the corporate governance of any of the
parties hereto
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shall be governed by their respective jurisdictions of incorporation. Each of
the parties hereto irrevocably consents to the exclusive jurisdiction of any
state or federal court within the Northern District of California, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, other than issues involving the corporate
governance of any of the parties hereto, agrees that process may be served
upon them in any manner authorized by the laws of the State of California for
such persons and waives and covenants not to assert or plead any objection
which they might otherwise have to such jurisdiction and such process.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule
of construction providing that ambiguities in an agreement or other document
will be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the parties. Subject to the preceding sentence, this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
USWEB CORPORATION
/s/ Joseph Firmage
By: _________________________________
Name: Joseph Firmage
Title: Chief Executive Officer and
Chairman of the Board
USWEB ACQUISITION CORPORATION 134
/s/ Carolyn V. Aver
By: _________________________________
Name: Carolyn V. Aver
Title: Executive Vice President and
Chief Financial Officer
CKS GROUP, INC.
/s/ Mark D. Kvamme
By: _________________________________
Name: Mark D. Kvamme
Title: Chief Executive Officer and
Chairman of the Board
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EXHIBIT A
CKS STOCK OPTION AGREEMENT
THIS CKS STOCK OPTION AGREEMENT dated as of September 1, 1998 (the
"Agreement") is entered into by and between USWeb Corporation, a Delaware
corporation ("USWeb"), and CKS Group, Inc., a Delaware corporation ("CKS").
RECITALS
Concurrently with the execution and delivery of this Agreement, CKS, USWeb
and USWeb Acquisition Corporation 134, a Delaware corporation and a wholly
owned subsidiary of USWeb ("Merger Sub"), are entering into an Agreement and
Plan of Reorganization (the "Merger Agreement"), which provides that, among
other things, upon the terms and subject to the conditions thereof, Merger Sub
will be merged with and into CKS (the "Merger") with CKS continuing as the
surviving corporation and as a wholly owned subsidiary of USWeb.
As a condition and inducement to USWeb's willingness to enter into the
Merger Agreement, USWeb has required that CKS agree, and CKS has so agreed, to
grant to USWeb an option to acquire shares of CKS Common Stock, par value
$0.001 per share ("CKS Common Stock") upon the terms and subject to the
conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. Grant of Option
On the terms and subject to the conditions set forth in this Agreement, CKS
hereby grants to USWeb an irrevocable option (the "Option") to acquire a
number of the authorized but unissued shares of CKS Common Stock (the "Option
Shares") equal to 19.9% of the number of shares of CKS Common Stock issued and
outstanding on the date the Option is first exercised for any Option Shares,
in the manner set forth below, at a price per share equal to the lower of (i)
the Exchange Ratio (as defined in the Merger Agreement) times closing price of
USWeb Common Stock on the last trading day before the date of this Agreement
or (ii) the average closing price of CKS Common Stock on the five trading days
immediately prior to the first public announcement or disclosure of a CKS
Alternative Proposal (as defined in the Merger Agreement) (the "Exercise
Price"), payable in cash. Capitalized terms used in this Agreement but not
defined herein shall have the meanings ascribed thereto in the Merger
Agreement.
2. Exercise of Option
The Option may only be exercised by USWeb, in whole or in part, at any time
or from time to time, from and after (i) the commencement of a tender or
exchange offer for 25% or more of any class of CKS's capital stock, or (ii)
the failure to obtain the required vote of CKS stockholders for approval of
the Merger and approval and adoption of the Merger Agreement upon a vote taken
at a meeting of CKS stockholders duly convened therefor (or at any adjournment
thereof) if at the time of such failure a CKS Alternative Proposal (as defined
in the Merger Agreement) shall have been publicly announced or otherwise
publicly disclosed, or (iii) the occurrence of any of the events specified in
Sections 7.1(f) or 7.1(h) of the Merger Agreement (any of the events specified
in clauses (i), (ii) and (iii) of this sentence being referred to herein as an
"Exercise Event"). In the event USWeb wishes to exercise the Option, USWeb
shall deliver to CKS a
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written notice (an "Exercise Notice") specifying the total number of Option
Shares it wishes to acquire. Each closing of a purchase of Option Shares
hereunder (a "Closing") shall occur on a date and at a time designated by
USWeb in an Exercise Notice delivered to CKS at least five (5) business days
prior to the date of such Closing, which Closing shall be held at the offices
of counsel to USWeb. The Option shall terminate upon the earliest to occur of
(i) the Effective Time, (ii) sixty (60) days following the termination of the
Merger Agreement pursuant to Article VII thereof, if an Exercise Event shall
have occurred on or prior to the date of such termination, (iii) the date on
which the Merger Agreement is terminated pursuant to Article VII thereof if an
Exercise Event shall not have occurred on or prior to such date, and (iv) the
termination of the Merger Agreement pursuant to Section 7.1(a) or 7.1(c)
thereof; provided, however, with respect to the preceding clause (ii) of this
sentence, that if the Option cannot be exercised by reason of any applicable
government order or because the waiting period related to the issuance of the
Option Shares under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), if applicable, shall not have expired or been
terminated, then the Option shall not terminate until the tenth business day
after such impediment to exercise shall have been removed or shall have become
final and not subject to appeal. Notwithstanding the foregoing, but subject to
the further limitations set forth in Section 7(a), (i) the Option may not be
exercised if USWeb is in breach in any material respect of any of its
covenants or agreements contained in the Merger Agreement; and (ii) in the
event USWeb receives more than an aggregate of (x) eighteen million dollars
($18,000,000) plus (y) the Exercise Price multiplied by the Number of Option
Shares purchased by USWeb pursuant to the Option minus (z) any amounts paid to
USWeb by CKS pursuant to Section 7.3(b) of the Merger Agreement, in connection
with a sale or other disposition of the Option Shares, all proceeds in excess
of such amount shall be remitted to CKS.
3. Conditions to Closing
The obligation of CKS to issue the Option Shares to USWeb hereunder is
subject to the conditions that (a) any waiting period under the HSR Act
applicable to the issuance of the Option Shares hereunder shall have expired
or been terminated; (b) all consents, approvals, orders or authorizations of,
or registrations, declarations or filings with, any federal, state or local
administrative agency or commission or other federal state or local
governmental authority or instrumentality, if any, required in connection with
the issuance of the Option Shares hereunder shall have been obtained or made,
as the case may be; and (c) no preliminary or permanent injunction or other
order by any court of competent jurisdiction prohibiting or otherwise
restraining such issuance shall be in effect.
4. Closing
At any Closing, (a) CKS shall deliver to USWeb a single certificate in
definitive form representing the number of Option Shares designated by USWeb
in its Exercise Notice, such certificate to be registered in the name of USWeb
and to bear the legend set forth in Section 11 hereof, and (b) USWeb shall pay
to CKS the aggregate purchase price for the Option Shares so designated and
being purchased by wire transfer of immediately available funds or by delivery
of a certified check or bank check. At any Closing at which USWeb is
exercising the Option in part, USWeb shall present and surrender this
Agreement to CKS, and CKS shall deliver to USWeb an executed new agreement
with the same terms as this Agreement evidencing the right to purchase the
balance of the Option Shares purchasable hereunder.
5. Representations and Warranties of CKS
CKS represents and warrants to USWeb that (a) CKS is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder; (b) the execution and
delivery of this Agreement by CKS and consummation by CKS of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of CKS and no other corporate proceedings on the part of
CKS are necessary to authorize this Agreement or any of the transactions
contemplated hereby; (c) this Agreement has been duly executed and delivered
by CKS and constitutes a legal, valid and binding
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obligation of CKS and, assuming this Agreement constitutes a legal, valid and
binding obligation of USWeb, is enforceable against CKS in accordance with its
terms, except as enforceability may be limited by bankruptcy and other laws
affecting the rights and remedies of creditors generally and general
principles of equity; (d) except for any filings as may be required under the
HSR Act and foreign antitrust or similar laws, CKS has taken all necessary
corporate and other action to authorize and reserve for issuance and to permit
it to issue upon exercise of the Option, and at all times from the date hereof
until the termination of the Option will have reserved for issuance, a
sufficient number of unissued Option Shares for USWeb to exercise the Option
in full and will take all necessary corporate or other action to authorize and
reserve for issuance all additional Option Shares or other securities which
may be issuable pursuant to Section 10 upon exercise of the Option, all of
which, upon their issuance and delivery in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable; (e) upon
delivery of the Option Shares and any other securities to USWeb upon exercise
of the Option, USWeb will acquire such Option Shares or other securities free
and clear of all material claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever, excluding those imposed by USWeb;
(f) the execution and delivery of this Agreement by CKS does not, and the
performance of this Agreement by CKS will not, (i) violate the Certificate of
Incorporation or Bylaws of CKS, (ii) conflict with or violate any order
applicable to CKS or any of its subsidiaries or by which they or any of their
property is bound or (iii) result in any breach of or constitute a default (or
an event which with notice or lapse of time or both would become a default)
under, or give rise to any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the property or assets of CKS or any of its subsidiaries pursuant to, any
contract or agreement to which CKS or any of its subsidiaries is a party or by
which CKS or any of its subsidiaries or any of their property is bound,
except, in the case of clauses (ii) and (iii) above, for violations,
conflicts, breaches, defaults, rights of termination, amendment, acceleration
or cancellation, liens or encumbrances which would not, individually or in the
aggregate, have a Material Adverse Effect on CKS; and (g) the execution and
delivery of this Agreement by CKS does not, and the performance of this
Agreement by CKS will not, require any consent, approval, authorization or
permit of, or filing with, or notification to, any Governmental Entity except
as may be required pursuant to the HSR Act, foreign antitrust or similar laws,
and Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
6. Representations and Warranties of USWeb
USWeb represents and warrants to CKS that (a) USWeb is a corporation duly
incorporated, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder; (b) the execution and
delivery of this Agreement by USWeb and the consummation by USWeb of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of USWeb and no other corporate proceedings on
the part of USWeb are necessary to authorize this Agreement or any of the
transactions contemplated hereby; (c) this Agreement has been duly executed
and delivered by USWeb and constitutes a legal, valid and binding obligation
of USWeb and, assuming this Agreement constitutes a legal, valid and binding
obligation of CKS, is enforceable against USWeb in accordance with its terms,
except as enforceability may be limited by bankruptcy and other laws affecting
the rights and remedies of creditors generally and general principles of
equity; (d) the execution and delivery of this Agreement by USWeb do not, and
the performance of this Agreement by USWeb will not, (i) violate the
Certificate of Incorporation or Bylaws of USWeb, (ii) conflict with or violate
any order applicable to USWeb or any of its subsidiaries or by which they or
any of their property is bound or (iii) result in any breach of or constitute
a default (or an event which with notice or lapse of time or both would become
a default) under, or give rise to any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the property or assets of USWeb or any of its
subsidiaries pursuant to, any contract or agreement to which USWeb or any of
its subsidiaries is a party or by which USWeb or any of its subsidiaries or
any of their property is bound, except, in the case of clauses (ii) and (iii)
above, for violations, conflicts, breaches, defaults, rights of termination,
amendment, acceleration or cancellation, liens or encumbrances which would
not, individually or in the aggregate, have a Material Adverse Effect on
USWeb; (e) the execution and delivery of
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this Agreement by USWeb does not, and the performance of this Agreement by
USWeb will not, require any consent, approval, authorization or permit of, or
filing with or notification to, any Governmental Entity except as may be
required pursuant to the HSR Act, foreign antitrust or similar laws, and
Section 13(d) of the Exchange Act; and (f) any Option Shares acquired upon
exercise of the Option will not be acquired by USWeb with a view to the public
distribution thereof and USWeb will not sell or otherwise dispose of such
shares in violation of applicable law or this Agreement.
