<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended JUNE 30, 1998.
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________.
COMMISSION FILE NO. 000-23151
USWEB CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 87-0551650
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER
2880 LAKESIDE DRIVE, SUITE 300
SANTA CLARA, CALIFORNIA 95054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(408) 987-3200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
TITLE OF EACH CLASS OUTSTANDING AT JUNE 30, 1998
------------------- ----------------------------
Common Stock, $.001 par value 42,698,649
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USWEB CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
QUARTER ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Page No.
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PART I -- FINANCIAL INFORMATION
<S> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited) 1
Condensed Consolidated Balance Sheet at June 30, 1998 and December 31, 1997 1
Condensed Consolidated Statement of Operations for the three and six months
ended June 30, 1998 and 1997 2
Condensed Consolidated Statement of Cash Flows for the six months ended
June 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
PART II--OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
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PART I - FINANCIAL INFORMATION
USWEB CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,549 $ 44,145
Short-term investments 46,263 -
Accounts receivable, net 25,078 7,903
Other current assets 1,256 657
-------------- ---------------
Total current assets 88,146 52,705
Property and equipment, net 10,506 6,202
Intangible assets, net 157,339 19,019
Other assets 3,875 1,324
-------------- ---------------
$ 259,866 $ 79,250
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,177 $ 2,923
Accrued expenses 20,593 7,997
Deferred revenue 745 470
Current portion of debt and lease obligations 2,575 799
-------------- ---------------
Total current liabilities 29,090 12,189
Debt and lease obligations, long-term portion 1,177 372
-------------- ---------------
30,267 12,561
-------------- ---------------
Commitments and contingencies
Stockholders' equity:
Common stock 39 29
Additional paid-in capital 378,934 138,804
Accumulated deficit (149,374) (72,144)
-------------- ---------------
Total stockholders' equity 229,599 66,689
-------------- ---------------
$ 259,866 $ 79,250
============== ===============
</TABLE>
1
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USWEB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -------------------------------
1998 1997 1998 1997
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Services $ 25,243 $ 2,186 $ 38,698 $ 2,245
Other 174 258 370 694
------------- ------------- -------------- --------------
Total revenues 25,417 2,444 39,068 2,939
------------- ------------- -------------- --------------
Cost of revenues:
Services 16,303 2,005 25,138 2,170
Other 179 79 388 211
Stock compensation 3,576 347 5,257 347
------------- ------------- -------------- --------------
Total cost of revenues 20,058 2,431 30,783 2,728
------------- ------------- -------------- --------------
Gross profit 5,359 13 8,285 211
------------- ------------- -------------- --------------
Operating expenses:
Marketing, sales and support 6,431 4,584 10,971 8,335
General and administrative 5,501 2,318 9,349 3,762
Acquired in-process technology 18,289 2,137 22,612 2,848
Stock compensation 19,816 912 22,384 948
Amortization of intangible assets 16,933 1,472 21,428 1,578
------------- ------------- -------------- --------------
Total operating expenses 66,970 11,423 86,744 17,471
------------- ------------- -------------- --------------
Loss from operations (61,611) (11,410) (78,459) (17,260)
Interest income 894 58 1,432 65
Interest expense (153) (48) (203) (48)
Impairment of investee carried at cost - (4,000) - (4,000)
------------- ------------- -------------- --------------
Net loss $ (60,870) $ (15,400) $ (77,230) $ (21,243)
============= ============= ============== ==============
Net loss per share:
Basic and diluted $ (1.81) $ (3.43) $ (2.45) $ (5.74)
============= ============= ============== ==============
Weighted average shares outstanding 33,719 4,488 31,580 3,701
============= ============= ============== ==============
</TABLE>
2
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USWEB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (77,230) $ (21,243)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,876 367
Provision for doubtful accounts 222 471
Stock, option and warrant expenses 27,788 1,354
Amortization of intangible assets 21,428 1,577
Acquired in-process technology 22,612 2,848
Impairment of investee carried at cost - 4,000
Changes in assets and liabilities:
Accounts receivable (10,011) (444)
Other current assets 448 (77)
Other assets (1,579) 226
Accounts payable (460) 132
Accrued expenses (2,310) 2,005
Deferred revenues (119) -
--------------- --------------
Net cash used in operating activities (17,335) (8,784)
--------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (3,131) (1,009)
Cash acquired from (used in) acquisitions, net 1,919 (93)
Purchase of investment in affiliate - (1,150)
Purchases of short-term investments (54,635) -
Proceeds from maturities/sales of short-term investments 8,373 -
--------------- --------------
Net cash used in investing activities (47,474) (2,252)
--------------- --------------
Cash flows from financing activities:
Proceeds from issuance of Mandatorily Redeemable
Convertible Preferred Stock, net - 16,290
Proceeds from issuance of Common Stock, net 35,968 -
Proceeds from collection of note receivable - 1,400
Proceeds from capital lease financing 1,507 -
Principal payments on capital leases (1,262) (541)
--------------- --------------
Net cash provided by financing activities 36,213 17,149
--------------- --------------
Increase (decrease) in cash and cash equivalents (28,596) 6,113
Cash and cash equivalents, beginning of period 44,145 3,220
--------------- --------------
Cash and cash equivalents, end of period $ 15,549 $ 9,333
=============== ==============
</TABLE>
3
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USWEB CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(UNAUDITED)
NOTE 1--THE COMPANY:
USWeb Corporation ("USWeb" or the "Company") was incorporated in Utah on
December 6, 1995 ("inception") and reincorporated in Delaware on December 2,
1997. Through offices nationwide and internationally, the Company provides
Internet professional services including strategy consulting; analysis and
design; project management; Intranet, Extranet and Web site design; E-commerce
business systems; application development; technology integration; graphic
design and user interface; online marketing and brand development; deployment
and hosting; and maintenance and support.
During the quarter ended June 30, 1998, the Company recognized the acquisition
of all the outstanding stock of Xplora Limited, Kallista, Inc., USWeb San Jose,
Nutley Systems, Inc. (nSET), Gray Peak Technologies, Inc., and Advanced Video
Communications in separate transactions in exchange for a total of 5,785,765
shares of the Company's Common Stock and the assumption of certain stock options
for an aggregate purchase price of $145,927, excluding acquisition expenses.
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the recognized purchase price has been allocated to
the tangible and identifiable intangible assets acquired and liabilities assumed
on the basis of their fair values on the acquisition dates. Approximately
$3,813 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 $18,289 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 $16,440 was
allocated to workforce in place and existing technology and is being amortized
over their estimated useful lives, which range from six to forty-two months.
The purchase price in excess of the fair value of identified tangible and
intangible assets and liabilities assumed in the amount of $107,385 was
allocated to goodwill and is being amortized over its estimated useful life,
which ranges from twelve to thirty-six months.
