<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
USWEB CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 7373 870551650
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR NUMBER)
ORGANIZATION) ---------------
USWEB CORPORATION
2880 LAKESIDE DRIVE, SUITE 300
SANTA CLARA, CA 95054
(408) 987-3200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
JAMES J. HEFFERNAN
CHIEF FINANCIAL OFFICER
USWEB CORPORATION
2880 LAKESIDE DRIVE, SUITE 300
SANTA CLARA, CA 95054
(408) 987-3200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
MARK BONHAM, ESQ. JOHN W. CAMPBELL III, ESQ.
PAUL R. TOBIAS, ESQ. KRISTIAN E. WIGGERT, ESQ.
KEVIN M. GALLIGAN, ESQ. EDA S. L. TAN, ESQ.
SAM ZUCKER, ESQ. SUSAN H. MAC CORMAC, ESQ.
WILSON SONSINI GOODRICH & ROSATI MORRISON & FOERSTER LLP
PROFESSIONAL CORPORATION 425 MARKET STREET
650 PAGE MILL ROAD SAN FRANCISCO, CA 94105
PALO ALTO, CALIFORNIA 94304 (415) 268-7000
(650) 493-9300
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value 5,750,000 shares $18.75 $107,812,500 $31,805
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 600,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(c) under the Securities Act. The above
calculation is based on the closing price of the Common Stock on the
Nasdaq National Market on February 18, 1998.
---------------
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 FEBRUARY 24, 1998
PROSPECTUS
5,000,000 SHARES
[LOGO OF USWEB]
COMMON STOCK
Of the 5,000,000 shares of Common Stock offered hereby, 1,000,000 shares are
being issued and sold by the Company and 4,000,000 shares are being sold by
certain stockholders of the Company (the "Selling Stockholders"). The Company
will not receive any of the proceeds from the sale of shares by the Selling
Stockholders. See "Principal and Selling Stockholders."
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol USWB. On February 23, 1998, the last reported sale price of the Common
Stock was $18.94 per share. See "Price Range of Common Stock."
-----------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 8.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.... $ $ $ $
- --------------------------------------------------------------------------------
Total (3).... $ $ $ $
================================================================================
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $700,000.
(3) The Company and certain Selling Stockholders have granted the Underwriters
a 30-day option to purchase up to 750,000 additional shares of Common Stock
solely to cover over-allotments, if any. If all such shares are purchased,
the total Price to Public, Underwriting Discount, Proceeds to Company and
Proceeds to Selling Stockholders will be $ , $ , $ and $ ,
respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, at the office of the agent of Hambrecht
& Quist LLC in New York, New York.
HAMBRECHT & QUIST
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
WESSELS, ARNOLD & HENDERSON
FIRST ALBANY CORPORATION
, 1998
<PAGE>
A STRATEGIC PARTNER FOR THE INFORMATION AGE
[ART]
[Logo of Zenith]
[Logo of Hammacher Schlemmer]
[Logo of Microsoft]
[Logo of Epic]
[Logo of Thomasville]
[Logo of Harley Davidson]
[Logo of Polk Audio]
[Logo of Charles Schwab]
[Logo of Burger King]
[Logo of Chevron]
[Logo of Toshiba]
[Logo of Northwestern Mutual Life]
[Logo of Sony Music]
[Logo of World Economic Forum]
[Logo of REI]
USWeb Logo
----------
A Strategic Partner for the
Information Age
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE AND
OTHER MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK
MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES
EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
STRATEGIC RELATIONSHIPS [Map of the United States with star
representing USWeb headquarters and
dots representing USWeb Consulting
offices]
[LOGO OF INTEL]
[LOGO OF MICROSOFT]
[LOGO OF HEWLETT-PACKARD]
SERVICES
[LOGO OF SUN MICROSYSTEMS]
[LOGO OF REUTERS] [_] STRATEGY CONSULTING
[LOGO OF PANDESIC] 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 process.
Strategic relationships are an
important element of the Company's
efforts to enter new markets, gain
early access to leading-edge
technology, cooperatively market
products and services with leading [_] ANALYSIS AND DESIGN
technology vendors, cross-sell Once the strategic groundwork has
additional services and gain been established, the Company
enhanced access to vendor training translates the client's strategic
and support. requirements into a system or
process design architecture, a
blueprint that defines the roles the
system will perform to meet those
requirements.
[_] TECHNOLOGY DEVELOPMENT
In the development phase, the
Company builds a testable version of
the client's solution based on the
blueprint produced in the analysis
and design phase.
[_] 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.
[_] AUDIENCE DEVELOPMENT
The Company can work with the client
to develop a strategy for achieving
its online marketing objectives by
increasing Web site traffic,
strengthening brand awareness and
generating sales leads.
[_] 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.
INSIDE GATE-FOLD
<PAGE>
GATE-FOLD TWO
[SCREEN SHOT #1]
USWeb built an e-business Extranet solution for Harley-Davidson to communicate
with its 800 independently owned dealerships to automate business-critical
processes for technical documentation distribution and warranty claims.
[SCREEN SHOT #2]
USWeb worked with Chevron's Project Resources Division to build an Intranet site
as a primary communication and management tool for Chevron's divisional
operations. The functionally rich solution centralizes operational resources
to improve decision-making quality and project execution by Chevron's
geographically dispersed divisions.
[SCREEN SHOT #3]
USWeb designed and deployed an Intranet solution to serve as a vital
communications link and business tool between Thomasville Furniture Industries
headquarters and dealers to view real-time reports concerning order status,
inventory and credit histories.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Pro Forma
Consolidated Financial Information, including the Notes thereto, appearing
elsewhere in this Prospectus. This Prospectus contains, in addition to
historical information, forward-looking statements that involve risks and
uncertainties and the Common Stock offered hereby involves a high degree of
risk. The Company's actual results or experience could differ significantly
from those discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors," as well as those discussed elsewhere in this
Prospectus. Investors should carefully consider the information set forth under
the heading "Risk Factors."
THE COMPANY
USWeb is a leading Internet professional services firm that provides
Intranet, Extranet and Web site solutions and services to medium-sized and
large companies. International Data Corporation estimates that the worldwide
market for Internet professional services was $2.5 billion in 1996 and will
grow to $13.8 billion in 2000. To take advantage of the opportunity presented
by this market, the Company has invested substantial resources to establish a
national network of consulting offices. Because of this investment, the Company
believes it has built one of the most recognized brands for Internet
professional services and developed a highly scalable organization that can
leverage central resources as its operations expand through acquisitions as
well as internal growth. The Company has developed and is aggressively pursuing
an acquisition program that uses a consistent methodology designed to identify,
acquire and integrate qualified Internet professional services firms.
The Company offers a comprehensive range of services to deliver Internet
solutions designed to improve clients' business processes. The Company's
services include strategy consulting; analysis and design; technology
development; implementation and integration; audience development; and
maintenance. The Company delivers these services to clients through its network
of consulting offices, whose regional presence enables each office to develop
close client relationships and an understanding of client needs. In addition,
individual consulting offices may draw as needed upon the assistance of one or
more additional offices with specialized creative or technical expertise.
The Company has developed central resources to provide clients with Internet
solutions based on the most effective technologies and proven methodologies.
The USWeb Internet Strategy and Solutions Center aggregates and redeploys the
best practices, technologies and creative work delivered by USWeb consulting
offices. The Strategy and Solutions Center provides the offices with efficient,
real-time access to these resources through USWeb Central, the Company's secure
Intranet, thereby enabling them to leverage the capabilities of the entire
USWeb operation.
The Company markets its services to medium-sized and large companies. Among
the clients of Company-owned offices during the year ended December 31, 1997
were Amgen, Barnes & Noble, Charles Schwab, Chevron, Harley-Davidson, Ingram
Micro, Microsoft, REI, Silicon Graphics and Sony Music. Clients typically begin
their adoption of Internet solutions by establishing a basic Web site costing
several thousand dollars and then implementing increasingly powerful business
solutions, which can include business critical, fully integrated Intranets or
Extranets costing several million dollars. The Company's strategy is to provide
clients with services at all stages of their adoption of Internet solutions.
The Company has made a significant investment in building and maintaining the
USWeb brand. Increasing recognition of the USWeb brand improves the ability of
USWeb consulting offices to access and influence key client decision makers,
hire skilled employees and leverage strategic relationships. The Company
believes that its marketing, advertising, seminars and other brand development
efforts have established USWeb as one of the most recognized Internet
professional services firms.
3
<PAGE>
Strategic relationships are an important element of the Company's efforts to
enter new markets, gain early access to leading-edge technology, cooperatively
market products and services with leading technology vendors, cross-sell
additional services and gain enhanced access to vendor training and support.
The Company has entered into, and intends to continue entering into, strategic
relationships with a limited number of leading Internet hardware, software and
content vendors. The Company currently has strategic relationships with Intel,
Microsoft, Hewlett-Packard, Pandesic LLC (the Internet company from Intel and
SAP), Sun Microsystems and Reuters.
The Company's objective is to become and remain the leading global Internet
professional services firm. To achieve its goal, the Company's strategy is to
continue to expand its network of consulting offices, develop additional
Internet services and solutions, enhance the USWeb brand and leverage
operational economies of scale. To add consulting offices through acquisitions,
the Company uses a consistent valuation methodology that includes purchase
price adjustments to align target company management objectives with those of
the overall USWeb organization and stock bonus and stock option grants to all
target company employees to provide them with an incentive to contribute to the
success of the overall USWeb organization. As of December 31, 1997, the Company
had acquired nineteen companies.
The Company regularly evaluates potential acquisition candidates, is
currently holding preliminary discussions with a number of such candidates and
is in active negotiations with a number of such other candidates. If, after due
diligence review and negotiation, such companies can be acquired on a basis
considered fair to the Company and its stockholders, the Company may proceed
with such acquisitions. The Company is also evaluating or negotiating
acquisition transactions outside the United States. The Company expects most of
its future acquisitions to include the issuance of additional shares of the
Company's Common Stock in the future. The Company recently 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," "--Management of Growth; Integration of Acquisitions," "Use of
Proceeds," "Dilution," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Acquisition of Internet Professional
Services Firms," and "Business--Strategy" and "--Consulting Office Network
Development."
The Company was incorporated in Utah in December 1995 and changed its
jurisdiction of incorporation to Delaware in December 1997. The Company's
principal executive offices are located at 2880 Lakeside Drive, Suite 300,
Santa Clara, California 95054, its World Wide Web address is
http://www.usweb.com and its telephone number is (408) 987-3200. As used in
this Prospectus, the "Company" and "USWeb" refer to USWeb Corporation, a
Delaware corporation and its Utah predecessor.
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.
4
<PAGE>
THE OFFERING
Common Stock offered by the Company... 1,000,000 shares
Common Stock offered by the Selling 4,000,000 shares
Stockholders..........................
Common Stock to be outstanding after 34,811,085 shares (1)
the offering..........................
Use of proceeds....................... For general corporate purposes,
including working capital. See "Use of
Proceeds."
Nasdaq National Market symbol......... USWB
- --------------------
(1) Based on the number of shares of Common Stock outstanding at December 31,
1997. Excludes as of December 31, 1997 (i) 12,600,000 shares of Common
Stock reserved for issuance under the Company's stock option plans, of
which 9,492,403 shares were issuable upon exercise of outstanding options
at a weighted average exercise price of $8.03 per share, (ii) 809,270
shares of Common Stock issuable upon exercise of outstanding warrants at a
weighted average exercise price of $6.81 per share, (iii) 333,333 shares of
Common Stock reserved for issuance under the Company's Affiliate Warrant
Program, of which 267,284 shares were issuable upon exercise of outstanding
warrants at a weighted average exercise price of $2.55 per share, (iv)
1,000,000 shares of Common Stock reserved for issuance under the Company's
1997 Employee Stock Purchase Plan, (v) additional shares of Common Stock
that are considered probable of issuance as stock bonuses and acquisition
purchase price adjustments and (vi) 16,666,667 shares of Common Stock
registered pursuant to a Registration Statement on Form S-4 for use in
future acquisitions. See "Risk Factors--Dilution," "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Acquisition
of Internet Professional Services Firms," "Business--Consulting Office
Network Development" and "--Strategic Relationships," "Management--Employee
Benefit Plans," "Underwriting" and Notes 1, 9 and 10 to Consolidated
Financial Statements.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE MONTHS ENDED
----------------- ---------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 (1) 1997 1997 1997 1997 1997
-------- ------- -------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL
- ----------
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues--Services.... $ -- $18,366 $ 59 $ 2,186 $ 5,623 $10,498
Revenues--Other....... 1,820 912 436 258 114 104
Gross profit.......... 1,612 2,096 198 12 124 1,762
Loss from operations.. (13,965) (54,493) (5,850) (11,410) (18,099) (19,134)
Net loss.............. (13,808) (58,336) (5,843) (15,400) (18,027) (19,066)
Net loss per share:
Basic and dilut-
ed (2).............. $ (2.46) $ (4.78) $ (0.90) $ (1.73) $ (1.45) $ (0.91)
Weighted average
shares outstanding
(2)................. 5,620 12,193 6,462 8,911 12,440 20,960
PRO FORMA (UNAUDITED)
(3)
PRO FORMA CONSOLIDATED
STATEMENT OF
OPERATIONS DATA:
Revenues--Services.... $34,298 $ 6,685 $ 7,607 $ 9,104 $10,902
Revenues--Other....... 514 176 171 68 99
Gross profit.......... 6,078 1,375 1,129 1,529 2,045
Loss from operations.. (81,048) (26,058) (18,576) (18,557) (17,857)
Net loss.............. (84,939) (26,100) (22,553) (18,497) (17,789)
Net loss per share:
Basic and diluted
(2)................. $ (4.77) $ (1.69) $ (1.40) $ (1.11) $ (0.77)
Weighted average
shares outstanding
(2)................. 17,795 15,438 16,136 16,650 22,954
SUPPLEMENTAL (UNAUDITED)
(3)(4)
PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
DATA BEFORE
ACQUISITION-RELATED
NON-CASH CHARGES:
Revenues--Services.... $34,298 $ 6,685 $ 7,607 $ 9,104 $10,902
Revenues--Other....... 514 176 171 68 99
Gross profit before
stock compensation... 11,126 2,637 2,391 2,791 3,307
Operating loss before
acquisition-related
non-cash charges..... (28,584) (4,936) (6,926) (8,711) (8,011)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED (5)
------- ---------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................. $44,145 $61,388
Working capital....................................... 40,516 57,759
Total assets.......................................... 79,250 96,493
Total stockholders' equity............................ 66,689 83,932
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AS OF
------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
OTHER DATA:
Total employees.......................... 106 238 431 527
Company-owned offices.................... 4 13 20 20
Affiliate offices (6).................... 31 23 22 11
Consulting offices....................... 35 36 42 31
</TABLE>
- --------------------
(1) The Company was incorporated on December 6, 1995 and had insignificant
activities from inception through December 31, 1995, which have been
included in the 1996 consolidated financial statements to facilitate
presentation.
(2) See computation of basic and diluted net loss per share in Note 2 to the
Consolidated Financial Statements.
(3) Pro forma and supplemental consolidated statement of operations data
reflects the consolidation of the results of operations of USWeb San
Francisco, USWeb Seattle, USWeb Milwaukee, USWeb LA Metro, USWeb Atlanta,
USWeb Silicon Valley, USWeb DC, USWeb Phoenix, USWeb Pittsburgh, USWeb
Chicago Metro, USWeb Hollywood, USWeb Marin, USWeb Long Island, USWeb
Detroit, USWeb San Mateo, USWeb LA Central, USWeb Houston and USWeb New
York Central as if each such company had been acquired on January 1, 1997.
(4) Acquisition-related non-cash charges include stock compensation,
amortization of intangible assets and acquired in-process technology. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 1 to Consolidated Financial Statements.
(5) Adjusted to give effect to the sale of 1,000,000 shares of Common Stock by
the Company at an assumed public offering price of $18.94 per share and the
application of the net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
(6) The number of Affiliate offices has decreased over time because of
acquisitions of Affiliates by USWeb, consolidation of offices and
discontinuance of franchise relationships.
----------------
Unless otherwise indicated, all information contained in this Prospectus: (i)
assumes no exercise of the Underwriters' over-allotment option; (ii) reflects
an assumed public offering price of $18.94 per share; and (iii) unless
otherwise indicated, refers to historical and not pro forma results of
operations. See "Underwriting." The phrase "Company-owned office" refers to an
office managed by an entity included in the Company's Consolidated Financial
Statements as of the date indicated.
7
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including the
factors set forth below and elsewhere in this Prospectus. The following risk
factors should be considered carefully in addition to the other information
contained in this Prospectus before purchasing the Common Stock offered
hereby.
Limited Operating History; Accumulated Deficit. The Company was founded in
December 1995 and enrolled its first franchisee ("Affiliate") in April 1996.
Accordingly, the Company has only a limited operating history on which to base
an evaluation of its business and prospects. The Company and its prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in an early stage of development, particularly
companies in new and rapidly evolving markets such as Internet professional
services. Such risks for the Company include, but are not limited to, an
evolving business model and the management of both internal and acquisition-
based growth. To address these risks, the Company must, among other things,
continue to expand its network of consulting offices, continue to develop the
strength and quality of its operations, maximize the value delivered to
clients by the USWeb Internet Strategy and Solutions Center (the "Strategy and
Solutions Center"), enhance the USWeb brand, respond to competitive
developments and continue to attract, retain and motivate qualified employees.
There can be no assurance that the Company will be successful in meeting these
challenges and addressing such risks and the failure to do so could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company has incurred net losses since inception, and as of December 31,
1997 had an accumulated deficit of $72.1 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Related to Acquisitions. A key component of the Company's growth
strategy is the acquisition of Internet professional service firms that meet
the Company's criteria for revenues, profitability, growth potential and
operating strategy. The successful implementation of this strategy depends on
the Company's ability to identify suitable acquisition candidates, acquire
such companies on acceptable terms and integrate their operations successfully
with those of the Company. As of December 31, 1997, the Company had acquired
nineteen companies. There can be no assurance that the Company will be able to
continue to identify additional suitable acquisition candidates or that the
Company will be able to acquire such candidates on acceptable terms. Moreover,
in pursuing acquisition opportunities the Company may compete with other
companies with similar growth strategies, certain of which competitors may be
larger and have greater financial and other resources than the Company.
Competition for these acquisition targets likely could also result in
increased prices of acquisition targets and a diminished pool of companies
available for acquisition. Acquisitions also involve a number of other risks,
including adverse effects on the Company's reported operating results from
increases in goodwill amortization, acquired in-process technology, stock
compensation expense and increased compensation expense resulting from newly
hired employees, the diversion of management attention, potential disputes
with the sellers of one or more acquired entities and the possible failure to
retain key acquired personnel. Client satisfaction or performance problems
with an acquired firm could also have a material adverse impact on the
reputation of the Company as a whole, and any acquired subsidiary could
significantly underperform relative to the Company's expectations. As all of
the Company's acquisitions were completed in the last twelve months, the
Company is currently facing all of these challenges and its ability to meet
them over the long term has not been established. For all 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
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extent the Company chooses to use cash consideration for acquisitions in the
future, the Company may be required to obtain additional financing, and there
can be no assurance that such financing will be available on favorable terms,
if at all. As the Company issues stock to complete future acquisitions,
existing stockholders will experience further ownership dilution. See "--
Dilution," "--Future Capital Needs; Uncertainty of Additional Financing,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business--Consulting Office Network Development" and Note 1 to
Consolidated Financial Statements.
Potential Fluctuations in Quarterly Results. As a result of the Company's
limited operating history, rapid growth and the emerging nature of the markets
in which it competes, the Company's historical financial data is of limited
value in planning future operating expenses. Accordingly, the Company's
expense levels are based in part on its expectations concerning future
revenues and are fixed to a large extent. The Company's revenues are derived
primarily from consulting fees for Internet solution engagements, which are
difficult to forecast accurately. The Company may be unable to adjust spending
in a timely manner to compensate for any unexpected shortfall in revenues.
Accordingly, a significant shortfall in demand for the Company's services
could have an immediate and material adverse effect on the Company's business,
results of operations and financial condition. Further, the Company intends to
increase its business development and marketing expenses significantly to
expand operations and enhance the Company's brand name and to increase other
operating expenses as required to build the Strategy and Solutions Center and
support the operations of the Company's consulting offices. To the extent that
such expenses precede or are not rapidly followed by increased revenues, the
Company's business, results of operations and financial condition may be
materially adversely affected.
The Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. These factors include the level of demand for Intranet,
Extranet and Web site development; the productivity of the Company's
consulting offices; the Company's success in finding and acquiring suitable
acquisition candidates; the Company's ability to attract and retain personnel
with the necessary strategic, technical and creative skills required to
service clients effectively; the cost of advertising and related media; the
amount and timing of expenditures by USWeb clients for Internet professional
services; client budgetary cycles; the amount and timing of capital
expenditures and other costs relating to the expansion of the Company's
operations; the introduction of new products or services by the Company or its
competitors; pricing changes in the industry; technical difficulties with
respect to the use of the Internet; economic conditions specific to Internet
technology usage; government regulation and legal developments regarding the
use of the Internet; and general economic conditions. As a strategic response
to changes in the competitive environment, the Company may from time to time
make certain pricing, service, technology or marketing decisions or business
or technology acquisitions that could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
may also experience seasonality in its business in the future, resulting in
diminished revenues to the Company as a consequence of decreased demand for
Internet professional services during summer and year-end vacation and holiday
periods. Due to all of the foregoing factors, in some future quarter the
Company's operating results may fall below the expectations of securities
analysts and investors. In such event, the trading price of the Company's
Common Stock would likely be materially and adversely affected and litigation
may ensue. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Recruitment and Retention of Internet Solutions Professionals. The Company's
business of delivering Internet professional services is labor intensive.
Accordingly, the Company's success depends in part on its ability to identify,
hire, train and retain consulting professionals who can provide the Internet
strategy, technology, marketing, audience development and creative skills
required by clients. There is currently a shortage of such personnel, and this
shortage is likely to continue for the foreseeable future. The Company
competes intensely for qualified personnel with other companies, and there can
be no assurance that the Company will be able to attract, assimilate or retain
other highly qualified technical, marketing and managerial personnel in the
future. The inability to attract and retain the necessary technical, marketing
and managerial personnel would have a material adverse effect on the Company's
business, results of operations and financial condition.
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Competition; Low Barriers to Entry. The market for Internet professional
services is relatively new, intensely competitive, rapidly evolving and
subject to rapid technological change. The Company expects competition to
persist, intensify and increase in the future. The Company's competitors can
be divided into several groups: computer hardware and service vendors such as
International Business Machines Corporation ("IBM"), Digital Equipment
Corporation ("DEC") and Hewlett-Packard Company ("Hewlett-Packard");
advertising and media agencies such as CKS Group, Inc. ("CKS"), Foote, Cone &
Belding and Ogilvy & Mather; Internet integrators and Web presence providers
such as iXL Holding, Inc. ("iXL"), Organic Online, Inc. ("Organic Online"),
Poppe Tyson and Proxicom, Inc. ("Proxicom"); large information technology
consulting service providers such as Andersen Consulting, Cambridge Technology
Partners and Electronic Data Systems Corporation ("EDS"); telecommunications
companies such as AT&T Corporation ("AT&T") and MCI Communications Group
("MCI"); Internet and online service providers such as America Online
Incorporated ("America Online"), NETCOM On-Line Communications Services Inc.
("NETCOM") and UUNet Technologies, Inc. ("UUNet"); and software vendors such
as Lotus Development Corporation ("Lotus"), Microsoft Corporation
("Microsoft"), Netscape Communications Corp. ("Netscape"), Novell, Inc.
("Novell") and Oracle Corporation ("Oracle"). Although only a few of these
competitors have to date offered a full range of Internet professional
services, several have announced their intention to offer comprehensive
Internet technology solutions. Furthermore, most of the Company's current and
potential competitors have longer operating histories, larger installed
customer bases, longer relationships with clients and significantly greater
financial, technical, marketing and public relations resources than the
Company, and could decide at any time to increase their resource commitments
to the Company's market. In addition, the market for Intranet, Extranet and
Web site development is relatively new and subject to continuing definition,
and, as a result, may better position the Company's competitors to compete in
this market as it matures. Competition of the type described above could
materially adversely affect the Company's business, results of operations and
financial condition.
There are relatively low barriers to entry into the Company's business.
Because professional services firms such as the Company rely on the skill of
their personnel and the quality of their client service, the Company has no
patented technology that would preclude or inhibit competitors from entering
the Internet professional services market. The Company expects that it will
face additional competition from new entrants into the market in the future.
There can be no assurance that existing or future competitors will not develop
or offer services that provide significant performance, price, creative or
other advantages over those offered by the Company, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Competition."
Management of Growth; Integration of Acquisitions. The Company's rapid
growth has placed, and is expected to continue to place, a significant strain
on the Company's managerial, operational, financial and other resources. As of
January 31, 1998, the Company had grown to 550 employees since its inception
in December 1995, and the Company expects that continued hiring of new
personnel will be required to support its business. The Company's future
success will depend, in part, upon its ability to manage its growth
effectively, which will require that the Company continue to implement and
improve its operational, administrative and financial and accounting systems
and controls and to expand, train and manage its employee base. There can be
no assurance that the Company's systems, procedures or controls will be
adequate to support the Company's operations or that the Company's management
will be able to achieve the rapid execution necessary to exploit the market
for the Company's business model. Furthermore, the Company's future
performance will depend on the Company's ability to integrate the
organizations acquired by the Company, which, even if successful, may take a
significant period of time, will place a significant strain on the Company's
resources, and could subject the Company to additional expenses during the
integration process. As a result, there can be no assurance that the Company
will be able to integrate acquired businesses successfully or in a timely
manner in accordance with its strategic objectives. If the Company is unable
to manage internal or acquisition-based growth effectively, the Company's
business, results of operations and financial condition will be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Strategy," "--Consulting
Office Network Development" and "--Employees."
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Dilution. Investors participating in this offering will incur immediate,
substantial 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 in addition to granting substantial stock options and stock
bonuses to the employees of the acquired companies. Furthermore, the Company
may be required, pursuant to the terms of the definitive acquisition
agreements, to issue additional shares, stock options and stock bonuses to the
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 participating in this offering. See "Dilution."