7. Certain Rights
(a) Put. At the request of USWeb at any time during the period during which
the Option is exercisable pursuant to Section 2, provided that an event
specified in Sections 7.1(f) or 7.1(h) of the Merger Agreement shall have
occurred and the CKS Termination Fee (as defined in the Merger Agreement) has
become payable pursuant to Section 7.3(b) of the Merger Agreement (the
"Purchase Period"), CKS (or any successor entity thereof) shall purchase from
USWeb the Option Shares, if any, acquired by USWeb pursuant to this Agreement,
at a price equal to the sum of (i) the Exercise Price paid by USWeb for the
Option Shares acquired pursuant to the Option plus (ii) the difference between
the "Market Price" for such Option Shares as of the date USWeb gives notice of
its intent to exercise its rights under this Section 7(a) and such Exercise
Price (but only if the Market Price is greater than the Exercise Price),
multiplied by the number of Option Shares so purchased. Notwithstanding any
other provision of this Agreement, CKS shall not be required pursuant to this
Section 7 to pay USWeb any amount in excess of an aggregate of (x) twelve
million dollars ($12,000,000) plus (y) the Exercise Price paid by USWeb for
the Option Shares acquired pursuant to the Option minus (z) any amounts paid
to USWeb by CKS pursuant to Sections 7.3(b) of the Merger Agreement. For
purpose of this Section 7(a), "Market Price" means the average closing sale
price of CKS Common Stock on the Nasdaq National Market during the five (5)
trading days ending on the trading day immediately preceding such date).
(b) Payment and Redelivery of Option or Shares. In the event USWeb exercises
its rights under Section 7(a), CKS shall, within ten (10) business days after
USWeb delivers notice pursuant to Section 7(a) (which notice may be delivered
prior to consummation of the exercise of the Option), pay the required amount
to USWeb in immediately available funds and USWeb shall surrender to CKS the
certificates evidencing the Option Shares purchased by USWeb pursuant thereto,
and USWeb shall represent and warrant that such shares are then free and clear
of all claims, liens, charges, encumbrances and security interests of any kind
or nature whatsoever.
8. Certain Restrictions
(a) Restrictions on Transfer. Prior to the fifth anniversary of the date
hereof (the "Expiration Date"), USWeb shall not directly or indirectly, by
operation of law or otherwise, sell, assign, pledge, or otherwise dispose of
or transfer any shares of capital stock of CKS acquired by USWeb pursuant to
this Agreement, ("Restricted Shares"), other than (i) pursuant to Section 7 or
(ii) in accordance with Sections 8(b) or 9.
(b) Permitted Sales. Following the termination of the Merger Agreement,
USWeb shall be permitted to sell any Restricted Shares beneficially owned by
it if such sale is made (i) pursuant to a tender or exchange offer or other
business combination transaction that has been approved or recommended, or
otherwise determined to be fair to and in the best interests of the holders of
CKS Common Stock, by a majority of the members of the Board of Directors of
CKS, or (ii) subject to Section 8(c) or (d) as the case may be, to a person
who, immediately following such sale, would beneficially own (within the
meaning of Rule 13d-3 promulgated under the Exchange Act), either alone or as
part of a "group" (as used in Rule 13d-5 under the Exchange Act), not more
than ten percent (10%) of CKS's outstanding voting securities, which person is
a passive institutional investor who would be eligible under Rule 13d-1(b)(1)
under the Exchange Act to report such holdings of Restricted Shares on
Schedule 13G under the Exchange Act.
(c) CKS's Right of First Refusal. At any time after the first occurrence of
a Exercise Event and prior to the Expiration Date, if USWeb shall desire to
sell, assign, transfer or otherwise dispose of all or any of the
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Option Shares acquired pursuant to this Agreement, it shall give CKS written
notice of the proposed transaction (an "USWeb Offer Notice"), identifying the
proposed transferee, accompanied by a copy of a binding offer to purchase such
shares or other securities signed by such transferee and setting forth the
terms of the proposed transaction. A USWeb Offer Notice shall be deemed an
offer by USWeb to CKS, which may be accepted within five (5) business days of
the receipt of such USWeb Offer Notice, on the same terms and conditions and
at the same price at which USWeb is proposing to transfer such shares or other
securities to such transferee. The purchase of any such shares or other
securities by CKS shall be settled within five (5) business days of the date
of the acceptance of the offer and the purchase price shall be paid to USWeb
in immediately available funds. In the event of the failure or refusal of CKS
to purchase all the shares or other securities covered by a USWeb Offer
Notice, USWeb may sell all, but not less than all, of such shares or other
securities to the proposed transferee at no less than the price specified and
on terms no more favorable to the transferee than those set forth in the USWeb
Offer Notice as long as such sale is completed within ninety (90) days of the
receipt by CKS of the applicable USWeb Offer Notice; provided that the
provisions of this sentence shall not limit the rights USWeb may otherwise
have in the event CKS has accepted the offer contained in the USWeb Offer
Notice and wrongfully refuses to purchase the shares or other securities
subject thereto.
(d) Additional Restrictions. Prior to any permitted sales of any Restricted
Shares under Section 8(b)(ii), the holder thereof shall give written notice to
the issuer of such Restricted Shares of its intention to effect such transfer.
Each such notice shall describe the manner of the proposed transfer and, if
requested by the issuer of such Restricted Shares, shall be accompanied by an
opinion of counsel satisfactory to such issuer (it being agreed that each of
Gray Cary Ware & Freidenrich LLP, and Wilson Sonsini Goodrich & Rosati,
Professional Corporation, shall be satisfactory) to the effect that such sale
may be effected without registration under the Securities Act and any
applicable state securities laws. Each certificate for Restricted Shares
transferred as above provided shall bear the legend set forth in Section 11,
except that such certificate shall not bear such legend if (i) such transfer
is in accordance with the provisions of Rule 144 (or any other rule permitting
public sale without registration under the Securities Act) or (ii) the opinion
of counsel referred to above is to the further effect that the transferee and
any subsequent transferee would be entitled to transfer such securities in a
public sale without registration under the Securities Act and any applicable
state securities laws. The restrictions provided for in this Section 8(d)
shall not apply to securities which are not required to bear the legend
prescribed by Section 11 in accordance with the provisions of this Agreement.
The foregoing restrictions on transferability shall terminate as to any
particular shares when such shares shall have been effectively registered
under the Securities Act and any applicable state securities laws and sold or
otherwise disposed of in accordance with the registration statement covering
such shares.
(e) Voting of Shares. Following the date hereof and prior to the Expiration
Date, USWeb (i) shall vote all Restricted Shares, on each matter submitted to
a vote of the stockholders of CKS, for and against such matter in the same
proportion as all other shares of the same class of capital stock of CKS are
voted (whether by proxy or otherwise) for and against such matter, and (ii)
shall execute written consents with respect to the Restricted Shares in the
same proportion as written consents are executed by other holders of such
class of capital stock of CKS. Before acquiring any Restricted Shares
hereunder, USWeb shall execute and deliver a proxy to CKS authorizing CKS to
vote and execute written consents with respect to all Restricted Shares held
by USWeb in accordance with the provisions of this paragraph.
9. Registration Rights
(a) Following the termination of the Merger Agreement, USWeb may by written
notice (a "Registration Notice") to CKS request CKS to register under the
Securities Act all or any part of the shares acquired by USWeb pursuant to
this Agreement (the "Registrable Securities") in order to permit the sale or
other disposition of such shares pursuant to a bona fide firm commitment
underwritten public offering in which USWeb and the underwriters shall effect
as wide a distribution of such Registrable Securities as is reasonably
practicable and shall use reasonable efforts to prevent any person or group
from purchasing through such offering shares representing more than 1% of the
outstanding shares of Common Stock of CKS
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on a fully diluted basis; provided, however, that any such Registration Notice
must relate to a number of shares equal to at least 2% of the outstanding
shares of Common Stock of CKS on a fully diluted basis and that any rights to
require registration hereunder shall terminate with respect to any shares that
may be sold pursuant to Rule 144(k) under the Securities Act.