As of June 30, 1998, the Company had recognized the acquisition of thirty-one
businesses ("Acquired Entities"). The following unaudited pro forma
consolidated amounts give effect to these acquisitions as if they had occurred
on January 1, 1998 and on January 1, 1997 by consolidating the results of
operations of the Acquired Entities with the results of USWeb for the three and
six months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- --------------------------------
1998 1997 1998 1997
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 27,684 $ 14,805 $ 50,923 $ 27,962
Net loss (51,695) (47,466) (122,873) (120,277)
Net loss per share:
Basic and diluted $ (1.37) $ (3.30) $ (3.35) $ (8.87)
Weighted average shares outstanding 37,746,140 14,378,355 36,715,299 13,566,122
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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USWEB CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(UNAUDITED)
Note 2--Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not contain all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments (consisting
of only normal recurring adjustments) considered necessary for a fair
presentation of USWeb's financial condition as of June 30, 1998, the results of
its operations for the three and six months ended June 30, 1998 and 1997, and
the results of its cash flows for the six months ended June 30, 1998 and 1997.
These financial statements should be read in conjunction with the Company's
audited 1997 financial statements, including the notes thereto, and the other
information set forth therein included in the Company's annual report on Form
10-K. Operating results for the three and six months ended June 30, 1998 are
not necessarily indicative of the operating results that may be expected for the
year ending December 31, 1998. The following discussions may contain forward-
looking statements, which are subject to the risk factors set forth in "Risk
Factors" contained in Item 2.
NOTE 3--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 $10,000. In connection with the strategic alliance, the
Company issued warrants to NBC allowing them to purchase 1,600,000 and 500,000
shares of the Company's Common Stock at $22.50 and $25.43 per share,
respectively. The fair value of the warrants on the date of grant totaled
$12,568, which has been recorded as Stock Compensation in the Company's
Condensed Consolidated Statement of Operations for the three and six months
ended June 30, 1998. The warrants are exercisable at any time prior to their
expiration in November 1999. No warrants had been exercised at June 30, 1998.
NOTE 4--RECENT ACCOUNTING PRONOUNCEMENTS:
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in the three and
six months ended June 30, 1998. SFAS No. 130 requires the Company to report in
their financial statements, in addition to its net income (loss), comprehensive
income (loss), which includes all changes in equity during a period from non-
owner sources including, as applicable, foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain investments in
debt and equity securities. During the three and six months ended June 30,
1998, such items were not significant, and the Company's comprehensive loss
approximated its net loss.
Note 5--Supplemental Cash Flow Information:
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Non-cash financing and investing activities:
Common stock issued for acquisitions 176,798 11,102
Assumption of liabilities for acquisitions 4,976 -
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
USWEB CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(UNAUDITED)
Note 6--Balance Sheet Components:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable $ 27,131 $ 8,722
Less: allowance for doubtful accounts (2,053) (819)
--------------- ---------------
$ 25,078 $ 7,903
=============== ===============
Property and equipment, net:
Computer and equipment $ 11,788 $ 6,490
Furniture and fixtures 1,418 834
Leasehold improvements 903 605
--------------- ---------------
14,109 7,929
Less: accumulated depreciation and amortization (3,603) (1,727)
--------------- ---------------
$ 10,506 $ 6,202
=============== ===============
Intangible assets, net:
Goodwill $ 167,099 $ 24,885
Purchased technology 9,944 3,610
Workforce in-place 11,200 -
--------------- ---------------
188,243 28,495
Less: accumulated amortization (30,904) (9,476)
--------------- ---------------
$ 157,339 $ 19,019
=============== ===============
Accrued expenses:
Compensation and benefits $ 5,641 $ 1,900
Professional fees 3,767 1,916
Marketing costs 1,727 1,155
Other 9,458 3,026
--------------- ---------------
$ 20,593 $ 7,997
=============== ===============
</TABLE>
Note 7--Subsequent Events:
Subsequent to June 30, 1998, the Company completed its acquisition of all of
the outstanding stock of Tucker Network Technologies, Inc. in exchange for
577,897 shares of the Company's Common Stock for a total purchase price of
approximately $12,640.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward-looking statements that involve risks and
uncertainties, including statements regarding the Company's strategy, planned
operations, financial performance, and revenue sources. The Company's actual
results could differ materially from the results anticipated in these forward-
looking statements as a result of certain factors set forth under "Risk Factors"
below. For additional information regarding the Company and factors that could
affect future performance, see the information contained in the Company's public
filings with the Securities and Exchange Commission.
OVERVIEW
USWeb is a leading Internet professional services firm that provides Intranet,
Extranet and Web site solutions and services to businesses. The Company has
built an international network of consulting offices and what it believes to be
one of the most recognized brands for Internet professional services. The
Company offers a comprehensive range of services to deliver Internet solutions
designed to improve clients' business processes. The Company's services include
strategy consulting; analysis and design; 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. The
Company markets its services to medium-sized and large companies.
From December 6, 1995 (inception) to March 31, 1997, the Company's operating
activities related primarily to recruiting personnel, raising capital, preparing
and securing approval of its Uniform Franchise Offering Circular and conducting
business as a franchisor of Internet professional services firms. Each such
firm that entered into a franchise agreement with USWeb was designated an
"Affiliate." In March 1997, the Company entered into its last Affiliate
agreement and does not expect to enter into any additional Affiliate agreements.
In the first quarter of 1997, the Company initiated the second phase of its
corporate development strategy and began to acquire Internet professional
services firms, beginning with certain qualified Affiliates. To date, the
Company has derived its revenues from a combination of service revenues
generated by its Company-owned offices and fees paid by its Affiliates.
Revenues from Company-owned offices represented approximately 99% of total
company revenues for the three and six months ended June 30, 1998. This
transition in business strategy from a franchising model to one based on
Company-owned operations accounts for the primary differences in the results of
operations between the three and six months ended June 30, 1998 and 1997. In
addition, because of this transition in business strategy, the Company believes
that its historical financial statements for periods ending on or before March
31, 1997 are not indicative of future operating results.
The Company has only a limited operating history upon which to base an
evaluation of its business and prospects. The Company and its prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in an early stage of development, particularly
companies in new and rapidly evolving markets such as Internet professional
services. Such risks for the Company include, but are not limited to, an
evolving business model and the management of both internal and acquisition-
based growth. To address these risks, the Company must, among other things,
continue to expand its network of consulting offices, continue to develop the
strength and quality of its operations, maximize the value delivered to clients,
enhance the USWeb brand, respond to competitive developments and continue to
attract, retain and motivate qualified employees. There can be no assurance
that the Company will be successful in meeting these challenges and addressing
such risks, and the failure to do so could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
has incurred net losses since inception, and as of June 30, 1998 had an
accumulated deficit of $149.4 million. Although the Company has experienced
revenue growth in recent quarters, such growth rates may not be sustainable or
indicative of future operating results. The Company expects to continue to
incur substantial operating losses through at least 1998, and there can be no
assurance that the Company will achieve or sustain profitability. See "Risk
Factors--Limited Operating History."
7
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ACQUISITION OF INTERNET PROFESSIONAL SERVICES FIRMS
The Company began to acquire selected Internet professional services firms in
the first quarter of 1997. The Company transitioned from a franchise-based
business model to one based on Company-owned operations to provide greater
economies of scale, enable the consulting offices to focus on providing Internet
professional services and facilitate their growth by furnishing needed working
capital. See Note 1 of Notes to Condensed Consolidated Financial Statements.