Uncertain Maintenance and Strengthening of the USWeb Brand. The Company
believes that maintaining and strengthening the USWeb brand is an important
aspect of its efforts to attract clients and that the importance of brand
recognition will increase due to the increasing number of companies entering
the market for Internet professional services. Promoting and positioning the
USWeb brand will depend largely on the success of the Company's marketing
efforts and the ability of the Company to provide high quality, reliable and
cost effective Internet solution strategy consulting, analysis and design,
technology development, implementation and integration, audience development
and maintenance services. If clients do not perceive the Company's services as
meeting their needs, or if the Company fails to market those services
effectively, the Company will be unsuccessful in maintaining and strengthening
its brand. In addition, while the Company centralizes its marketing efforts,
it provides client service through the individual consulting offices and
client dissatisfaction with the performance of a single office could tarnish
the perception of the USWeb brand as a whole. Furthermore, in order to promote
the USWeb brand in response to competitive pressures, the Company may find it
necessary to increase its marketing budget or otherwise increase its financial
commitment to creating and maintaining brand loyalty among clients. If the
Company fails to promote and maintain its brand, or incurs excessive expenses
in an attempt to promote and maintain its brand, the Company's business,
results of operations and financial condition will be materially adversely
affected. See "Business--Services" and "--Marketing."
Reliance Upon Key Strategic Relationships. The Company has established a
number of strategic relationships with leading hardware and software
companies, including Intel Corporation ("Intel"), Microsoft, Hewlett-Packard,
Pandesic LLC ("Pandesic," the Internet company from Intel and SAP America Inc.
("SAP")), Sun Microsystems, Inc. ("Sun Microsystems") and Reuters Ltd.
("Reuters"). The loss of any one of these strategic relationships would
deprive the Company of the opportunity to gain early access to leading-edge
technology, cooperatively market products with the vendor, cross-sell
additional services and gain enhanced access to vendor training and support.
Maintenance of the Company's strategic relationships is based primarily on an
ongoing mutual business opportunity and a good overall working relationship.
The legal contracts associated with these relationships, certain of which are
terminable at-will by the parties, would not be sufficient to force the
strategic relationship to continue effectively if that were otherwise not in
the strategic partners' best interests. In the event that any strategic
relationship is terminated, the Company's business, results of operations and
financial condition may be materially adversely affected. See "Business--
Strategy" and "--Strategic Relationships."
Uncertain Adoption of Internet Solutions; Dependence on Client
Outsourcing. The market for the Company's services will depend upon the
adoption of Internet solutions by companies to improve their business
processes. The Internet may not prove to be a viable commercial marketplace
because of inadequate development of the necessary infrastructure, lack of
development of complementary products, such as high speed modems and high
speed communication lines, implementation of competing technology, delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, governmental regulation, or other
reasons. The Internet has experienced, and is expected to continue
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to experience, significant growth in the number of users and volume of
traffic. There can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed on it by this continued
growth. Moreover, critical issues concerning the use of Internet solutions
(including security, reliability, cost, ease of deployment and administration
and quality of service) remain unresolved and may affect the growth of the use
of such technologies to solve business problems. The adoption of Internet
solutions for commerce and communications, particularly by those individuals
and enterprises that have historically relied on alternative means of commerce
and communication, generally requires the acceptance of a new way of
conducting business and exchanging information, which may be difficult for
those with substantial investments in alternate means that might be made
obsolete. If critical issues concerning the ability of Internet solutions to
improve business processes are not resolved or if the necessary infrastructure
is not developed, the Company's business, results of operations and financial
condition will be materially adversely affected.
Even if these issues are resolved, there can be no assurance that businesses
will elect to outsource the design, development and maintenance of their
Intranets, Extranets and Web sites to Internet professional services firms.
Companies may decide to assign the design, development and implementation of
Internet solutions to their internal information technology divisions, which
have ready access to both key client decision makers and the information
required to prepare proposals for such solutions. If independent providers of
Internet professional services prove to be unreliable, ineffective or too
expensive, or if software companies develop tools that are sufficiently user-
friendly and cost-effective, enterprises may choose to design, develop or
maintain all or part of their Intranets, Extranets or Web sites in-house. If
the market for the Company's services does not continue to develop or develops
more slowly than expected, or if the Company's services do not achieve market
acceptance, the Company's business, results of operations and financial
condition will be materially adversely affected. See "Business--Industry
Background" and "--Strategy."
Rapid Technological Change. The market for Internet professional services is
characterized by rapid technological change, changes in user and client
requirements and preferences, frequent new product and service introductions
embodying new processes and technologies and evolving industry standards and
practices that could render the Company's existing service practices and
methodologies obsolete. The Company's success will depend, in part, on its
ability to improve its existing services, develop new services and solutions
that address the increasingly sophisticated and varied needs of its current
and prospective clients, and respond to technological advances, emerging
industry standards and practices, and competitive service offerings. There can
be no assurance that the Company will be successful in responding quickly,
cost-effectively and sufficiently to these developments. If the Company is
unable, for technical, financial or other reasons, to adapt in a timely manner
in response to changing market conditions or client requirements, its
business, results of operations and financial condition would be materially
adversely affected. See "Business--Strategy" and "--Clients."
Risks Associated with International Operations and Expansion. The Company
intends to expand its operations into international markets. However, to date
the Company has not established any consulting office outside of the United
States and has no experience in either managing an international network of
consulting offices or in marketing services to international clients. The
Company expects to incur significant costs to do both. If revenues from
international consulting offices are not adequate to offset the expenses of
establishing and maintaining an international network and of localizing the
Company's marketing programs, the Company's business, results of operations
and financial condition could be materially adversely affected. There can be
no assurance that the Company will be able to establish and maintain
international consulting offices or market its services to international
clients. In addition to the uncertainty as to the Company's ability to
generate revenues from foreign operations and expand its international
presence, there are certain risks inherent in doing business on an
international level, such as unexpected changes in regulatory requirements,
export and import restrictions, tariffs and other trade barriers; difficulties
in staffing and managing foreign operations; potentially adverse differences
in business customs, practices, and norms; longer payment cycles; problems in
collecting accounts receivable; political instability; fluctuations in
currency exchange rates; software piracy; seasonal reductions in business
activity; and potentially adverse tax consequences, any of which could
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adversely affect the Company's international operations. There can be no
assurance that one or more of the factors described above will not have a
material adverse effect on the Company's future international operations and,
consequently, on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Risks of Fixed-Price Engagements. The Company intends to increase the
percentage of its engagements that are billed on a fixed-price basis, as well
as the percentage of revenues derived from fixed-price engagements, as
distinguished from the Company's current principal method of billing on a time
and materials basis. To date, the Company has had only limited experience with
fixed-price engagements. The Company's failure to estimate accurately there
sources and time required for an engagement, to manage client expectations
effectively regarding the scope of services to be delivered for the estimated
fees or to complete fixed-price engagements within budget, on time and to
clients' satisfaction would expose the Company to risks associated with cost
overruns and, in certain cases, penalties, any of which could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Risks of Franchising. USWeb has entered into franchise agreements with
Affiliates, which manage a number of its consulting offices. While these
agreements permit the Company to terminate the franchise relationship if an
Affiliate continues to under perform relative to other Affiliates, such an
Affiliate must be given at least 12 months to improve its performance.
Consequently, a significantly underperforming Affiliate could adversely affect
the Company's reputation. In addition, a terminated Affiliate may refuse to
comply with the terms of the franchise agreement relating to relinquishment of
the USWeb brand and other Company intellectual property or initiate litigation
against the Company. The operational autonomy granted to each Affiliate
through the franchise structure, together with the absence of certain
territorial restrictions on its activities, may inhibit the Company's control
over its market presence or enable the Affiliate to compete with Company-owned
offices for client engagements. Further, despite implementation of contractual
safeguards and insurance against such a possibility, USWeb may be held by a
court to be responsible for some action or liability of an Affiliate. Varying
rights and protections under different state laws, lack of control of
Affiliate actions, or findings of vicarious liability for Affiliate actions
could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, if a significant portion of the
Affiliates chose not to work cooperatively, or if any significant Affiliate or
group of Affiliates were to leave the USWeb network, the network would be
correspondingly weaker. Furthermore, although for a period of two years after
the end of the Affiliate relationship the Affiliate and key persons associated
with the Affiliate are prohibited from certain activities in competition with
USWeb and from soliciting USWeb employees for alternate employment,
enforceability of these restrictions will vary depending on applicable state
law. To the extent that the action or inaction of any Affiliate proves
deleterious to the reputation associated with the USWeb brand, the Company's
business, results of operations and financial condition could be materially
adversely affected.
Dependence on Key Personnel. The Company's performance is substantially
dependent on the continued services and on the performance of its executive
officers and other key employees, many of whom have worked together for only a
short period of time. Particularly in light of the Company's relatively early
stage of development, the Company is dependent on retaining and motivating
highly qualified personnel, especially its senior management. The Company does
not have "key person" life insurance policies on any of its executive
officers. The loss of the services of any of its executive officers or other
key employees could have a material adverse effect on the business, results of
operations or financial condition of the Company. See "Management."
Intellectual Property Risks. The Company regards its copyrights, trademarks,
trade secrets (including its methodologies, practices and tools) and other
intellectual property rights as critical to its success. To protect its rights
in these various intellectual properties, the Company relies on a combination
of trademark and copyright law, trade secret protection and confidentiality
agreements and other contractual arrangements
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with its employees, Affiliates, clients, strategic partners, acquisition
targets and others to protect its proprietary rights. The Company has also
registered several of its trademarks in the U.S. and internationally.
Effective trademark, copyright and trade secret protection may not be
available in every country in which the Company offers or intends to offer its
services. There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate or that third parties will not
infringe or misappropriate the Company's copyrights, trademarks and similar
proprietary rights, or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its rights. In addition, although
the Company believes that its proprietary rights do not infringe on the
intellectual property rights of others, there can be no assurance that other
parties will not assert infringement claims against the Company. Such claims,
even if not meritorious, could result in the expenditure of significant
financial and managerial resources.
Potential Liability to Clients. Many of the Company's consulting engagements
involve the development, implementation and maintenance of applications that
are critical to the operations of its clients' businesses. The Company's
failure or inability to meet a client's expectations in the performance of its
services could injure the Company's business reputation or result in a claim
for substantial damages against the Company, regardless of the Company's
responsibility for such failure. In addition, the Company aggregates and makes
available through the Strategy and Solutions Center methodologies,
technologies and content, which may include confidential or proprietary client
information. Although the Company has implemented policies to prevent such
client information from being disclosed to unauthorized parties or used
inappropriately, any such unauthorized disclosure or use could result in a
claim for substantial damages. The Company attempts to limit contractually its
damages arising from negligent acts, errors, mistakes or omissions in
rendering Internet professional services; however there can be no assurance
that any contractual protections will be enforceable in all instances or would
otherwise protect the Company from liability for damages. Although the Company
maintains general liability insurance coverage, including coverage for errors
and omissions, there can be no assurance that such coverage will continue to
be available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against the Company that are uninsured, exceed available insurance coverage or
result in changes to the Company's insurance policies, including premium
increases or the imposition of a large deductible or co-insurance
requirements, could adversely affect the Company's business, results of
operations and financial condition.
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two-digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, in less than two
years, computer systems and software used by many companies, including
customers and potential customers of the Company, may need to be upgraded to
comply with such "Year 2000" requirements. Although the Company believes that
its internal systems are Year 2000 compliant, failure to provide Year 2000
compliant business solutions to its customers could have a material adverse
effect on the Company's business, results of operations and financial
condition. Furthermore, the Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase products and services such as those
offered by the Company, which could result in a material adverse effect on the
Company's business, results of operations and financial condition.
Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its available cash resources and credit facilities
will be sufficient to meet its presently anticipated working capital and
capital expenditure requirements for at least the next 12 months. However, the
Company may need to raise additional funds in order to support more rapid
expansion, develop new or enhanced services and products, respond to
competitive pressures, acquire complementary businesses or technologies or
take advantage of unanticipated opportunities. The Company's future liquidity
and capital requirements will depend upon numerous factors, including the
success of the Company's existing and new service offerings and competing
technological and market developments. The Company may be required to raise
additional funds through public or private financing, strategic relationships
or other arrangements. There can be no
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assurance that such additional funding, if needed, will be available on terms
acceptable to the Company, or at all. Furthermore, any additional equity
financing may be dilutive to stockholders, and debt financing, if available,
may involve restrictive covenants, which may limit the Company's operating
flexibility with respect to certain business matters. Strategic arrangements,
if necessary to raise additional funds, may require the Company to relinquish
its rights to certain of its intellectual property. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
the stockholders of the Company will be reduced, stockholders may experience
additional dilution in net book value per share, and such equity securities
may have rights, preferences or privileges senior to those of the holders of
the Company's Common Stock. If adequate funds are not available on acceptable
terms, the Company may be unable to develop or enhance its services and
products, take advantage of future opportunities or respond to competitive
pressures, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Government Regulation and Legal Uncertainties. The Company is not currently
subject to direct government regulation, other than pursuant to certain
franchising regulations, the securities laws and the regulations thereunder
applicable to all publicly owned companies, and laws and regulations
applicable to businesses generally, and there are currently few laws or
regulations directly applicable to access to or commerce on the Internet.
However, due to the increasing popularity and use of the Internet, it is
likely that a number of laws and regulations may be adopted at the local,
state, national or international levels with respect to the Internet covering
issues such as user privacy, freedom of expression, pricing of products and
services, taxation, advertising, intellectual property rights, information
security or the convergence of traditional communications services with
Internet communications. For example, the Telecommunications Act of 1996
imposes criminal penalties on anyone who distributes obscene or indecent
communications over the Internet. Although the federal courts have declared
the anti-indecency provisions of the Telecommunications Act unconstitutional,
the increased attention focused upon these liability issues as a result of the
Telecommunications Act could adversely affect the growth of the Internet and
therefore demand for the Company's services. In addition, because of the
growth in the electronic commerce market, Congress has held hearings on
whether to regulate providers of services and transactions in the electronic
commerce market, which regulations could negatively affect client demand for
Internet solutions that facilitate electronic commerce. Moreover, the adoption
of any such laws or regulations may decrease the growth of the Internet, which
could in turn decrease the demand for the Company's services or increase the
cost of doing business or in some other manner have a material adverse effect
on the Company's business, results of operations or financial condition. In
addition, the applicability to the Internet of existing laws governing issues
such as property ownership, copyrights and other intellectual property issues,
taxation, libel and personal privacy is uncertain. The vast majority of such
laws were adopted prior to the advent of the Internet and related technologies
and, as a result, do not contemplate or address the unique issues of the
Internet and related technologies. Changes to such laws intended to address
these issues, including some recently proposed changes, could create
uncertainty in the marketplace which could reduce demand for the Company's
services or increase the cost of doing business as a result of costs of
litigation or increased service delivery costs, or could in some other manner
have a material adverse effect on the Company's business, results of
operations and financial condition.
Volatility of Stock Price. Prior to the Company's initial public offering in
December 1997, there was no public market for the Company's Common Stock. The
market price of the Company's Common Stock is likely to continue to be highly
volatile and could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by the Company or its competitors, changes in financial estimates
by securities analysts, or other events or factors. In addition, the stock
market, which has recently been at or near historic highs, has experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of many technology companies and that often
have been unrelated to the operating performance of such companies. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation
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has often been instituted against such a company. Such litigation could result
in substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Company's business,
operating results and financial condition.
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely
affect the market price for the Common Stock. See "Description of Capital
Stock" and "Shares Eligible for Future Sale."
Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. The Board of Directors has the
authority to issue up to 1,000,000 shares of Preferred Stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue shares of Preferred Stock.
Further, certain provisions of the Company's Amended and Restated Certificate
of Incorporation and Bylaws and of Delaware law could delay or make difficult
a merger, tender offer or proxy contest involving the Company. See
"Description of Capital Stock--Preferred Stock" and "--Certain Antitakeover
Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware
Law."
Concentration of Stock Ownership. Upon completion of this offering, the
present directors, executive officers and their respective affiliates will
beneficially own approximately 39.4% of the outstanding Common Stock assuming
no exercise of the Underwriters' over-allotment option and 37.9% of the
outstanding Common Stock assuming full exercise of the Underwriters' over-
allotment option. As a result, these stockholders will be able to exercise
significant influence over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership may also have the effect of
delaying or preventing a change in control of the Company. See "Principal
Stockholders" and "Description of Capital Stock--Certain Antitakeover Effects
of Provisions of the Certificate of Incorporation, Bylaws and Delaware Law."
No Specific Use of Proceeds. The Company has not designated any specific use
for the net proceeds from the sale by the Company of the Common Stock offered
hereby. The Company expects to use the net proceeds for general corporate
purposes, including working capital. Accordingly, management will have
significant flexibility in applying the net proceeds of this offering. The
failure of management to apply such funds effectively could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Use of Proceeds."
FORWARD LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act which
are subject to the "safe harbor" created by those sections. These forward-
looking statements include, but are not limited to, statements concerning the
Company's strategy, mission, acquisition program, opportunities and goals and
the potential development of the market for Intranet, Extranet and Web site
solutions and services.
These forward-looking statements may be found in the "Prospectus Summary,"
"Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." Forward-looking
statements not specifically set forth above may also be found in these and
other sections of this Prospectus. Actual results could differ materially and
adversely from those discussed in the forward-looking statements as a result
of certain factors, including those discussed in "Risk Factors" and elsewhere
in this Prospectus. See "Risk Factors."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock being
offered by the Company hereby at an assumed public offering price of $18.94
per share are approximately $17,243,000 (approximately $19,935,000 if the
Underwriters' over-allotment option is exercised in full). The Company will
not receive any of the proceeds from the sale of Common Stock by the Selling
Stockholders. See "Principal and Selling Stockholders."
The Company expects to use the net proceeds from this offering for general
corporate purposes, including working capital. The Company regularly evaluates
potential acquisition candidates, is currently holding preliminary discussions
with a number of such candidates and is in active negotiations with a number
of such other candidates. If, after due diligence review and negotiation, such
companies can be acquired on a basis considered fair to the Company and its
stockholders, the Company may proceed with such acquisitions. The Company is
also evaluating or negotiating acquisition transactions outside the United
States. The Company expects most of its future acquisitions to include the
issuance of additional shares of the Company's Common Stock. The Company
recently filed a "shelf" Registration Statement on Form S-4 to register
16,666,667 shares of its Common Stock for use in future acquisitions. To the
extent the Company chooses to use cash as consideration for future
acquisitions, the Company may be required to obtain additional financing.
Pending use of the net proceeds for the above purposes, the Company intends to
invest such funds in short-term, interest-bearing, investment-grade
obligations. See "Risk Factors--Risks Related to Acquisitions," "--Management
of Growth; Integration of Acquisitions," "--No Specific Use of Proceeds,"
"Dilution," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Acquisition of Internet Professional Services Firms,"
"--Liquidity and Capital Resources" and "Business--Strategy" and "--Consulting
Office Network Development."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future. The payment of cash
dividends in the future will be at the discretion of the Board of Directors
and subject to certain limitations under the Delaware General Corporation Law
and will depend upon factors such as the Company's earnings levels, capital
requirements, financial condition and other factors deemed relevant by the
Board of Directors. There can be no assurance that the Company will pay any
dividends in the future.
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company commenced trading publicly on the Nasdaq
National Market on December 5, 1997 and is traded under the symbol USWB. Prior
to that date, there was no public market for the Common Stock. The following
table sets forth for the periods indicated the high and low closing sales
prices of the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Fourth Quarter (from December 5, 1997)........................ $13.13 $ 8.50
YEAR ENDING DECEMBER 31, 1998
First Quarter (through February 23, 1998)..................... $20.00 $10.13
</TABLE>
As of February 20, 1998, there were approximately 374 holders of record of
the Common Stock. On February 23, 1998, the last sales price reported on the
Nasdaq National Market for the Common Stock was $18.94 per share. See "Risk
Factors--Volatility of Stock Price."
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 (i) on an actual basis and (ii) as adjusted to give effect
to the sale by the Company of 1,000,000 shares of Common Stock offered hereby
at an assumed public offering price of $18.94 per share and the application of
the net proceeds therefrom. See "Use of Proceeds." This table should be read
in conjunction with the Consolidated Financial Statements and Pro Forma
Consolidated Financial Information and Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-----------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease obligations, long-term portion..................... $ 372 $ 372
------- -------
Stockholders' equity:
Preferred Stock, $.001 par value, 1,000,000 shares
authorized; no shares issued and outstanding actual or
as adjusted........................................... -- --
Common Stock, $.001 par value, 100,000,000 shares
authorized; 33,811,085 shares issued and outstanding
actual; 34,811,085 shares issued and outstanding as
adjusted (1).......................................... 29 30
Additional paid-in capital............................. 138,804 156,046
Accumulated deficit.................................... (72,144) (72,144)
------- -------
Total stockholders' equity........................... 66,689 83,932
------- -------
Total capitalization............................... $67,061 $84,304
======= =======
</TABLE>
- ---------------------
(1) Excludes, as of December 31, 1997, (i) 12,600,000 shares of Common Stock
reserved for issuance under the Company's stock option plans, of which
9,492,403 shares were issuable upon exercise of outstanding options at a
weighted average exercise price of $8.03 per share, (ii) 809,270 shares of
Common Stock issuable upon exercise of outstanding warrants at a weighted
average exercise price of $6.81 per share, (iii) 333,333 shares of Common
Stock reserved for issuance under the Company's Affiliate Warrant Program,
of which 267,284 shares were issuable upon exercise of outstanding
warrants at a weighted average exercise price of $2.55 per share, (iv)
1,000,000 shares of Common Stock reserved for issuance under the Company's
1997 Employee Stock Purchase Plan, (v) additional shares of Common Stock
that are considered probable of issuance as stock bonuses and acquisition
purchase price adjustments and (vi) 16,666,667 shares of Common Stock
registered pursuant to a Registration Statement on Form S-4 for use in
future acquisitions. See "Risk Factors--Dilution," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Acquisition of Internet Professional Services Firms," "Business--
Consulting Office Network Development," "Management--Employee Benefit
Plans" and Notes 1, 9 and 10 to Consolidated Financial Statements.
18
<PAGE>
DILUTION
The net tangible book value of the Company as of December 31, 1997 was
$47,670,000, or $1.41 per share of Common Stock. Net tangible book value per
share represents the amount of total tangible assets less total liabilities
divided by 33,811,085, the number of shares of Common Stock treated as
outstanding. After giving effect to the sale by the Company of 1,000,000
shares of Common Stock offered hereby (based upon an assumed public offering
price of $18.94 per share and after deducting underwriting discounts and
commissions and estimated offering expenses), the Company's net tangible book
value at December 31, 1997 would have been $64,913,000, or $1.86 per share.
This represents an immediate increase in net pro forma tangible book value to
existing stockholders of $0.45 per share and an immediate dilution of $17.08
per share to new investors. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share........................ $18.94
Pro forma net tangible book value per share as of December
31, 1997.................................................... $1.41
Increase in net tangible book value per share attributable to
new investors............................................... .45
-----
Pro forma net tangible book value per share after the offering. 1.86
------
Dilution per share to new investors............................ $17.08
======
</TABLE>
For additional information regarding potential dilution, see "Risk Factors--
Dilution."
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The statement of operations data set forth below
with respect to the years ended December 31, 1996 and 1997 and the balance
sheet data at December 31, 1996 and 1997 are derived from, and are qualified
by reference to, the audited consolidated financial statements of the Company
included elsewhere in this Prospectus. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The unaudited pro forma consolidated statement of operations data for the
year ended December 31, 1997 reflect the effects of the acquisitions of USWeb
San Francisco, USWeb Seattle, USWeb Milwaukee, USWeb LA Metro, USWeb Atlanta,
USWeb Silicon Valley, USWeb DC, USWeb Phoenix, USWeb Pittsburgh, USWeb Chicago
Metro, USWeb Hollywood, USWeb Marin, USWeb Long Island, USWeb Detroit, USWeb
San Mateo, USWeb LA Central, USWeb Houston and USWeb New York Central, as if
each of the acquisitions had occurred on January 1, 1997. All intercompany
transactions have been eliminated in consolidation.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PRO FORMA
------------------ ------------
YEAR ENDED
DECEMBER 31,
1996 1997 1997
-------- -------- ------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
(1):
Revenues:
Services.................................... $ -- $ 18,366 $ 34,298
Other....................................... 1,820 912 514
-------- -------- --------
Total revenues.............................. 1,820 19,278 34,812
-------- -------- --------
Cost of revenues:
Services.................................... -- 13,468 22,392
Other....................................... 208 1,294 1,294
Stock compensation (2)...................... -- 2,420 5,048
-------- -------- --------
Total cost of revenues...................... 208 17,182 28,734
-------- -------- --------
Gross profit................................. 1,612 2,096 6,078
-------- -------- --------
Operating expenses:
Marketing, sales and support ............... 12,764 20,672 25,689
General and administrative.................. 2,813 10,271 14,021
Acquired in-process technology (2).......... -- 9,472 9,472
Stock compensation (2)...................... -- 6,698 15,768
Amortization of intangible assets (2) ...... -- 9,476 22,176
-------- -------- --------
Total operating expenses.................... 15,577 56,589 87,126
-------- -------- --------
Loss from operations......................... (13,965) (54,493) (81,048)
Interest income.............................. 215 233 268
Interest expense............................. (58) (76) (159)
Impairment of investee carried at cost ...... -- (4,000) (4,000)
-------- -------- --------
Net loss..................................... $(13,808) $(58,336) $(84,939)
======== ======== ========
Net loss per share:
Basic and diluted (3)....................... $ (2.46) $ (4.78) $ (4.77)
======== ======== ========
Weighted average shares outstanding (3)..... 5,620 12,193 17,795
======== ======== ========
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 3,220 $ 44,145
Working capital.............................. 73 40,516
Total assets................................. 7,482 79,250
Lease obligations, long-term portion......... 436 372
Mandatorily Redeemable Convertible Preferred
Stock....................................... 16,200 --
Stockholders' equity (deficit)............... (12,492) 66,689
</TABLE>
20
<PAGE>
- ---------------------
(1) The Company was incorporated on December 6, 1995 and had insignificant
activities from inception through December 31, 1995, which have been
included in the 1996 financial statements to facilitate presentation.
(2) These expenses are non-cash acquisition-related charges incurred as a
result of the Company's acquisition program. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 1
to Consolidated Financial Statements.
(3) 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 net loss by the weighted average number of common
shares outstanding during the period. The weighted average shares
outstanding excludes acquisition shares held in escrow which, based upon
currently available information, are not probable of issuance and includes
shares which, based upon currently available information, are probable of
issuance at the end of the contingency periods. The computation of diluted
net loss per share excludes Mandatorily Redeemable Convertible Preferred
Stock prior to its conversion date and outstanding stock options and
warrants as their effect 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.