(b) CKS shall use commercially reasonable best efforts to effect, as
promptly as practicable, the registration under the Securities Act of the
Registrable Securities; provided, however, that (i) USWeb shall not be
entitled to more than an aggregate of two effective registration statements
hereunder and (ii) CKS will not be required to file any such registration
statement during any period of time (not to exceed 40 days after a
Registration Notice in the case of clause (A) below or 90 days after a
Registration Notice in the case of clauses (B) and (C) below) when (A) CKS is
in possession of material non-public information which it reasonably believes
would be detrimental to be disclosed at such time and, in the written opinion
of counsel to CKS, such information would have to be disclosed if a
registration statement were filed at that time; (B) CKS is required under the
Securities Act to include audited financial statements for any period in such
registration statement and such financial statements are not yet available for
inclusion in such registration statement; or (C) CKS determines, in its
reasonable judgment, that such registration would interfere with any
financing, acquisition or other material transaction involving CKS. If
consummation of the sale of any Registrable Securities pursuant to a
registration hereunder does not occur within 180 days after the filing with
the SEC of the initial registration statement therefor, the provisions of this
Section 9 shall again be applicable to any proposed registration, it being
understood that USWeb shall not be entitled to more than an aggregate of two
effective registration statements hereunder. CKS shall use commercially
reasonable best efforts to cause any Registrable Securities registered
pursuant to this Section 9 to be qualified for sale under the securities or
blue sky laws of such jurisdictions as USWeb may reasonably request and shall
continue such registration or qualification in effect in such jurisdictions;
provided, however, that CKS shall not be required to qualify to do business
in, or consent to general service of process in, any jurisdiction by reason of
this provision.
(c) The registration rights set forth in this Section 9 are subject to the
condition that USWeb shall provide CKS with such information with respect to
USWeb's Registrable Securities, the plan for distribution thereof, and such
other information with respect to USWeb as, in the reasonable judgment of
counsel for CKS, is necessary to enable CKS to include in a registration
statement all material facts required to be disclosed with respect to a
registration thereunder.
(d) A registration effected under this Section 9 shall be effected at CKS's
expense, except for underwriting discounts and commissions and the fees and
expenses of counsel to USWeb, and CKS shall provide to the underwriters such
documentation (including certificates, opinions of counsel and "comfort"
letters from auditors) as are customary in connection with underwritten public
offerings and as such underwriters may reasonably require. In connection with
any registration, the parties agree (i) to indemnify each other and the
underwriters in the customary manner and (ii) to enter into an underwriting
agreement in form and substance customary for transactions of this type with
the underwriters participating in such offering.
10. Adjustment Upon Changes in Capitalization
In the event of any change in the Option Shares by reason of stock
dividends, split-ups, mergers (other than the Merger), recapitalizations,
combinations, exchanges of shares and the like, the type and number of shares
or securities subject to the Option, the Exercise Price shall be adjusted
appropriately, and proper provision shall be made in the agreements governing
such transaction so that USWeb shall receive, upon exercise of the Option, the
number and class of shares or other securities or property that USWeb would
have received in respect of the Option Shares if the Option had been exercised
immediately prior to such event or the record date therefor, as applicable.
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11. Restrictive Legends
Each certificate representing Option Shares issued to USWeb hereunder shall
include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF AUGUST 31,
1998, A COPY OF WHICH MAY BE OBTAINED FROM CKS CORPORATION.
12. Listing and HSR Filing
CKS, upon the request of USWeb, shall promptly file an application to list
the Option Shares to be acquired upon exercise of the Option for quotation on
the Nasdaq National Market and shall use its best efforts to obtain approval
of such listing as soon as practicable. Promptly after the date such a filing
is permitted to be made, each of the parties hereto shall file with the
Federal Trade Commission and the Antitrust Division of the United States
Department of Justice all required premerger notification and report forms and
other documents and exhibits required to be filed under the HSR Act, if any,
to permit the acquisition of the Option Shares subject to the Option at the
earliest possible date.
13. Binding Effect
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. Nothing
contained in this Agreement, express or implied, is intended to confer upon
any person other than the parties hereto and their respective successors and
permitted assigns any rights or remedies of any nature whatsoever by reason of
this Agreement. Any shares sold by a party in compliance with the provisions
of Section 9 shall, upon consummation of such sale, be free of the
restrictions imposed with respect to such shares by this Agreement and any
transferee of such shares shall not be entitled to the rights of such party.
Certificates representing shares sold in a registered public offering pursuant
to Section 9 shall not be required to bear the legend set forth in Section 11.
14. Specific Performance
The parties recognize and agree that if for any reason any of the provisions
of this Agreement are not performed in accordance with their specific terms or
are otherwise breached, immediate and irreparable harm or injury would be
caused for which money damages would not be an adequate remedy. Accordingly,
each party agrees that in addition to other remedies the other party shall be
entitled to an injunction restraining any violation or threatened violation of
the provisions of this Agreement. In the event that any action shall be
brought in equity to enforce the provisions of the Agreement, neither party
will allege, and each party hereby waives the defense, that there is an
adequate remedy at law.
15. Entire Agreement
This Agreement and the Merger Agreement (including the appendices thereto)
constitute the entire agreement between the parties with respect to the
subject matter hereof and supersede all other prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof.
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16. Further Assurances
Each party will execute and deliver all such further documents and
instruments and take all such further action as may be necessary in order to
constitute the transactions contemplated hereby.
17. Validity
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of the other provisions of this
Agreement, which shall remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of this
Agreement to be null, void or unenforceable, the parties hereto shall
negotiate in good faith and shall execute and deliver an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision.
18. Notices
All notices and other communications hereunder shall be in writing and shall
be deemed given if delivered personally or by commercial delivery service, or
sent via telecopy (receipt confirmed) to the parties at the following
addresses or telecopy numbers (or at such other address or telecopy numbers
for a party as shall be specified by like notice):
(a) if to USWeb, to:
USWeb Corporation
2880 Lakeside Drive, Suite 300
Santa Clara, CA 95054
Attention: Chief Financial Officer
Telephone No.: (408) 989-3200
Telecopy No.: (408) 987-3240
with a copy at the same address to the
attention of the General Counsel, and
with a copy to:
Wilson Sonsini Goodrich & Rosati, Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Mark Bonham
Telephone No. (650) 493-9300
Telecopy No.: (650) 493-6811
(b) if to CKS, to:
CKS Group, Inc.
10441 Bandley Drive
Cupertino, CA 95014
Attention: Chief Financial Officer
Telephone No.: (40) 366-5100
Telecopy No.: (408) 366-5120
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with a copy at the same address to the
attention of the General Counsel, and
with a copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Ave.
Palo Alto, CA 94034
Attention: Rod J. Howard
Telephone No.: 650-833-2496
Telecopy No.: 650-327-3699
19. Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware applicable to agreements made and to be
performed entirely within such State.
20. Counterparts
This Agreement may be executed in two counterparts, each of which shall be
deemed to be an original, but both of which, taken together, shall constitute
one and the same instrument.
21. Expenses
Except as otherwise expressly provided herein or in the Merger Agreement,
all costs and expenses incurred in connection with the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses.
22. Amendments; Waiver
This Agreement may be amended by the parties hereto and the terms and
conditions hereof may be waived only by an instrument in writing signed on
behalf of each of the parties hereto, or, in the case of a waiver, by an
instrument signed on behalf of the party waiving compliance.
23. Assignment
Neither of the parties hereto may sell, transfer, assign or otherwise
dispose of any of its rights or obligations under this Agreement or the Option
created hereunder to any other person, without the express written consent of
the other party, except that USWeb may assign its rights and obligations
hereunder to Merger Sub.
[Remainder of Page Intentionally Blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
USWEB CORPORATION
/s/ Carolyn V. Aver
By: _________________________________
Name: Carolyn V. Aver
Title: Executive Vice President and
Chief Financial Officer
CKS GROUP, INC.
/s/ Mark D. Kvamme
By: _________________________________
Name: Mark D. Kvamme
Title: Chief Executive Officer and
Chairman of the Board
*CKS STOCK OPTION AGREEMENT*
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EXHIBIT B
USWEB STOCK OPTION AGREEMENT
THIS USWEB STOCK OPTION AGREEMENT dated as of September 1, 1998 (the
"Agreement") is entered into by and between CKS Group, Inc. , a Delaware
corporation ("CKS"), and USWeb Corporation, a Delaware corporation ("USWeb").
RECITALS
Concurrently with the execution and delivery of this Agreement, USWeb, CKS
and USWeb Acquisition Corporation, a Delaware corporation and a wholly owned
subsidiary of USWeb ("Merger Sub"), are entering into an Agreement and Plan of
Reorganization (the "Merger Agreement"), which provides that, among other
things, upon the terms and subject to the conditions thereof, Merger Sub will
be merged with and into USWeb (the "Merger") with USWeb continuing as the
surviving corporation and as a wholly owned subsidiary of CKS.
As a condition and inducement to CKS's willingness to enter into the Merger
Agreement, CKS has required that USWeb agree, and USWeb has so agreed, to
grant to CKS an option to acquire shares of USWeb Common Stock, par value
$0.001 per share ("USWeb Common Stock") upon the terms and subject to the
conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. Grant of Option
On the terms and subject to the conditions set forth in this Agreement,
USWeb hereby grants to CKS an irrevocable option (the "Option") to acquire a
number of the authorized but unissued shares of USWeb Common Stock (the
"Option Shares") equal to 19.9% of the number of shares of USWeb Common Stock
issued and outstanding on the date the Option is first exercised for any
Option Shares, in the manner set forth below, at a price per share equal to
the lower of (i) the closing price of USWeb Common Stock on the last trading
day before the date of this Agreement or (ii) the average closing price of
USWeb Common Stock on the five trading days immediately prior to the first
public announcement or disclosure of a USWeb Alternative Proposal (as defined
in the Merger Agreement) (the "Exercise Price"), payable in cash. Capitalized
terms used in this Agreement but not defined herein shall have the meanings
ascribed thereto in the Merger Agreement.