The Company generally uses a consistent valuation and process methodology for
its acquisitions. The Company determines the initial purchase price of each
acquisition candidate based on quantitative factors, including historical
revenues, profitability, financial condition and contract backlog, and the
Company's qualitative evaluation of the acquisition candidate's management team,
operational scalability and customer base. The Company typically acquires
suitable candidates through mergers in exchange for shares of USWeb Common
Stock. Generally, on the closing date of the acquisition, 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. In a typical
acquisition, the acquired company is valued again, at each of six and twelve
months after acquisition, and additional shares are issued or escrowed shares
are returned depending on whether the valuation has increased or decreased.
After all such purchase price adjustments have been made, all shares remaining
in escrow are issued to the acquired company's shareholders. The Company
expects to continue using this valuation methodology for most of its future
acquisitions; however, the Company has in the past used, and in the future may
use, other methodologies as considered appropriate. The Company's acquisition
program will result in further substantial ownership dilution to investors. See
"Risk Factors--Dilution" and Note 1 of Notes to Condensed Consolidated Financial
Statements.
All acquisitions to date have been accounted for using the purchase method of
accounting. For each acquisition, a portion of the purchase price is allocated
to the tangible and identifiable intangible assets acquired and liabilities
assumed based on their respective fair values on the acquisition date.
Identifiable intangible assets include both (i) amounts allocated to in-process
technology and immediately charged to operations and (ii) amounts allocated to
workforce and completed technology and amortized on a straight-line basis over
the estimated useful life of workforce in place and technology, which ranges
from six to forty-two months. The portion of the purchase price in excess of
tangible and identifiable intangible assets and liabilities assumed is allocated
to goodwill and amortized on a straight-line basis over the estimated period of
benefit, which ranges from twelve to thirty-six months. The results of
operations of an acquired entity are consolidated with those of the Company as
of the date the Company acquires effective control of the entity, which
generally occurs prior to the formal legal closing of the transaction and the
physical exchange of acquisition consideration.
All target company employees and non-employee shareholders that enter into
consulting agreements are granted options to purchase shares of the Company's
Common Stock. In most cases, each option becomes exercisable over a 36-month
period. All such 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 are generally 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, which has a value when paid equal to the aggregate exercise
price of options granted at acquisition, vests at the same rate as the
corresponding option. The stock bonus is payable at the earlier of three years
from the date of grant or, to the extent vested, upon termination of employment.
The stock bonus amount is amortized ratably over a 36-month period and recorded
as compensation expense. This charge is identified as "Stock Compensation" and
allocated to cost of revenues or operating expenses depending on whether the
optionee is acting in a service delivery or administrative capacity.
As a result of both the purchase accounting adjustments and the stock
compensation charges described above, the Company has incurred significant non-
cash expenses related to its acquisitions. For example, for the quarter ended
June 30, 1998, stock compensation expense included in cost of revenues totaled
$3.6 million, stock compensation expense included in operating expenses totaled
$7.2 million (net of the $12.6 million associated with warrants issued to NBC
Multimedia, Inc. (NBC); see Results of Operations--Stock Compensation) and
amortization of intangible assets totaled $16.9 million, all of which were
related to the acquisition of the thirty-one Company-owned offices completed
since the Company's inception. In addition, the Company recognized an aggregate
cost of $18.3 million for acquired in-process technology related to the six
acquisitions completed during the quarter ended
8
<PAGE>
June 30, 1998. The Company expects these acquisition-related non-cash expenses
to increase as it continues its acquisition program.
The successful implementation of the Company's acquisition strategy depends on
the Company's ability to identify suitable acquisition candidates, acquire such
companies on acceptable terms and integrate their operations successfully with
those of the Company. There can be no assurance that the Company will be able
to do so. Moreover, in pursuing acquisitions the Company may compete with
companies with similar acquisition strategies, certain of which competitors may
be larger and have greater financial and other resources than the Company.
Competition for these acquisition targets could also result in increased prices
for acquisition targets and a diminished pool of companies available for
acquisition. Acquisitions also involve a number of other risks, including
adverse effects on the Company's reported operating results from increases in
goodwill amortization, acquired in-process technology, stock compensation
expense and increased compensation expenses resulting from newly hired
employees, the diversion of management attention, risks associated with the
subsequent integration of acquired businesses, potential disputes with the
sellers or other affiliates of one or more acquired entities and the failure to
retain key acquired personnel. Client satisfaction or performance problems with
an acquired firm could also have a material adverse impact on the reputation of
the Company as a whole and any acquired subsidiary could significantly
underperform relative to the Company's expectations. For all of these reasons,
the Company's pursuit of an overall acquisition strategy or any individual
completed, pending or future acquisition may have a material adverse effect on
the Company's business, results of operations and financial condition. To the
extent the Company chooses to use cash consideration in the future to pay for
all or part of any acquisitions, the Company may be required to obtain
additional financing, and there can be no assurance that such financing will be
available on favorable terms, if at all. See "Risk Factors--Management of
Growth; Integration of Acquisitions" and "--Future Capital Needs; Uncertainty of
Additional Financing."
SOURCES OF REVENUES
The Company consolidates the financial statements of acquired entities
beginning on the date the Company assumes effective control of those entities.
Revenues primarily consist of fees from consulting services engagements
(including both time-and-materials and fixed-price engagements). The services
offered by the Company include strategy consulting; analysis and design; project
management; Intranet, Extranet and Web site design; E-commerce business systems;
application development; technology integration; graphic design and user
interface; online marketing and brand development; deployment and hosting; and
maintenance and support. Revenues from time-and-material engagements are
recognized as incurred and revenues from fixed-price engagements are recognized
on a percentage-of-completion basis. Billable rates vary by the service
provided and geographical region. Although a majority of engagements are
currently performed on a time and materials basis, the Company intends to
increase the percentage of its engagements that are based on a fixed-price. The
pricing, management and execution of individual engagements are the
responsibility of the consulting office that performs or coordinates the
services.
The Company operated under its Affiliate model from December 1995 (inception)
through the first quarter of 1997. During that period, revenues were derived
almost exclusively from initial fees and monthly royalties from Affiliates.
Initial fees were typically recognized when received because all obligations
required of USWeb by the Affiliate agreement were substantially performed
concurrently with the execution of the agreement. Monthly royalty revenue is
recognized as reported by the Affiliate to the Company. In the first quarter of
1997, the Company ended its program for attracting new Affiliates and initiated
the acquisition phase of its corporate development strategy. During the three
and six months ended June 30, 1998, revenues from Affiliates were insignificant.
COST STRUCTURE
Consulting offices owned by the Company recognize revenues primarily using the
percentage-of-completion method. Direct costs, such as personnel salaries and
benefits and the cost of any third-party hardware or software included in an
Internet solution, and related overhead expenses, such as depreciation and
occupancy charges, associated with the generation of the revenues are classified
as cost of revenues. The technology, sales, marketing and administrative costs
of each Company-owned office are classified as operating expenses. Corporate
expenses are primarily classified as operating expenses. Marketing, sales and
support expenses include product and service
9
<PAGE>
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
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues. Total revenues increased to $25.4 million for the three months ended
June 30, 1998, from $2.4 million for the three months ended June 30, 1997. This
increase was attributable to the increased number and relative size of client
engagements combined with the Company's acquisition program, which began in the
first quarter of 1997. The Company had completed thirty-one acquisitions as of
June 30, 1998 compared to eight as of June 30, 1997.