21
<PAGE>
PRO FORMA SELECTED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated statement of operations data
reflects the acquisitions of USWeb San Francisco, USWeb Seattle, USWeb
Milwaukee, USWeb LA Metro, USWeb Atlanta, USWeb Silicon Valley, USWeb DC,
USWeb Phoenix, USWeb Pittsburgh, USWeb Chicago Metro, USWeb Hollywood, USWeb
Marin, USWeb Long Island, USWeb Detroit, USWeb San Mateo, USWeb LA Central,
USWeb Houston and USWeb New York Central, as if each of the acquisitions had
occurred on January 1, 1997. All intercompany transactions have been
eliminated in consolidation. The pro forma consolidated statement of
operations data is presented for informational purposes only and may not be
indicative of the results of operations had the acquisitions occurred on
January 1, 1997, nor do they purport to indicate the future results of
operations of the Company. The following pro forma consolidated statement of
operations data should be read in conjunction with the Consolidated Financial
Statements and the Pro Forma Consolidated Financial Information and related
notes appearing elsewhere in this Prospectus. Management believes that all
adjustments necessary to present fairly such pro forma consolidated statement
of operations data have been made.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED ---------------------------------------
DECEMBER 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1997
------------ -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues:
Services................. $ 34,298 $ 6,685 $ 7,607 $ 9,104 $ 10,902
Other.................... 514 176 171 68 99
-------- -------- -------- -------- --------
Total revenues........... 34,812 6,861 7,778 9,172 11,001
-------- -------- -------- -------- --------
Cost of revenues:
Services................. 22,392 4,092 5,308 5,412 7,580
Other.................... 1,294 132 79 969 114
Stock compensation (1)... 5,048 1,262 1,262 1,262 1,262
-------- -------- -------- -------- --------
Total cost of revenues... 28,734 5,486 6,649 7,643 8,956
-------- -------- -------- -------- --------
Gross profit.............. 6,078 1,375 1,129 1,529 2,045
-------- -------- -------- -------- --------
Operating expenses:
Marketing, sales and
support ................ 25,689 4,841 5,964 7,007 7,877
General and administra-
tive.................... 14,021 2,732 3,353 4,495 3,441
Acquired in-process
technology (1) ......... 9,472 9,472 -- -- --
Stock compensation (1)... 15,768 3,942 3,942 3,942 3,942
Amortization of
intangible assets (1)... 22,176 6,446 6,446 4,642 4,642
-------- -------- -------- -------- --------
Total operating expenses. 87,126 27,433 19,705 20,086 19,902
-------- -------- -------- -------- --------
Loss from operations...... (81,048) (26,058) (18,576) (18,557) (17,857)
Interest income........... 268 30 72 98 68
Interest expense.......... (159) (72) (49) (38) --
Impairment of investee
carried at cost.......... (4,000) -- (4,000) -- --
-------- -------- -------- -------- --------
Net loss.................. $(84,939) $(26,100) $(22,553) $(18,497) $(17,789)
======== ======== ======== ======== ========
Pro forma net loss per
share:
Basic and diluted (2).... $ (4.77) $ (1.69) $ (1.40) $ (1.11) $ (0.77)
======== ======== ======== ======== ========
Weighted average shares
outstanding (2)......... 17,795 15,438 16,136 16,650 22,954
======== ======== ======== ======== ========
</TABLE>
22
<PAGE>
- ---------------------
(1) These expenses are non-cash acquisition-related charges incurred as a
result of the Company's acquisition program. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 1
to Consolidated Financial Statements.
(2) 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 net loss by the weighted average number of common
shares outstanding during the period. The weighted average shares
outstanding excludes acquisition shares held in escrow which, based upon
currently available information, are not probable of issuance and includes
shares which, based upon currently available information, are probable of
issuance at the end of the contingency periods. The computation of diluted
net loss per share excludes Mandatorily Redeemable Convertible Preferred
Stock prior to its conversion date and outstanding stock options and
warrants as their effect 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. Pro forma net loss
per share is computed on the basis described above and giving effect to
all acquisitions as if they occurred on January 1, 1997. See Pro Forma
Consolidated Financial Information included elsewhere herein.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data," "Pro Forma Selected Consolidated
Financial Data," "Pro Forma Consolidated Financial Information" and the
Company's Consolidated Financial Statements, including the Notes thereto,
included elsewhere in this Prospectus. The discussion in Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions,
as well as financial trends. The cautionary statements made in Management's
Discussion and Analysis of Financial Condition and Results of Operations
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed below. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere herein.
OVERVIEW
USWeb is a leading Internet professional services firm that provides
Intranet, Extranet and Web site solutions and services to businesses. The
Company has built a national network of consulting offices and what it
believes to be one of the most recognized brands for Internet professional
services. The Company offers a comprehensive range of services to deliver
Internet solutions designed to improve clients' business processes. The
Company's services include strategy consulting; analysis and design;
technology development; implementation and integration; audience development;
and maintenance. The Company markets its services to medium-sized and large
companies.
From December 6, 1995 (inception) to March 31, 1997, the Company's operating
activities related primarily to recruiting personnel, raising capital,
preparing and securing approval of its Uniform Franchise Offering Circular and
conducting business as a franchisor of Internet professional services firms.
Each such firm that entered into a franchise agreement with USWeb was
designated an "Affiliate." In March 1997, the Company entered into its last
Affiliate agreement and does not expect to enter into any additional Affiliate
agreements. In the first quarter of 1997, the Company initiated the second
phase of its corporate development strategy and began to acquire Internet
professional services firms, starting with certain qualified Affiliates. To
date, the Company has derived its revenues from a combination of service
revenues generated by its Company-owned offices and fees paid by its
Affiliates. The Company expects that revenues attributable to its Company-
owned offices, which represented approximately 95% of total revenues for the
year ended December 31, 1997, will increase as a percentage of total revenues.
Because of this transition in business strategy from a franchising model to
one based on Company-owned operations, 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
December 31, 1997 had an accumulated deficit of $72.1 million. Although the
Company
24
<PAGE>
has experienced revenue growth in recent months, such growth rates may not be
sustainable or indicative of future operating results. The Company expects to
continue to incur substantial operating losses through at least 1998, and
there can be no assurance that the Company will achieve or sustain
profitability. See "Risk Factors--Limited Operating History; Accumulated
Deficit."
ACQUISITION OF INTERNET PROFESSIONAL SERVICES FIRMS
The Company began to acquire selected Internet professional services firms
in the first quarter of 1997. The Company 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. All acquisitions to date
have been structured as stock-for-stock mergers. However, the Company is
currently negotiating one asset acquisition and one international acquisition
that include consideration other than stock. See Note 1 to Consolidated
Financial Statements.
The Company uses a consistent valuation and process methodology for its
acquisitions. The Company determines the initial purchase price of each
candidate company based on quantitative factors, including historical
revenues, profitability, financial condition and contract backlog, and the
Company's qualitative evaluation of the candidate's management team,
operational scalability and customer base. The Company typically acquires
suitable candidates through mergers in exchange for shares of USWeb Common
Stock. On the closing date of the acquisition, at least fifty percent of the
shares to be issued are deposited into a one-year escrow and the remaining
shares are delivered to the acquired company's shareholders. The acquired
company is valued again, typically at each of six and twelve months after
acquisition, and additional shares are issued or escrowed shares are returned
depending on whether the valuation has increased or decreased. After all such
purchase price adjustments have been made, all shares remaining in escrow are
issued to the acquired company's shareholders. The Company expects to continue
using this valuation methodology for future acquisitions. The Company's
acquisition program will result in further substantial ownership dilution to
investors participating in this offering. See "Risk Factors--Dilution" and
Note 1 to Consolidated Financial Statements.
The acquisitions have been accounted for using the purchase method of
accounting. For each acquisition, a portion of the purchase price is allocated
to the tangible and identifiable intangible assets acquired and liabilities
assumed based on their respective fair values on the acquisition date.
Identifiable intangible assets include both (i) amounts allocated to in-
process technology and immediately charged to operations and (ii) amounts
allocated to completed technology and amortized on a straight-line basis over
the estimated useful life of the technology of six months. The portion of the
purchase price in excess of tangible and identifiable intangible assets and
liabilities assumed is allocated to goodwill and amortized on a straight-line
basis over the estimated period of benefit, which ranges from one to two
years. The results of operations of the acquired entity are consolidated with
those of the Company as of the date the Company acquires effective control of
the entity, which generally occurs prior to the formal legal closing of the
transaction and the physical exchange of acquisition consideration.
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. Each option becomes exercisable over a 36-month period and has
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 granted at
the six and twelve-month re-valuation dates if the target company's formula-
based valuation increases. 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
share price equal to the fair market value of USWeb Common Stock at the time
of exercise, 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
25
<PAGE>
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 year ended
December 31, 1997, stock compensation expense included in cost of revenues
totaled $2.4 million, stock compensation expense included in operating
expenses totaled $6.7 million and amortization of intangible assets totaled
$9.5 million, all of which were related to the acquisition of the initial
nineteen Company-owned offices. In addition, the Company has recognized an
aggregate cost of $9.5 million for acquired in-process technology related to
these acquisitions. The Company expects these acquisition-related non-cash
expenses to increase as it continues its acquisition program.
To capitalize on the growth opportunities for a newly acquired consulting
office, the Company generally hires a number of additional Internet
professionals during the three-month period following the office's integration
into the USWeb network. The capacity utilization rates of these new employees
are initially not as high as those of seasoned employees because of the time
spent on training and professional development. Consequently, the Company
expects that the cost of service revenues as a percentage of service revenues
of an integrated office will generally increase during the first three months
following such integration. The Company believes that this investment in
training and professional development will contribute to its ability to meet
its growth targets.
The successful implementation of the Company's acquisition strategy depends
on the Company's ability to identify suitable acquisition candidates, acquire
such companies on acceptable terms and integrate their operations successfully
with those of the Company. There can be no assurance that the Company will be
able to do so. Moreover, in pursuing acquisitions the Company may compete with
companies with similar acquisition strategies, certain of which competitors
may be larger and have greater financial and other resources than the Company.
Competition for these acquisition targets could also result in increased
prices for acquisition targets and a diminished pool of companies available
for acquisition. Acquisitions also involve a number of other risks, including
adverse effects on the Company's reported operating results from increases in
goodwill amortization, acquired in-process technology, stock compensation
expense and increased compensation expenses resulting from newly hired
employees, the diversion of management attention, risks associated with the
subsequent integration of acquired businesses, potential disputes with the
sellers of one or more acquired entities and the failure to retain key
acquired personnel. Client satisfaction or performance problems with an
acquired firm could also have a material adverse impact on the reputation of
the Company as a whole, and any acquired subsidiary could significantly under-
perform relative to the Company's expectations. For all of these reasons, the
Company's pursuit of an overall acquisition strategy or any individual
completed, pending or future acquisition may have a material adverse effect on
the Company's business, results of operations, financial condition and cash
flows. To the extent the Company chooses to use cash consideration in the
future to pay for all or part of any acquisitions, the Company may be required
to obtain additional financing, and there can be no assurance that such
financing will be available on favorable terms, if at all. See "Risk Factors--
Risks Related to Acquisitions," "--Future Capital Needs; Uncertainty of
Additional Financing" and Note 1 to Consolidated Financial Statements.
SOURCES OF REVENUES
The Company operated under its Affiliate model from December 1995
(inception) through the first quarter of 1997. During that period, revenues
were derived almost exclusively from initial fees and monthly royalties from
Affiliates. Initial fees were typically recognized when received because all
obligations required of USWeb by the Affiliate agreement were substantially
performed concurrently with the execution of the agreement. Monthly royalties
are equal to the greater of (a) a minimum monthly payment or (b) the aggregate
of a five percent royalty and a two percent marketing promotion fee applied to
each Affiliate's "Adjusted Gross Revenues," defined as the Affiliate's gross
revenues from Internet professional services less (i) rebates,
26
<PAGE>
discounts and taxes the Affiliate is required to collect, (ii) the Affiliate's
direct cost for third-party hardware and software resold to clients, (iii)
Internet access services purchased from USWeb-approved suppliers and resold to
clients, and (iv) certain other goods and services purchased and resold to
clients. Monthly royalty revenue is recognized as reported by the Affiliate to
the Company. During the year ended December 31, 1997, revenues from Affiliates
were insignificant.
In the first quarter of 1997, the Company ended its program for attracting
new Affiliates and initiated the acquisition phase of its corporate
development strategy. As discussed above under "--Acquisition of Internet
Professional Services Firms," the Company consolidates the financial
statements of acquired entities beginning on the date the Company assumes
effective control of those entities. Revenues from Company-owned operations
consist of fees for consulting services rendered over the course of an
engagement, recognized primarily on a percentage-of-completion basis. The
services offered by the Company include strategy consulting; analysis and
design; technology development; implementation and integration; audience
development; and maintenance. Each engagement is billed over the course of the
engagement on either a time and materials basis or a fixed-price basis.
Billable rates vary by the service provided and geographical region and
typically range from $100 to $250 per hour. Although a majority of engagements
are currently performed on a time and materials basis, the Company intends to
increase the percentage of engagements billed on a fixed-price basis. The
pricing, management and execution of individual engagements are the
responsibility of the consulting office that performs or coordinates the
services. The Company also recognizes revenues from third-party hardware,
software, Internet access and hosting services (which include hardware,
software, connectivity and support that allows users to access a website) and
certain other goods and services purchased and resold to clients; however,
revenues from such activities have been immaterial to date.
To date, the Company has had only limited experience with fixed-price
engagements. The Company's failure to estimate accurately the resources and
time required for an engagement, to manage effectively client expectations
regarding the scope of services to be delivered for the estimated fees or to
complete fixed-price engagements within budget, on time and to clients'
satisfaction would expose the Company to risks associated with cost overruns
and, in certain cases, penalties, any of which could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Risk Factors--Risks of Fixed-Price Engagements."
COST STRUCTURE
Consulting offices owned by the Company recognize revenues primarily using
the percentage-of-completion method. Direct costs, such as personnel salaries
and benefits and the cost of any third-party hardware or software included in
an Internet solution, and related overhead expenses, such as depreciation and
occupancy charges, associated with the generation of the revenues are
classified as cost of revenues. The technology, sales, marketing and
administrative costs of each Company-owned office are classified as operating
expenses. Corporate expenses are primarily classified as operating expenses.
Marketing, sales and support expenses include product and service research,
advertising, brand name promotions and lead-generation activities, as well as
the salary and benefits costs of the personnel in these functions. General and
administrative expenses include accounting, legal and human resources costs.
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PRO FORMA RESULTS OF OPERATIONS
The following table presents unaudited pro forma quarterly results of
operations as a percentage of pro forma total revenues. The Company believes
that all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
such quarterly information. The operating results for any quarter are not
necessarily indicative of results for any subsequent period. Because of the
Company's transition from a franchise business model to one based on Company-
owned operations, the Company believes that its historical financial
statements for periods ended on or before March 31, 1997 are not necessarily
indicative of future operating results. The Company has therefore included its
quarterly results of operations on a pro forma basis to facilitate the
understanding of the effects of business acquisitions on the Company's
operations. See "Pro Forma Consolidated Financial Information" following the
notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED ------------------------------------
DECEMBER 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1997
------------ -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Services................... 99 % 97 % 98 % 99 % 99 %
Other...................... 1 3 2 1 1
---- ---- ---- ---- ----
Total revenues............. 100 100 100 100 100
---- ---- ---- ---- ----
Cost of revenues:
Services................... 64 60 68 59 69
Other...................... 4 2 1 11 1
Stock compensation (1)..... 15 18 16 14 11
---- ---- ---- ---- ----
Total cost of revenues..... 83 80 85 84 81
---- ---- ---- ---- ----
Gross profit................ 17 20 15 16 19
---- ---- ---- ---- ----
Operating expenses:
Marketing, sales and sup-
port...................... 74 71 77 76 72
General and administrative. 40 40 43 49 31
Acquired in-process tech-
nology (1)................ 27 138 -- -- --
Stock compensation (1)..... 45 57 51 43 36
Amortization of intangible
assets (1)................ 64 94 83 51 42
---- ---- ---- ---- ----
Total operating expenses.... 250 400 254 219 181
---- ---- ---- ---- ----
Loss from operations........ (233) (380) (239) (203) (162)
Interest income............. 1 -- 1 1 1
Interest expense............ -- (1) (1) -- --
Impairment of investee car-
ried at cost............... (11) -- (51) -- --
---- ---- ---- ---- ----
Net loss.................... (243)% (381)% (290)% (202)% (161)%
==== ==== ==== ==== ====
</TABLE>
- ---------------------
(1) These expenses are non-cash acquisition-related charges incurred as a
result of the Company's acquisition program. See "--Acquisition of
Internet Professional Services Firms" and Note 1 to Consolidated Financial
Statements.
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PRO FORMA RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Revenues. Pro forma revenues for the year ended December 31, 1997 were $34.8
million. This amount is comprised primarily of service revenues generated by
Company-owned offices, which totaled $34.3 million. The quarterly increases in
revenues are primarily attributable to increases in the number of billable
consultants, the addition of new clients and expanded relationships with
existing clients.
Cost of Revenues. Pro forma cost of revenues totaled $28.7 million for the
year ended December 31, 1997. This amount consisted of cost of services, other
costs and stock compensation totaling $22.4 million, $1.3 million and $5.0
million, respectively.
Variations in cost of services as a percentage of total revenues during 1997
quarterly periods are primarily attributable to increases in revenue and costs
associated with hiring additional consultants in various offices. Consultants
typically are not fully utilized during the initial months of employment as
they undergo training and become integrated into the Company's operations.
Costs of other revenues represent costs associated with the Affiliate
Warrant Program and other services costs such as web site hosting. The
increase in cost of other revenues during the quarter ended September 30, 1997
to $969,000, or 11% of total revenues, was primarily attributable to estimated
losses on certain hosting contracts and non-cash expenses associated with the
Affiliate Warrant Program.
Stock compensation represents a non-cash charge related to the amortization
of stock bonuses.
Marketing, Sales and Support Expenses. Pro forma marketing, sales and
support expenses totaled $25.7 million for the year ended December 31, 1997.
This amount is comprised primarily of expenditures and personnel-related costs
incurred in advertising and promoting the USWeb brand. Marketing, sales and
support expenses for the quarter ended December 31, 1997 include a one-time,
non-cash charge of $1.3 million, or 11% of the total revenues, relating to the
discounted sale of Common Stock to Intel at $6.00 per share contemporaneously
with the Company's initial public offering.
General and Administrative Expenses. Pro forma general and administrative
expenses totaled $14.0 million for the year ended December 31, 1997. The
amount consisted primarily of personnel costs related to growth of the
Company's operations and professional services fees incurred in relation to
the Company's acquisition program.
General and administrative expenses in the quarter ended September 30, 1997
include a one-time non-cash compensation charge of $1.1 million related to the
Company's decision to end its program for attracting new Affiliates.
Acquired In-Process Technology. On a pro forma basis, assuming all of the
acquisitions occurred on January 1, 1997, the Company recognized the cost of
acquired in-process technology totaling $9.5 million during the year ended
December 31, 1997. The acquired in-process technology had not reached the
stage of technological feasibility at the date of acquisition and had no
alternative future use.
Stock Compensation Expense. Pro forma stock compensation expense, including
amounts allocated to cost of revenues, totaled $20.8 million for the year
ended December 31, 1997 and represents amortization of stock bonuses awarded
to employees of Company-owned offices. Such amount is amortized over the
related vesting period of thirty-six months on a straight-line basis.
Amortization of Intangible Assets. Pro forma amortization of intangible
assets totaled $22.2 million for the year ended December 31, 1997. Such amount
represents amortization of identified intangible assets and goodwill resulting
from the Company's various acquisitions amortized over various periods ranging
from six to twenty-four months. Decreases in amortization of intangible assets
as a percentage of revenue result from increasing service revenues and
completion of the amortization of capitalized technologies of Company-owned
offices.
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<PAGE>
Impairment of Investee. During June 1997, the Company recognized an
impairment provision totaling $4.0 million, representing the total amount of
its cost basis investment in Utopia, Inc., an independent Internet consulting
firm. In assessing the level of impairment, the Company considered the
entity's current financial position, recent operating performance and the
likelihood of recovery of some or all of its investment in the event of
liquidation, sale or merger.
Income Taxes. No provision for federal and state income taxes was recorded
for 1997, because the Company incurred net operating losses during that year.
Net Loss. Pro forma net loss was $84.9 million for the year ended December
31, 1997. The net loss was comprised primarily of revenues totaling $34.8
million offset by cost of revenues and operating expenses totaling $28.7
million and $87.1 million respectively. Included in cost of revenues and
operating expenses are approximately $52.5 million of non-cash charges
associated with the Company's ongoing acquisition program.
HISTORICAL RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. Total revenues increased to $19.3 million for the year ended
December 31, 1997 from $1.8 million for the year ended December 31, 1996. This
increase was primarily attributable to the Company beginning its acquisition
program in the first quarter of 1997. No service revenues were recorded for
the year ended December 31, 1996 because during this period the Company did
not have any Company-owned offices and instead derived its revenues from
initial fees and monthly royalties from Affiliates. The Company anticipates
that revenues will be impacted in future periods as a result of internal
growth and as a result of acquisitions of additional Internet professional
service firms.
Cost of Revenues. Cost of revenues increased to $17.2 million for the year
ended December 31, 1997 from $208,000 for the year ended December 31, 1996.
The increase in cost of revenues was primarily attributable to the cost of
revenues associated with Company-owned offices subsequent to their respective
acquisition dates. The Company anticipates that cost of revenues will increase
in absolute dollars as service fees generated by the Company-owned offices and
the level of services increases, and as a result of acquisitions of additional
Internet professional service firms.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased to $20.7 million for the year ended December 31, 1997 from $12.8
million for the year ended December 31, 1996. This increase was primarily
attributable to USWeb branding campaigns, increases in personnel to support
the growth in the Company's operations and the consolidation of the results of
operations of Internet professional services firms with those of the Company
throughout 1997. In addition, during December 1997, the Company recognized a
non-cash charge of $1.3 million associated with the discounted sale of Common
Stock to Intel Corporation. The Company anticipates that marketing, sales and
support expenses will increase in future periods in absolute dollars as it
continues to pursue an aggressive brand building strategy and continues to
acquire and consolidate the results of Internet professional service firms.
General and Administrative Expenses. General and administrative expenses
increased to $10.3 million for the year ended December 31, 1997, from $2.8
million for the year ended December 31, 1996. This increase was primarily
attributable to a non-cash compensation charge of $1.1 million during the
quarter ended September 30, 1997, related to the Company's decision to end its
program for attracting new Affiliates and increases in personnel to support
the internal growth in the Company's operations and the consolidation of the
results of operations of acquired Internet professional services firms with
those of the Company throughout 1997. The Company believes that the absolute
dollar level of general and administrative expenses will increase in future
periods, as a result of increased staffing, fees for professional services,
and costs associated with acquiring and consolidating the results of Internet
professional service firms with those of the Company.
Acquired In-Process Technology. The Company recognized the cost of acquired
in-process technology totaling $9.5 million during the year ended December 31,
1997. The Company did not record any such
30
<PAGE>
expenses for the year ended December 31, 1996, because the Company did not
acquire any entities during such period. The acquired in-process technology had
not reached the stage of technological feasibility at the date of acquisition
and had no alternative future use. The Company anticipates that acquired in-
process technology expenses will increase in future periods in absolute dollars
as it continues to acquire Internet professional service firms with in-process
technology.
Stock Compensation. Stock compensation expense relating to stock bonus awards
to employees of acquired entities totaled $6.7 million for the year ended
December 31, 1997. The Company did not record any such expenses for the year
ended December 31, 1996 because the Company did not acquire any entities during
such period. The Company anticipates that stock compensation expense will
increase in future periods in absolute dollars as it continues to acquire
Internet professional service firms.
Amortization of Intangible Assets. Amortization of intangible assets,
consisting primarily of purchased technology and goodwill, was $9.5 million for
the year ended December 31, 1997. The Company did not record any such expenses
for the year ended December 31, 1996 because the Company did not acquire any
entities during such period. The Company anticipates that costs related to the
amortization of intangible assets will increase in future periods in absolute
dollars as it continues to acquire Internet professional service firms.
Impairment of Investee. During June 1997, the Company recognized an
impairment provision totaling $4.0 million, representing the total amount of
its cost basis investment in Utopia, Inc., an independent Internet consulting
firm. In assessing the level of impairment, the Company considered the entity's
current financial position, recent operating performance and the likelihood of
recovery of some or all of its investment in the event of liquidation, sale or
merger.
Income Taxes. No provision for federal and state income taxes was recorded
for either of the years ended December 31, 1997 and 1996 because the Company
incurred net operating losses in each of those periods.
Net Loss. Net losses for the years ended December 31, 1997 and 1996 were
$58.3 million and $13.8 million, respectively. The increase in the net loss was
primarily attributable to increases in marketing, sales and support
expenditures, approximately $28.1 million of non-cash charges associated with
the Company's acquisition program and a $4.0 million impairment charge relating
to an investee carried at cost.
FACTORS AFFECTING OPERATING RESULTS
The Company's operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside the Company's
control. These factors include the level of demand for Intranet, Extranet and
Web site development; the productivity of the Company's consulting offices; the
Company's success in finding and acquiring suitable acquisition candidates; the
Company's ability to attract and retain personnel with the necessary strategic,
technical and creative skills required to service clients effectively; the cost
of advertising and related media; the amount and timing of expenditures by
USWeb clients for Internet professional services; client budgetary cycles; the
amount and timing of capital expenditures and other costs relating to the
expansion of the Company's operations; the introduction of new products or
services by the Company or its competitors; pricing changes in the industry;
technical difficulties with respect to the use of the Internet; economic
conditions specific to Internet technology usage; and general economic
conditions. As a strategic response to changes in the competitive environment,
the Company may from time to time make certain pricing, service, technology or
marketing decisions or business or technology acquisitions that could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company may also experience seasonality in its
business in the future, resulting in diminished revenues to the Company as a
consequence of decreased demand for Internet professional services during
summer and year-end vacation and holiday periods. Due to all of the foregoing
factors, in some future period the Company's operating results may fall below
the expectations of securities analysts and investors. In such event, the
trading price of the Company's Common Stock would likely be materially and
adversely affected. See "Risk Factors--Potential Fluctuations in Quarterly
Results."
31
<PAGE>
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 both statements are
required for fiscal years beginning after December 15, 1997. Under SFAS
No. 130, companies are required to report in their 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 their 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 impact on the Company's consolidated financial results and is
currently assessing the disclosure requirements of the new pronouncements.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had approximately $44.1 million in cash and
cash equivalents. In December 1997, the Company completed an initial public
offering of its Common Stock, resulting in net proceeds to the Company of
approximately $38.3 million. The Company has also financed its operations
through private sales of equity securities. For the period from December 6,
1995 (inception) to December 31, 1997, the Company used approximately $34.2
million and approximately $4.4 million to fund operating activities and capital
equipment purchases, respectively. These operating and investing expenditures
were financed primarily with the net proceeds from private sales of Preferred
Stock totaling approximately $32.5 million, the issuance of Common Stock
totaling approximately $2.0 million, the issuance of $500,000 in promissory
notes that were subsequently converted into Common Stock and equipment lease
obligations totaling approximately $1.0 million.