2. Exercise of Option
The Option may only be exercised by CKS, in whole or in part, at any time or
from time to time, from and after (i) the commencement of a tender or exchange
offer for 25% or more of any class of USWeb's capital stock, or (ii) the
failure to obtain the required vote of USWeb stockholders contemplated by the
Merger Agreement upon a vote taken at a meeting of USWeb stockholders duly
convened therefor (or at any adjournment thereof) if at the time of such
failure a USWeb Alternative Proposal (as defined in the Merger Agreement)
shall have been publicly announced or otherwise publicly disclosed, or (iii)
the occurrence of any of the events specified in Section 7.1(g) and Section
7.1(k) of the Merger Agreement (any of the events specified in clauses (i),
(ii) and (iii) of this sentence being referred to herein as an "Exercise
Event"). In the event CKS wishes to exercise the Option, CKS shall deliver to
USWeb a written notice (an "Exercise Notice") specifying the total number of
Option Shares it wishes to acquire. Each closing of a purchase of Option
Shares
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hereunder (a "Closing") shall occur on a date and at a time designated by CKS
in an Exercise Notice delivered to USWeb at least five (5) business days prior
to the date of such Closing, which Closing shall be held at the offices of
counsel to CKS. The Option shall terminate upon the earliest to occur of (i)
the Effective Time, (ii) sixty (60) days following the termination of the
Merger Agreement pursuant to Article VII thereof, if an Exercise Event shall
have occurred on or prior to the date of such termination, (iii) the date on
which the Merger Agreement is terminated pursuant to Article VII thereof if an
Exercise Event shall not have occurred on or prior to such date, and (iv) the
termination of the Merger Agreement pursuant to Section 7.1(a) or 7.1(c)
thereof; provided, however, with respect to the preceding clause (ii) of this
sentence, that if the Option cannot be exercised by reason of any applicable
government order or because the waiting period related to the issuance of the
Option Shares under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), if applicable, shall not have expired or been
terminated, then the Option shall not terminate until the tenth business day
after such impediment to exercise shall have been removed or shall have become
final and not subject to appeal. Notwithstanding the foregoing, but subject to
the further limitations set forth in Section 7(a), (i) the Option may not be
exercised if CKS is in breach in any material respect of any of its covenants
or agreements contained in the Merger Agreement; and (ii) in the event CKS
receives more than an aggregate of (x) eighteen million dollars ($18,000,000)
plus (y) the Exercise Price multiplied by the Number of Option Shares
purchased by CKS pursuant to the Option minus (z) any amounts paid to CKS by
USWeb pursuant to Section 7.3(d) of the Merger Agreement, in connection with a
sale or other disposition of the Option Shares, all proceeds in excess of such
amount shall be remitted to USWeb.
3. Conditions to Closing
The obligation of USWeb to issue the Option Shares to CKS hereunder is
subject to the conditions that (a) any waiting period under the HSR Act
applicable to the issuance of the Option Shares hereunder shall have expired
or been terminated; (b) all consents, approvals, orders or authorizations of,
or registrations, declarations or filings with, any federal, state or local
administrative agency or commission or other federal state or local
governmental authority or instrumentality, if any, required in connection with
the issuance of the Option Shares hereunder shall have been obtained or made,
as the case may be; and (c) no preliminary or permanent injunction or other
order by any court of competent jurisdiction prohibiting or otherwise
restraining such issuance shall be in effect.
4. Closing
At any Closing, (a) USWeb shall deliver to CKS a single certificate in
definitive form representing the number of Option Shares designated by CKS in
its Exercise Notice, such certificate to be registered in the name of CKS and
to bear the legend set forth in Section 11 hereof, and (b) CKS shall pay to
USWeb the aggregate purchase price for the Option Shares so designated and
being purchased by wire transfer of immediately available funds or by delivery
of a certified check or bank check. At any Closing at which CKS is exercising
the Option in part, CKS shall present and surrender this Agreement to USWeb,
and USWeb shall deliver to CKS an executed new agreement with the same terms
as this Agreement evidencing the right to purchase the balance of the Option
Shares purchasable hereunder.
5. Representations and Warranties of USWeb
USWeb represents and warrants to CKS that (a) USWeb is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder; (b) the execution and
delivery of this Agreement by USWeb and consummation by USWeb of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of USWeb and no other corporate proceedings on
the part of USWeb are necessary to authorize this Agreement or any of the
transactions contemplated hereby; (c) this Agreement has been duly executed
and delivered by USWeb and constitutes a legal, valid and binding obligation
of USWeb and, assuming this Agreement constitutes a legal, valid and binding
obligation of CKS, is enforceable against USWeb in accordance with its terms,
except as enforceability may be limited by
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bankruptcy and other laws affecting the rights and remedies of creditors
generally and general principles of equity; (d) except for any filings as may
be required under the HSR Act and foreign antitrust or similar laws, USWeb has
taken all necessary corporate and other action to authorize and reserve for
issuance and to permit it to issue upon exercise of the Option, and at all
times from the date hereof until the termination of the Option will have
reserved for issuance, a sufficient number of unissued Option Shares for CKS
to exercise the Option in full and will take all necessary corporate or other
action to authorize and reserve for issuance all additional Option Shares or
other securities which may be issuable pursuant to Section 9 upon exercise of
the Option, all of which, upon their issuance and delivery in accordance with
the terms of this Agreement, will be validly issued, fully paid and
nonassessable; (e) upon delivery of the Option Shares and any other securities
to CKS upon exercise of the Option, CKS will acquire such Option Shares or
other securities free and clear of all material claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever,
excluding those imposed by CKS; (f) the execution and delivery of this
Agreement by USWeb does not, and the performance of this Agreement by USWeb
will not, (i) violate the Certificate of Incorporation or Bylaws of USWeb,
(ii) conflict with or violate any order applicable to USWeb or any of its
subsidiaries or by which they or any of their property is bound or (iii)
result in any breach of or constitute a default (or an event which with notice
or lapse of time or both would become a default) under, or give rise to any
right of termination, amendment, acceleration or cancellation of, or result in
the creation of a lien or encumbrance on any of the property or assets of
USWeb or any of its subsidiaries pursuant to, any contract or agreement to
which USWeb or any of its subsidiaries is a party or by which USWeb or any of
its subsidiaries or any of their property is bound, except, in the case of
clauses (ii) and (iii) above, for violations, conflicts, breaches, defaults,
rights of termination, amendment, acceleration or cancellation, liens or
encumbrances which would not, individually or in the aggregate, have a
Material Adverse Effect on USWeb; and (g) the execution and delivery of this
Agreement by USWeb does not, and the performance of this Agreement by USWeb
will not, require any consent, approval, authorization or permit of, or filing
with, or notification to, any Governmental Entity except as may be required
pursuant to the HSR Act, foreign antitrust or similar laws, and Section 13(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
6. Representations and Warranties of CKS
CKS represents and warrants to USWeb that (a) CKS is a corporation duly
incorporated, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder; (b) the execution and
delivery of this Agreement by CKS and the consummation by CKS of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of CKS and no other corporate proceedings on the
part of CKS are necessary to authorize this Agreement or any of the
transactions contemplated hereby; (c) this Agreement has been duly executed
and delivered by CKS and constitutes a legal, valid and binding obligation of
CKS and, assuming this Agreement constitutes a legal, valid and binding
obligation of USWeb, is enforceable against CKS in accordance with its terms,
except as enforceability may be limited by bankruptcy and other laws affecting
the rights and remedies of creditors generally and general principles of
equity; (d) the execution and delivery of this Agreement by CKS do not, and
the performance of this Agreement by CKS will not, (i) violate the Certificate
of Incorporation or Bylaws of CKS, (ii) conflict with or violate any order
applicable to CKS or any of its subsidiaries or by which they or any of their
property is bound or (iii) result in any breach of or constitute a default (or
an event which with notice or lapse of time or both would become a default)
under, or give rise to any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the property or assets of CKS or any of its subsidiaries pursuant to, any
contract or agreement to which CKS or any of its subsidiaries is a party or by
which CKS or any of its subsidiaries or any of their property is bound,
except, in the case of clauses (ii) and (iii) above, for violations,
conflicts, breaches, defaults, rights of termination, amendment, acceleration
or cancellation, liens or encumbrances which would not, individually or in the
aggregate, have a Material Adverse Effect on CKS; (e) the execution and
delivery of this Agreement by CKS does not, and the performance of this
Agreement by CKS will not, require any consent, approval, authorization or
permit of, or filing with or notification to, any Governmental Entity except
as may be required pursuant to the HSR Act, foreign antitrust or similar laws,
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and Section 13(d) of the Exchange Act; and (f) any Option Shares acquired upon
exercise of the Option will not be acquired by CKS with a view to the public
distribution thereof and CKS will not sell or otherwise dispose of such shares
in violation of applicable law or this Agreement.
7. Certain Rights
(a) Put. At the request of CKS at any time during the period during which
the Option is exercisable pursuant to Section 2, provided that an event
specified in Sections 7.1(g) of the Merger Agreement shall have occurred and
the USWeb Termination Fee (as defined in the Merger Agreement) has become
payable pursuant to Section 7.3(d) of the Merger Agreement (the "Purchase
Period"), USWeb (or any successor entity thereof) shall purchase from CKS the
Option Shares, if any, acquired by CKS pursuant to this Agreement, at a price
equal to the sum of (i) the Exercise Price paid by CKS for the Option Shares
acquired pursuant to the Option plus (ii) the difference between the "Market
Price" for such Option Shares as of the date CKS gives notice of its intent to
exercise its rights under this Section 7(a) and such Exercise Price (but only
if the Market Price is greater than the Exercise Price), multiplied by the
number of Option Shares so purchased. Notwithstanding any other provision of
this Agreement, USWeb shall not be required pursuant to this Section 7 to pay
CKS any amount in excess of an aggregate of (x) twelve million dollars
($12,000,000) plus (y) the Exercise Price paid by CKS for the Option Shares
acquired pursuant to the Option minus (z) any amounts paid to CKS by USWeb
pursuant to Sections 7.3(d) of the Merger Agreement. For purpose of this
Section 7(a), "Market Price" means the average closing sale price of USWeb
Common Stock on the Nasdaq National Market during the five (5) trading days
ending on the trading day immediately preceding such date).