Cost of Revenues. Cost of revenues increased to $20.1 million for the three
months ended June 30, 1998, from $2.4 million for the three months ended June
30, 1997. The increase in cost of revenues was attributable to increased
staffing for engagements combined with the cost of revenues associated with
acquired companies subsequent to their respective acquisition dates. As a
percentage of revenues, cost of revenues decreased to 79% for the three months
ended June 30, 1998 from 99% for the corresponding period in 1997. This
decrease resulted from the further integration of the Company's acquisitions,
many of which were fully integrated as of June 30, 1998. Included in cost of
revenues for the three months ended June 30, 1998, are non-cash charges
aggregating $4.5 million, which include stock compensation resulting from the
Company's acquisition program and depreciation and amortization of fixed assets
and leasehold improvements. The Company anticipates that cost of revenues will
increase in absolute dollars as a result of acquisitions of additional Internet
professional service firms and as Company-owned offices accept additional
engagements.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased to $6.4 million for the three months ended June 30, 1998, from $4.6
million for the three months ended June 30, 1997. This increase was primarily
attributable to USWeb branding campaigns, increases in personnel to support the
growth in the Company's operations and the consolidation of the results of
operations of twenty-three additional Internet professional services firms with
those of the Company. As a percentage of revenues, marketing sales and support
expenses decreased to 25% of revenues for the three months ended June 30, 1998,
compared to 188% for the corresponding period in 1997. This decrease resulted
primarily from economies of scale. Included in marketing, sales and support
expenses for the three-month period ended June 30, 1998 are non-cash charges
aggregating $77,000 related to depreciation and amortization of fixed assets and
leasehold improvements. The Company anticipates that marketing, sales and
support expenses will increase in future periods in absolute dollars as it
continues to pursue an aggressive brand building strategy and continues to
acquire and consolidate the results of additional Internet professional service
firms.
General and Administrative Expenses. General and administrative expenses
increased to $5.5 million for the three months ended June 30, 1998, from $2.3
million for the three months ended June 30, 1997. This increase was primarily
attributable to increases in personnel to support the internal growth in the
Company's operations and the consolidation of the operations of twenty-three
additional Internet professional services firms with those of the Company. As a
percentage of revenues, general and administrative expenses decreased to 22% of
revenues for the three months ended June 30, 1998 compared to 95% for the
corresponding period in 1997. This decrease resulted primarily from economies
of scale. Included in general and administrative expenses for the three months
ended June 30, 1998 are non-cash charges aggregating $143,000 related to
depreciation and amortization of fixed assets and leasehold improvements. The
Company believes that the absolute dollar level of general and administrative
expenses will increase in future periods as a result of increased staffing and
costs associated with acquiring and consolidating the results of additional
Internet professional service firms.
Acquired In-Process Technology. Acquired in-process technology increased to
$18.3 million for the three months ended June 30, 1998, from $2.1 million for
the three months ended June 30, 1997. This increase resulted from the number
and relative size of acquisitions completed in the three months ended June 30,
1998, compared to the corresponding period in 1997. The value of the acquired
in-process technology was determined using a
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combination of risk-adjusted income approaches and independent valuations. The
acquired in-process technology related to each acquired company had not reached
the stage of technological feasibility at the date of acquisition and had no
alternative future use. The Company anticipates that acquired in-process
technology expenses in future periods will vary in absolute dollars and as a
percentage of revenues.
Stock Compensation. Stock compensation expense increased to $19.8 million for
the three months ended June 30, 1998, from $912,000 for the three months ended
June 30, 1997. Included in stock compensation are the value of warrants granted
to NBC in connection with a strategic relationship (see Note 3 of Notes to
Condensed 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 three months ended June 30, 1998, as compared to
the corresponding period in 1997, resulted from the value of the warrants
associated with the NBC agreement, as well as the increased number and relative
size of the Company's various acquisitions. The Company anticipates that stock
compensation expense will vary in future periods.
Amortization of Intangible Assets. Amortization of intangible assets,
consisting primarily of purchased technology, workforce in place, and goodwill,
increased to $16.9 million for the three months ended June 30, 1998, from $1.5
million, for the three months ended June 30, 1997. This increase resulted from
the increased number and relative size of the Company's acquisitions completed
prior to June 30, 1998. The Company anticipates that expenses related to the
amortization of intangible assets will increase in future periods in absolute
dollars as it continues to acquire additional Internet professional service
firms.
Interest Income and Expense. Net interest income increased to $741,000 for the
three months ended June 30, 1998 from $10,000 for the three months ended June
30, 1997. This increase resulted from interest earned on the investment of the
net proceeds of the Company's public equity offerings, completed in December
1997 and April 1998, offset by interest expense incurred on the Company's debt
and lease obligations.
Income Taxes. No provision for federal and state income taxes was recorded for
the three months ended June 30, 1998 and 1997 because the Company incurred net
operating losses in each of those periods.
Impairment of Investee. During June 1997, the Company recognized an impairment
provision totaling $4.0 million, representing the total amount of its cost basis
investment in Utopia, Inc., an independent Internet consulting firm.
Net Loss. Net losses for the three months ended June 30, 1998 and 1997 were
$60.9 million and $15.4 million, respectively. The increase in the net loss was
primarily attributable to non-cash charges of $59.7 million for the three months
ended June 30, 1998, the majority of which resulted from the Company's
acquisition program, compared to non-cash charges of $5.1 million for the three
months ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues. Total revenues increased to $39.1 million for the six months ended
June 30, 1998, from $2.9 million for the six months ended June 30, 1997. This
increase was attributable to the increased number and relative size of client
engagements combined with the Company's acquisition program, which began in the
first quarter of 1997. The Company had completed thirty-one acquisitions as of
June 30, 1998 compared to eight as of June 30, 1997.
Cost of Revenues. Cost of revenues increased to $30.8 million for the six
months ended June 30, 1998, from $2.7 million for the six months ended June 30,
1997. The increase in cost of revenues was primarily attributable to the
increased staffing for engagements combined with the cost of revenues associated
with acquired companies subsequent to their respective acquisition dates. As a
percentage of revenues, cost of revenues decreased to 79% for the six months
ended June 30, 1998, from 93% for the corresponding period in 1997. This
decrease resulted from the further integration of the Company's acquisitions,
many of which were fully integrated as of June 30, 1998. Included in cost of
revenues for the six months ended June 30, 1998 are non-cash charges aggregating
$6.8 million, which include stock compensation resulting from the Company's
acquisition program and depreciation and amortization of fixed assets and
leasehold improvements. The Company anticipates that cost of revenues will
increase in absolute dollars as a result of acquisitions of additional Internet
professional service firms and as Company-owned offices accept additional
engagements.