In October 1997, the Company entered into a credit facility with a bank that
allows the Company to borrow up to a maximum of $3.0 million to finance various
equipment purchases. As of December 31, 1997, borrowings outstanding under the
credit facility approximated $431,000. Expenditures for property and equipment,
including those subsequently financed under capitalized equipment leases, are
primarily for purchases of computer hardware and software used in the Company's
operations, including expenditures for management information and
communications systems.
In November 1997, the Company obtained a bridge loan facility from a bank.
Under the terms of the facility the Company borrowed $2.0 million, which was
secured by substantially all of the Company's assets. The loan accrued interest
at the bank's prime rate plus 1%. On December 10, 1997, the Company repaid the
outstanding amount.
In addition to the 5,750,000 shares of Common Stock sold by the Company in
its initial public offering, including the underwriter's over-allotment option,
contemporaneously with that offering the Company sold to Intel in a private
placement 1,666,666 shares of unregistered Common Stock at a price of $6.00 per
share. Such sale was effected pursuant to a separate agreement with Intel
entered into in November 1997 and not pursuant to the Underwriting Agreement
entered into by the Company in connection with its initial public offering.
The Company believes that the net proceeds from this offering, combined with
current cash and cash equivalent balances, borrowings available under its
credit facilities and proceeds from the private placement, will be sufficient
to fund its requirements for working capital and capital expenditures for at
least the next 12 months. Thereafter the Company may sell additional equity or
debt securities or seek additional credit facilities. Sales of additional
equity or convertible debt securities would result in additional dilution to
the Company's stockholders. The Company may need to raise additional funds
sooner in order to support more rapid expansion, develop new or enhanced
services and products, respond to competitive pressures, acquire complementary
businesses or technologies or take advantage of unanticipated opportunities.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the success of the Company's existing and new
service offerings and competing technological and market developments. See
"Risk Factors--Future Capital Needs; Uncertainty of Additional Financing."
32
<PAGE>
BUSINESS
OVERVIEW
USWeb is a leading Internet professional services firm that provides
Intranet, Extranet and Web site solutions and services to businesses. The
Company has built a national network of consulting offices and what it
believes to be one of the most recognized brands for Internet professional
services. The Company offers a comprehensive range of services to deliver
Internet solutions designed to improve clients' business processes. The
Company's services include strategy consulting; analysis and design;
technology development; implementation and integration; audience development;
and maintenance. The Company markets its services to medium-sized and large
companies.
INDUSTRY BACKGROUND
Intranets, Extranets and Web sites (collectively, "Internet solutions")
provide companies with a new set of tools for improving basic business
processes such as communications, data transmission, marketing, transaction
processing and customer service. An Intranet enables a company's employees to
receive corporate information and training efficiently, communicate through e-
mail, use the internal network's business applications, and access proprietary
information and legacy databases. An Extranet can extend part or all of the
functionality of a secure Intranet to selected business partners outside of
the company, such as customers, suppliers or distributors. Forrester Research,
Inc. ("Forrester") estimates that the worldwide market for Intranet
development services will grow from approximately $100 million in 1996 to
approximately $6.9 billion in 2000. Web sites, which are accessible by the
general public, can present advertising and marketing materials in new and
compelling fashions, display products and services in electronic catalogs,
offer products and services for sale online, process transactions and fulfill
orders, provide customers with rapid and accurate responses to their
questions, and gather customer feedback efficiently. Forrester estimates that
the worldwide market for Web site content and electronic commerce solution
development will grow from approximately $1.2 billion in 1996 to approximately
$9.4 billion in 2000.
Although businesses are adopting Internet solutions rapidly and at
increasing rates, the basic technical differences of such solutions from
earlier technologies and the broad scope of business process improvements that
such solutions can provide require companies to take fundamentally new
approaches toward implementing them. Businesses seeking to realize the
benefits provided by Internet solutions face a formidable series of challenges
presented by the need to link business strategy, new and rapidly changing
technologies and continuously updated content. Before creating an Intranet,
Extranet or Web site, a company must first conduct a thorough needs assessment
to review its strategic business requirements and compare them to the
capabilities of its existing processes and systems. Next, the company must
architect the solution and develop an implementation plan. The implementation,
establishment and maintenance of the solution will require significant
technical expertise in a number of areas, such as electronic commerce systems,
security and privacy technologies, application and database programming,
mainframe and legacy integration technologies and advanced user interface and
multimedia production.
To perform this multitude of functions in-house, a company would have to
make substantial commitments of time, money and technical personnel to keep
current with rapidly evolving technologies, content presentation techniques
and competitors' offerings. Professionals with the requisite strategic,
technical and creative skills are often in short supply and many organizations
are reluctant to expand their internal information systems or marketing
departments for particular engagements at a time when they are attempting to
minimize fixed costs to increase returns on investment. At the same time,
external economic factors encourage organizations to focus on their core
competencies and trim workforces in the information technology management
area. Accordingly, many businesses have chosen to outsource a significant
portion of the design, development and maintenance of their Intranets,
Extranets and Web sites to independent professionals who can leverage
accumulated strategic, technical and creative talent and stay current with
ongoing developments in a field characterized by extremely short technology,
process and content lifecycles.
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<PAGE>
Companies seeking to establish Internet solutions may turn to their
traditional marketing or technology service providers for assistance. However,
most of these providers have neither a proven track record of successful
Internet solution deployment nor the full portfolio of strategy, technology,
marketing and creative skills required to serve client needs effectively. Most
advertising and marketing communications agencies lack the extensive technical
skills, such as application development and legacy system and database
integration, required to produce the increasingly complex and functional
solutions demanded by clients. Most national information technology consulting
service providers have sizable corporate infrastructures and have therefore
chosen to focus on multi-million dollar engagements such as Year 2000 projects
and client/server enterprise resource planning software deployments, not
Internet solution consulting engagements. Most large computer technology
product and service vendors lack the creative and marketing skills required to
build audiences and deliver unique and compelling content, and are further
constrained by their need to recommend their proprietary brands. Internet
access service providers, whose core strength is in providing Internet access
and site hosting rather than solution development, typically lack both the
necessary creative and application development skills.
A number of small Internet professional services firms have emerged to
address the significant and rapidly growing market for Internet solutions.
However, the small size and capital constraints of most of these firms
restrict their ability to supply clients with the necessary depth and
integration of strategic, technical and creative skills. Furthermore, many of
these providers tend to develop expertise in a limited number of vertical
markets because of the need to leverage the information and experiences gained
from the relatively small number of Internet solution engagements they have
completed.
The Company believes that the rapidly increasing demand for Internet
solutions, combined with the inability of most current providers to supply the
full range and integration of strategic, technical and creative skills
required by clients, has created a significant market opportunity for a scaled
Internet professional services firm. In the currently fragmented and rapidly
changing environment, an organization that could deliver the creative
strengths of advertising and marketing firms, the strategic skills and
technical capabilities of information technology consulting service providers,
and the national reputation, economies of scale, multiple points of local
presence and information sharing capabilities of a large organization could
capitalize on this opportunity to help companies significantly improve their
business processes.
THE USWEB SOLUTION
USWeb's mission is to provide clients with the vision, expertise and
resources required to develop new strategies and improve business processes
using Internet solutions. To capitalize on the opportunity presented by the
rapid growth in demand for such solutions combined with a fragmented group of
organizations serving this demand, USWeb has built and is continuing to expand
through acquisitions and internal growth an Internet professional services
firm with 31 Company-owned and Affiliate offices nationwide as of January 31,
1998. The Company's services include strategy consulting; analysis and design;
technology development; implementation and integration; audience development;
and maintenance.
The Company delivers value to its clients through the application of its
Internet strategy and solutions methodology. Through its focus on Internet
technologies, the Company believes that it is well positioned to provide wide-
ranging and leading edge expertise with regard to:
. Internet browsers, servers and plug-ins.
. Electronic commerce and transaction systems.
. Security authentication and privacy technologies.
. E-mail and advanced collaboration systems.
. Digital asset management systems.
. Client/server and database application systems.
. Mainframe and legacy integration technologies.
. Advanced user interface and multimedia production.
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<PAGE>
. Internet-based video conferencing.
. Custom programming and tool applications.
. Site administration and reporting tools.
. Internet marketing systems and services.
. Client, server and routing hardware.
. Internet access and hosting services.
The Company delivers these services to clients through its network of
consulting offices, whose regional presence enables each office to develop
close client relationships and an understanding of client needs. Each
consulting office also benefits from the resources of the overall USWeb
organization. For example, individual consulting offices may draw as needed
upon the assistance of one or more additional offices with specialized
creative or technical expertise. Each consulting office also draws upon the
USWeb Internet Strategy and Solutions Center, which aggregates the expertise
of the entire USWeb network of offices to provide resources such as USWeb
Business Solutions that target selected client market segments or business
functions, a centralized index of best demonstrated practice methodologies, a
technology library of proprietary reusable software and content objects, a
central project registry, executive briefing programs for client decision
makers, SiteCast Internet solution education broadcasts and professional
Internet technology certification programs. The consulting offices can
leverage these central resources to provide clients efficiently with effective
Internet business solutions. The Company believes that its methodology has a
proven track record of delivering value to clients and is an important factor
in retaining existing clients and marketing to new ones.
USWeb believes that its operational model enables it to scale rapidly by
leveraging its central resources as its operations expand. First, the Company
believes that its aggregation and deployment of the accumulated experience and
expertise of its network of offices provides clients with enhanced business
solutions. Second, the Company's ability to leverage central technology and
operational resources enables the Company to scale efficiently, both through
the growth of existing consulting offices and the acquisition of new offices,
which also provides significant numbers of additional skilled personnel.
Finally, the Company's aggressive brand development campaign, which reinforces
the message that USWeb is a secure, reliable, high quality choice for the
provision of Internet professional services, increases the Company's ability
to access and influence key client decision makers.
STRATEGY
The Company's objective is to become and remain the leading global Internet
professional services firm. The Company's strategy to achieve this objective
includes the following elements:
Continue to Expand Network of Company-Owned Offices. The Company is
continuing to build its network of Company-owned offices through acquisitions
and internal growth. The Company believes that in the fragmented market for
providing Internet solutions, rapidly building a critical mass of strategic,
technical and creative talent through both internal growth and acquisitions
will provide USWeb with a substantial competitive advantage. As of January 31,
1998, USWeb had Company-owned offices in 20 locations across the United
States, including Atlanta, Austin, Chicago, Detroit, Los Angeles, Milwaukee,
New York, Philadelphia, Phoenix, Pittsburgh, Santa Clara, San Diego, San
Francisco, Seattle and Washington, D.C. The Company intends to acquire
additional entities in both the U.S. and abroad by continuing to implement its
acquisition methodology for identifying, acquiring and integrating Internet
professional services firms that meet the Company's criteria for revenues,
profitability, growth potential and operating strategy.
Strengthen Position as a Leading Internet Professional Services Firm. The
Company is continuing to strengthen its position as a leading Internet
professional services firm in order to provide clients with superior Internet
solutions. The Company intends to continue investing significantly in
identifying, reviewing and integrating the latest Internet technologies and
accumulating and deploying the best demonstrated practices for developing and
implementing Internet solutions. The Company is continuing to develop USWeb
Business Solutions, partially pre-built Internet solutions that combine USWeb
methodologies, services and reusable software and content objects with third-
party software. The Company's consulting offices intend to continue
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leveraging the Company's nationwide presence, operational scale and
professional marketing tools, which provide each consulting office with
resources and credibility to convince client decision makers that USWeb can
provide successful Internet solutions to meet the most demanding business
needs. The Company also intends to remain both vendor and technology neutral
in order to focus on delivering the Internet solution best suited to a
client's needs.
Enhance USWeb Brand. In a fragmented industry that lacks brands strongly
identified with Internet professional services, USWeb believes that it has
built one of the most well-recognized brands. The Company's brand development
programs are designed to reinforce the message that USWeb is a national
company with a local presence that can provide a complete range of services to
build and deploy business solutions and has a proven track record of doing so.
The Company is continuing to build and differentiate this brand through the
use of publicity campaigns that include Internet, print and radio advertising;
national seminars and executive briefings; Internet broadcasts; extensive
marketing tools and educational "white papers"; and co-marketing programs with
selected strategic partners.
Develop Additional Strategic Relationships. The Company intends to continue
developing strategic relationships because they enable USWeb to enter new
markets, gain early access to leading-edge technology, cooperatively market
products and services with leading technology vendors, cross-sell additional
services and gain enhanced access to vendor training and support. USWeb has
developed a number of strategic relationships with leading Internet hardware,
software and content companies, including Intel, Microsoft, Hewlett-Packard,
Pandesic LLC (the Internet company from Intel and SAP), Sun Microsystems and
Reuters. Collectively these relationships provide for co-marketing programs,
joint research and development on leading implementations of Internet
solutions, technical education, client feedback channels and hardware and
software distribution rights.
Leverage Operational Economies of Scale. USWeb provides certain operational
and administrative services centrally, allowing the network of offices to
benefit from the economies of scale created by a large operation while
enabling the consulting offices to focus on their core competency of providing
superior client services. These centrally provided services include business
development programs, operations management guides, client support assistance,
carrier-grade site hosting, human resources programs, financial reporting and
forecasting, performance appraisals and standardized methodologies.
SERVICES
The Company offers a comprehensive range of services to deliver Internet
solutions designed to improve clients' business processes. In each consulting
engagement, the client can contract for the specific services it requires,
depending on the nature of the engagement and the capabilities of the client's
organization. The Company bills most of its engagements on a time and
materials basis, although it has delivered several solutions on a fixed-price
basis and intends to increase the percentage of engagements provided on such a
basis.
INTERNET SOLUTION DEVELOPMENT AND DEPLOYMENT. The Company's Internet
solution development and deployment methodology consists of six phases:
Strategy Consulting. USWeb works closely with the client to conduct a
thorough study of the client's strategic market position, business
requirements and existing systems and capabilities to determine the ways in
which Internet solutions can most improve the client's business processes. The
Company then delivers its recommendations, which define the strategic basis
for a specific Internet solution that takes into account the client's budget,
timeline and available resources.
Analysis and Design. Once the strategic groundwork has been established, the
Company translates the client's strategic requirements into a system or
process design architecture, a blueprint that defines the roles the system
will perform to meet those requirements. By choosing USWeb, the Company's
clients receive
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vendor-neutral solutions prepared by Internet-focused consultants. USWeb
researches, tests and evaluates virtually all major Internet technologies and
tools to design system and process architectures that successfully meet client
needs. The Company's objective is to design, build and deploy a solution that
is logically planned, scales well over time, is sufficiently secure, and is
easy to use, administer and manage.
Technology Development. In the development phase, the Company builds a
testable version of the client's solution based on the blueprint produced in
the analysis and design phase. The Company designs, codes, integrates and
tests all necessary programs and components using a broad range of expertise,
including object-based and relational database systems; electronic commerce
systems; custom ActiveX, Java and C++ programming and host integration;
implementation of third-party applications and security technologies; and
integration of hardware, software and Internet access products. USWeb's
experienced and professional graphic designers also work to create a
compelling user interface for the solution to enable it to attract and hold
the attention of the client's target audience while conforming to the client's
brand image and marketing campaigns. In performing these functions, USWeb
professionals benefit from access to an extensive library of re-usable
software and content objects.
Implementation and Integration. In the implementation phase, USWeb tests the
solution created in the development phase and readies it to be deployed into a
full production system. The Company delivers the system to the client,
installs it, converts and initializes all necessary data, performs acceptance
testing and puts the system into operation. The Company also integrates
Intranet solutions with back-office legacy systems to ensure that each
client's critical applications are secure and seamless. USWeb maintains third-
party vendor relationships that offer its clients secure, state-of-the-art,
high-availability Intranet, Extranet and Web site hosting and integrated
services for relational databases, workgroup collaboration, streaming audio
and video, management and monitoring, e-mail and secure electronic commerce.
Audience Development. The Company can work with the client to develop a
strategy for achieving its online marketing objectives by increasing Web site
traffic, strengthening brand awareness and generating sales leads. The Company
provides online media planning and purchasing services and advice regarding
online public relations. The Company has also developed a proprietary audience
creation methodology designed to optimize a Web site's search engine presence,
increase site access through hyperlink recruitment and disseminate the
client's key messages to Internet newsgroups, mailing lists and forums.
Maintenance. USWeb can provide the client with ongoing support services for
its Internet solutions, from content maintenance to site administration, for
as long as the client wishes. The Company's technical staff can also assist
clients on a case-by-case basis to resolve technical problems, provide
assistance with the hosting environment, and deliver support for Internet
solution software.
EXAMPLES OF USWEB INTERNET SOLUTIONS. The following examples illustrate the
Company's Internet solution development capabilities.
Ingram Micro E-Commerce Extranet. Ingram Micro Inc. ("Ingram Micro"), a
leading wholesale distributor of technology products and services, teamed with
USWeb to build and deploy an e-commerce 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
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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.
Real Estate Tax Services Intranet. Real Estate Tax Services ("RETS"), a
provider of corporate tax assessment and property appraisal services, wanted to
improve its network infrastucture and its mission critical system of managing
and distributing data. Processing more than 200,000 tax bills annually, RETS
uses mainframe computers for storing client tax-related information.
Frequently, RETS field agents require quick turn-around on custom client
reports. To prepare these reports, administrators previously used proprietary
software to import mainframe data into desktop spreadsheet applications. After
manipulating and reformatting the content, the data was then exported into
word-processing applications suitable for presentations. Following this highly
administrative, time-consuming effort, RETS administrators would then forward
these reports to agents around the country. Beginning with the deployment of a
new high-speed network infrastructure, USWeb automated these processes by
designing a database-integrated Intranet solution. The RETS Intranet
streamlines internal resources and empowers field agents to easily and
effectively store and retrieve data, as well as generate client presentations
from any geographic location using lap-top computers and an intuitive Web
browser.
The foregoing examples of the Company's Internet solutions show the breadth
of the Company's Internet solution capabilities. Because each USWeb client and
its needs are different, the Internet solutions in these examples may be more
extensive and successful than others that do not achieve all the goals of a
particular client. There can be no assurance that any particular client project
will meet the client's objectives, stay within budgeted expense levels, be
completed at the desired or scheduled date or otherwise allow the Company's
clients to realize the intended benefits of a project. Promoting and
positioning the USWeb brand will depend largely on the success of the Company's
marketing efforts and the ability of the Company to provide high quality,
reliable and cost effective Internet solution strategy consulting, analysis and
design, technology development, implementation and integration, audience
development and maintenance services. If clients do not perceive the Company's
solutions or services as meeting their needs, or if the Company fails to market
those solutions or services effectively, the Company will be unsuccessful in
maintaining and strengthening its brand, which could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Risk Factors--Uncertain Maintenance and Strengthening of the
USWeb Brand," "--Potential Liability to Clients" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
CONSULTING OFFICE NETWORK DEVELOPMENT
USWeb has established and is continuing to expand a nationwide network of
consulting offices. As of January 31, 1998, the Company had 31 consulting
offices, 20 of which were Company-owned and 11 of which were owned by
Affiliates. The number of Affiliate offices has decreased over time because of
acquisitions of Affiliates by USWeb, consolidation of offices and
discontinuance of franchise relationships. The Company believes that in the
fragmented market for providing Internet solutions, rapidly building a critical
mass of strategic, technical and creative talent through both internal growth
and acquisition will provide USWeb with a substantial competitive advantage.
The Company promotes internal growth through its continued investment in
branded marketing programs, expansion and improvement of the Strategy and
Solutions Center, new and existing strategic partnerships, and rigorous
management of business fundamentals.
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The Company is aggressively pursuing its selective acquisition program. The
Company uses a standardized transaction structure that includes a purchase
price adjustment feature to provide target company management with an incentive
to improve and expand their operations. The Company also generally grants stock
options to all employees of a target company to provide them with an incentive
to contribute to the success of the overall USWeb organization. The Company
believes that use of a consistent acquisition structure can speed the
negotiation and closing of acquisitions.
The Company has a team of professionals dedicated to identifying potential
acquisition candidates and implementing the Company's acquisition methodology.
This team identifies those Internet professional service firms that meet its
acquisition criteria, engages in a series of meetings and due diligence
activities with each candidate to explore whether it meets USWeb's criteria for
growth potential and operating strategy, and completes the acquisition of a
significant percentage of those candidates. The Company stresses to each
desired candidate the advantages of merging with USWeb, including client
recognition and acceptance of the USWeb brand, additional funding required to
pursue profitably large, long-term client opportunities and strategic
partnerships with leading hardware, software and content vendors. Following the
closing of each acquisition, the Company moves rapidly to integrate the new
subsidiary into USWeb operations by deploying a conversion team to integrate
financial, marketing and operating procedures, providing access to USWeb
Central, the Company's secure Intranet, and delivering a thorough orientation
to all employees.
The Company regularly evaluates potential acquisition candidates, is
currently holding preliminary discussions with a number of such candidates and
is in active negotiations with a number of such other candidates. If, after due
diligence review and negotiation, such companies can be acquired on a basis
considered fair to the Company and its stockholders, the Company may proceed
with such acquisitions. The Company is also considering joint ventures or
acquisitions outside the United States. The Company expects most of its future
joint ventures or acquisitions to include the issuance of additional shares of
the Company's Common Stock in the future. The Company recently 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," "--Management of Growth; Integration of Acquisitions," "--
Dilution" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Acquisition of Internet Professional Service Firms."
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As of January 31, 1998, the Company had acquired or signed an acquisition
agreement with the following companies:
<TABLE>
<CAPTION>
OFFICE MONTH OF NUMBER OF
NAME LOCATIONS CONSOLIDATION (1) EMPLOYEES (2)
---- ----------------- ----------------- -------------
<S> <C> <C> <C>
USWeb San Francisco....... San Francisco, CA March 1997 44
San Diego, CA
USWeb Seattle............. Seattle, WA April 1997 34
USWeb Milwaukee........... Milwaukee, WI April 1997 35
USWeb LA Metro............ Los Angeles, CA April 1997 21
USWeb Silicon Valley...... Santa Clara, CA May 1997 19
USWeb Atlanta............. Atlanta, GA May 1997 25
Austin, TX
USWeb DC ................. Washington, D.C. June 1997 32
Philadelphia, PA
USWeb Phoenix............. Phoenix, AZ June 1997 14
USWeb Pittsburgh.......... Pittsburgh, PA July 1997 63
USWeb Chicago Metro....... Chicago, IL July 1997 17
USWeb DreamMedia (3)...... Culver City, CA August 1997 22
USWeb Hollywood (3)....... Culver City, CA August 1997 --
USWeb Marin............... Sausalito, CA September 1997 45
USWeb Long Island......... Long Island, NY September 1997 14
USWeb Detroit............. Detroit, MI September 1997 11
USWeb San Mateo........... San Mateo, CA September 1997 13
USWeb Houston............. Houston, TX November 1997 12
USWeb LA Central (3)...... Culver City, CA November 1997 20
USWeb New York Central.... New York, NY November 1997 22
</TABLE>
- ---------------------
(1) The Company consolidates the target entity's financial statements as of
the date USWeb establishes effective control of the target entity, which
date is generally in advance of the legal completion of the underlying
merger.
(2) Represents the number of full-time employees as of January 31, 1998.
(3) USWeb Dream Media and USWeb Hollywood combined their operations into a
single wholly owned subsidiary of the Company upon the consummation of the
acquisitions. The combined entity had an aggregate of 22 employees. USWeb
LA Central shares facilities and is expected to combine its operations
with these entities in the future.
The Company believes that there are many other potential acquisition
candidates in the U.S. and abroad that satisfy its acquisition criteria. The
Company is currently discussing on a non-binding basis the acquisitions of
several companies in the U.S. To penetrate foreign markets, the Company may
use joint ventures as well as acquisitions, so as to capitalize on a foreign
partner's local knowledge and reputation as well as USWeb's brand name and
central technical, marketing and administrative resources. The Company's
acquisition strategy involves a number of risks and uncertainties, and there
can be no assurance that the Company will be able to identify suitable
acquisition candidates, acquire such companies on acceptable terms or
integrate their operations successfully with those of the Company. As the
Company issues stock to complete future acquisitions, there will be further
ownership dilution to existing stockholders. In addition, to the extent the
Company chooses to use cash as consideration for such acquisitions, the
Company may be required to obtain additional financing and there can be no
assurance that such financing will be available on favorable terms, if at all.
See "Risk Factors--Risks Related to Acquisitions," "--Dilution," "--Management
of Growth; Integration of Acquisitions" and "--Future Capital Needs;
Uncertainty of Additional Financing."
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In addition to its Company-owned offices, as of January 31, 1998 USWeb had 9
Affiliates which collectively managed an aggregate of 11 consulting offices.
Each Affiliate agreement typically grants a nonexclusive right to the Affiliate
to maintain an office and advertise in a designated metropolitan area or
territory. The Affiliate agreements, which have terms ranging from five to ten
years, also include a nonexclusive license to use the Company's intellectual
property and proprietary information, including the USWeb brand, the Company's
Internet solution development methodology and the Strategy and Solutions
Center. In exchange for these rights, most Affiliates paid the Company an
initial fee and all Affiliates make monthly royalty payments to the Company.
Monthly royalties are equal to the greater of (i) a minimum monthly payment or
(ii) the aggregate of a five percent royalty and a two percent marketing
promotion payment, each based on the Affiliate's adjusted gross revenues. For
the year ended December 31, 1997, initial fees and monthly royalty payments
together represented 4% of the Company's total revenues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company selected a franchise business model as the first phase of its
corporate development strategy because it enabled the Company to rapidly scale
its operations and build its brand with relatively low risk and capital
commitment while leveraging the existing infrastructure, expertise and client
relationships of the Affiliates. The Company launched the second phase of its
market entry strategy, the acquisition of those Affiliates and other Internet
professional services firms that meet its acquisition criteria, in the first
quarter of 1997. The Company last enrolled an Affiliate in March 1997 and does
not intend to enter into any additional Affiliate agreements. The Company may
also decide to terminate the Affiliate agreements of those Affiliates that do
not meet the performance criteria required by such agreements to ensure their
continuation. A significant number of Affiliates remain and the operation of
franchises does entail certain risks to the Company's business. See "Risk
Factors--Risks of Franchising."
CLIENTS
The Company markets its services to medium-sized and large companies, which
it defines as those with over 100 employees or $10 million in annual revenues.
Such companies have several desirable characteristics as potential clients: a
need for Internet solutions ranging from basic Web sites to complex and highly
functional Intranets, substantial budgets devoted to information technology
expenditures, and a relatively high willingness to adopt Internet-based
strategies and solutions. The Company tailors its professional services to meet
the specific needs of these clients. No individual customer accounted for more
than 10% of the Company's total revenues for the year ended December 31, 1997.
The Company's top 10 clients accounted for 31% of the Company's total revenues
during such period.
The Company provides Internet professional services to clients in a variety
of industries, as indicated by the selected clients set forth below, each of
which was responsible for at least $50,000 in services revenues for the year
ended December 31, 1997.