(b) Payment and Redelivery of Option or Shares. In the event CKS exercises
its rights under Section 7(a), USWeb shall, within ten (10) business days
after CKS delivers notice pursuant to Section 7(a) (which notice may be
delivered prior to consummation of the exercise of the Option), pay the
required amount to CKS in immediately available funds and CKS shall surrender
to USWeb the certificates evidencing the Option Shares purchased by CKS
pursuant thereto, and CKS shall represent and warrant that such shares are
then free and clear of all claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever.
8. Certain Restrictions
(a) Restrictions on Transfer. Prior to the fifth anniversary of the date
hereof (the "Expiration Date"), CKS shall not directly or indirectly, by
operation of law or otherwise, sell, assign, pledge, or otherwise dispose of
or transfer any shares of capital stock of USWeb acquired by CKS pursuant to
this Agreement, ("Restricted Shares"), other than (i) pursuant to Section 7 or
(ii) in accordance with Sections 8(b) or 9.
(b) Permitted Sales. Following the termination of the Merger Agreement, CKS
shall be permitted to sell any Restricted Shares beneficially owned by it if
such sale is made (i) pursuant to a tender or exchange offer or other business
combination transaction that has been approved or recommended, or otherwise
determined to be fair to and in the best interests of the holders of USWeb
Common Stock, by a majority of the members of the Board of Directors of USWeb,
or (ii) subject to Section 8(c) or (d) as the case may be, to a person who,
immediately following such sale, would beneficially own (within the meaning of
Rule 13d-3 promulgated under the Exchange Act), either alone or as part of a
"group" (as used in Rule 13d-5 under the Exchange Act), not more than ten
percent (10%) of USWeb's outstanding voting securities, which person is a
passive institutional investor who would be eligible under Rule 13d-1(b)(1)
under the Exchange Act to report such holdings of Restricted Shares on
Schedule 13G under the Exchange Act.
(c) USWeb's Right of First Refusal. At any time after the first occurrence
of a Exercise Event and prior to the Expiration Date, if CKS shall desire to
sell, assign, transfer or otherwise dispose of all or any of the Option Shares
acquired pursuant to this Agreement, it shall give USWeb written notice of the
proposed transaction (an "CKS Offer Notice"), identifying the proposed
transferee, accompanied by a copy of a binding offer to purchase such shares
or other securities signed by such transferee and setting forth the terms of
the
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proposed transaction. A CKS Offer Notice shall be deemed an offer by CKS to
USWeb, which may be accepted within five (5) business days of the receipt of
such CKS Offer Notice, on the same terms and conditions and at the same price
at which CKS is proposing to transfer such shares or other securities to such
transferee. The purchase of any such shares or other securities by USWeb shall
be settled within five (5) business days of the date of the acceptance of the
offer and the purchase price shall be paid to CKS in immediately available
funds. In the event of the failure or refusal of USWeb to purchase all the
shares or other securities covered by a CKS Offer Notice, CKS may sell all,
but not less than all, of such shares or other securities to the proposed
transferee at no less than the price specified and on terms no more favorable
to the transferee than those set forth in the CKS Offer Notice as long as such
sale is completed within ninety (90) days of the receipt by USWeb of the
applicable CKS Offer Notice; provided that the provisions of this sentence
shall not limit the rights CKS may otherwise have in the event USWeb has
accepted the offer contained in the CKS Offer Notice and wrongfully refuses to
purchase the shares or other securities subject thereto.
(d) Additional Restrictions. Prior to any permitted sales of any Restricted
Shares under Section 8(b)(ii), the holder thereof shall give written notice to
the issuer of such Restricted Shares of its intention to effect such transfer.
Each such notice shall describe the manner of the proposed transfer and, if
requested by the issuer of such Restricted Shares, shall be accompanied by an
opinion of counsel satisfactory to such issuer (it being agreed that each of
Gray Cary Ware & Freidenrich LLP, and Wilson Sonsini Goodrich & Rosati,
Professional Corporation, shall be satisfactory) to the effect that such sale
may be effected without registration under the Securities Act and any
applicable state securities laws. Each certificate for Restricted Shares
transferred as above provided shall bear the legend set forth in Section 11,
except that such certificate shall not bear such legend if (i) such transfer
is in accordance with the provisions of Rule 144 (or any other rule permitting
public sale without registration under the Securities Act) or (ii) the opinion
of counsel referred to above is to the further effect that the transferee and
any subsequent transferee would be entitled to transfer such securities in a
public sale without registration under the Securities Act and any applicable
state securities laws. The restrictions provided for in this Section 8(d)
shall not apply to securities which are not required to bear the legend
prescribed by Section 11 in accordance with the provisions of this Agreement.
The foregoing restrictions on transferability shall terminate as to any
particular shares when such shares shall have been effectively registered
under the Securities Act and any applicable state securities laws and sold or
otherwise disposed of in accordance with the registration statement covering
such shares.
(e) Voting of Shares. Following the date hereof and prior to the Expiration
Date, CKS (i) shall vote all Restricted Shares, on each matter submitted to a
vote of the stockholders of USWeb, for and against such matter in the same
proportion as all other shares of the same class of capital stock of USWeb are
voted (whether by proxy or otherwise) for and against such matter, and (ii)
shall execute written consents with respect to the Restricted Shares in the
same proportion as written consents are executed by other holders of such
class of capital stock of USWeb. Before acquiring any Restricted Shares
hereunder, CKS shall execute and deliver a proxy to USWeb authorizing USWeb to
vote and execute written consents with respect to all Restricted Shares held
by CKS in accordance with the provisions of this paragraph.
9. Registration Rights
(a) Following the termination of the Merger Agreement, CKS may by written
notice (a "Registration Notice") to USWeb request USWeb to register under the
Securities Act all or any part of the shares acquired by CKS pursuant to this
Agreement (the "Registrable Securities") in order to permit the sale or other
disposition of such shares pursuant to a bona fide firm commitment
underwritten public offering in which CKS and the underwriters shall effect as
wide a distribution of such Registrable Securities as is reasonably
practicable and shall use reasonable efforts to prevent any person or group
from purchasing through such offering shares representing more than 1% of the
outstanding shares of Common Stock of USWeb on a fully diluted basis;
provided, however, that any such Registration Notice must relate to a number
of shares equal to at least 2% of the outstanding shares of Common Stock of
USWeb on a fully diluted basis and that any rights
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<PAGE>
to require registration hereunder shall terminate with respect to any shares
that may be sold pursuant to Rule 144(k) under the Securities Act.
(b) USWeb shall use commercially reasonable best efforts to effect, as
promptly as practicable, the registration under the Securities Act of the
Registrable Securities; provided, however, that (i) CKS shall not be entitled
to more than an aggregate of two effective registration statements hereunder
and (ii) USWeb will not be required to file any such registration statement
during any period of time (not to exceed 40 days after a Registration Notice
in the case of clause (A) below or 90 days after a Registration Notice in the
case of clauses (B) and (C) below) when (A) USWeb is in possession of material
non-public information which it reasonably believes would be detrimental to be
disclosed at such time and, in the written opinion of counsel to USWeb, such
information would have to be disclosed if a registration statement were filed
at that time; (B) USWeb is required under the Securities Act to include
audited financial statements for any period in such registration statement and
such financial statements are not yet available for inclusion in such
registration statement; or (C) USWeb determines, in its reasonable judgment,
that such registration would interfere with any financing, acquisition or
other material transaction involving USWeb. If consummation of the sale of any
Registrable Securities pursuant to a registration hereunder does not occur
within 180 days after the filing with the SEC of the initial registration
statement therefor, the provisions of this Section 9 shall again be applicable
to any proposed registration, it being understood that CKS shall not be
entitled to more than an aggregate of two effective registration statements
hereunder. USWeb shall use commercially reasonable best efforts to cause any
Registrable Securities registered pursuant to this Section 9 to be qualified
for sale under the securities or blue sky laws of such jurisdictions as CKS
may reasonably request and shall continue such registration or qualification
in effect in such jurisdictions; provided, however, that USWeb shall not be
required to qualify to do business in, or consent to general service of
process in, any jurisdiction by reason of this provision.
(c) The registration rights set forth in this Section 9 are subject to the
condition that CKS shall provide USWeb with such information with respect to
CKS's Registrable Securities, the plan for distribution thereof, and such
other information with respect to CKS as, in the reasonable judgment of
counsel for USWeb, is necessary to enable USWeb to include in a registration
statement all material facts required to be disclosed with respect to a
registration thereunder.
(d) A registration effected under this Section 9 shall be effected at
USWeb's expense, except for underwriting discounts and commissions and the
fees and expenses of counsel to CKS, and USWeb shall provide to the
underwriters such documentation (including certificates, opinions of counsel
and "comfort" letters from auditors) as are customary in connection with
underwritten public offerings and as such underwriters may reasonably require.
In connection with any registration, the parties agree (i) to indemnify each
other and the underwriters in the customary manner and (ii) to enter into an
underwriting agreement in form and substance customary for transactions of
this type with the underwriters participating in such offering.
10. Adjustment Upon Changes in Capitalization
In the event of any change in the Option Shares by reason of stock
dividends, split-ups, mergers (other than the Merger), recapitalizations,
combinations, exchanges of shares and the like, the type and number of shares
or securities subject to the Option, the Exercise Price shall be adjusted
appropriately, and proper provision shall be made in the agreements governing
such transaction so that CKS shall receive, upon exercise of the Option, the
number and class of shares or other securities or property that CKS would have
received in respect of the Option Shares if the Option had been exercised
immediately prior to such event or the record date therefor, as applicable.