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Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased to $11.0 million for the six months ended June 30, 1998, from $8.3
million for the six months ended June 30, 1997. This increase was primarily
attributable to USWeb branding campaigns, increases in personnel to support the
growth in the Company's operations and the consolidation of the results of
operations of additional Internet professional services firms with those of the
Company during each period. As a percentage of revenues, marketing sales and
support expenses decreased to 28% of revenues for the six months ended June 30,
1998, compared to 284% for the corresponding period in 1997. This decrease
resulted primarily from economies of scale. Included in marketing, sales and
support expenses for the six months ended June 30, 1998 are non-cash charges
aggregating $154,000 related to depreciation and amortization of fixed assets
and leasehold improvements. The Company anticipates that marketing, sales and
support expenses will increase in future periods in absolute dollars as it
continues to pursue an aggressive brand building strategy and continues to
acquire and consolidate the results of additional Internet professional service
firms.
General and Administrative Expenses. General and administrative expenses
increased to $9.3 million for the six months ended June 30, 1998, from $3.8
million for the six months ended June 30, 1997. This increase was primarily
attributable to increases in personnel to support the internal growth in the
Company's operations and the consolidation of the operations of acquired
Internet professional services firms with those of the Company during each
period. As a percentage of revenues, general and administrative expenses
decreased to 24% of revenues for the six months ended June 30, 1998, compared to
128% for the corresponding period in 1997. This decrease resulted primarily
from economies of scale. Included in general and administrative expenses for
the six months ended June 30, 1998 are non-cash charges aggregating $219,000
related to depreciation and amortization of fixed assets and leasehold
improvements. The Company believes that the absolute dollar level of general
and administrative expenses will increase in future periods as a result of
increased staffing and costs associated with acquiring and consolidating the
results of additional Internet professional service firms.
Acquired In-Process Technology. Acquired in-process technology increased to
$22.6 million for the six months ended June 30, 1998, from $2.8 million for the
six months ended June 30, 1997. This increase resulted from the number and
relative size of acquisitions completed in the six months ended June 30, 1998,
compared to the corresponding period in 1997. The value of the acquired in-
process technology was determined using a combination of risk-adjusted income
approaches and independent valuations. The acquired in-process technology
related to each company had not reached the stage of technological feasibility
at the date of acquisition and had no alternative future use. The Company
anticipates that acquired in-process technology expenses in future periods will
vary in absolute dollars and as a percentage of revenues.
Stock Compensation. Stock compensation expense increased to $22.4 million for
the six months ended June 30, 1998, from $948,000 for the six months ended June
30, 1997. Included in stock compensation are the value of warrants granted to
NBC in connection with a strategic relationship (see Note 3 of Notes to
Condensed 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 six months ended June 30, 1998, as compared to the
corresponding period in 1997, resulted from the value of the warrants associated
with the NBC agreement, as well as the increased number and relative size of the
Company's various acquisitions. The Company anticipates that stock compensation
expense will vary in future periods.
Amortization of Intangible Assets. Amortization of intangible assets,
consisting primarily of purchased technology, workforce in place, and goodwill,
increased to $21.4 million for the six months ended June 30, 1998, from $1.6
million for the six months ended June 30, 1997. This increase resulted from the
increased number and relative size of the Company's acquisitions completed prior
to June 30, 1998. The Company anticipates that expenses related to the
amortization of intangible assets will increase in future periods in absolute
dollars as it continues to acquire additional Internet professional service
firms.
Interest Income and Expense. Net interest income increased to $1.2 million for
the six months ended June 30, 1998, from $17,000 for the six months ended June
30, 1997. This increase resulted from interest earned on the investment of the
net proceeds of the Company's public equity offerings, completed in December
1997 and April 1998, offset by interest expense incurred on the Company's debt
and lease obligations.
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Income Taxes. No provision for federal and state income taxes was recorded for
the six months ended June 30, 1998 and 1997 because the Company incurred net
operating losses in each of those periods.
Impairment of Investee. During June 1997, the Company recognized an impairment
provision totaling $4.0 million, representing the total amount of it cost basis
investment in Utopia, Inc., an independent Internet consulting firm.
Net Loss. Net losses for the six months ended June 30, 1998 and 1997 were
$77.2 million and $21.2 million, respectively. The increase in the net loss was
primarily attributable to non-cash charges of $73.5 million for the six months
ended June 30, 1998, the majority of which resulted from the Company's
acquisition program, compared to non-cash charges of $6.1 million for the six
months ended June 30, 1997.
Liquidity and Capital Resources
The Company invests predominantly in instruments that are highly liquid, are
of high-quality investment grade, and have maturities of less than one year,
with the intent to make such funds readily available for operating purposes. At
June 30, 1998, the Company had approximately $61.8 million in cash, cash
equivalents and short-term investments compared to $44.1 million at December 31,
1997.
Cash used in operating activities was $17.3 million for the six months ended
June 30, 1998, and was primarily due to the net loss from operations of $77.2
million, offset by non-cash charges of $73.5 million (which includes 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 $10.0 million resulting from an
increase in the number and size of engagements being entered into. Cash used in
operating activities was $8.8 million for the six months ended June 30, 1997,
and was primarily due to the net loss from operations of $21.2 million, offset
by non-cash charges of $6.1 million, an impairment provision of $4.0 million,
representing the cost basis in Utopia, Inc., and an increase in accrued
liabilities of $2.0 million primarily for financing costs related to the
issuance of Mandatorily Redeemable Convertible Preferred Stock.
Cash used in investing activities was $47.5 million for the six months June
30, 1998. Purchases (net of sales and maturities) of investments in marketable
securities during the period were $46.3 million and capital expenditures totaled
$3.1 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 $2.3 million for the six months ended June 30, 1997,
and was primarily due to an investment in Utopia, Inc. of $1.2 million and
capital expenditures of $1.0 million.
Cash provided by financing activities was $36.2 million for the six months
ended June 30, 1998. In April 1998, the Company completed a follow-on public
offering of its Common Stock, resulting in net proceeds of $31.2 million.
Additionally, various stock option and common stock warrant holders exercised
their stock options and common stock warrants, resulting in net proceeds of $4.8
million. Cash provided by financing activities was $17.1 million for the six
months ended June 30, 1997, and was primarily due to the issuance of Mandatorily
Redeemable Preferred Stock (which converted to shares of Common Stock upon the
close of the Company's initial public offering in December 1997), resulting in
net proceeds of $16.3 million.
The Company currently has no material commitments other than those under
operating lease agreements. The Company has experienced a substantial increase
in its capital expenditures and operating lease arrangements since its
inception, which is consistent with increased staffing, and anticipates that
this will continue in the future. Additionally, the Company will continue to
evaluate possible acquisitions of or investments in businesses, products, and
technologies that are complementary to those of the Company, which may require
the use of cash. The Company believes that existing cash, investments, and
borrowings available under its credit facilities will be sufficient to fund its
requirements for working capital and capital expenditures for at least the next
12 months; however, the Company may sell additional equity or debt securities or
seek additional credit facilities if it believes such actions would be a better
way to fund acquisition-related or other costs. Sales of additional equity or
convertible debt securities would result in additional dilution to the Company's
stockholders. The Company may need to raise additional funds sooner in order to
support more rapid expansion, develop new or enhanced services
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and products, respond to competitive pressures, acquire complementary businesses
or technologies or take advantage of unanticipated opportunities. The Company's
future liquidity and capital requirements will depend upon numerous factors,
including the success of the Company's existing and new service offerings and
competing technological and market developments. See "Risk Factors--Future
Capital Needs; Uncertainty of Additional Financing."