Amgen Harley-Davidson Real Estate Tax 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
Clients typically begin their adoption of Internet solutions by establishing
a basic Web site costing several thousand dollars and then implement
increasingly powerful business solutions, which can include business critical,
fully integrated Intranets or Extranets costing several million dollars. The
Company's strategy is to provide clients with services at all stages of their
adoption of Internet solutions. The Company targets clients
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whose Internet technology consulting needs will result in contracts ranging
from $25,000 to $3,000,000 per engagement. The Company's 30 largest clients
spent approximately $100,000 to $1,700,000 each for USWeb services for the
year ended December 31, 1997.
USWEB INTERNET STRATEGY AND SOLUTIONS CENTER
The Strategy and Solutions Center, located at the Company's headquarters in
Santa Clara, California, is designed to provide clients with more effective
Internet solutions by aggregating and redeploying the best methodologies,
technologies and creative work delivered by USWeb consulting offices. The
Company believes that the Strategy and Solutions Center provides USWeb
consulting offices with a competitive advantage by giving them efficient, real
time access to these assets, thereby allowing them to leverage the
capabilities of the entire USWeb operation in their efforts on behalf of each
client. The Strategy and Solutions Center is a centrally managed resource that
can be made available to a large number of consulting offices through USWeb
Central, the Company's secure Intranet.
The Strategy and Solutions Center provides the following resources and
programs for the USWeb network and its clients:
USWeb Solutions Library. The Strategy and Solutions Center aggregates the
best demonstrated practices of its offices to develop USWeb Business
Solutions, partially pre-built Internet solutions that combine USWeb
methodologies, services and reusable software and content objects with third-
party software. One of the first USWeb Business Solutions was designed for
human resources in collaboration with Coopers & Lybrand and leading providers
of Internet-based human resource management technologies. The Company intends
to target each USWeb Business Solution toward a selected vertical market or
business function and offer it at a fixed price range. The Company's goal is
to provide through each USWeb Business Solution a large volume of high-quality
sales and implementation tools that leverage the cumulative experience of all
USWeb consulting offices.
USWeb Technology Library. The Strategy and Solutions Center maintains and
continually expands a technology library of proprietary reusable software and
content objects developed during the course of client engagements. The Company
believes that access to these assets helps reduce the costs of designing and
implementing individual Internet solutions, improves the quality of client
service and facilitates the Company's development of USWeb Business Solutions.
USWeb Project Registry. The Strategy and Solutions Center has constructed a
database in which each client engagement is summarized and registered,
enabling each consulting office to find rapidly which offices have performed
certain types of work. This project registry is used to facilitate the real-
time distribution of engagement activity to those consulting offices best
equipped to serve the client.
USWeb Executive Briefing Program. The Strategy and Solutions Center has
established a program that enables USWeb consulting offices to provide their
key clients with executive seminars, solution demonstrations and discussions
with senior USWeb executives on-site at the Strategy and Solutions Center.
These sessions provide key client decision makers with first-hand experience
on the ways Internet solutions can significantly improve business processes.
USWeb SiteCasts. The Strategy and Solutions Center develops and distributes
the USWeb SiteCast Intranet Series, a sequence of Internet broadcasts designed
to show businesses how to use Internet solutions to improve business
processes. The Company sponsors the SiteCasts jointly with Microsoft and each
SiteCast incorporates leading Microsoft Internet technologies. The first
SiteCast, held on June 24, 1997 using Microsoft's NetShow 2.0, brought
together computer industry leaders to discuss how to use Intranets to achieve
business objectives. This SiteCast, which attracted approximately 800
participants, was the first Internet broadcast to incorporate simultaneous
video conferencing, chat sessions and presentations and include both pre-taped
and live video. The second SiteCast, held on September 16, 1997, attracted
more than 2,300 participants and demonstrated how Internet solutions can
automate business processes, using as an example the Intranet USWeb created
for the Stanford University Graduate School of Business.
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On December 10, 1997, the Company held a third SiteCast to provide an
interactive, online forum to discuss trends and issues surrounding electronic
commerce. Attracting more than 3,400 participants, this SiteCast was broadcast
live from the Intel booth at Internet World in New York and included a
discussion on how e-Business solutions can improve business processes and
profitability and create competitive advantages for businesses.
In each area where methodologies, technologies and content are aggregated,
the Company has implemented policies to ensure that confidential or
proprietary client information and assets are accessible only by properly
authorized personnel and not disclosed to unauthorized parties.
MARKETING
The Company's marketing efforts are dedicated to demonstrating the benefits
of Internet solutions, and the proven effectiveness of the USWeb organization
in providing such solutions, to key decision makers in client organizations.
The Company believes that a strong USWeb brand provides USWeb consulting
offices with a competitive advantage over those Internet professional services
firms whose brands may not be as well known or may not convey the same focused
message of competence, security and results. The Company's marketing programs
are also highly scalable because most advertising campaigns and marketing
tools are developed by the Company's corporate marketing group and can be
delivered to all of the consulting offices without requiring significant
additional expenses.
The Company's marketing program includes the following initiatives:
Enhance the USWeb Brand. The continued strengthening of the USWeb brand is
crucial to the achievement of the Company's objective of becoming the most
recognized provider of Internet professional services to medium-sized and
large business clients. The Company's brand development programs are designed
to reinforce the message that USWeb is a national company with a local
presence that can provide a complete range of services to build and deploy
business solutions and has a proven track record of doing so. The Company is
continuing to build and differentiate this brand through the use of publicity
campaigns that include Internet, print and radio advertising; national
seminars and executive briefings; Internet broadcasts; extensive marketing
tools and educational "white papers"; and co-marketing programs with strategic
partners.
Generate Client Leads. The Company's marketing campaigns are intended to
generate client leads for its consulting offices in several ways. First,
central lead management programs direct leads generated by the Company's
national advertising to consulting offices based on client zip code and other
substantive lead attributes. Second, regional marketing derived from corporate
advertising templates for multiple forms of media, including direct mail and
tradeshow programs, are personalized for an office's target market to drive
demand directly to that office. Third, the Company has implemented programs to
encourage cross-office lead referral when clients have vertical market needs
or proximity concerns that would be best addressed by another office. Finally,
the Company has established a national account program to help manage the
accounts of clients with multiple locations and direct service fulfillment to
the consulting office best situated by geography and specialty to meet the
client's needs.
Develop Marketing and Sales Tools for Consulting Offices. The Company has
developed a toolkit of marketing and sales materials to be used by consulting
offices in their business generation efforts. These materials include
brochures, reprints of articles, fact sheets, white papers, summary "success
stories," PR handbooks, business development guides and client presentation
templates and technologies. These materials are designed to increase the
effectiveness of the sales and marketing efforts of the Company's consulting
offices by providing them with centralized expert advice and consistent,
professional marketing tools.
STRATEGIC RELATIONSHIPS
The Company has entered into, and intends to continue entering into,
strategic relationships with a limited number of leading Internet hardware,
software and content companies. The Company believes that
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these relationships, which typically are non-exclusive, enable it to deliver
clients more effective solutions with greater efficiency because the strategic
relationships provide the Company with the opportunity to gain early access to
leading-edge technology, cooperatively market products and services with
leading technology vendors, cross-sell additional services and gain enhanced
access to vendor training and support. The Company also believes that these
relationships are important because they leverage the strong brand and
technology positions of these market leaders.
The Company has strategic relationships with the following companies:
Intel. In November 1997, the Company entered into a Relationship
Agreement with Intel pursuant to which the Company and Intel
[LOGO] will jointly define and develop a program designed to establish
and promote end-to-end e-business solutions running on high-end
Intel Architecture-based platforms. Activities under the program will range
from creation of specific business solutions to joint advertising. These
programs will be administered by representatives of each party. Intel
purchased $10.0 million of the Company's Common Stock in a private placement
transaction which closed contemporaneously with the Company's initial public
offering.
Microsoft. The Company and Microsoft have entered into a joint
[LOGO] marketing and technical information sharing agreement. The
companies are engaging in a jointly branded marketing campaign designed to
increase demand for Microsoft's Internet software products and USWeb's
professional services. Microsoft is also providing USWeb consulting offices
with education and support in the use of Microsoft's Internet products, and
the USWeb consulting offices are providing Microsoft with product feedback and
customer reactions.
Hewlett-Packard. The Company and Hewlett-Packard have entered
[LOGO] 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 jointly branded marketing
campaign designed to increase demand for Hewlett-Packard's Internet systems
and USWeb's professional services. Hewlett-Packard is also providing USWeb
consulting offices with education and support in the use of Hewlett-Packard's
Internet systems and USWeb consulting offices are providing Hewlett-Packard
with product feedback and client reactions.
Pandesic. Intel and SAP have formed Pandesic LLC to deliver a
comprehensive hardware, software and service solution for
[LOGO] managing Internet-based electronic commerce. The Company and
Pandesic have entered into a letter agreement regarding plans to
implement a joint systems integration program, develop joint
marketing and sales programs, build field development programs and conduct
ongoing technical exchanges to ensure the proper deployment and efficient
utilization of the Pandesic electronic commerce platform.
Sun Microsystems. The Company and Sun Microsystems have entered
into an agreement enabling USWeb consulting offices to become
[LOGO] authorized resellers of Sun NETRA network servers after having
filed the appropriate documentation and attended required
training classes. This marketing program enables USWeb affiliates to deliver a
complete UNIX Intranet solution to a customers.
LOGO
Reuters. The Company and Reuters have entered into a letter
[LOGO] agreement regarding plans to develop USWeb Business Solutions
that will integrate Reuters data feeds into corporate Intranet environments.
The two parties also intend to develop joint sales and marketing programs.
The contractual agreements regarding these strategic relationships do not
cover the entire scope of the strategic relationship and are typically
terminable at will by either party. In the event that any strategic
relationship is discontinued, either in connection with termination of an
agreement or otherwise, the Company's business, results of operations and
financial condition may be materially adversely affected. See "Risk Factors--
Reliance Upon Key Strategic Relationships."
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In early 1998, the Company assisted in the formation of USWeb Learning,
Inc., a separate company with the mission to become the leading provider of
education and certification services relating to Internet technologies to
address the shortage of technology professionals. USWeb Learning will license
the USWeb name from the Company and the Company will contribute certain
training materials it has created. The Company intends to make a minority
equity investment in USWeb Learning and add management experience through
board representation. The Company will also have an option to acquire USWeb
Learning in the future.
OPERATIONS
The Company's organization includes its headquarters in Santa Clara,
California and as of January 31, 1998, 31 Company-owned and Affiliate
consulting offices in the U.S. Each consulting office is responsible for
providing Internet professional services to its clients, either alone or in
conjunction with one or more other offices. The managers of each office also
make all client sales, engagement pricing, and staffing decisions for that
office. However, the Company's executive officers take an active role in
directing the activities of all consulting offices.
USWeb headquarters manages the Strategy and Solutions Center, the Company's
marketing campaigns, the strategic relationships with partner companies and
the acquisition program. The Company's headquarters also provides consulting
offices with operational support in financial management and reporting, human
resources, office administration, and management performance improvement
tools. USWeb also negotiates with product, office equipment and financing
vendors to deliver quality products to its consulting offices at favorable
prices. In addition, the Company has established relationships with leading
Internet communications companies to provide clients with carrier-grade,
highly reliable central hosting and value-added services such as shared
databases, electronic commerce, and audio and video streaming.
USWeb headquarters also manages USWeb Central, the Company's Intranet and
the Company's primary channel for enterprise-wide interaction and
communication. The Company developed and maintains USWeb Central in-house.
USWeb Central provides Company-owned and Affiliate consulting offices with
rapid, secure and efficient online access to each other and to all of the
Company's centrally managed resources, such as the Strategy and Solutions
Center libraries, sales and marketing tools, vendor information and
operational assistance. The Company believes that USWeb Central is both
scalable and critical to its strategy of strengthening its position as a
leading Internet professional services firm because USWeb Central is the
primary mechanism by which the Company is able to aggregate and redeploy the
best strategic, technical and creative work developed by the consulting
offices.
COMPETITION
The market for Internet professional services is relatively new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to persist, intensify and increase in the future.
The Company's competitors can be divided into several groups: computer
hardware and service vendors such as IBM, DEC and Hewlett-Packard; advertising
and media agencies such as CKS, Foote, Cone & Belding and Ogilvy & Mather;
Internet integrators and Web presence providers such as iXL, Organic Online,
PoppeTyson and Proxicom; large information technology consulting service
providers such as Andersen Consulting, Cambridge Technology Partners and EDS;
telecommunications companies such as AT&T and MCI; Internet and online service
providers such as America Online, NETCOM and UUNet; and software vendors such
as Lotus, Microsoft, Netscape, Novell and Oracle. Although only a few of these
competitors have to date offered a full range of Internet professional
services, several have announced their intention to offer comprehensive
Internet technology solutions.
The Company believes that the principal competitive factors in its market
are strategic expertise, technical knowledge and creative skills, brand
recognition, reliability of the delivered solution, client service and price.
Most of the Company's current and potential competitors have longer operating
histories, larger installed client bases, longer relationships with clients
and significantly greater financial, technical, marketing and public relations
resources than the Company and could decide at any time to increase their
resource
45
<PAGE>
commitments to the Company's market. In addition, the market for Internet
solutions is relatively new and subject to continuing definition, and, as a
result, the core business of certain of the Company's competitors may better
position them to compete in this market as it matures. Competition of the type
described above could materially adversely affect the Company's business,
results of operations and financial condition.
There are relatively low barriers to entry into the Company's business. For
example, the Company has no patented technology that would preclude or inhibit
competitors from entering the Internet professional
services market. The Company expects that it will face additional competition
from new entrants into the market in the future. There can be no assurance
that existing or future competitors will not develop or offer services that
provide significant performance, price, creative or other advantages over
those offered by the Company, which could have a material adverse effect on
the Company's business, results of operations and financial condition.
Moreover, in pursuing acquisition opportunities the Company may compete with
other companies with similar growth strategies, certain of which competitors
may be larger and have greater financial and other resources than the Company.
Competition for these acquisition targets likely could also result in
increased prices of acquisition targets and a diminished pool of companies
available for acquisition. See "Risk Factors--Risks Related to Acquisitions"
and "--Competition; Low Barriers to Entry."
EMPLOYEES
As of January 31, 1998, the Company had 550 employees, of which 87 were
located at the Company's headquarters office in Santa Clara, California and
463 were located in consulting offices. The headquarters employees included 44
in sales and marketing, 9 in hosting and education and 34 in finance,
administration and the Strategy and Solutions Center. None of the Company's
employees is represented by a labor union. The Company has experienced no work
stoppages and believes its relationship with its employees is good.
Competition for qualified personnel in the industry in which the Company
competes is intense. The Company believes that its future success will depend
in part on its continued ability to attract, hire or acquire and retain
qualified employees. See "Risk Factors--Recruitment and Retention of Internet
Solutions Professionals" and "--Dependence on Key Personnel."
FACILITIES
The Company's principal administrative, sales, marketing, training, and
research and development facilities occupy approximately 27,100 square feet in
a single building in Santa Clara, California, pursuant to a lease that expires
in January 2007. All Company-owned offices also lease their facilities. The
Company believes its current facilities are adequate to meet its needs for the
foreseeable future. No facilities have been identified for acquisition in
connection with potential acquisition candidates and the Company does not
anticipate acquiring property or buildings in the foreseeable future.
46
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company, and their ages as of
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Joseph Firmage...................... 27 Chairman of the Board and Chief Executive Officer
Tobin Corey......................... 36 President
James Heffernan..................... 56 Executive Vice President, Chief Financial Officer,
Secretary and Director
Sheldon Laube....................... 47 Executive Vice President and Chief Technology
Officer
Jeffrey Ballowe (1)................. 41 Director
Robert Hoff (1)(2).................. 44 Director
Gary Rieschel (2)................... 40 Director
Barry Rubenstein.................... 54 Director
</TABLE>
- ---------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Joseph Firmage co-founded the Company in December 1995 and has served as
its Chairman and Chief Executive Officer since that time. From August 1994 to
December 1995, Mr. Firmage served as Vice President of Strategic Planning of
the Systems Group of Novell. Prior to joining Novell, Mr. Firmage founded
Serius Corporation ("Serius"), where he served as Chief Executive Officer from
1989 through 1993, when Serius was sold to Novell.
Mr. Tobin Corey co-founded the Company in December 1995 and has served as
its President since June 1996. Prior to June 1996, Mr. Corey served as its
Executive Vice President, Marketing. From 1994 to December 1995, Mr. Corey
served as Vice President of Marketing for the NetWare Products Division of
Novell. From 1991 through 1994, Mr. Corey served as Director of Marketing for
the Desktop Division of Novell.
Mr. James Heffernan co-founded the Company in December 1995 and has served
as its Executive Vice President, Chief Financial Officer, Secretary and a
Director since that time. From May 1993 to July 1994, he worked as an
independent consultant and then joined Interlink Computer Sciences, Inc. in
July 1994 as Chief Financial Officer, where he served until January 1996. From
March 1992 to May 1993, Mr. Heffernan served as Chief Financial Officer and
Chief Operating Officer of Serius. Mr. Heffernan has also served as an officer
of several other technology companies, including Software Publishing Corp.,
Zital Inc. and Measurex Corp. Mr. Heffernan is a director of Western
MicroTechnology, Inc.
Mr. Sheldon Laube co-founded the Company and has served as its Executive
Vice President and Chief Technology Officer since January 1996. From July 1995
through January 1996, Mr. Laube served as Chief Technology Officer for Novell.
Prior to joining Novell, Mr. Laube was employed by Price Waterhouse LLP as a
partner and served as Director of Information and Technology from 1986 to May
1995.
Mr. Jeffrey Ballowe has served as a Director of the Company since February
1996. From March 1996 to December 1997, Mr. Ballowe served as President of the
Ziff-Davis Interactive Media and Development Group. Prior to March 1996, Mr.
Ballowe served as President of the Ziff-Davis Interactive Media Group in 1995
and as President of the Ziff-Davis Marketing and Development Group in 1994. He
became Group Vice President of the Ziff-Davis Business Media Group in 1993 and
Vice President of the Ziff-Davis Worldwide Network of Direct Publications in
1991.
Mr. Robert Hoff has served as a Director of the Company since February 1996.
He has been a general partner of Crosspoint Venture Partners, a private
venture capital investment company, since September 1983. Mr. Hoff also serves
as a director of Pair Gain Technologies, Inc. and Onyx Acceptance Corporation.
47
<PAGE>
Mr. Gary Rieschel has served as a Director of the Company since March 1996.
Mr. Rieschel has been a Senior Vice President of SOFTBANK Holdings since
January 1996. Prior to January 1996, Mr. Rieschel served as Vice President of
Marketing for nCube from September 1994 to December 1995; as Director of
Channel Sales for Cisco Systems from July 1993 to October 1994; and as General
Manager, Asia for Sequent Computer from January 1989 to July 1993. Mr.
Rieschel is a director of Concentric Networks and several privately held
companies.
Mr. Barry Rubenstein has served as a Director of the Company since May 1997.
Mr. Rubenstein is President, a director and a shareholder of InfoMedia
Associates, Ltd. which is a General Partner of the 21st Century Partnerships.
Mr. Rubenstein is also Chief Executive Officer of Wheatley Partners, L.L.C.,
the General Partner of Wheatley Foreign Partners, L.P. Seneca Ventures and
Woodland Venture Fund, each of which is an investment partnership. Prior to
his experience as an investor, Mr. Rubenstein served as the founder of several
technology companies, including Applied Digital Data Systems, Inc. and
Cheyenne Software, Inc. Mr. Rubenstein also serves as a director of
Infonautics, Inc., The Milbrook Press, Inc. and Source Media Inc.
Executive officers of the Company are appointed by the Board of Directors
and serve at the discretion of the Board. There are no family relationships
among any of the directors or executive officers of the Company.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of Mr. Ballowe and Mr. Hoff,
recommends the selection of independent public accountants to the Board of
Directors, reviews the scope and results of the audit and other services
provided by the Company's independent accountants, and reviews the Company's
accounting practices and its systems of internal accounting controls.
The Compensation Committee, consisting of Mr. Hoff and Mr. Rieschel, reviews
and approves the salaries, bonuses and other compensation payable to the
Company's executive officers and administers and makes recommendations
concerning the Company's employee benefit plans. See "Certain Transactions."
DIRECTOR COMPENSATION
The Company reimburses its directors for all out-of-pocket expenses incurred
in the performance of their duties as directors of the Company. The Company
currently does not pay fees to its directors for attendance at meetings. The
Company also grants stock options to directors. See "--Employee Benefit
Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Company serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee. See "Certain Transactions" for a
description of transactions between the Company and entities affiliated with
members of the Compensation Committee.
MANAGEMENT CONTINUITY AGREEMENTS
The Company has entered into Management Continuity Agreements with each of
Messrs. Firmage, Corey, Heffernan and Laube. Pursuant to the agreements with
each of Messrs. Firmage, Corey and Heffernan, if the Company (a) terminates
his employment without cause at any time more than 60 days before or more than
18 months after a "change in control" (as defined in the agreement), the
Company shall provide severance pay to him equal to his 12 months' base
compensation or (b) if the Company terminates his employment or he voluntarily
terminates his employment at any time 60 days or less before or within 18
48
<PAGE>
months after a change in control, the Company shall provide him severance pay
equal to the greater of his base compensation for the year immediately
preceding or the year coinciding with the year of payment of such severance
pay. In either case, the Company shall also provide health insurance coverage
to the extent provided immediately prior to his termination until the earlier
of 12 months following such termination or the date that he receives health
insurance coverage from another employer. In the event of a change of control,
the Company shall provide a release of all repurchase rights over unvested
stock and an acceleration of the vesting period for any unvested options. In
the event that he is terminated as a result of death or disability (regardless
of whether there is a change in control), any repurchase rights of the Company
with respect to 50% of the shares that he holds shall lapse and options that
he holds shall become vested as to an additional 50% of the shares subject to
such options. The term of each of the agreements is for the period of each of
Mr. Corey's, Mr. Heffernan's and Mr. Laube's at will employment.
Pursuant to the agreement with Mr. Laube, if the Company terminates his
employment without cause (a) at any time more than 60 days before or more than
18 months after a "change in control" (as defined in the agreement), the
Company shall provide severance pay equal to his 12 months' base compensation
or (b) at any time 60 days or less before or within 18 months after a change
in control, the Company shall provide severance pay equal to the greater of
his base compensation for the year immediately preceding or the year
coinciding with the year of payment of such severance pay. In either case, the
Company shall also provide health insurance coverage to the extent provided
immediately prior to his termination until the earlier of 12 months following
such termination or the date that he receives health insurance coverage from
another employer. In the event of a change of control, the Company shall
provide a release of all repurchase rights over unvested stock and an
acceleration of the vesting period for any unvested options. In the event that
he is terminated as a result of death or disability (regardless of whether
there is a change in control), any repurchase rights of the Company with
respect to 50% of the shares that he holds shall lapse and options that he
holds shall become vested as to an additional 50% of the shares subject to
such options. Further, he may not be terminated during the period ending
February 12, 1998 except for cause or for "good business reasons" (as defined
in the agreement). After such period, his employment will be at will. In the
event that he is terminated for good business reasons during the initial two-
year period, he is entitled to receive severance pay equal to 24 months' base
compensation together with a release of all repurchase rights over unvested
stock and an acceleration of the vesting period for any unvested options (as
defined in the agreement). In addition to his base compensation of $260,000,
he is entitled to receive a quarterly bonus of $25,000 so long as he is
employed by the Company.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation, the Company's Bylaws, Section
145 of the Delaware General Corporation Law and the form of indemnification
agreement entered into between the Company and certain of its directors and
officers, subject to certain conditions, authorize the Company to indemnify,
or indemnify by their terms, as the case may be, the directors and officers of
the Company against certain liabilities and expenses incurred by such persons
in connection with claims made by reason of their being such a director or
officer.
The Underwriting Agreement with respect to the offering made hereby provides
for indemnification by the Underwriters and their controlling persons, on the
one hand, and of the Company and its controlling persons on the other hand,
for certain liabilities arising under the Securities Act of 1933, as amended,
and the Securities Exchange Act of 1934, as amended, or otherwise.
The Company has obtained directors' and officers' insurance providing
indemnification for certain of the Company's directors, officers, affiliates,
partners or employees for certain liabilities.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the
Company's Bylaws. These agreements, among other things, indemnify
49
<PAGE>
the Company's directors and executive officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
the Company, arising out of such person's services as a director or executive
officer of the Company, any subsidiary of the Company or any other company or
enterprise to which the person provides services at the request of the
Company. The Company believes that these provisions and agreements are
necessary to attract and retain qualified directors and executive officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification is
expected to be required or permitted. The Company is not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company during the fiscal year ended December 31, 1997 to the Company's
Chief Executive Officer and each of the Company's four other executive
officers (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------ ------------
SECURITIES
UNDERLYING OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION COMPENSATION
- --------------------------- ---- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Joseph Firmage........... 1997 $ 200,000 $ -- 105,000 $ -- $ 168(3)
Chairman and Chief 1996 200,000(1) -- -- 115,216(2) 140(3)
Executive Officer and
Director
Tobin Corey.............. 1997 200,000 -- 105,000 -- 139,230(5)
President 1996 197,307(4) 5,582 -- 48,787(2) 193(3)
James Heffernan.......... 1997 200,000 -- 60,000 -- 1,571(3)
Executive Vice 1996 191,667(4) -- -- -- 1,313(3)
President, Chief
Financial Officer,
Secretary and Director
Sheldon Laube............ 1997 259,992 100,000 30,000 -- 816(3)
Executive Vice President 1996 241,886(4) 100,000 -- -- 508(3)
and Chief Technology
Officer
Kenneth Campbell (6)..... 1997 126,641 -- -- -- 668(3)
Executive Vice 1996 220,000 -- -- -- 840(3)
President, Affiliate
Operations
</TABLE>
- ---------------------
(1) Does not include $16,666 earned in 1995 but not paid until 1996.
(2) Consists of payments made in reimbursement for relocation expenses for Mr.
Firmage and Mr. Corey.
(3) Consists of life insurance premiums paid on behalf of Mr. Firmage, Mr.
Corey, Mr. Heffernan, Mr. Laube and Mr. Campbell.
(4) The annual base salaries for Mr. Corey, Mr. Heffernan and Mr. Laube are
$200,000, $200,000 and $260,000, respectively. The figures listed
represent payment for actual employment during 1996, which was slightly
less than 12 months.
(5) Consists of $230 of life insurance premiums paid on behalf of Mr. Corey
and $139,000 of loan forgiveness. See "Certain Transactions."
(6) Mr. Campbell resigned from the Company effective July 29, 1997. See
"Certain Transactions" for a description of the terms of the Company's
agreement with Mr. Campbell. The annual base salary for Mr. Campbell was
$220,000. The figure listed represents payment for actual employment
during 1997, which was slightly less than seven months.