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<PAGE>
11. Restrictive Legends
Each certificate representing Option Shares issued to CKS hereunder shall
include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET
FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF AUGUST 31, 1998, A COPY OF
WHICH MAY BE OBTAINED FROM USWEB CORPORATION.
12. Listing and HSR Filing
USWeb, upon the request of CKS, shall promptly file an application to list
the Option Shares to be acquired upon exercise of the Option for quotation on
the Nasdaq National Market and shall use its best efforts to obtain approval
of such listing as soon as practicable. Promptly after the date such a filing
is permitted to be made, each of the parties hereto shall file with the
Federal Trade Commission and the Antitrust Division of the United States
Department of Justice all required premerger notification and report forms and
other documents and exhibits required to be filed under the HSR Act, if any,
to permit the acquisition of the Option Shares subject to the Option at the
earliest possible date.
13. Binding Effect
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. Nothing
contained in this Agreement, express or implied, is intended to confer upon
any person other than the parties hereto and their respective successors and
permitted assigns any rights or remedies of any nature whatsoever by reason of
this Agreement. Any shares sold by a party in compliance with the provisions
of Section 9 shall, upon consummation of such sale, be free of the
restrictions imposed with respect to such shares by this Agreement and any
transferee of such shares shall not be entitled to the rights of such party.
Certificates representing shares sold in a registered public offering pursuant
to Section 9 shall not be required to bear the legend set forth in Section 11.
14. Specific Performance
The parties recognize and agree that if for any reason any of the provisions
of this Agreement are not performed in accordance with their specific terms or
are otherwise breached, immediate and irreparable harm or injury would be
caused for which money damages would not be an adequate remedy. Accordingly,
each party agrees that in addition to other remedies the other party shall be
entitled to an injunction restraining any violation or threatened violation of
the provisions of this Agreement. In the event that any action shall be
brought in equity to enforce the provisions of the Agreement, neither party
will allege, and each party hereby waives the defense, that there is an
adequate remedy at law.
15. Entire Agreement
This Agreement and the Merger Agreement (including the appendices thereto)
constitute the entire agreement between the parties with respect to the
subject matter hereof and supersede all other prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof.
16. Further Assurances
Each party will execute and deliver all such further documents and
instruments and take all such further action as may be necessary in order to
constitute the transactions contemplated hereby.
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<PAGE>
17. Validity
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of the other provisions of this
Agreement, which shall remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of this
Agreement to be null, void or unenforceable, the parties hereto shall
negotiate in good faith and shall execute and deliver an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision.
18. Notices
All notices and other communications hereunder shall be in writing and shall
be deemed given if delivered personally or by commercial delivery service, or
sent via telecopy (receipt confirmed) to the parties at the following
addresses or telecopy numbers (or at such other address or telecopy numbers
for a party as shall be specified by like notice):
(a) if to CKS, to:
CKS Group, Inc.
10441 Bandley Drive
Cupertino, CA 95014
Attention: Chief Financial Officer
Telephone No.: (408) 366-5100
Telecopy No.: (408) 366-5120
with a copy at the same address to the
attention of the General Counsel, and
with a copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Ave.
Palo Alto, CA 94034
Attention: Rod J. Howard
Telephone No.: 650-833-2496
Telecopy No.: 650-327-3699
(b) if to USWeb, to:
USWeb Corporation
2880 Lakeside Drive, Suite 300
Santa Clara, CA 95054
Attention: Chief Financial Officer
Telephone No.: (408) 987-3200
Telecopy No.: (408) 987-3260
with a copy at the same address to the
attention of the General Counsel, and
with a copy to:
Wilson Sonsini Goodrich & Rosati, Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Mark Bonham
Telephone No. (650) 493-9300
Telecopy No.: (650) 493-6811
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<PAGE>
19. Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware applicable to agreements made and to be
performed entirely within such State.
20. Counterparts
This Agreement may be executed in two counterparts, each of which shall be
deemed to be an original, but both of which, taken together, shall constitute
one and the same instrument.
21. Expenses
Except as otherwise expressly provided herein or in the Merger Agreement,
all costs and expenses incurred in connection with the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses.
22. Amendments; Waiver
This Agreement may be amended by the parties hereto and the terms and
conditions hereof may be waived only by an instrument in writing signed on
behalf of each of the parties hereto, or, in the case of a waiver, by an
instrument signed on behalf of the party waiving compliance.
23. Assignment
Neither of the parties hereto may sell, transfer, assign or otherwise
dispose of any of its rights or obligations under this Agreement or the Option
created hereunder to any other person, without the express written consent of
the other party, except that CKS may assign its rights and obligations
hereunder to Merger Sub.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
By: /s/ Carolyn V. Aver
_________________________________
Name: Carolyn V. Aver
Title: Executive Vice President and
Chief Financial Officer
CKS GROUP, INC.
By: /s/ Mark D. Kvamme
_________________________________
Name: Mark D. Kvamme
Title: Chief Executive Officer and
Chairman of the Board
A-B-9
<PAGE>
ANNEX B
August 30, 1998
Board of Directors
USWeb Corporation
2880 Lakeside Drive, Suite 300
Santa Clara, California 95054
Members of the Board:
We understand that USWeb Corporation ("USWeb"), CKS Group, Inc. ("CKS"), and
USWeb Acquisition Corporation 134 ("Merger Sub"), a wholly-owned subsidiary of
USWeb, propose to enter into an Agreement and Plan of Reorganization,
substantially in the form of the draft dated August 30, 1998 (the "Merger
Agreement") which provides, among other things, for the merger (the "Merger")
of Merger Sub with and into CKS. Pursuant to the Merger, CKS will become a
wholly-owned subsidiary of USWeb and each outstanding share of common stock,
par value $0.001 per share (the "CKS Common Stock") of CKS, other than shares
held in treasury or held by USWeb or any affiliate of USWeb or CKS, will be
converted into the right to receive 1.500 shares (the "Exchange Ratio") of
common stock, par value $0.001 per share, of USWeb (the "USWeb Common Stock").
The terms and conditions of the Merger are more fully set forth in the Merger
Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to USWeb.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of USWeb and CKS, respectively;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning USWeb and CKS prepared by the management of
USWeb and CKS, respectively;
(iii) discussed the past and current operations and financial condition and
the prospects of USWeb, including information relating to certain
strategic, financial and operational benefits anticipated from the
Merger, with senior executives of USWeb;
(iv) discussed the past and current operations and financial condition and
the prospects of CKS, including information relating to certain
strategic, financial and operational benefits anticipated from the
Merger, with senior executives of CKS;
(v) reviewed the pro forma impact of the Merger on the earnings per share
of USWeb;
(vi) reviewed the reported prices and trading activity for the USWeb Common
Stock and CKS Common Stock;
(vii) compared the financial performance of USWeb and CKS and the prices
and trading activity of the USWeb Common Stock and CKS Common Stock
with that of certain other publicly-traded companies and their
securities;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(ix) reviewed and discussed with the senior managements of USWeb and CKS
their strategic rationales for the Merger;
(x) participated in discussions and negotiations among representatives of
USWeb and CKS and their financial and legal advisors;
(xi) reviewed the draft Merger Agreement and certain related agreements;
and
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(xii) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon without independent verification the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the internal financial statements and other financial
and operating data and discussions relating to strategic, financial and
operational benefits anticipated from the Merger, we have assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the prospects of USWeb and CKS, respectively. We
have relied upon the assessment by the managements of USWeb and CKS of their
ability to retain key employees of USWeb and CKS. We have also relied upon
without independent verification the assessment by the managements of USWeb
and CKS of the strategic and other benefits expected to result from the
merger. We have also relied upon, without independent verification, the
assessment by the managements of USWeb and CKS of USWeb's and CKS's
technologies, products and services, the timing and risks associated with the
integration of USWeb with CKS, the timing and risks associated with USWeb's
ongoing acquisition program, and the validity of, and risks associated with,
USWeb's and CKS's existing and future technologies, products, and services. We
have not made any independent valuation or appraisal of the assets or
liabilities or technologies of USWeb or CKS, nor have we been furnished with
any such appraisals. In addition, we have assumed that the Merger will be
accounted for as a "pooling-of-interests" business combination in accordance
with U.S. Generally Accepted Accounting Principles and the Merger will be
treated as a tax-free reorganization and/or exchange pursuant to the Internal
Revenue Code of 1986 and will be consummated in accordance with the terms set
forth in the Merger Agreement. Our opinion is necessarily based on financial,
economic, market and other conditions as in effect on, and the information
made available to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors of USWeb in
connection with this transaction and will receive a fee for our services.
It is understood that this letter is for the information of the Board of
Directors of USWeb, except that this opinion may be included in its entirety
in any filing made by USWeb with the Securities and Exchange Commission in
respect of the transaction. In addition, this opinion does not in any manner
address the prices at which the USWeb Common Stock will actually trade at any
time and we express no recommendation or opinion as to how the holders of
USWeb Common Stock should vote at the shareholders' meeting held in connection
with the Merger.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to USWeb.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
/s/ Mark S. Menell
By: _________________________________
Mark S. Menell
Principal
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<PAGE>
ANNEX C
PERSONAL AND CONFIDENTIAL
September 1, 1998
Board of Directors
CKS Group, Inc.