RISK FACTORS
Limited Operating History. The Company was founded in December 1995 and has
only a limited operating history on which to base an evaluation of its business
and prospects. The Company and its prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in an early
stage of development, particularly companies in new and rapidly evolving markets
such as Internet professional services. Such risks for the Company include, but
are not limited to, an evolving business model and the management of both
internal and acquisition-based growth. To address these risks, the Company must,
among other things, continue to expand its network of consulting offices,
continue to develop the strength and quality of its operations, enhance the
USWeb brand, respond to competitive developments and continue to attract, retain
and motivate qualified employees.
Potential Fluctuations in Quarterly Results. As a result of the Company's
limited operating history, rapid growth and the emerging nature of the markets
in which it competes, the Company's historical financial data is of limited
value in planning future operating expenses. Accordingly, the Company's expense
levels are based in part on its expectations concerning future revenues and are
fixed to a large extent. The Company's revenues are derived primarily from
consulting fees for Internet solution engagements, which are difficult to
forecast accurately. Further, the Company intends to increase its expenses
significantly to expand operations and enhance the Company's brand name and to
increase other operating expenses as required to support the operations of the
Company's consulting offices. If the Company experiences a shortfall in demand,
or if its expenses precede or are not rapidly followed by increased revenues,
the Company's business, results of operations and financial condition may be
materially adversely affected.
The Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. These factors include the level of demand for Intranet,
Extranet and Web site development; the productivity of the Company's consulting
offices; the Company's success in finding and acquiring suitable acquisition
candidates; the Company's ability to attract and retain personnel with the
strategic, technical and creative skills required to service clients
effectively; the cost of advertising and related media; the amount and timing of
expenditures by USWeb clients for Internet professional services; client
budgetary cycles; the amount and timing of capital expenditures and other costs
relating to the expansion of the Company's operations; the introduction of new
products or services by the Company or its competitors; pricing changes in the
industry; technical difficulties with respect to the use of the Internet;
economic conditions specific to Internet technology usage; government regulation
and legal developments regarding the use of the Internet; and general economic
conditions. As a strategic response to changes in the competitive environment,
the Company may from time to time make certain pricing, service, technology or
marketing decisions or business or technology acquisitions that could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company may also experience seasonality in demand for
its business. Due to all of the foregoing factors, in some future quarter the
Company's operating results may fall below the expectations of securities
analysts and investors. In such event, the trading price of the Company's
Common Stock would likely be materially and adversely affected and expensive
litigation may ensue.
Management of Growth; Integration of Acquisitions. The Company's rapid growth
has placed, and is expected to continue to place, a significant strain on the
Company's managerial, operational, financial and other resources. As of June
30, 1998, the Company had grown to 1,080 employees since its inception in
December 1995, and the Company expects that continued hiring of new personnel
will be required to support its business. The Company's future success will
depend, in part, upon its ability to manage its growth effectively, which will
require that the Company continue to implement and improve its operational,
administrative and financial and accounting systems and controls and to expand,
train and manage its employee base. A key component of the Company's growth
strategy is the acquisition of Internet professional service firms. The
successful implementation of this strategy
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depends on the Company's ability to identify suitable acquisition candidates,
acquire such companies on acceptable terms and integrate their operations
successfully with those of the Company. Acquisitions involve a number of risks,
including adverse effects on 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; the possible failure to retain key acquired personnel;
and client satisfaction or performance problems with an acquired entity. Because
all of the Company's thirty-one acquisitions through June 30, 1998 were
completed in the past fifteen months, the Company is currently facing all of
these challenges and its ability to meet them over the long term has not been
established. To the extent the Company chooses to use cash consideration for
acquisitions in the future, the Company may be required to obtain additional
financing, and there can be no assurance that such financing will be available
on favorable terms, if at all. As the Company issues stock to complete future
acquisitions, existing stockholders will experience further ownership dilution.
Competition. The market for Internet professional services is relatively new,
intensely competitive, rapidly evolving and subject to rapid technological
change. The Company's competitors include large computer hardware, software and
service vendors; established advertising and media agencies; large information
technology consulting service providers; telecommunications companies; major
Internet and online service providers; and other Internet integrators and Web
presence providers. Some of these competitors offer a full range of Internet
professional services and several others have announced their intention to do
so. In addition, there are relatively low barriers to entry into the Company's
business and the Company expects that it will face additional competition from
new entrants into the market. Furthermore, most of the Company's current and
potential competitors have longer operating histories, longer relationships with
clients and significantly greater financial, technical, marketing and public
relations resources than the Company
Dilution. The Company has outstanding a large number of stock options and
warrants to purchase the Company's Common Stock with exercise prices
significantly below the current market price. To the extent such options or
warrants are exercised, there will be further dilution. The Company expects to
continue its acquisition program through at least the end of 1998, and pursuant
to a "shelf" Registration Statement has registered 16,666,667 shares of its
Common Stock, which the Company intends to issue as acquisition consideration as
well as granting additional stock options and stock bonuses to the employees of
the acquired companies. As of June 30, 1998, 7,387,018 were available for
issuance. Furthermore, the Company may be required, pursuant to the terms of
most of its acquisition agreements, to issue additional shares, stock options
and stock bonuses to the shareholders and employees of the acquired companies at
each of six and twelve months after acquisition of the acquired companies. For
these reasons, the Company's acquisition program will result in further
substantial ownership dilution to investors.
Recruitment and Retention of Personnel. The Company's business of delivering
Internet professional services is labor intensive. Accordingly, the Company's
success depends in part on its ability to identify, hire, train and retain
consulting professionals, of whom there is a shortage. The Company's
performance is particularly dependent on the continued services and on the
performance of its executive officers and other key employees. The loss of the
services of any of its executive officers or other key employees could have a
material adverse effect on the Company.
Need to Maintain and Strengthen the USWeb Brand. The Company believes that
maintaining and strengthening the USWeb brand is an important aspect of its
efforts to attract clients and that the importance of brand recognition will
increase due to the increasing number of companies entering the market for
Internet professional services. If the Company fails to promote and maintain
its brand, or incurs excessive expenses in an attempt to promote and maintain
its brand, the Company's business, results of operations and financial condition
will be materially adversely affected.
Reliance Upon Key Strategic Relationships. The Company has established a
number of strategic relationships with leading hardware and software companies,
certain of which are terminable at-will by the parties. The loss of any one of
these strategic relationships would deprive the Company of the opportunity to
gain early access to leading-edge technology, cooperatively market products with
the vendor, cross-sell additional services and gain enhanced access to vendor
training and support.
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Uncertain Adoption of Internet Solutions; Dependence on Client Outsourcing.