50
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the stock options granted during the fiscal
year ended December 31, 1997 to each of the Named Officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS (1) OPTION TERM (3)
------------------------------------------- ---------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE
GRANTED FISCAL PRICE EXPIRATION
NAME (#)(1) YEAR (2) ($/SH.) DATE 5% ($) 10% ($)
- ---- ---------- ------------ -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Joseph Firmage.......... 105,000 6.4% $9.75 11/13/07 $ 643,831 $ 1,631,594
Tobin Corey............. 105,000 6.4% $9.75 11/13/07 $ 643,831 $ 1,631,594
James Heffernan......... 60,000 3.7% $9.75 11/13/07 $ 367,903 $ 932,339
Sheldon Laube........... 30,000 1.8% $9.75 11/13/07 $ 183,952 $ 466,170
Kenneth Campbell(4)..... -- -- -- -- -- --
</TABLE>
- ---------------------
(1) These options were granted under the Company's 1996 Equity Compensation
Plan (the "1996 Equity Plan"). Options granted under the 1996 Equity Plan
generally have a ten-year term and become exercisable in annual 25%
increments commencing on the first anniversary of the original grant date,
with full exercisability occurring on the fourth anniversary date. The per
share exercise price is the estimated fair market value of the Company's
Common Stock on the date of grant. The 1996 Equity Plan provides for the
automatic acceleration of vesting of all outstanding options (such that
they become exercisable in full) in the event of a "change in control," as
defined in the 1996 Equity Plan.
(2) Based on options to purchase an aggregate of 1,635,653 shares granted to
employees during 1997 under the 1996 Equity Plan.
(3) Potential realizable value is based on an assumption that the stock price
appreciates at the annual rate shown (compounded annually) from the date
of grant until the end of the ten-year option term. These numbers are
calculated based on requirements promulgated by the SEC and do not reflect
the Company's estimate of its future stock price.
(4) Mr. Campbell resigned from the Company effective July 29, 1997. See
"Certain Transactions" for a description of the terms of the Company's
agreement with Mr. Campbell.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table sets forth, for each of the Named Officers, information
with respect to stock options exercised during the fiscal year ended December
31, 1997 and stock options held at fiscal year end:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END (#) AT FISCAL YEAR END ($) (2)
ACQUIRED ON VALUE ----------------------------------- --------------------------------
NAME EXERCISE (#) REALIZED ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ---------------- -------------- ----------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Joseph Firmage.......... -- -- -- 105,000 -- --
Tobin Corey............. -- -- -- 105,000 -- --
James Heffernan......... -- -- -- 60,000 -- --
Sheldon Laube........... -- -- -- 30,000 -- --
Kenneth Campbell........ -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Market value of underlying securities on the exercise date minus the
exercise price.
(2) Market value of underlying securities at December 31, 1997 minus the
exercise price.
51
<PAGE>
EMPLOYEE BENEFIT PLANS
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the
Board of Directors in December 1995 and approved by the stockholders in
December 1996. The 1996 Plan will terminate in December 2005 unless terminated
earlier by the Board of Directors. The 1996 Plan provides for grants of
options to employees and consultants (including officers and directors) of the
Company and its subsidiaries. A total of 600,000 shares of Common Stock were
reserved for issuance pursuant to the 1996 Plan. The 1996 Plan may be
administered by the Board of Directors or by a committee appointed by the
Board, in a manner that satisfies the legal requirements relating to the
administration of stock plans under all applicable laws (the "Administrator").
The 1996 Plan is currently administered by the Board of Directors. The Company
does not intend to issue any additional options under the 1996 Plan.
The exercise price of options granted under the 1996 Plan is determined by
the Administrator. With respect to incentive stock options granted under the
1996 Plan, the exercise price must be at least equal to the fair market value
per share of the Common Stock on the date of grant, and the exercise price of
any incentive stock option granted to a participant who owns more than 10% of
the voting power of all classes of the Company's outstanding capital stock
must be equal to at least 110% of fair market value of the Common Stock on the
date of grant. The maximum term of an option granted under the 1996 Plan may
not exceed ten years from the date of grant (five years in the case of a
participant who owns more than 10% of the voting power of all classes of the
Company's outstanding capital stock). In the event of termination of an
optionee's employment or consulting arrangement, an option may only be
exercised, to the extent vested as of the date of termination, for a period
not to exceed 90 days (12 months, in the case of termination as a result of
death or disability) following the date of termination. Options granted under
the 1996 Plan are not generally transferable by the optionee, and may be
exercised during the life of the optionee only by the optionee.
The 1996 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option shall be assumed or an equivalent option substituted for
by the successor corporation. If the outstanding options are not assumed or
substituted for by the successor corporation, the optionee shall have the
right to exercise the option as to all of the optioned stock, including shares
as to which it would not otherwise be exercisable. If an option becomes
exercisable in full in the event of a merger or sale of assets, the
Administrator shall notify the optionee that the option shall be fully
exercisable for a period of 15 days from the date of such notice, and the
option will terminate upon the expiration of such period.
The 1996 Plan provides that in the event of a proposed dissolution or
liquidation, the Administrator may provide for the optionee to have the right
to exercise the option as to all of the optioned stock, including shares as to
which it would not otherwise be exercisable. If the Administrator makes an
option exercisable in full in the event of a proposed dissolution or
liquidation, the Administrator shall notify the optionee that the option shall
be fully exercisable until 10 days prior to such transaction. To the extent
the option has not been exercised, such option will terminate immediately
prior to the consummation of such proposed action.
As of December 31, 1997, the Company had outstanding options to purchase
112,856 shares of Common Stock under the 1996 Plan held by an aggregate of 57
persons at a weighted average exercise price of $0.74 per share. As of
December 31, 1997, options to purchase an aggregate of 323,395 shares of
Common Stock under the 1996 Plan had been exercised.
1996 Equity Compensation Plan
The Company's 1996 Equity Compensation Plan (the "1996 Equity Plan")
provides for the granting to employees of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and for the granting to employees and consultants of nonstatutory
stock options and stock purchase rights ("SPRs"). The 1996 Equity Plan was
approved by the Board of Directors in
52
<PAGE>
October 1996 and by the stockholders in December 1996 and amended in September
and November 1997. Unless terminated sooner by the Board of Directors, the
1996 Equity Plan will terminate automatically in December 2006. A total of
2,000,000 shares of Common Stock, plus annual increases equal to the lesser of
(i) 400,000 shares, (ii) 4% of the outstanding shares, or (iii) a lesser
amount determined by the Board of Directors, are currently reserved for
issuance pursuant to the 1996 Equity Plan.
The 1996 Equity Plan may be administered by the Board of Directors or a
committee of the Board (the "Administrator"), which Administrator shall, in
the case of options intended to qualify as "performance-based compensation"
within the meaning of Section 162(m) of the Code, consist of two or more
"outside directors" within the meaning of Section 162(m) of the Code. The
Administrator has the power to determine the terms of the options or SPRs
granted, including the exercise price, the number of shares subject to each
option or SPR, the exercisability thereof and the form of consideration
payable upon such exercise. In addition, the Committee has the authority to
amend, suspend or terminate the 1996 Equity Plan, provided that no such action
may impair the rights of any optionee under the 1996 Equity Plan unless
mutually agreed. Notwithstanding the foregoing, no existing employee, director
or consultant may be granted options to purchase more than an aggregate of
150,000 shares of Common Stock in any fiscal year and no newly hired employee,
director or consultant may be granted options to purchase more than an
aggregate of 300,000 shares of Common Stock in any fiscal year. The 1996
Equity Plan also provides for certain non-employee directors to receive a one-
time initial option grant of 25,000 shares that becomes exercisable over 48
months so long as the individual remains a director and for all non-employee
directors to receive option grants for 7,000 shares that become exercisable
over 12 months upon their reelection each year.
Unless otherwise determined by the Administrator, options and SPRs granted
under the 1996 Equity Plan are not generally transferable by the optionee, and
each option or SPR is exercisable during the lifetime of the optionee only by
such optionee. Options granted under the 1996 Equity Plan must generally be
exercised within three months of the end of the optionee's status as an
employee or consultant of the Company, or within 12 months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's ten year term. In the case of SPRs, unless the
Committee determines otherwise, the restricted stock purchase agreement
pursuant to which the SPR is exercised shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for shares repurchased pursuant to such
restricted stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator. The exercise price of all incentive stock options granted under
the 1996 Equity Plan must be at least equal to the fair market value of the
Common Stock on the date of grant. The exercise price of nonstatutory stock
options and SPRs granted under the 1996 Equity Plan is determined by the
Administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code, the exercise price must at least be equal to the fair
market value of the Common Stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of the Company's outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date and the term of such incentive stock option must not
exceed five years. The term of all other options granted under the 1996 Equity
Plan may not exceed ten years.
The 1996 Equity Plan provides that in the event of a merger of the Company
with or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option shall be
assumed or an equivalent option substituted by the successor corporation. If
the outstanding options are not assumed or substituted as described in the
preceding sentence, the optionee shall have the right to exercise the option
or SPR as to all of the optioned stock, including shares as to which it would
not otherwise be exercisable. If an option or SPR becomes exercisable in full
in the event of a merger or sale of assets, the Administrator shall notify the
optionee that the option or SPR shall be fully exercisable for a period of 15
days from the date of such notice, and the option or SPR will terminate upon
the expiration of such period.
53
<PAGE>
The 1996 Equity Plan provides that in the event of a proposed dissolution or
liquidation, the Administrator may provide for the optionee to have the right
to exercise the option or SPR as to all of the optioned stock, including
shares as to which it would not otherwise be exercisable. If the Administrator
makes an option or SPR exercisable in full in the event of a proposed
dissolution or liquidation, the Administrator shall notify the optionee that
the option or SPR shall be fully exercisable until 10 days prior to such
transaction. To the extent the option or SPR has not been exercised, such
option or SPR will terminate immediately prior to the consummation of such
proposed action.
As of December 31, 1997, the Company had outstanding options to purchase
1,589,485 shares of Common Stock under the 1996 Equity Plan held by an
aggregate of 261 persons at a weighted average exercise price of $9.24 per
share. As of December 31, 1997, no options to purchase shares of Common Stock
under the 1996 Equity Plan had been exercised.
1997 Acquisition Stock Option Plan
The Company's 1997 Acquisition Stock Option Plan (the "1997 Plan") was
approved by the Board of Directors in February 1997 and amended in July and
November 1997. The 1997 Plan provides for the grant of incentive stock
options, within the meaning of Section 422 of the Code, to employees
(including officers and employee directors) and for the grant of nonstatutory
stock options and SPRs to employees, directors and consultants. A total of
10,000,000 shares of Common Stock, plus annual increases equal to the lesser
of (i) 400,000 shares, (ii) 4% of the outstanding shares, or (iii) a lesser
amount determined by the Board of Directors, are currently reserved for
issuance pursuant to the 1997 Plan. Unless terminated sooner by the Board of
Directors, the 1997 Plan will terminate automatically in February 2007.
The 1997 Plan may be administered by the Board of Directors or a committee
of the Board (the "Administrator"). The Administrator has the power to
determine the terms of the options or SPRs granted, including the exercise
price of the option or SPR, the number of shares subject to each option or
SPR, the exercisability thereof and the form of consideration payable upon
such exercise. In addition, the Administrator has the authority to amend,
suspend or terminate the 1997 Plan, provided that such action may not impair
the rights of any optionee under the 1997 Plan unless mutually agreed.
Options and SPRs granted under the 1997 Plan are generally not transferable
by the optionee, and each option or SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1997 Plan must
generally be exercised within three months after the end of optionee's status
as an employee, director or consultant of the Company, or within 12 months
after such optionee's termination by death or disability, but in no event
later than the expiration of the option's ten year term.
In the case of SPRs, unless the Administrator determines otherwise, the
restricted stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for shares repurchased pursuant to the
restricted stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
The exercise price of all incentive stock options granted under the 1997
Plan must be at least equal to the fair market value of the Common Stock on
the date of grant. The exercise price of nonstatutory stock options and SPRs
granted under the 1997 Plan is determined by the Administrator, but with
respect to nonstatutory stock options intended to qualify as "performance-
based compensation" within the meaning of Section 162(m) of the Code, the
exercise price must at least be equal to the fair market value of the Common
Stock on the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of the outstanding
capital stock of the Company, its parent or any subsidiary, the exercise price
of any incentive stock option granted must equal at least 110% of the fair
market value on the grant date and the term of such incentive stock option
must not exceed five years. The term of all other options granted under the
1997 Plan may not exceed ten years.
54
<PAGE>
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option and SPR shall be assumed or an equivalent option
substituted for by the successor corporation. If the outstanding options or
SPRs are not assumed or substituted for by the successor corporation, the
optionee shall have the right to exercise the option or SPR as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. If an option or SPR becomes exercisable in full in the event of a
merger or sale of assets, the Administrator shall notify the optionee that the
option or SPR shall be fully exercisable for a period of 15 days from the date
of such notice, and the option or SPR will terminate upon the expiration of
such period.
The 1997 Plan provides that in the event of a proposed dissolution or
liquidation, the Administrator may provide for the optionee to have the right
to exercise the option or SPR as to all of the optioned stock, including
shares as to which it would not otherwise be exercisable. If the Administrator
makes an option or SPR exercisable in full in the event of a proposed
dissolution or liquidation, the Administrator shall notify the optionee that
the option or SPR shall be fully exercisable until 15 days prior to such
transaction. To the extent the option or SPR has not been exercised, such
option or SPR will terminate immediately prior to the consummation of such
proposed action.
As of December 31, 1997, the Company had outstanding options to purchase
7,790,062 shares of Common Stock under the 1997 Plan held by an aggregate of
352 persons at a weighted average exercise price of $7.89 per share. As of
December 31, 1997, 73,728 options to purchase shares of Common Stock under the
1997 Plan had been exercised.
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "ESPP") was adopted by
the Board of Directors in September 1997. A total of 1,000,000 shares of
Common Stock has been reserved for issuance under the ESPP, plus annual
increases equal to the lesser of (i) 50,000 shares, (ii) 4% of the outstanding
shares on such date or (iii) a lesser amount determined by the Board.
The ESPP, which is intended to qualify under Section 423 of the Code,
contains consecutive, overlapping, 24-month offering periods. Each offering
period includes four six-month purchase periods. The offering periods
generally start on the first trading day on or after May 1 and November 1 of
each year, except for the first such offering period which commences on the
first trading day on or after the effective date of this Offering and ends on
the last trading day on or before October 31, 1998.
Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. However, no employee may be
granted an option to purchase under the ESPP who (i) immediately after grant
owns stock possessing 5% or holds equivalent outstanding options or more of
the total combined voting power or value of all classes of the capital stock
of the Company, or (ii) whose rights to purchase stock under all employee
stock purchase plans of the Company accrues at a rate which exceeds $25,000
worth of stock for each calendar year. The ESPP permits participants to
purchase Common Stock through payroll deductions of up to 15% of the
participant's "compensation." Compensation is defined as the participant's
base straight time gross earnings, overtime and commissions but excludes
payments for shift premium, incentive compensation, incentive payments,
bonuses and other compensation. The maximum number of shares a participant may
purchase during a single purchase period is 2,500 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each purchase period. The price of stock
purchased under the ESPP is 85% of the lower of the fair market value of the
Common Stock at the beginning of the offering period or at the end of the
purchase period. In the event the fair market value at the end of a purchase
period is less than the fair market value at the beginning of the offering
period, the participants will be withdrawn from the current offering period
following exercise and automatically re-enrolled in a new offering period. The
new offering period will use
55
<PAGE>
the lower fair market value as of the first date of the new offering period to
determine the purchase price for future purchase periods. Participants may end
their participation at any time during an offering period, and they will be
paid their payroll deductions to date. Participation ends automatically upon
termination of employment with the Company.
Rights granted under the ESPP are generally not transferable by a
participant unless otherwise provided under the ESPP. The ESPP provides that,
in the event of a merger of the Company with or into another corporation or a
sale of substantially all of the Company's assets, each outstanding option may
be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date
will be set. The ESPP will terminate by its own terms in September 2007. The
Board of Directors has the authority to amend or terminate the ESPP, except
that no such action may adversely affect any outstanding rights to purchase
stock under the ESPP.
Affiliate Warrant Program
In June 1996, the Company established the Affiliate Warrant Program (the
"Program") with the intent of attracting new Affiliates and to create
performance incentives for such Affiliates. Under the Program, each Affiliate
that signed an Affiliate agreement on or before March 31, 1997 was granted a
warrant to purchase shares of the Company's Common Stock upon execution of the
Affiliate agreement and earns additional warrants to purchase shares of Common
Stock at the rate of one share of Common Stock per $50 of Affiliate adjusted
gross revenue, as defined. The exercise price of all warrants issued and
issuable to an individual Affiliate was set at the time of signing of the
Affiliate agreement. Warrants vest 25% after one year and then ratably each
month over the following 36 month period. Warrants are exercisable for a
maximum period of five years from the effective date of the Affiliate
agreement. Warrants may not be exercised prior to the earlier of the closing
of this offering or any acquisition of the Company. A total of 333,333 shares
of Common Stock have been reserved for issuance under the Program, and the
Company does not intend to increase this amount. As of December 31, 1997, the
Company had issued warrants under the program to purchase an aggregate of
267,284 shares of Common Stock at a weighted average exercise price of $2.55
per share. See Note 10 to Consolidated Financial Statements.
56
<PAGE>
CERTAIN TRANSACTIONS
Since its inception, the Company has issued, in private placement
transactions, shares of Preferred Stock as follows: 6,172,833 shares of Series
A Preferred Stock at $1.62 per share, 3,103,333 shares of Series B Preferred
Stock at $2.01 per share and 2,818,193 shares of Series C Preferred Stock at
$6.21 per share. In connection with the issuance of Series C Preferred Stock,
the Company issued warrants (the "Series C Warrants") to purchase an aggregate
of 704,549 shares of Series C Preferred Stock at an exercise price of $7.50
per share. Each such share of Preferred Stock converted into one share of
Common Stock upon the closing of the Company's initial public offering in
December 1997. The holders of such shares of converted Preferred Stock are
entitled to certain registration rights with respect to the Common Stock
issued upon conversion thereof. See "Description of Capital Stock--
Registration Rights." The following table sets forth the number of shares of
Preferred Stock, Series C Warrants and Common Stock purchased by the Company's
directors, five percent stockholders and their respective affiliates:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES C COMMON
INVESTOR PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK WARRANTS STOCK
-------- --------------- --------------- --------------- -------- -------
<S> <C> <C> <C> <C> <C>
Crosspoint Venture
Partners (1)........... 1,233,333 -- 48,309 12,077 500,000
SOFTVEN No. 2 Investment
Enterprise
Partnership (2)........ 4,625,000 3,103,333 -- -- --
21st Century
Communications
Partners, L.P. (3)..... -- -- 805,153 201,288 --
The Cutler Group (4).... 308,333 -- 24,892 6,223 958,982
</TABLE>
- ---------------------
(1) Robert Hoff, a general partner of Crosspoint Venture Partners, serves on
the Company's Board of Directors.
(2) Jeffrey Ballowe and Gary Rieschel, Executive Managing Director of SOFTBANK
Holdings, an affiliate of SOFTVEN No. 2 Investment Enterprise Partnership,
serve on the Company's Board of Directors.
(3) Includes 545,893 shares of Series C Preferred Stock and warrants to
purchase 136,473 shares of Series C Preferred Stock held by 21st Century
Communications Partners, L.P., 185,668 shares of Series C Preferred Stock
and warrants to purchase 46,417 shares of Series C Preferred Stock held by
21st Century Communications T-E Partners, L.P., and 73,591 shares of
Series C Preferred Stock and warrants to purchase 18,398 shares of Series
C Preferred Stock held by 21st Century Communications Foreign Partners,
L.P., each of which is an affiliate of 21st Century Communications
Partners, L.P., a general partnership of which Barry Rubenstein, who
serves on the Company's Board of Directors, is a general partner. Mr.
Rubenstein disclaims beneficial ownership of such shares.
(4) Includes 24,892 shares of Series C Preferred Stock, 533,333 shares of
Common Stock and warrants to purchase 6,223 shares of Series C Preferred
Stock held by Storie Partners, an affiliate of The Cutler Group. Frank
Cutler, principal of The Cutler Group, has a shared ownership interest in
these shares and warrants. Also includes 8,982 shares of Common Stock held
by Frank Cutler, principal of the Cutler Group.
57
<PAGE>
In December 1995, the Company entered into Restricted Stock Purchase
Agreements with each of Joseph Firmage, Tobin Corey, James Heffernan and
Kenneth Campbell. In January 1996, the Company entered a Restricted Stock
Purchase Agreement with Sheldon Laube. Pursuant to these Restricted Stock
Purchase Agreements, Messrs. Firmage, Corey, Heffernan, Laube and Campbell
acquired the number of shares of the Company's Common Stock set forth opposite
their names in the table below:
<TABLE>
<CAPTION>
SHARES OF COMMON
EXECUTIVE OFFICER STOCK ACQUIRED
----------------- ----------------
<S> <C>
Joseph Firmage.......................................... 1,779,993
Tobin Corey............................................. 932,360
James Heffernan......................................... 762,549
Sheldon Laube........................................... 762,549
Kenneth Campbell........................................ 762,549
</TABLE>
The shares of Common Stock subject to the Restricted Stock Purchase
Agreements were issued in exchange for cash. The Restricted Stock Purchase
Agreements provide the Company the right to repurchase at the original
purchase price all shares of Common Stock not released from such right of
repurchase, and 1/48th of the shares issued under the Restricted Stock
Purchase Agreements are released from the Company's right of repurchase each
month after the date of purchase. Further, the Company retains a right of
first refusal to purchase any shares issued pursuant to a Restricted Stock
Purchase Agreement until 90 days after the effective date of this offering.
The Company has entered into indemnification agreements with each of its
directors and executive officers. These agreements require the Company to
indemnify such individuals for certain liabilities to which they may be
subject as a result of their affiliation with the Company, to the fullest
extent allowed by Delaware law. See "Management--Limitation on Liability and
Indemnification Matters."
The Company has entered into Management Continuity Agreements with Messrs.
Firmage, Corey, Heffernan and Laube. See "Management--Employment Agreements."
In January 1996, the Company extended a loan of $70,000 (with interest
accruing at 5% per annum) to Tobin Corey, to cover the expenses of Mr. Corey's
relocation to California from Utah (the "Corey Loan"). In July 1997, the
Company forgave the Corey Loan, together with accrued interest and a tax
gross-up, for a total amount forgiven of $139,000.
In August 1997, the Company entered into a General Release Agreement with
Kenneth Campbell (the "Campbell Release Agreement"). Pursuant to the terms of
the Campbell Release Agreement, Mr. Campbell shall receive an amount equal to
his base salary of $220,000, payable semimonthly over the 12-month period
beginning August 1, 1997. In addition, on Mr. Campbell's termination date, the
Company paid Mr. Campbell $15,229, an amount equal to the value of his accrued
and unused vacation. Further, pursuant to the terms of the Campbell Release
Agreement, the Company accelerated vesting of certain shares of Common Stock
held by Mr. Campbell so that, as of the date of the Campbell Release
Agreement, Mr. Campbell held 413,047 shares. The Company repurchased the
remaining 349,502 shares of Common Stock held by Mr. Campbell at a price of
$.0003 per share.
In November 1997, the Company granted the following options to executive
officers pursuant to the 1996 Equity Plan: 105,000 shares to Joseph Firmage,
105,000 shares to Tobin Corey, 60,000 shares to James Heffernan and 30,000
shares to Sheldon Laube. Each option has an exercise price of $9.75 per share
and becomes exercisable over 36 to 60 months.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of December 31, 1997 for
(i) each person or entity who is known by the Company to beneficially own more
than 5% of the outstanding Common Stock of the Company, (ii) each of the
Company's directors, (iii) each Named Executive Officer, (iv) all directors
and executive officers of the Company as a group and (v) other Selling
Stockholders:
<TABLE>
<CAPTION>
DIRECTORS, NAMED SHARES SHARES
EXECUTIVE OFFICERS, 5% BENEFICIALLY OWNED BENEFICIALLY OWNED
STOCKHOLDERS AND ALL PRIOR TO THE OFFERING(1) NUMBER OF AFTER THE OFFERING(1)
EXECUTIVE OFFICERS AND ------------------------------ SHARES ---------------------
DIRECTORS AS A GROUP NUMBER PERCENTAGE BEING OFFERED NUMBER PERCENTAGE
- ---------------------- --------------- --------------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SOFTVEN No. 2 Investment
Enterprise Partnership. 7,443,323 22.0% 1,250,000 6,193,323 17.8%
24-1 Nihonbashi-
Hakozakicho
Chuo-Ku
Tokyo, 103 Japan
Gary Rieschel (2)....... 7,443,323 22.0 1,250,000 6,193,323 17.8
Robert Hoff (3)......... 1,793,719 5.3 -- 1,793,719 5.2
Crosspoint Venture
Partners (3)........... 1,793,719 5.3 -- 1,793,719 5.2
Barry Rubenstein (4).... 1,610,303 4.8 -- 1,610,303 4.6
Joseph Firmage (5)...... 1,568,336 4.6 175,000 1,393,336 4.0
Tobin Corey (6)......... 840,366 2.5 93,000 647,366 2.1
Sheldon Laube (7)....... 737,549 2.2 76,000 661,549 1.9
James Heffernan (8)..... 704,709 2.1 76,000 628,709 1.8
Kenneth Campbell........ 378,708 1.1 200,000 178,708 *
Jeffrey Ballowe (9)..... 1,667 * -- 1,667 *
All executive officers
and directors as a
group (8 persons) (10). 15,078,680 44.6% 1,870,000 13,208,680 37.9%
OTHER SELLING STOCKHOLD-
ERS
- ------------------------
Selling Stockholder
Group ( persons) (11). 2,130,000
</TABLE>
- ---------------------
*less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by
that person that are currently exercisable or exercisable within 60 days
of December 31, 1997 are deemed outstanding. Such shares, however, are
not deemed outstanding for the purposes of computing the percentage
ownership of each other person. Except as indicated in the footnotes to
this table and pursuant to applicable community property laws, each
stockholder named in the table above has sole voting and investment power
with respect to the shares set forth opposite such stockholder's name.
Percentage beneficial ownership is based on 33,811,085 shares of Common
Stock outstanding as of December 31, 1997 and 34,811,085 shares of Common
Stock after completion of the offering.
(2) Consists of 7,443,323 shares of Common Stock held by SOFTVEN No. 2
Investment Enterprise Partnership. Gary Rieschel, Executive Managing
Director of SOFTBANK Holdings, an affiliate of SOFTVEN No. 2 Investment
Enterprise Partnership, serves on the Company's Board of Directors.
Mr. Rieschel disclaims beneficial ownership of such shares. Mr.
Rieschel's mailing address is c/o USWeb Corporation, 2880 Lakeside Drive,
Santa Clara, CA 95054.