10441 Bandley Drive
Cupertino, CA 95014
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of Common Stock, par value
$0.001 per share (the "Shares"), of CKS Group, Inc. (the "Company") of the
exchange ratio of 1.50 shares of Common Stock, par value $0.001 per share (the
"USWeb Common Stock"), of USWeb Corporation ("USWeb") to be received for each
Share (the "Exchange Ratio") pursuant to the Agreement and Plan of
Reorganization (the "Agreement"), dated as of September 1, 1998, among USWeb,
USWeb Acquisition Corporation 134, a direct wholly-owned subsidiary of USWeb,
and the Company.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. In addition to having acted as CKS's financial advisor in connection
with, and having participated in certain of the negotiations leading to, the
Agreement, Goldman, Sachs & Co. has also provided certain investment banking
services to the Company from time to time, including having acted as managing
underwriter of the Company's initial public offering of Shares in 1995 and the
Company's secondary offering of Shares in 1996. Goldman, Sachs & Co. provides
a full range of financial advisory and securities services and, in the course
of its normal trading activities, may from time to time effect transactions
and hold securities, including derivative securities, of the Company or USWeb
for its own account and for the accounts of customers.
In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Shareholders and Annual Reports on Form 10-K of
the Company for the two fiscal years ended November 30, 1997 and of USWeb for
the year ended December 31, 1997; certain interim reports to shareholders and
Quarterly Reports on Form 10-Q of the Company and USWeb; the prospectuses for
the USWeb initial public offering dated December 5, 1997 and the USWeb
secondary offering dated March 31, 1998; certain other communications from the
Company and USWeb to their respective shareholders; certain internal financial
analyses and forecasts (the "Forecasts") for the Company and USWeb prepared by
the management of the Company; and certain analyses and forecasts of cost
savings and operating synergies anticipated to result from the combination of
the Company and USWeb prepared by the managements of the Company and USWeb
(the "Synergies"). We have also held discussions with members of the senior
managements of the Company and USWeb regarding the strategic rationale for,
and potential benefits of, the transaction contemplated by the Agreement, and
the past and current business operations, financial condition and future
prospects of the Company and USWeb. In addition, we have reviewed the reported
price and trading activity for the Shares and for the USWeb Common Stock,
compared certain financial and stock market information for the Company with
similar information for certain other companies the securities of which are
publicly traded, and performed such other studies and analyses as we
considered appropriate.
We have relied upon the accuracy and completeness of all of the financial
and other information discussed with or reviewed by us and have assumed such
accuracy and completeness for purposes of rendering this opinion. In that
regard, we have assumed, with your consent, that the Synergies have been
reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the managements of
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the Company and of USWeb, and that such Synergies will be realized in the
amounts and at the times contemplated thereby. In addition, we have taken into
account the point of view of management of the Company that there are risks
and uncertainties in achieving its Forecasts. As you know, we did not receive
financial forecasts of USWeb prepared by its management. Therefore, our review
of such matters was limited to a discussion with USWeb management of certain
publicly available research analyst estimates of USWeb future financial
performance. We have not made an independent evaluation or appraisal of the
assets and liabilities of the Company or USWeb or any of their respective
subsidiaries, and we have not been furnished with any such evaluation or
appraisal. Our advisory services and the opinion expressed herein are provided
for the information and assistance of the Board of Directors of the Company in
connection with its consideration of the transaction contemplated by the
Agreement and such opinion does not constitute a recommendation as to how any
holder of Shares should vote with respect to such transaction.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that as of the date hereof, the
Exchange Ratio pursuant to the Agreement is fair from a financial point of
view to the holders of Shares.
/s/ Goldman Sachs & Co.
- -------------------------------------
Goldman Sachs & Co.
C-2
<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 Merger, the Registrant will indemnify the current officers and
directors of CKS Group for any action or inaction by such person prior to the
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>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1+ Amended and Restated Certificate of Incorporation of the Regis-
trant.
3.2*** Amended and Restated 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 No-
vember 7, 1997 among the Registrant and the other parties named
therein.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- -----------
<C> <S>
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. (see Annex A to Joint Proxy Statement/Prospectus contained in
this Registration Statement).
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.
8.1*** Opinion of Wilson Sonsini Goodrich & Rosati, as to tax matters.
8.2*** Opinion of Gray Cary Ware & Freidenrich LLP, as to tax matters.
10.1+ Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.
10.2+ 1996 Stock Option Plan and related agreements.
10.3++ 1996 Equity Compensation Plan and related agreements.
10.4++ 1997 Acquisition Stock Option Plan and related agreements.
10.5++ 1997 Employee Stock Purchase Plan.
10.6+ Form of Restricted Stock Purchase Agreement between the Registrant
and certain executive officers.
10.7+ Management Continuity Agreement between the Registrant and Joseph P.
Firmage.
10.8+ Management Continuity Agreement between the Registrant and Tobin Co-
rey.
10.9+ Management Continuity Agreement between the Registrant and Sheldon
Laube.
10.10+ Management Continuity Agreement between the Registrant and James J.
Heffernan.
10.11+ Form of Affiliate Agreement.
10.12+ Loan and Security Agreement dated September 29, 1997 between the Reg-
istrant and Silicon Valley Bank.
10.13+ Amendment, dated November 5, 1997 to Loan and Security Agreement
dated September 29, 1997 between the Registrant and Silicon Valley
Bank.
10.14+ Intel-USWeb Relationship Agreement dated as of November 7, 1997 be-
tween the Registrant and Microsoft Corporation.
10.15** Lease Agreement dated December 16, 1996 by and between the Company
and LAKESIDE DRIVE, INC. for 2880 Lakeside Drive, Santa Clara, CA
95054.
10.16** First Amendment to Lease Agreement dated July 23, 1997 by and between
the Company and LAKESIDE DRIVE, INC. for 2880 Lakeside Drive, Santa
Clara, CA 95054.
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.
10.20*** Employment Offer Letter dated November 4, 1998 between Robert Shaw
and USWeb.
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
and 8.1).
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 Consent of KPMG Peat Marwick LLP, Independent Accountants.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- -----------
<C> <S>
23.4 Consent of Ernst & Young LLP, Independent Auditors.
23.5*** Consent of Morgan Stanley & Co. Incorporated, financial advisor to
Registrant.
23.6*** Consent of Goldman Sachs & Co., financial advisor to CKS Group, Inc.
23.7*** Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit
8.2).
23.8*** Consent of Forrester Research, Inc.
23.9*** Consent of Mark Kvamme.
23.10*** Consent of Tom Suiter.
24.1*** Power of Attorney.
27.1*** Financial Data Schedule.
99.1 Form of Registrant's Proxy.
99.2 Form of CKS Group, Inc. Proxy.
99.3*** Founders' Letter.
</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).
** Incorporated by reference from the Company's Registration Statement on
Form S-4 (No. 333-38351).
*** Previously filed with this Registration Statement.
(b) Financial Statements Schedules
The information required to be set forth herein is incorporated by reference
to USWeb's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 and CKS Group's Annual Report on Form 10-K for the fiscal year ended
November 30, 1997.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby 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;
(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 set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act 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.
(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.
II-3
<PAGE>
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that
is incorporated by reference in the registration statement 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.
(5) 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 applicable
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.
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
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.
(7) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 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.
(8) To supply by means of a post-effective amendment all required
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
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, 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 of 1933 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, 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 of 1933 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. 4 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 19TH 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. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON THE 19TH 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
ROBERT SHAW of the Board of Directors
(Principal Executive Officer)
/S/ CAROLYN AVER
____________________________________ Executive Vice President and Chief
CAROLYN AVER Financial Officer (Principal
Financial and Accounting Officer)
*
____________________________________ President, Chief Operating Officer
TOBIN COREY and Director
____________________________________
JEFFREY BALLOWE Director
*
____________________________________
JAMES DALEY Director
*
____________________________________
JOSEPH FIRMAGE Director
*
____________________________________
JAMES HEFFERNAN Director
*
____________________________________
ROBERT HOFF Director
____________________________________
JOSEPH MARENGI Director
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*
____________________________________
GARY RIESCHEL Director
*
____________________________________
BARRY RUBENSTEIN Director
*
____________________________________
KLAUS SCHWAB Director
</TABLE>
/S/ CAROLYN V. AVER
*By: __________________________
CAROLYN V. AVER
ATTORNEY IN FACT
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
3.1+ Amended and Restated Certificate of Incorporation of the
Registrant.
3.2*** Amended and Restated 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 Corpo-
ration 121, Gray Peak Technologies, Inc. and other indi-
viduals 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. (see Annex A to Joint Proxy
Statement/Prospectus contained in this Registration
Statement).
4.11*** Form of USWeb Corporation Holder Agreement among Regis-
trant, CKS Group, Inc. and certain stockholders of Reg-
istrant dated September 1, 1998 (included in Exhibit
10.19).
5.1*** Opinion of Wilson Sonsini Goodrich & Rosati regarding
legality of the securities being issued.
8.1*** Opinion of Wilson Sonsini Goodrich & Rosati, as to tax
matters.
8.2*** Opinion of Gray Cary Ware & Freidenrich LLP, as to tax
matters.
10.1+ Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive of-
ficers.
10.2+ 1996 Stock Option Plan and related agreements.
10.3++ 1996 Equity Compensation Plan and related agreements.
10.4++ 1997 Acquisition Stock Option Plan and related agree-
ments.
10.5++ 1997 Employee Stock Purchase Plan.
10.6+ Form of Restricted Stock Purchase Agreement between the
Registrant and certain executive officers.
10.7+ Management Continuity Agreement between the Registrant
and Joseph P. Firmage.
10.8+ Management Continuity Agreement between the Registrant
and Tobin Corey.
10.9+ Management Continuity Agreement between the Registrant
and Sheldon Laube.
10.10+ Management Continuity Agreement between the Registrant
and James J. Heffernan.
10.11+ Form of Affiliate Agreement.
10.12+ Loan and Security Agreement dated September 29, 1997 be-
tween the Registrant and Silicon Valley Bank.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
10.13+ Amendment, dated November 5, 1997 to Loan and Security
Agreement dated September 29, 1997 between the Regis-
trant and Silicon Valley Bank.
10.14+ Intel-USWeb Relationship Agreement dated as of November
7, 1997 between the Registrant and Microsoft Corpora-
tion.
10.15** Lease Agreement dated December 16, 1996 by and between
the Company and LAKESIDE DRIVE, INC. for 2880 Lakeside
Drive, Santa Clara, CA 95054.