The market for the Company's services will depend upon the adoption of Internet
solutions by companies to improve their business processes. Critical issues
concerning the use of Internet solutions (including security, reliability, cost,
ease of deployment and administration and bandwidth of the Internet itself)
remain unresolved and may affect the growth of the use of such technologies to
solve business problems. Even if these issues are resolved, there can be no
assurance that businesses will elect to outsource the design, development and
maintenance of their Intranets, Extranets and Web sites to Internet professional
services firms.
Rapid Technological Change. The market for Internet professional services is
characterized by rapid technological change, changes in user and client
requirements and preferences, frequent new product and service introductions
embodying new processes and technologies and evolving industry standards and
practices that could render the Company's existing service practices and
methodologies obsolete. The Company's success will depend, in part, on its
ability to improve its existing services, develop new services and solutions
that address the increasingly sophisticated and varied needs of its current and
prospective clients, and respond to technological advances, emerging industry
standards and practices, and competitive service offerings.
Risks Associated with International Operations and Expansion. The Company
intends to expand its operations into international markets. However, to date
the Company has established only two consulting offices outside of the United
States and has no experience in either managing an international network of
consulting offices or in marketing services to international clients. The
Company expects to incur significant costs to do both. There are certain risks
inherent in doing business on an international level, such as: unexpected
changes in regulatory requirements, difficulties in staffing and managing
foreign operations, potentially adverse differences in business customs and
practices, longer payment cycles, problems in collecting accounts receivable,
and political instability, among others, any of which could adversely affect the
Company's international operations.
Risks of Fixed-Price Engagements. The Company intends to increase the
percentage its engagements that are based on a fixed-price, as well as the
percentage of revenues derived from fixed-price engagements, as distinguished
from the Company's current principal method of billing on a time-and-materials
basis. The Company's failure to estimate accurately the resources and time
required for an engagement, to manage effectively client expectations regarding
the scope of services to be delivered for the estimated fees or to complete
fixed-price engagements within budget, on time and to clients' satisfaction
would expose the Company to risks associated with cost overruns and, in certain
cases, penalties, any of which could have a material adverse effect on the
Company's business, results of operations and financial condition.
Risks of Franchising. USWeb has entered into franchise agreements with
Affiliates, which manage a small number of its consulting offices. The
operational autonomy granted to each Affiliate through the franchise structure
might inhibit the Company's control over its market presence and the USWeb brand
or enable the Affiliate to compete with Company-owned offices for client
engagements. Further, despite implementation of contractual safeguards and
insurance against such a possibility, USWeb may be held by a court to be
responsible for some action or liability of an Affiliate.
Intellectual Property Risks. The Company regards its copyrights, trademarks,
trade secrets (including its methodologies, practices and tools) and other
intellectual property rights as important to its success. There can be no
assurance that third parties will not infringe or misappropriate the Company's
copyrights, trademarks and similar proprietary rights. In addition, although
the Company does not believe that it is infringing the intellectual property
rights of others, there can be no assurance that other parties will not assert
infringement claims against the Company. Such claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources.
Potential Liability to Clients. Many of the Company's consulting engagements
involve the development, implementation and maintenance of applications that are
critical to the operations of its clients' businesses. The Company's failure or
inability to meet a client's expectations in the performance of its services
could injure the Company's business reputation or result in a claim for
substantial damages against the Company, regardless of the Company's
responsibility for such failure. In addition, the Company routinely has access
to confidential client information. Although the Company has implemented
policies to prevent such client information from being
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disclosed to unauthorized parties or used inappropriately, any such disclosure
or use could result in a claim for substantial damages.
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two-digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, in less than two
years, computer systems and software used by many companies, including customers
and potential customers of the Company, may need to be upgraded to comply with
such "Year 2000" requirements. Although the Company believes that its internal
systems are Year 2000 compliant, failure to provide Year 2000 compliant business
solutions to its customers could have a material adverse effect on the Company's
business, results of operations and financial condition. Furthermore, the
Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or patch their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase products and services such as those offered by the Company.
Future Capital Needs; Uncertainty of Additional Financing. The Company's
future liquidity and capital requirements will depend upon numerous factors,
including the timing and amount of funds required for or generated by
operations, the success and duration of the Company's acquisition program,
unanticipated opportunities requiring substantial additional funds, and other
factors. The Company may seek to raise additional funds through public or
private financing, strategic relationships or other arrangements. There can be
no assurance that such additional funding will be available on terms acceptable
to the Company, or at all. Furthermore, any equity financing may be dilutive to
stockholders and may involve the issuance of securities with rights, preferences
or privileges senior to those of the holders of the Company's Common Stock. Any
debt financing, if available, may involve restrictive covenants, which may limit
the Company's operating flexibility with respect to certain business matters.
Strategic arrangements may require the Company to relinquish its rights to
certain of its intellectual property. If adequate funds are not available on
acceptable terms, the Company may be unable to develop or enhance its services
and products, take advantage of future opportunities or respond to competitive
pressures.
Accumulated Deficit. The Company has incurred net losses since inception, and
as of June 30, 1998, had an accumulated deficit of $149.4 million. Although the
Company has experienced revenue growth in recent months, such growth rates may
not be sustainable or indicative of future operating results. In addition, the
Company intends to continue to invest heavily in acquisitions, infrastructure
development and marketing. As a result, the Company expects to continue to
incur substantial operating losses at least through 1998, and there can be no
assurance that the Company will achieve or sustain profitability.
Government Regulation and Legal Uncertainties. Due to the increasing use of
the Internet, it is likely that a number of laws and regulations may be adopted
or changed 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. The adoption or change of any such laws
or regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Company's services or increase the cost of doing
business or in some other manner have a material adverse effect on the Company's
business, results of operations or financial condition.
Volatility of Stock Price. The market price of the Company's Common Stock has
been and is likely to continue to be highly volatile and could be subject to
wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or its
competitors, changes in financial estimates by securities analysts, overall
equity market conditions, or other events or factors.
17
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company has been named as a defendant in a lawsuit filed in the
Superior Court of California for the County of Los Angeles on June 10, 1998,
by Larmark Inc. alleging, among other claims, breach of contract against
USWeb's former Affiliate "SystemLogic" in Santa Monica, California, and
apparent agency of USWeb. USWeb believes the claims are without substantial
merit and intends to defend itself vigorously against the claims made.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
a. Use of Proceeds:
As of June 30, 1998, the Company has used the net proceeds from its initial
public offering of Common Stock of the Company, registration statement file
number 333-36827, which became effective on December 5, 1997, for the
following purposes: $4,682,000 for professional service fees, $1,756,000 for
marketing related costs, $3,878,000 for equipment purchases and $36,266,000
for other operating activities. The initial public offering commenced on the
effective date and terminated shortly thereafter when all the securities
registered under such registration statement were sold. The managing
underwriter for the initial public offering was Hambrecht & Quist LLC. The
number of shares of Common Stock registered was 5,750,000 shares, all of which
have been sold. The offering price was $7.50 per share for an aggregate
offering price of $43,125,000. The underwriters' discount was $0.525 per
share, or an aggregate of $2,625,000. The net offering proceeds (including
underwriters' discount and expenses) was approximately $38,309,000.