59
<PAGE>
(3) Includes warrants to purchase 12,077 shares held by Crosspoint Venture
Partners. Mr. Hoff is a general partner of Crosspoint Venture Partners.
Mr. Hoff disclaims beneficial ownership of all such shares. Mr. Hoff's
mailing address is c/o USWeb Corporation, 2880 Lakeside Drive, Santa
Clara, CA 95054.
(4) Includes 545,893 shares and warrants to purchase 136,473 shares held by
21st Century Communications Partners, L.P., 185,668 shares and warrants
to purchase 46,417 shares held by 21st Century Communications T-E
Partners, L.P., 73,591 shares and warrants to purchase 18,398 shares held
by 21st Century Communications Foreign Partners, L.P., 442,841 shares and
warrants to purchase 110,710 shares held by Wheatley Partners, L.P. and
40,250 shares and warrants to purchase 10,062 shares held by Wheatley
Foreign Partners, L.P. Mr. Rubenstein is President of InfoMedia
Associates, Ltd., a general partner of 21st Century Communications
Partners, L.P., 21st Century Communications T-E Partners, L.P. and 21st
Century Communications Foreign Partners, L.P. Mr. Rubenstein is also a
member and CEO of Wheatley Partners, LLC, a general partner of Wheatley
Partners, L.P. and Wheatley Foreign Partners, L.P. Mr. Rubenstein
disclaims beneficial ownership of such shares. Mr. Rubenstein's mailing
address is c/o USWeb Corporation, 2880 Lakeside Drive, Santa Clara, CA
95054.
(5) Includes 120,000 shares held by certain relatives of Mr. Firmage and
279,993 shares held by JPF LLC, a limited liability company of which Mr.
Firmage retains beneficial control. Mr. Firmage disclaims beneficial
ownership of such shares. Mr. Firmage's mailing address is c/o USWeb
Corporation, 2880 Lakeside Drive, Santa Clara, CA 95054.
(6) Includes 200,457 shares held by certain relatives of Mr. Corey. Mr. Corey
disclaims beneficial ownership of all such shares.
(7) Includes 20,000 shares held by certain relatives of Mr. Laube. Mr. Laube
disclaims beneficial ownership of all such shares.
(8) Includes 115,000 shares held by certain relatives of Mr. Heffernan. Mr.
Heffernan disclaims beneficial ownership of all such shares.
(9) Includes options exercisable within 60 days for 1,667 shares of the
Company's Common Stock.
(10) See notes (2)-(8) above.
(11) Other Selling Stockholders is a group comprised of individuals or
entities, none of which owns individually one percent or more of the
Company's Common Stock. No member of the other Selling Stockholders Group
is an officer or director of the Company. Most members of the Other
Selling Stockholders Group are employees of the Company and received
stock of the Company as shareholders of one of the nineteen companies
acquired by USWeb during 1997.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a
summary and is qualified in its entirety by the provisions of the Certificate
of Incorporation and Bylaws, which have been filed as exhibits to the
Company's Registration Statement of which this Prospectus is a part.
Upon the closing of this offering, the authorized capital stock of the
Company will be 101,000,000 shares, consisting of 100,000,000 shares of Common
Stock, par value $0.001 per share, and 1,000,000 shares of undesignated
Preferred Stock, par value $0.001 per share.
COMMON STOCK
As of December 31, 1997 there were 32,773,412 shares of Common Stock
outstanding held of record by approximately 310 stockholders.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may
be declared by the Board of Directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preferences of any
outstanding shares of Preferred Stock, if any. Holders of Common Stock have no
preemptive rights or rights to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and all shares
of Common Stock to be outstanding upon completion of the offering will be,
fully paid and nonassessable. The rights of holders of Common Stock are
subject to, and may be adversely affected by, the rights of any series of
Preferred Stock which the Company may issue in the future.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 1,000,000 shares of Preferred Stock in one or
more series, and to fix the rights, designations, preferences, privileges,
qualifications and restrictions thereof, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences
and sinking fund terms, any or all of which may be greater than the rights of
the Common Stock. No shares of Preferred Stock will be outstanding upon the
closing of this offering. The issuance of Preferred Stock could adversely
affect the voting power of holders of Common Stock and the likelihood that
such holders will receive dividend payments and payments upon liquidation.
Such issuance could have the effect of decreasing the market price of the
Common Stock. The issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change in control of the Company with any further
action by the stockholders. The Company has no present plans to issue any
shares of Preferred Stock.
WARRANTS
As of December 31, 1997, the Company had warrants outstanding to purchase
1,076,554 shares of its Common Stock at a weighted average exercise price per
share of $5.75.
No fractional shares of Common Stock will be issued in connection with the
exercise of warrants. In the event a holder of warrant fails to exercise the
warrants prior to their expiration, the warrants will expire and the holder
thereof will have no further rights with respect to such warrants.
A holder of warrants will not have any rights, privileges or liabilities as
a stockholder of the Company prior to exercise of the warrants. The Company is
required to keep available a sufficient number of authorized shares of Common
Stock to permit exercise of the warrants.
61
<PAGE>
The exercise price of the warrants and the number of shares issuable upon
exercise of the warrants will be subject to adjustment to protect against
dilution in the event of stock dividends, stock splits, combinations,
subdivisions and reclassifications. See "Management--Affiliate Warrant
Program."
REGISTRATION RIGHTS
After this offering, the holders of approximately 12,925,000 shares of
Common Stock, including approximately 758,000 shares of Common Stock issuable
upon the conversion of outstanding warrants, will be entitled to certain
rights with respect to the registration of such shares under the Securities
Act. Under the terms of the agreement between the Company and the holders of
such registrable securities, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled to include shares
of such Common Stock therein. Further, holders may require the Company to file
additional registration statements on Form S-3 at the Company's expense. These
rights are subject to certain conditions and limitations, among them the right
of the underwriters of an offering to limit the number of shares included in
such registration in certain circumstances.
CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW
General
Certain provisions of the Delaware General Corporation Law and the Company's
Certificate of Incorporation and Bylaws could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
to acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock. These provisions of Delaware law and the Company's
Certificate of Incorporation and Bylaws may also have the effect of
discouraging or preventing certain types of transactions involving an actual
or threatened change of control of the Company (including unsolicited takeover
attempts), even though such a transaction may offer the Company's stockholders
the opportunity to sell their stock at a price above the prevailing market
price. The Certificate of Incorporation allows the Company to issue Preferred
Stock with rights senior to those of the Common Stock and other rights that
could adversely affect the interests of holders of Common Stock, which could
decrease the amount of earnings or assets available for distribution to the
holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock, as well as having the anti-takeover effect
discussed above. See "Risk Factors--Effect of Certain Charter Provisions;
Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware
Law."
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which prohibits a Delaware corporation from engaging in a
"business combination" with certain persons ("Interested Stockholders") for
three years following the date any such person becomes an Interested
Stockholder. Interested Stockholders generally include (i) persons who are the
beneficial owners of 15% or more of the outstanding voting stock of the
corporation and (ii) persons who are affiliates or associates of the
corporation and who hold 15% or more of the corporation's outstanding voting
stock at any time within three years before the date on which such person's
status as an Interested Stockholder is determined. Subject to certain
exceptions, a business combination includes, among other things, (i) a merger
or consolidation, (ii) the sale, lease exchange, mortgage, pledge, transfer or
other disposition of assets having an aggregate market value equal to 10% or
more of either the aggregate market value of all assets of the corporation
determined on a consolidated basis or the aggregate market value of all the
outstanding stock of the corporation, (iii) any transaction that results in
the issuance or transfer by the corporation of any stock of the corporation to
the Interested Stockholder, except pursuant to a transaction that effects a
pro rata distribution to all stockholders
62
<PAGE>
of the corporation, (iv) any transaction involving the corporation that has
the effect of increasing the proportionate share of the stock of any class or
series, or securities convertible into the stock of any class or series, of
the corporation that is owned directly or indirectly by the Interested
Stockholder, or (v) any receipt by the Interested Stockholder of the benefit
(except proportionately as a stockholder) of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
Section 203 does not apply to a business corporation if (i) before a person
becomes an Interested Stockholder, the board of directors of the corporation
approves the transaction in which the Interested Stockholder became an
Interested Stockholder or approved the business combination, or (ii) upon
consummation of the transaction that resulted in the Interested Stockholder
becoming an Interested Stockholder, the Interested Stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commences, other than certain the affirmative vote of the holders
of at least two-thirds of the outstanding voting stock of the corporation not
owned by the Interested Stockholder.
Certificate of Incorporation and Bylaws
The Company's Bylaws also require that special meetings of the stockholders
of the Company may be called only by the Board of Directors, the Chief
Executive Officer of the Company or by any person or persons holding shares
representing at least 20% of the outstanding capital stock. The Company's
Bylaws also require advance written notice, which must be received by the
Secretary of the Company not less than 90 days prior to the meeting, by a
stockholder of a proposal or directors nomination which such stockholder
desires to present at an annual or special meeting of stockholders. The
Company's Certificate of Incorporation does not include a provision for
cumulative voting in the election of directors. Under cumulative voting, a
minority stockholder holding a sufficient number of shares may be able to
ensure the election of one or more directors. The absence of cumulative voting
may have the effect of limiting the ability of minority stockholders to effect
changes in the Board of Directors and, as a result, may have the effect of
deterring hostile takeover or delaying or preventing changes in control or
management of the Company.
The Company's Bylaws provide that the authorized number of directors may be
changed by an amendment to the Bylaws adopted by the Board of Directors or by
the stockholders. Vacancies in the Board of Directors may be filled either by
holders of a majority of the Company's voting stock or a majority of directors
in office, although less than a quorum. See "Risk Factors--Effect of Certain
Charter Provisions; Antitakeover Effects of Incorporation, Bylaws and Delaware
Law."
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services has been appointed as transfer agent and
registrar for the Company's Common Stock.
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 34,811,085 shares of Common
Stock outstanding. The 5,000,000 shares (or up to 5,750,000 shares if the
Underwriters' over-allotment option is exercised in full) of Common Stock sold
in this offering will be freely tradable (other than by an "affiliate" of the
Company as such term is defined in the Securities Act) without restriction
under the Securities Act. The remaining shares of Common Stock then
outstanding will be deemed "restricted securities" within the meaning of Rule
144 of the Securities Act (the "Restricted Shares") and may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 promulgated under the Securities Act,
which rules are summarized below, or another available exemption from
registration.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned Restricted Shares for at least one year from the later of the date such
Restricted Shares were acquired from the Company or (if applicable) from an
affiliate on the date on which they were fully paid, is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then-outstanding shares of Common Stock or (ii) the
average weekly trading volume of the Common Stock in the public market as
reported through the Nasdaq National Market during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner and notice of sale and the availability of
public information about the Company.
Restricted Shares held by affiliates of the Company are subject to the
foregoing volume limitation, holding period and other restrictions under Rule
144. Affiliates may sell shares other than Restricted Shares in accordance
with the foregoing volume limitations and other restrictions, but without
regard to any holding period.
Further, under Rule 144(k), if a period of at least two years has elapsed
since the later of the date Restricted Shares were acquired from the Company
or from an affiliate of the Company on the date on which they were fully paid,
a holder of such Restricted Shares who is not an affiliate of the Company at
the time of sale, and has not been an affiliate of the Company for at least
three months prior to the sale, would be entitled to sell the shares
immediately without regard to volume limitations and the other conditions
described above.
In general, under Rule 701 of the Securities Act as currently in effect, any
employee, officer, director, consultant or advisor of the Company who
purchased shares from the Company in connection with a compensatory stock or
option plan or written employment agreement is eligible to resell such shares
90 days after the effective date of the Company's initial public offering in
reliance on Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144.
The Company intends to file a registration statement under the Securities
Act to register shares of Common Stock reserved for issuance under its equity
incentive plans, thus permitting the resale of such shares by non-affiliates
in the public market without restriction under the Securities Act. See
"Management--Employee Benefit Plans." Such registration statement will become
effective immediately upon filing. As of December 31, 1997, options to
purchase approximately 9,492,403 shares of Common Stock were outstanding under
the Company's stock option plans.
The holders of approximately 12,925,000 shares of Common Stock, including
approximately 758,000 shares of Common Stock issuable upon exercise of
outstanding warrants, are entitled to certain rights with respect to the
registration of such shares under the Securities Act. See "Description of
Capital Stock--Registration Rights."
64
<PAGE>
The Company, the Selling Stockholders and certain other stockholders,
optionholders and warrantholders of the Company, who will own substantially
all shares that have not been registered and sold in public offerings, have
agreed, with certain exceptions, that they will not, without the prior written
consent of Hambrecht & Quist LLC, offer, sell, or otherwise dispose of any
Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock during
the 180-day period following the date of the Prospectus for the Company's
initial public offering (first saleable June 3, 1998) other than shares
offered in the Company's initial public offering or hereby. The Company, the
Selling Stockholders and certain other stockholders, optionholders and
warrantholders of the Company, have agreed, with certain exceptions, that they
will not, without the prior written consent of Hambrecht & Quist LLC, offer,
sell, or otherwise dispose of any Common Stock, options or warrants to acquire
shares of Common Stock or securities exchangeable for or convertible into
shares of Common Stock during the period ending on the later of the 180th day
following the date of the Prospectus for the Company's initial public offering
(June 3, 1998) or the 90th day after the date of this Prospectus other than
shares offered hereby. However, Hambrecht & Quist LLC, in its sole discretion,
may release such persons from these lock-up agreements, in whole or in part,
at any time without notice. Following such lock-up periods, a substantial
portion of the Restricted Shares will become eligible for sale, subject to the
manner of sale, volume, notice and information requirements, under Rule 144 of
the Securities Act. After such lock-up periods expire, assuming such lock-up
periods both expire on June 3, 1998, approximately 13,867,000 shares of Common
Stock will become immediately saleable.
65
<PAGE>
UNDERWRITING
Subject to certain terms and conditions of the Underwriting Agreement, the
Underwriters named below through their representatives, Hambrecht & Quist LLC,
Donaldson, Lufkin & Jenrette Securities Corporation, Wessels, Arnold &
Henderson, L.L.C. and First Albany Corporation (collectively, the
"Representatives"), have severally agreed to purchase from the Company and the
Selling Stockholders the following respective numbers of shares of Common
Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC..............................................
Donaldson, Lufkin & Jenrette Securities Corporation................
Wessels, Arnold & Henderson, L.L.C.................................
First Albany Corporation...........................................
----
Total............................................................
====
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not to
exceed $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other dealers.
After the public offering of the shares, the offering price and other selling
terms may be changed by the Underwriters.
The Company and certain Selling Stockholders have granted to the
Underwriters an option, exercisable no later than 30 days after the date of
this Prospectus, to purchase up to an aggregate of 750,000 additional shares
of Common Stock at the public offering price, less the underwriting discount,
set forth on the cover page of this Prospectus. To the extent that the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof that the
number of shares of Common Stock to be purchased by it shown in the table
above bears to the total number of shares of Common Stock offered hereby. The
Company and such Selling Stockholders will be obligated, pursuant to the
option, to sell shares to the Underwriters to the extent the option is
exercised. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of shares of Common Stock offered
hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Company, the Selling Stockholders and certain other stockholders,
optionholders and warrantholders of the Company, who will own substantially
all shares that have not been registered and sold in public offerings, have
agreed, with certain exceptions, that they will not, without the prior written
consent of Hambrecht & Quist LLC, offer, sell, or otherwise dispose of any
Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock during
the 180-day period following the date of the Prospectus for the Company's
initial public offering (first saleable June 3, 1998) other than shares
offered in the Company's initial public offering or hereby. The
66
<PAGE>
Company, the Selling Stockholders and certain other stockholders, optionholders
and warrantholders of the Company, have agreed, with certain exceptions, that
they will not, without the prior written consent of Hambrecht & Quist LLC,
offer, sell, or otherwise dispose of any Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock during the period ending on the later of the 180th
day following the date of the Prospectus for the Company's initial public
offering (June 3, 1998) or the 90th day after the date of this Prospectus other
than shares offered hereby.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids or effecting syndicate
covering transactions. A stabilizing bid means the placing of any bid or
effecting of any purchase, for the purpose of pegging, fixing or maintaining
the price of the Common Stock. A syndicate covering transaction means the
placing of any bid on behalf of the underwriting syndicate or the effecting of
any purchase to reduce a short position created in connection with the
offering. Such transactions may be effected on the Nasdaq National Market, in
the over-the-counter market, or otherwise. Such stabilizing, if commenced, may
be discontinued at any time.
In general, the rules of the Commission will prohibit the Underwriters from
making a market in the Company's Common Stock during the "cooling off" period
immediately preceding the pricing of the Common Stock offered hereby. The
Commission has, however, adopted exemptions from these rules that permit
passive market making under certain conditions. These rules permit an
Underwriter to continue to make a market subject to the conditions, among
others, that its bid not exceed the highest bid by a market maker not connected
with the offering and that its net purchases on any one trading day not exceed
prescribed limits. Pursuant to these exemptions, certain Underwriters, selling
group members (if any) or their respective affiliates intend to engage in
passive market making in the Company's Common Stock during the "cooling off"
period.
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Attorneys employed by Wilson Sonsini Goodrich & Rosati, or
investment partnerships of which they are the beneficial owners, hold
approximately 7,000 shares of Common Stock. Certain legal matters in connection
with this offering will be passed upon for the Underwriters by Morrison &
Foerster LLP, San Francisco, California.
EXPERTS
The financial statements included in this Prospectus have been audited by
Price Waterhouse LLP, independent accountants. The companies and periods
covered by these audits are indicated in the individual reports of Price
Waterhouse LLP. Such financial statements have been so included in reliance on
the reports of Price Waterhouse LLP given on the authority of said firm as
experts in auditing and accounting.
67
<PAGE>
AVAILABLE INFORMATION
This Prospectus, which constitutes a part of a Registration Statement on
Form S-1 (the "Registration Statement") filed by the Company with the
Securities and Exchange Commission (the "SEC" or "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), omits certain of
the information set forth in the Registration Statement. Reference is hereby
made to the Registration Statement and to the exhibits thereto for further
information with respect to the Company and the securities offered hereby.
Copies of the Registration Statement and the exhibits thereto are on file at
the offices of the Commission and may be obtained upon payment of the
prescribed fee or may be examined without charge at the public reference
facilities of the Commission described below.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facility maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices located at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission
maintains an Internet website that contains reports, proxy statements and
information statements and other information regarding registrants that file
electronically with the Commission. The address of such web site is
http://www.sec.gov. Copies of such material can be obtained in person from the
Public Reference Section of the Commission at its principal office located at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Company's Common Stock is quoted on the Nasdaq National Market. Reports, proxy
statements and other information concerning the Company may be inspected at
the National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.
68
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
USWEB CORPORATION
Report of Independent Accountants.......................................... F-4
Consolidated Balance Sheet................................................. F-5
Consolidated Statement of Operations....................................... F-6
Consolidated Statement of Stockholders' Equity (Deficit)................... F-7
Consolidated Statement of Cash Flows....................................... F-8
Notes to Consolidated Financial Statements................................. F-9
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Overview................................................................... F-24
Pro Forma Consolidated Statement of Operations............................. F-26
Notes to Pro Forma Consolidated Financial Information...................... F-27
USWEB SAN FRANCISCO (FORMERLY XCOM CORPORATION)
Report of Independent Accountants.......................................... F-28
Balance Sheet.............................................................. F-29
Statement of Operations.................................................... F-30
Statement of Shareholders' Equity.......................................... F-31
Statement of Cash Flows.................................................... F-32
Notes to Financial Statements.............................................. F-33
USWEB MILWAUKEE (FORMERLY FETCH INTERACTIVE, INC.)
Report of Independent Accountants.......................................... F-36
Balance Sheet.............................................................. F-37
Statement of Operations.................................................... F-38
Statement of Stockholders' Deficit......................................... F-39
Statement of Cash Flows.................................................... F-40
Notes to Financial Statements.............................................. F-41
USWEB LA METRO (FORMERLY NEWLINK 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 ATLANTA (FORMERLY INTERNETOFFICE, LLC)
Report of Independent Accountants.......................................... F-53
Balance Sheet.............................................................. F-54
Statement of Operations.................................................... F-55
Statement of Stockholders' Equity.......................................... F-56
Statement of Cash Flows.................................................... F-57
Notes to Financial Statements.............................................. F-58
USWEB DC (FORMERLY INFOPRENEURS INC.)
Report of Independent Accountants.......................................... F-61
Consolidated Balance Sheet................................................. F-62
Consolidated Statement of Operations....................................... F-63
Consolidated Statement of Stockholders' Deficit............................ F-64
Consolidated Statement of Cash Flows....................................... F-65
Notes to Consolidated Financial Statements................................. F-66
</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-69
Balance Sheet............................................................. F-70
Statement of Operations................................................... F-71
Statement of Shareholders' Equity......................................... F-72
Statement of Cash Flows................................................... F-73
Notes to Financial Statements............................................. F-74
USWEB CHICAGO METRO (FORMERLY MULTIMEDIA MARKETING & DESIGN INC.)
Report of Independent Accountants......................................... F-79
Balance Sheet............................................................. F-80
Statement of Operations................................................... F-81
Statement of Shareholders' Equity......................................... F-82
Statement of Cash Flows................................................... F-83
Notes to Financial Statements............................................. F-84
USWEB HOLLYWOOD (FORMERLY KANDH, 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 HOLLYWOOD (FORMERLY DREAMMEDIA, INC.)
Report of Independent Accountants......................................... F-92
Balance Sheet............................................................. F-93
Statement of Operations................................................... F-94
Statement of Shareholders' Equity......................................... F-95
Statement of Cash Flows................................................... F-96
Notes to Financial Statements............................................. F-97
USWEB MARIN (FORMERLY INTERNET CYBERNAUTICS, INC.)
Report of Independent Accountants......................................... F-99
Balance Sheet............................................................. F-100
Statement of Operations................................................... F-101
Statement of Shareholders' Equity......................................... F-102
Statement of Cash Flows................................................... F-103
Notes to Financial Statements............................................. F-104
USWEB LONG ISLAND (FORMERLY SYNERGETIX SYSTEMS INTEGRATION, 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
</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-118
Balance Sheet............................................................. F-119
Statement of Operations................................................... F-120
Statement of Shareholders' Equity (Deficit)............................... F-121
Statement of Cash Flows................................................... F-122
Notes to Financial Statements............................................. F-123
USWEB SAN MATEO (FORMERLY ZENDATTA, 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
USWEB LA CENTRAL (FORMERLY W3-DESIGN)
Report of Independent Accountants......................................... F-133
Balance Sheet............................................................. F-134
Statement of Operations................................................... F-135
Statement of Shareholders' Equity......................................... F-136
Statement of Cash Flows................................................... F-137
Notes to Financial Statements............................................. F-138
USWEB HOUSTON (FORMERLY USWEB-APEX, INC.)
Report of Independent Accountants......................................... F-141
Combined Balance Sheet.................................................... F-142
Combined Statement of Operations.......................................... F-143
Combined Statement of Shareholders' Equity................................ F-144
Combined Statement of Cash Flows.......................................... F-145
Notes to Combined Financial Statements.................................... F-146
USWEB NEW YORK CENTRAL (FORMERLY REACH NETWORKS, INC.)
Report of Independent Accountants......................................... F-148
Consolidated Balance Sheet................................................ F-149
Consolidated Statement of Operations...................................... F-150
Consolidated Statement of Stockholders' Equity (Deficit).................. F-151
Consolidated Statement of Cash Flows...................................... F-152
Notes to Consolidated Financial Statements................................ F-153
</TABLE>
F-3
<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-4
<PAGE>
USWEB CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 3,220 $ 44,145
Accounts receivable, net................................ 137 7,903
Other current assets.................................... 54 657
-------- --------
Total current assets.................................. 3,411 52,705
Property and equipment, net............................... 1,084 6,202
Intangible assets, net.................................... -- 19,019
Investment in affiliate................................... 2,850 --
Other assets.............................................. 137 1,324
-------- --------
$ 7,482 $ 79,250
======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................ $ 906 $ 2,923
Accrued expenses........................................ 2,190 7,997
Deferred revenue ....................................... -- 470
Current portion of debt and lease obligations........... 242 799
-------- --------
Total current liabilities............................. 3,338 12,189
Lease obligations, long-term portion...................... 436 372
-------- --------
3,774 12,561
-------- --------
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 au-
thorized;
6,381,000 and 33,811,085 shares issued and outstanding. 2 29
Additional paid-in capital.............................. 2,714 138,804
Note receivable......................................... (1,400) --
Accumulated deficit..................................... (13,808) (72,144)
-------- --------
Total stockholders' equity (deficit).................. (12,492) 66,689
-------- --------
$ 7,482 $ 79,250
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Revenues:
Services................................................. $ -- $ 18,366
Other.................................................... 1,820 912
-------- --------
Total revenues......................................... 1,820 19,278
-------- --------
Cost of revenues:
Services................................................. -- 13,468
Other.................................................... 208 1,294
Stock compensation (Note 9).............................. -- 2,420
-------- --------
Total cost of revenues................................. 208 17,182
-------- --------
Gross profit............................................... 1,612 2,096
-------- --------
Operating expenses:
Marketing, sales and support............................. 12,764 20,672
General and administrative............................... 2,813 10,271
Acquired in-process technology (Note 1).................. -- 9,472
Stock compensation (Note 9).............................. -- 6,698
Amortization of intangible assets (Note 1)............... -- 9,476
-------- --------
Total operating expenses............................... 15,577 56,589
-------- --------
Loss from operations....................................... (13,965) (54,493)
Interest income............................................ 215 233
Interest expense........................................... (58) (76)
Impairment of investee carried at cost..................... -- (4,000)
-------- --------
Net loss................................................... $(13,808) $(58,336)
======== ========
Net loss per share:
Basic and diluted (Note 2)............................... $ (2.46) $ (4.78)
======== ========
Weighted average shares outstanding (Note 2)............. 5,620 12,193
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<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
========== ===== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $(13,808) $(58,336)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization............................... 263 1,464
Provision for doubtful accounts............................. -- 819
Stock, option and warrant costs and expenses................ 185 10,376
Discounted sale of Common Stock............................. -- 1,250
Amortization of intangible assets........................... -- 9,476
Acquired in-process technology.............................. -- 9,472
Impairment of investee carried at cost...................... -- 4,000
Changes in assets and liabilities:
Accounts receivable........................................ (137) (4,080)
Other current assets....................................... (54) (187)
Other assets............................................... (137) (690)
Accounts payable........................................... 906 177
Accrued expenses........................................... 2,190 2,194
Deferred revenues.......................................... -- 470
-------- --------
Net cash used in operating activities..................... (10,592) (23,595)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment......................... (1,059) (3,335)
Cash received from acquisitions, net of cash used............. -- 1,129
Purchase of investment in affiliate........................... (2,850) (1,150)
-------- --------
Net cash used in investing activities..................... (3,909) (3,356)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Mandatorily Redeemable
Convertible Preferred Stock.................................. 16,200 16,290
Proceeds from issuance of Common Stock........................ 31 50,459
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
Proceeds from capital lease financing......................... 599 431
Principal payments on capital lease........................... (209) (704)
-------- --------
Net cash provided by financing activities................. 17,721 67,876
-------- --------
Increase in cash and cash equivalents.......................... 3,220 40,925
Cash and cash equivalents, beginning of period................. -- 3,220
-------- --------
Cash and cash equivalents, end of period....................... $ 3,220 $ 44,145
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--THE COMPANY:
USWeb Corporation (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.