10.16** First Amendment to Lease Agreement dated July 23, 1997
by and between the Company and LAKESIDE DRIVE, INC. for
2880 Lakeside Drive, Santa Clara, CA 95054.
10.17*** Form of CKS Voting Agreement between Registrant and cer-
tain stockholders of CKS Group, Inc. dated September 1,
1998.
10.18*** Form of CKS Group, Inc. Holder Agreement among Regis-
trant, CKS Group, Inc. and certain stockholders of CKS
Group, Inc. dated September 1, 1998.
10.19*** Form of USWeb Corporation Holder Agreement among Regis-
trant, CKS Group, Inc. and certain stockholders of Reg-
istrant dated September 1, 1998.
10.20*** Employment Offer Letter dated November 4, 1998 between
Robert Shaw and USWeb.
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 and 8.1).
23.2 Consent of PricewaterhouseCoopers LLP, Independent Ac-
countants.
23.3 Consent of KPMG Peat Marwick LLP, Independent Accoun-
tants.
23.4 Consent of Ernst & Young LLP, Independent Auditors.
23.5*** Consent of Morgan Stanley & Co. Incorporated, financial
advisor to Registrant.
23.6*** Consent of Goldman Sachs & Co., financial advisor to CKS
Group, Inc.
23.7*** Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 8.2).
23.8*** Consent of Forrester Research, Inc.
23.9*** Consent of Mark Kvamme.
23.10*** Consent of Tom Suiter.
24.1*** Power of Attorney.
27.1 Financial Data Schedule.
99.1 Form of Registrant's Proxy.
99.2 Form of CKS Group, Inc. Proxy.
99.3*** Founder's Letter.
</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).
** Incorporated by reference from the Company's Registration Statement on Form
S-4 (No. 333-38351).
*** Previously filed with this Registration Statement.
<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 in Notes to
Consolidated Financial Statements.
(2) See computation of pro forma net loss per share in Note 1 in Notes to
Consolidated Financial Statements.
<PAGE>
EXHIBIT 23.2
CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Joint Proxy Statement/Prospectus
constituting part of this Registration Statement on Form S-4 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 4, 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 19, 1998
<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 Joint Proxy Statement/Prospectus constituting
part of this Registration Statement (No. 333-63323), on Form S-4, as amended,
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 17, 1998
<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 Joint Proxy Statement/Prospectus constituting
part of this Registration Statement (Form S-4 No. 333-63323) 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. We also consent to the reference to our
firm under the heading "Experts" in the Prospectus.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
Raleigh, North Carolina
November 18, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <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>
<PAGE>
Exhibit 99.1
________________________________________________________________________________
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
P
R USWEB CORPORATION
O
X SPECIAL MEETING OF STOCKHOLDERS
Y
December 16, 1998
The undersigned stockholder of USWeb Corporation, a Delaware corporation
(the "Company"), hereby acknowledges receipt of the Notice of Special Meeting of
Stockholders and Joint Proxy Statement/Prospectus, each dated November 23, 1998,
and hereby appoints Robert Shaw and Carolyn Aver, and each of them, proxies and
attorneys-in-fact, with full power to each of substitution, on behalf and in the
name of the undersigned, to represent the undersigned at the Special Meeting of
Stockholders of the Company to be held on December 16, 1998 at 10:00 a.m.,
Pacific Standard Time, at the offices of the Company at 2880 Lakeside Drive,
Suite 300, Santa Clara, California 95054 and at any continuation(s) or
adjournment(s) thereof, and to vote all shares of Common Stock that the
undersigned would be entitled to vote if then and there personally present, on
the matters set forth on the reverse side and, in their discretion, upon such
other matter or matters that may properly come before the meeting and any
adjournment(s) thereof.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED (1) FOR THE ISSUANCE OF SHARES OF THE COMMON STOCK, PAR
VALUE $0.001 PER SHARE, OF USWEB ("USWEB COMMON STOCK") TO THE STOCKHOLDERS OF
CKS GROUP, INC., A DELAWARE CORPORATION ("CKS GROUP"), PURSUANT TO AN AGREEMENT
AND PLAN OF REORGANIZATION, DATED AS OF SEPTEMBER 1, 1998 (THE "REORGANIZATION
AGREEMENT"), AMONG USWEB, CKS GROUP AND USWEB ACQUISITION CORPORATION 134, A
WHOLLY OWNED SUBSIDIARY OF USWEB ("MERGER SUB"), PROVIDING FOR THE MERGER OF
MERGER SUB WITH AND INTO CKS GROUP (THE "MERGER"); (2) FOR AN AMENDMENT TO THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF USWEB (THE "CERTIFICATE")
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF USWEB COMMON STOCK BY 100 MILLION
SHARES TO 200 MILLION SHARES; AND (3) AS SAID PROXIES DEEM ADVISABLE ON SUCH
OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
_____________________________________________________________________________
COMMENTS/ADDRESS CHANGE: PLEASE MARK COMMENT/ADDRESS BOX ON THE
REVERSE SIDE
(Continued and to be signed on reverse side)
- --------------------------------------------------------------------------------
(FOLD AND DETACH HERE)
[LOGO OF USWEB]
SPECIAL MEETING OF STOCKHOLDERS
December 16, 1998
10:00 a.m.
USWeb Corporation
2880 Lakeside Drive, Suite 300
Santa Clara, California 95054
________________________________________________________________________________
<PAGE>
________________________________________________________________________________
THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" EACH OF THE FOLLOWING PROPOSALS.
Please Mark [X]
your votes as
indicated in
this example
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
1. Proposal to approve the issuance of shares of the Common Stock, par [_] [_] [_]
value $0.001 per share, of USWeb ("USWeb Common Stock") to the
stockholders of CKS Group, Inc., a Delaware corporation ("CKS Group"),
pursuant to an Agreement and Plan of Reorganization, dated as of
September 1, 1998 (the "Reorganization Agreement"), among USWeb, CKS
Group and USWeb Acquisition Corporation 134, a wholly owned subsidiary
of USWeb ("Merger Sub"), providing for the merger of Merger Sub with
and into CKS Group (the "Merger");
FOR AGAINST ABSTAIN
2. Proposal to approve an amendment to the Certificate to increase the [_] [_] [_]
number of authorized shares of USWeb Common Stock by 100 million
shares to 200 million shares; and
FOR AGAINST ABSTAIN
3. The proxies are authorized to vote in their discretion upon such other [_] [_] [_]
business as may properly come before the meeting.
I PLAN TO ATTEND THE MEETING [_]
COMMENTS/ADDRESS CHANGE [_]
Please mark this if you have written
comments/address on the reverse side
</TABLE>
Signature_____________________ Signature___________________ Date________________
(This Proxy should be marked, dated, signed by the stockholder(s) exactly as his
or her name appears hereon, and returned promptly in the enclosed envelope.
Persons signing in a fiduciary capacity should so indicate. If shares are held
by joint tenants or as community property, both should sign.)
________________________________________________________________________________
(FOLD AND DETACH HERE)
<PAGE>
EXHIBIT 99.2
THE PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
----------------------------------------------------------
CKS GROUP, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
DECEMBER 16, 1998
The undersigned stockholder of CKS Group, Inc. (the "Company") hereby
acknowledges receipt of the Notice of Special Meeting of Stockholders and Joint
Proxy Statement/Prospectus for the Special Meeting of Stockholders of the
Company to be held on December 16, 1998 at 10:00 a.m., local time, at the
offices of the Company at 10441 Bandley Drive, Cupertino, California 95014, and
hereby revokes all previous proxies and appoints Mark D. Kvamme and Carlton H.
Baab, or either of them, with full power of substitution, Proxies and Attorneys-
in-Fact, on behalf and in the name of the undersigned, to vote and otherwise
represent all of the shares registered in the name of the undersigned at said
Special Meeting, or any continuation(s) adjournment(s) thereof, with the same
effect as if the undersigned were present and voting such shares, on the
following matters and in the following manner:
TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, PLEASE MARK, SIGN AND DATE
THIS PROXY AND RETURN IT AS PROMPTLY AS POSSIBLE. THE BOARD OF DIRECTORS
RECOMMENDS VOTING "FOR" EACH OF THE FOLLOWING PROPOSALS.
Please mark[ X ]
your votes as
indicated in
this example
FOR AGAINST ABSTAIN
1. Proposal to: (a) approve and adopt the Agreement and
Plan of Reorganization, dated as of September 1, 1998 [_] [_] [_]
(the "Reorganization Agreement"), among USWeb Corporation,
a Delaware corporation ("USWeb"), USWeb Acquisition
Corporation 134, a Delaware corporation and a wholly owned
subsidiary of USWeb ("Merger Sub"), and CKS Group and (b)
approve the merger of Merger Sub with and into CKS Group,
with CKS Group continuing as the surviving corporation and
becoming a wholly owned subsidiary of USWeb (the "Merger"),
pursuant to the Reorganization Agreement.
FOR AGAINST ABSTAIN
2. In their discretion, the Proxies are entitled to vote
upon such other matters as may properly come before the
Special Meeting or any adjournments thereof. [_] [_] [_]
(Continued and to be signed on reverse side)
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE. IF NO SPECIFICATION IS MADE, THE SHARES REPRESENTED BY THIS
PROXY WILL BE VOTED FOR THE ABOVE PROPOSAL, AND FOR SUCH OTHER MATTERS AS MAY
PROPERLY COME BEFORE THE SPECIAL MEETING AS THE PROXYHOLDERS DEEM ADVISABLE.
Signature(s)___________________________________ Date_____________________, 1998
(This proxy should be marked, dated and signed by each stockholder exactly as
such stockholder's name appears hereon, and returned promptly in the enclosed
envelope. Persons signing in a fiduciary capacity should so indicate. A
corporation is requested to sign its name by its President or other authorized
officer, with the office held designated. If shares are held by joint tenants or
as community property, both holders should sign.)