b. Recent Sales of Unregistered Securities
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 $10,000. In connection with the strategic alliance,
the Company issued warrants to NBC allowing them to purchase 1,600,000 and
500,000 shares of the Company's Common Stock at $22.50 and $25.43 per share,
respectively. The fair value of the warrants on the date of grant totaled
$12,568, which has been recorded as Stock Compensation in the Company's
Condensed Consolidated Statement of Operations for the three and six months
ended June 30, 1998. The warrants are exercisable at any time prior to their
expiration in November 1999. No warrants had been exercised at June 30, 1998.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
18
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 27, 1998, at the annual stockholder's meeting, a quorum of
stockholders of the Company approved the following proposals: (1) the election
of the Board of Directors; (2) Amendment to the Company's 1996 Equity
Compensation Plan to increase the number of shares of Common Stock authorized
for issuance thereunder by 5,000,000 shares; (3) Amendment to the Company's
1997 Acquisition Stock Option Plan to increase the number of shares of Common
Stock reserved for issuance thereunder by 10,000,000 shares; (4) Amendment to
the Company's 1997 Employee Stock Purchase Plan to increase the number of
shares of Common Stock reserved for issuance thereunder by 2,000,000 shares;
and (5) ratification of the appointment of PricewaterhouseCoopers LLP to serve
as the Company's independent accountants for fiscal 1998.
Proposal 1. Election of Directors
<TABLE>
<CAPTION>
Nominee In Favor Withheld
------------------- ---------------- ----------------
<S> <C> <C>
Tobin Corey 26,633,796 395,770
Joseph Firmage 26,798,707 230,859
James Heffernan 26,798,807 230,759
Jeffrey Ballowe 26,797,247 232,319
Robert Hoff 26,798,907 230,659
Gary Reischel 26,799,107 230,459
Barry Rubenstein 26,633,699 395,867
</TABLE>
Proposal 2. Amendment to the Company's 1996 Equity
Compensation Plan to increase the number of shares of Common Stock authorized
for issuance thereunder by 5,000,000 shares.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Vote
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
18,432,065 5,621,763 67,930 2,907,808
</TABLE>
Proposal 3. Amendment to the Company's 1997 Acquisition
Stock Option Plan to increase the number of shares reserved for issuance
thereunder by 10,000,000 shares.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Vote
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
18,433,540 5,617,243 70,975 2,907,808
</TABLE>
Proposal 4. Amendment to the Company's 1997 Employee Stock
Purchase Plan to increase the number of shares reserved for issuance thereunder
by 2,000,000 shares.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Vote
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
23,787,649 261,539 72,570 2,907,808
</TABLE>
Proposal 5. Ratification of Appointment of Independent
Accountants.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Vote
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
26,824,283 197,414 7,869 0
</TABLE>
19
<PAGE>
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits:
Exhibit 11.1 Statement of calculation of basic and diluted net loss and pro
forma net loss per share.
Exhibit 27.1 Financial Data Schedule.
b. Reports on Form 8-K:
No reports were filed on Form 8-K by the Company during the quarter ended
June 30, 1998.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
USWEB CORPORATION
Registrant
By: /s/ CAROLYN V. AVER
----------------------
CAROLYN V. AVER
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
(on behalf of the Registrant and as
principal financial officer)
Dated: August 6, 1998
21
<PAGE>
EXHIBIT 11.1
USWEB CORPORATION
CALCULATION OF NET LOSS AND PRO FORMA NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Historical (1) Pro Forma (2)
------------------------------------------------------------ -------------------------------
Three Months Ended June 30, Six Months Ended June 30, Three Months Ended June 30,
----------------------------- ----------------------------- -----------------------------
1998 1997 1998 1997 1998 1997
-------------- ------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net loss $ (60,870) $ (15,400) $ (77,230) $ (21,243) $ (51,695) $ (47,466)
-------------- ------------- -------------- ------------- -------------- --------------
Weighted average 33,095,721 4,296,281 30,545,062 3,602,937 35,794,714 12,423,907
common shares outstanding
Shares deemed outstanding under
stock bonus arrangements for
employees of acquired companies 623,446 191,777 1,034,775 98,476 1,951,426 1,954,448
-------------- ------------- -------------- ------------- -------------- --------------
Total weighted average common
shares outstanding 33,719,167 4,488,058 31,579,837 3,701,413 37,746,140 14,378,355
============== ============= ============== ============= ============== ==============
Basic and diluted net loss per
share $ (1.81) $ (3.43) $ (2.45) $ (5.74) $ (1.37) $ (3.30)
============== ============= ============== ============= ============== ==============
Pro Forma (2)
-----------------------------
Six Months Ended June 30,
-----------------------------
1998 1997
------------- --------------
Net loss $ (122,873) $ (120,277)
------------- --------------
Weighted average
common shares outstanding 34,502,787 12,263,157
Shares deemed outstanding under
stock bonus arrangements for
employees of acquired companies 2,212,512 1,302,965
------------- --------------
Total weighted average common
shares outstanding 36,715,299 13,566,122
============= ==============
Basic and diluted net loss per
share $ (3.35) $ (8.87)
============= ==============
</TABLE>
(1) Net loss per share is computed in accordance with SFAS No. 128,
"Earnings Per Share," and SEC Staff Accounting Bulletin No. 98 for all
periods presented. The computation excludes: (i) acquisition-related
shares held in escrow ("Acquisition Shares"), (ii) Common Stock subject
to repurchase rights ("Restricted Shares"), and (iii) Mandatorily
Redeemable Convertible Preferred Stock prior to their conversion into
Common Stock on December 5, 1997. The computation of diluted net loss
per share excludes Common Stock issuable upon exercise of employee stock
options and upon exercise of outstanding warrants, as their effect in
all periods presented is antidilutive. Common shares deemed outstanding
under stock bonus arrangements for employees of acquired companies is
computed for each period by dividing cumulative deferred compensation
expense recognized in the statement of operations by the weighted
average price of the Company's Common Stock during the period.
(2) The computation of pro forma net loss per share is computed on the basis
described in (1) above and giving effect to the common shares issued to
acquired companies and the related amortization of deferred compensation
expense as if acquired on January 1, 1998 and 1997.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE USWEB
CORPORATION FORM 10-Q FOR THE SIX MONTHS ENDED 6/30/98 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 15,549
<SECURITIES> 46,263
<RECEIVABLES> 27,131
<ALLOWANCES> (2,053)
<INVENTORY> 0
<CURRENT-ASSETS> 88,146
<PP&E> 14,109
<DEPRECIATION> 3,603
<TOTAL-ASSETS> 259,866
<CURRENT-LIABILITIES> 29,090
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 229,560
<TOTAL-LIABILITY-AND-EQUITY> 259,866
<SALES> 39,068
<TOTAL-REVENUES> 39,068
<CGS> 30,783
<TOTAL-COSTS> 30,783
<OTHER-EXPENSES> 86,744
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 203
<INCOME-PRETAX> 77,230
<INCOME-TAX> 0
<INCOME-CONTINUING> 77,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 77,230
<EPS-PRIMARY> 2.45
<EPS-DILUTED> 0
</TABLE>