From inception through May 31, 1996, the Company's operating activities
related primarily to recruiting personnel, raising capital, preparing and
securing approval of its Uniform Franchise Offering Circular, acquiring
operating assets and developing technical and marketing materials. The Company
signed its first franchise agreement in April 1996, recognized its first
revenues in June 1996 and signed its first definitive acquisition agreement in
March 1997.
During the year ended December 31, 1997, the Company recognized the
acquisition of all of the outstanding shares of nineteen businesses, including
certain franchised Affiliates ("Controlled Entities") in separate transactions
as follows:
<TABLE>
<CAPTION>
COMMON RECOGNIZED
EFFECTIVE SHARES PURCHASE
ACQUIRED ENTITY (FORMER BUSINESS NAME) DATE ISSUED PRICE
- -------------------------------------- ------------------ --------- ----------
<S> <C> <C> <C>
USWeb San Francisco (XCom Corporation)............... March 16, 1997 383,209 $ 1,609
USWeb Seattle (Cosmix Corporation)................... April 1, 1997 119,774 503
USWeb Milwaukee (Fetch Interactive, Inc.)............ April 1, 1997 464,838 1,397
USWeb LA Metro (NewLink Corporation)................. April 1, 1997 425,700 1,537
USWeb Atlanta (InterNetOffice, LLC).................. May 1, 1997 510,646 1,578
USWeb Silicon Valley (NetWORKERS Corporation)........ May 1, 1997 135,415 569
USWeb DC (Infopreneurs Inc.)......................... June 1, 1997 1,008,169 3,173
USWeb Phoenix (Netphaz Corporation).................. June 1, 1997 235,205 776
USWeb Pittsburgh (Electronic Images, Inc.)........... July 1, 1997 1,665,525 6,205
USWeb Chicago Metro (Multimedia Marketing &
Design Inc.)........................................ July 24, 1997 332,536 1,397
USWeb Hollywood (KandH, Inc.)........................ August 29, 1997 151,624 1,023
USWeb Hollywood (DreamMedia, Inc.)................... August 29, 1997 359,094 2,424
USWeb Marin (Internet Cybernautics, Inc)............. September 29, 1997 447,183 4,025
USWeb Long Island (Synergetix Systems Integration,
Inc.)............................................... September 30, 1997 151,716 1,365
USWeb Detroit (Online Marketing Company)............. September 30, 1997 95,730 861
USWeb San Mateo (Zendatta, Inc.)..................... September 30, 1997 176,360 1,587
USWeb LA Central (W3-design)......................... November 5, 1997 410,274 3,473
USWeb Houston (USWeb--Apex, Inc.).................... November 5, 1997 365,029 3,285
USWeb New York Central (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
F-9
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
operations because such in-process technology had not reached the stage of
technological feasibility at the acquisition dates and had no alternative
future use. Approximately $3,610 was allocated to existing technology and is
being amortized over its estimated useful life of six months. The purchase
price in excess of the fair value of identified tangible and intangible assets
and liabilities assumed in the amount of $24,885 was allocated to goodwill and
is being amortized over its estimated useful life of one to two years. See
Note 2.
The acquisitions of the Controlled Entities have been 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 fair values of purchased existing and in-process technologies were
determined by management using a risk-adjusted income valuation approach.
The various purchase agreements require that fifty percent of the shares
issuable at the acquisition date be placed in escrow for a period of twelve
months. The shares placed in escrow will either 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 Controlled
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 Controlled Entity allows for the issuance
of additional stock-based consideration in the event a Controlled 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 November 13, 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-10
<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 had occurred on January 1, 1996 (or date of inception,
if later) and on January 1, 1997 by consolidating the results of operations of
the Acquired Entities with the results of USWeb for the years ended December
31, 1996 and 1997.
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Revenues................................................ $ 19,765 $ 34,812
Net loss................................................ (57,069) (84,939)
Net loss per share:
Basic and diluted..................................... $ (4.02) $ (4.77)
Weighted average shares outstanding................... 14,211 17,795
</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-11
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Principles of Consolidation
The accompanying financial statements as of December 31, 1997 and the year
then ended, 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 and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term, not to exceed five years.
Intangible Assets
Goodwill resulting from the acquisition of Internet technology businesses is
estimated by management to be primarily associated with the acquired workforce
and technological know how. As a result of the rapid technological changes
occurring in the Internet industry and the intense competition for qualified
Internet professionals, recorded goodwill is amortized on the straight-line
basis over the estimated periods of benefit, which range from one to two
years. For certain acquisitions where the Company expects to issue additional
shares at the end of the 12 month purchase price adjustment periods,
amortization rates have been increased to reflect amortization of the total
expected consideration based upon the estimated fair value of the incremental
shares at the end of the purchase price adjustment periods.
At each balance sheet date, the Company assesses the value of recorded
goodwill for possible impairment based upon a number of factors, including
turnover of the acquired workforce and the undiscounted value of expected
future operating cash flows in relation to its net investment in each
subsidiary. Since inception, the Company has not recorded any provisions for
possible impairment of intangible assets.
Completed technologies obtained through acquisition or merger are
capitalized and amortized on the straight-line basis over the estimated period
of benefit of six months.
Costs of in-process technology acquired prior to the achievement of
technological feasibility determined using the working model approach, and any
costs associated with internally developed proprietary technologies prior to
the achievement of technological feasibility determined using the working
model approach are expensed in the period incurred.
Investments
Investments where the Company has an equity interest of less than 20% and
does not have the ability to exert significant influence are accounted for
using the cost method. At each balance sheet date, the Company assesses the
value recorded for cost-based investments and recognizes any identified
impairment.
F-12
<PAGE>
USWEB CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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
year 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 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
F-13
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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
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 net loss by the weighted average number of common shares outstanding
during the period. The weighted average shares outstanding excludes
acquisition shares held in escrow that, based on currently available
information, are not probable of issuance and includes shares which, based
upon currently available information, are probable of issuance at the end of
the contingency periods. The computation of diluted net loss per share
excludes Mandatorily Redeemable Convertible Preferred Stock prior to its
conversion date and outstanding stock options and warrants as their affect 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.
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 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 impact on the Company's consolidated
financial results and is currently assessing the impact of the disclosure
provisions of the new pronouncements.
F-14
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 3--SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1996 1997
------ --------
<S> <C> <C>
Supplemental disclosures:
Cash paid for interest................................... $ 58 $ 76
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
Common stock issued for services......................... -- 1,250
NOTE 4--BALANCE SHEET COMPONENTS:
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ --------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable...................................... $ 137 $ 8,722
Less: allowance for doubtful accounts.................... -- (819)
------ --------
$ 137 $ 7,903
====== ========
Property and equipment, net:
Computers and equipment.................................. $1,149 $ 6,490
Furniture and fixtures................................... 124 834
Leasehold improvements................................... 74 605
------ --------
1,347 7,929
Less: accumulated depreciation and amortization.......... (263) (1,727)
------ --------
$1,084 $ 6,202
====== ========
Intangible assets, net:
Goodwill................................................. $ -- $ 24,885
Purchased technology..................................... -- 3,610
------ --------
-- 28,495
Less: accumulated amortization........................... -- (9,476)
------ --------
$ -- $ 19,019
====== ========
Accrued expenses:
Marketing costs.......................................... $1,271 $ 1,155
Compensation and benefits................................ 549 1,900
Accrued financing costs.................................. -- 1,450
Legal costs.............................................. -- 466
Other.................................................... 370 3,026
------ --------
$2,190 $ 7,997
====== ========
</TABLE>
F-15
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 5--NOTES PAYABLE:
In January 1996, the Company received $500 in exchange for unsecured
convertible promissory notes. The notes were part of a bridge financing
arrangement associated with the Series A financing, were payable on demand and
bore interest at 6% per annum. The notes were repayable, at the option of the
holder, by the issuance of the Company's Common or Preferred Stock. In
February 1996 in connection with the Series A financing, the holder exercised
its conversion option and the notes were extinguished through the issuance of
500,000 shares of the Company's Common Stock.
On October 6, 1997, the Company entered into a credit facility with a bank
that allows the Company to borrow up to a maximum of $3,000 to finance various
equipment purchases. Advances accrue interest at the bank's prime lending rate
plus 1% (9.5% at December 31, 1997) and are repayable over a thirty-six month
period. As of December 31, 1997, borrowings outstanding under the credit
facility approximated $431. The credit facility is secured by the assets of
the Company and expires on September 29, 2001. In addition, the bank requires
the Company to comply with certain financial covenants relating to
profitability and cash flow ratios; the Company was in compliance with all
covenants at December 31, 1997.
In November 1997, the Company obtained a bridge loan facility from a bank.
Under the terms of the facility the Company borrowed $2,000 (the maximum
amount available), which was secured by substantially all of the Company's
assets. The loan accrued interest at the bank's prime rate plus 1%. On
December 10, 1997, the Company repaid the outstanding amount, plus interest of
$14.
NOTE 6--INCOME TAXES:
No provision for income taxes has been recognized for the years ended
December 31, 1997 and 1996, as the Company incurred net operating losses for
income tax purposes and has no carryback potential.
Deferred tax assets of approximately $17,000 at December 31, 1997, consist
primarily of federal and state net operating loss carryforwards. Based on a
number of factors, including the lack of a history of profits and the fact
that the Company competes in a developing market that is characterized by
rapidly changing technology, management believes that there is sufficient
uncertainty regarding the realization of deferred tax assets such that a full
valuation allowance has been provided.
The Company's various acquisitions have been structured as tax free stock
exchanges, therefore, the differences between the historical bases and the
fair value recognized by the Company, including intangible assets, are not
deductible for income tax purposes.
At December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $42,000 and $26,000, respectively, available to
reduce future taxable income, which expire in varying amounts through 2012.
The Company's ability to utilize net operating loss carryforwards and tax
credits are subject to limitations as set forth in applicable federal and
state tax laws. As specified in the Internal Revenue Code, an ownership change
of more than 50% by a combination of the Company's significant stockholders
during any three-year period would result in certain limitations on the
Company's ability to utilize its net operating loss and credit carryforwards.
NOTE 7--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
At December 31, 1996, a total of 9,329,500 shares of Mandatorily Redeemable
Convertible Preferred Stock were authorized for issuance, of which 6,226,167
and 3,103,333 shares were designated as Series A and Series B, respectively.
In 1996, the Company issued 6,172,833 shares of Series A and 3,103,333 shares
of
F-16
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Series B Mandatorily Redeemable Convertible Preferred Stock ("Series A" and
"Series B") for cash at $1.62 and $2.01 per share, respectively. In 1997, the
Company authorized an additional 3,400,000 shares of Mandatorily Redeemable
Convertible Preferred Stock designated as Series C and issued 2,818,193 shares
of Series C Mandatorily Redeemable Convertible Preferred Stock ("Series C")
for cash at $6.21 per share. Holders of Series A, Series B and Series C were
entitled to receive noncumulative dividends at the annual rate of $0.10, $0.12
and $0.37 per share, respectively, or, if greater (as determined on an as-
converted basis), an amount equal to that paid on the outstanding shares of
Common Stock, when, as and if declared by the Board of Directors. No such
dividends were declared. In the event of liquidation (but not upon a merger,
sale or acquisition of the Company), holders of Series A, Series B and Series
C were entitled to a per share distribution in preference to holders of Common
Stock equal to the original issue price of $1.62, $2.01, and $6.21,
respectively, plus any declared but unpaid dividends. On December 5, 1997, the
Company completed its initial public offering of its Common Stock. At that
time, all of the Company's Mandatorily Redeemable Convertible Preferred Stock
outstanding was converted into an aggregate of 12,094,359 shares of Common
Stock.
NOTE 8--STOCKHOLDERS' EQUITY:
Preferred Stock
The Company is authorized to issue 100,000,000 shares of $.001 par value
Common Stock and 1,000,000 shares of $.001 par value Preferred Stock, and the
Board of Directors has the authority to issue the undesignated Preferred Stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof.
Common Stock
During 1996, 5,000,000 shares of Common Stock were purchased by the
Company's five founders ("the Founders Shares"). In the event that any one of
the founders ceased to be an employee of the Company, the Company had the
right to repurchase ("the Repurchase Right"), at the original purchase price,
a declining percentage of the shares issued. During August 1997, a Company
Founder terminated his employment. In connection with the termination the
Company accelerated the vesting of 111,205 shares of Founder's Stock and
accordingly recognized a charge in the amount of $1,080. Additionally, 349,502
shares of unvested Founder's Stock were repurchased by the Company at their
original issuance price of $.0003 per share. In the event of a change in
control of the Company, the Founders Shares shall become immediately vested in
full and the Repurchase Rights shall lapse.
On September 30, 1997, the Company sold 222,222 shares of Common Stock in a
private transaction to an independent third party in exchange for a note
receivable in the amount of $2,000. On October 14, 1997, the note receivable
was collected in full.
On December 5, 1997, the Company completed its initial public offering of
5,750,000 shares of its Common Stock. Net proceeds to the Company aggregated
approximately $38,309. In addition, the Company sold 1,666,666 shares of
Common Stock to Intel Corporation in a private placement that closed
contemporaneously with the Offering. Net proceeds to the Company aggregated
approximately $9,650. In connection with the discounted sale of Common Stock
to Intel Corporation, the Company recognized a $1,250 non-cash charge that is
included in marketing, sales and support expense.
Warrants
In connection with the lease of its facility in January 1996, the Company
issued warrants to purchase 20,000 shares of Series A at $1.62 per share. Upon
completion of the Company's initial public offering, these
F-17
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
warrants were exchanged for warrants to purchase Common Stock. The fair value
of the warrants was not material on the date of grant. The warrants are
exercisable at any time prior to their expiration in February 2006. No
warrants had been exercised at December 31, 1997.
In connection with a master lease agreement in May 1996, the Company issued
warrants to purchase 33,333 shares of Series A at $1.62 per share. Upon
completion of the Company's initial public offering, these warrants were
exchanged for warrants to purchase Common Stock. The fair value of the
warrants was not material on the date of grant. The warrants are exercisable
at any time prior to their expiration in May 2001. No warrants had been
exercised at December 31, 1997.
In July 1996, the Company issued warrants to purchase 18,055 shares of
Common Stock at $0.90 per share to an individual employed as a consultant to
the Company. The fair value of the warrants was not material on the date of
grant. The warrants are exercisable at any time prior to their expiration in
July 2001. No warrants had been exercised at December 31, 1997.
In December 1996, the Company issued warrants to purchase 33,333 shares of
Common Stock at $3.75 per share to an individual employed as a consultant to
the Company. The fair value of the warrants was not material on the date of
grant. The warrants are exercisable at any time prior to their expiration in
December 2001. No warrants had been exercised at December 31, 1997.
In connection with the issuance of the Series C shares, the Company issued
warrants to purchase a total of 704,549 shares of Series C at $7.50 per share.
Upon completion of the Company's initial public offering, these warrants were
exchanged for warrants to purchase Common Stock. The warrants are exercisable
at any time prior to their expiration in May 2000. Approximately $1,690 of the
proceeds received from the issuance of Series C were allocated to the Series C
warrants. The accretion of the amount allocated to the Series C warrants for
the year ended December 31, 1997 was immaterial. No warrants had been
exercised at December 31, 1997.
NOTE 9--STOCK-BASED COMPENSATION:
At 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........................... $ (2.46) $ (4.78)
Basic and diluted, pro forma............................. (2.45) (4.86)
</TABLE>
F-18
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
STOCK OPTION PLANS
1996 Stock Option Plan
The Company has reserved an aggregate of 600,000 shares of Common Stock for
issuance under its 1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan
provides for grants of options to employees and consultants (including
officers and directors) of the Company, its parent and its subsidiaries.
The exercise price of options granted under the 1996 Plan is determined by
the 1996 Plan Administrator, as defined. With respect to incentive stock
options granted under the 1996 Plan, the exercise price must be at least equal
to the fair market value per share of the Common Stock on the date of grant,
and the exercise price of any incentive stock option granted to a participant
who owns more than 10% of the voting power of all classes of the Company's
outstanding capital stock must be equal to at least 110% of fair market value
of the Common Stock on the date of grant.
Each option outstanding under the 1996 Plan may be exercised in whole or in
part at any time. Exercised but unvested shares are subject to repurchase by
the Company. Options generally vest, assuming continued service by the
optionee as an employee or consultant, at the rate of 25% of the shares
subject to the option on the first anniversary of the commencement of vesting
date and 1/48th of the shares each month thereafter, such that all shares
under the option vest in full four years from the date of commencement of
vesting, assuming continued service as an employee or consultant. Options
outstanding under the 1996 Plan generally have a term of ten years.
1996 Equity Compensation Plan
The Company's 1996 Equity Compensation Plan (the "1996 Equity Plan")
provides for the granting to employees of incentive stock options, and for the
granting to employees and consultants of nonstatutory stock options and stock
purchase rights ("SPRs"). A total of 2,000,000 shares of Common Stock are
currently reserved for issuance pursuant to the 1996 Equity Plan.
The 1996 Equity Plan Administrator, as defined, has the power to determine
the terms of the options or SPRs granted, including the exercise price, the
number of shares subject to each option or SPR, the exercisability thereof,
and the form of consideration payable upon such exercise.
Each option outstanding under the 1996 Equity Plan may be exercised in whole
or in part at any time. Exercised but unvested shares are subject to
repurchase by the Company. Options generally vest, assuming continued service
by the optionee as an employee or consultant, at the rate of 25% of the shares
subject to the option on the first anniversary of the commencement of vesting
date and 1/48th of the shares each month thereafter, such that all shares
under the option vest in full four years from the date of commencement of
vesting, assuming continued service as an employee or consultant. Options
outstanding under the 1996 Equity Plan generally have a term of ten years.
The restricted stock purchase agreement pursuant to which the SPR is
exercised shall grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the purchaser's employment with the
Company for any reason (including death or disability).
The repurchase option shall lapse at a rate determined by the 1996 Equity
Plan Administrator. The exercise price of all incentive stock options granted
under the 1996 Equity Plan must be at least equal to the fair market value of
the Common Stock on the date of grant. The exercise price of nonstatutory
stock options and SPRs granted under the 1996 Equity Plan is determined by the
1996 Equity Plan Administrator, but with
F-19
<PAGE>
USWEB CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
respect to nonstatutory stock options intended to qualify as "performance-
based compensation", the exercise price must at least be equal to the fair
market value of the Common Stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of the Company's outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date and the term of such incentive stock option must not
exceed five years. The term of all other options granted under the 1996 Equity
Plan may not exceed ten years. As of December 31, 1997, no SPRs had been
granted.
1997 Acquisition Stock Option Plan
The Company's 1997 Acquisition Stock Option Plan (the "1997 Plan") provides
for the grant of incentive stock options to employees (including officers and
employee directors) and for the grant of nonstatutory stock options and SPRs
to employees, directors and consultants. A total of 10,000,000 shares of
Common Stock, plus annual increases equal to the lesser of (i) 400,000 shares,
(ii) 5% of the outstanding shares, or (iii) a lesser amount determined by the
Board of Directors, are currently reserved for issuance pursuant to the 1997
Plan.
The 1997 Plan Administrator, as defined, has the power to determine the
terms of the options or SPRs granted, including the exercise price of the
option or SPR, the number of shares subject to each option or SPR, the
exercisability thereof, and the form of consideration payable upon such
exercise.
The restricted stock purchase agreement pursuant to which the SPR is
exercised shall grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the purchaser's employment with the
Company for any reason (including death or disability). The repurchase option
shall lapse at a rate determined by the Administrator.
The exercise price of all incentive stock options granted under the 1997
Plan must be at least equal to the fair market value of the Common Stock on
the date of grant. The exercise price of nonstatutory stock options and SPRs
granted under the 1997 Plan is determined by the 1997 Plan Administrator, but
with respect to nonstatutory stock options intended to qualify as
"performance-based compensation", the exercise price must at least be equal to
the fair market value of the Common Stock on the date of grant. With respect
to any participant who owns stock possessing more than 10% of the voting power
of all classes of the outstanding capital stock of the Company, its parent and
its subsidiaries, the exercise price of any incentive stock option granted
must equal at least 110% of the fair market value on the grant date and the
term of such incentive stock option must not exceed five years. The term of
all other options granted under the 1997 Plan may not exceed ten years. As of
December 31, 1997, no SPRs had been granted.
Fair Value Estimates
For purposes of complying with the disclosure provisions of SFAS No. 123,
prior to the Company's initial public offering in December 1997, the fair
value of each option grant was determined on the date of grant using the
minimum value method. Subsequent to the offering, the fair value was
determined using the Black-Scholes option pricing model. Except for the
volatility assumption, which was only used under the Black-Scholes model, the
following weighted-average assumptions were used for grants during the years
ended December 31, 1996 and 1997, respectively: dividend yield of 0.0% for all
periods; expected volatility of 0.0% and 60.0% for all periods; risk-free
interest rates of 6.1% and 6.0% for the 1996 Plan options, 6.1% and 6.0% for
the 1996 Equity Plan options, and 6.1% and 6.2% for the 1997 Acquisition Plan
options; and expected lives of 4 years for all plans in all periods.
F-20
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
A summary of the status of the Company's three fixed stock option plans as
of December 31, 1996 and 1997, and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1996 1997
------------------------ -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
FIXED STOCK OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------- -------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of period............... -- $ -- 234,833 1.84
Granted.................. 567,500 .83 9,559,746 8.11
Exercised................ (281,000) .10 (103,079) 4.85
Canceled................. (51,667) .22 (199,097) 6.21
-------- ---------
Outstanding at end of pe-
riod.................... 234,833 1.84 9,492,403 8.03
======== =========
Options exercisable at
end of period........... 234,833 2,698,610
======== =========
Weighted-average minimum
and fair values of
options granted during
the period.............. $ .07 $ 1.47
======== =========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$.03.................... 4,688 8.1 years $ .03 4,688 $ .03
$.30.................... 69,167 8.4 years .30 69,167 .30
$.90.................... 29,167 8.7 years .90 29,167 .90
$3.75................... 9,834 8.8 years 3.75 9,834 3.75
$6.75 to $9.75.......... 9,379,547 9.2 years 8.12 2,585,754 8.51
--------- ---------
9,492,403 2,698,610
========= =========
</TABLE>
Acquisition Stock Bonus Plan
During the year ended December 31, 1997, the Company agreed to issue bonuses
contingent on future employment that are payable only in shares of Common
Stock to employees previously employed by Acquired Entities (each a "New
Employee").
Under the agreements, the stock bonuses vest over a thirty-six month period
from the date of first employment by the Company and will be paid at the
conclusion of the vesting period. However, to the extent that a New Employee's
status as an employee is terminated, the New Employee will be entitled only to
the vested portion of the stock bonus and such bonus shall become due and
payable upon such New Employee's termination. The aggregate stock bonus for
awards through December 31, 1997, totaled $62,118, and will be paid in shares
of Common Stock at the fair market value of the Common Stock at the date of
issuance. Stock bonus awards are recognized as compensation expense over the
thirty-six month vesting periods and comprise stock compensation expense in
the accompanying consolidated financial statements.
Employee Stock Purchase Plan
In September 1997, the Board of Directors approved the 1997 Employee Stock
Purchase Plan (the "Purchase Plan"). A total of 1,000,000 shares of Common
Stock have been reserved for issuance under this
F-21
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
plan. Terms of the plan permit eligible employees to purchase Common Stock
through payroll deductions of up to 15% of the employee's compensation.
Amounts deducted and accumulated by the participant are used to purchase
shares of the Company's Common Stock at 85% of the lower of the fair value of
the Common Stock at the beginning or the end of the offering period, as
defined. During the year ended December 31, 1997, the weighted average fair
value of rights granted under the Plan was $2.86 per share. There were no
shares issued under the Purchase Plan during 1997.
NOTE 10--AFFILIATE WARRANT PROGRAM:
In June 1996, the Company adopted the Affiliate Warrant Program (the
"Program") with the intent of attracting new Affiliates to the USWeb network
and to create performance incentives for such Affiliates. Under the Program,
each Affiliate was granted a warrant to purchase a fixed number of shares of
the Company's Common Stock upon execution of the franchise agreement (a
"Signing Warrant") and earns warrants ("AGR Warrants") to purchase additional
shares of Common Stock at the rate of one share of Common Stock per fifty
dollars of Affiliate adjusted gross revenue, as defined. The exercise price of
all warrants issued and issuable to an individual Affiliate was set at the
time of signing of the franchise agreement. Warrants vest 25% after one year
and then ratably each month over the remaining thirty-six month period.
Warrants are exercisable for a maximum period of five years from the effective
date of the Affiliate agreement. Warrants may not be exercised prior to the
earlier of the closing of an initial public offering of the Company's Common
Stock or an acquisition of the Company. A total of 333,333 shares of Common
Stock have been reserved for issuance under the Program. No Signing Warrants
are available for grant after March 31, 1997. However, all Affiliates entering
into an Affiliate agreement prior to of such date will continue to be entitled
to AGR Warrants upon generating qualifying revenues until such time when no
warrants remain available for grant.
During the years ended December 31, 1996 and 1997, the Company issued
Signing Warrants to purchase shares of Common Stock, AGR Warrants to purchase
shares of Common Stock and recognized costs estimated using the Black-Scholes
formula as follows:
<TABLE>
<CAPTION>
DESCRIPTION 1996 1997
----------- -------------- --------------
<S> <C> <C>
Signing Warrants............................... 106,834 shares 4,000 shares
AGR Warrants................................... 17,918 shares 138,532 shares
Estimated cost................................. $167 $150
</TABLE>
NOTE 11--COMMITMENTS AND CONTINGENCIES:
The Company and its subsidiaries lease facilities under non-cancelable
operating leases which expire through 2011. The leases provide for escalating
monthly payments which are being charged to operations ratably over the lease
terms. In addition to the minimum lease payments, the Company is responsible
for property taxes, insurance and certain other operating costs. The Company
also leases certain equipment under long-term lease agreements that are
classified as capital leases. These capital leases terminate at various dates
through January 2002.
F-22
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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-23
<PAGE>
USWEB CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
During the period from January 1, 1997 to November 13, 1997, the Company
recognized the effect of the acquisition of nineteen entities (the "Controlled
Entities") in separate transactions whereby the Company acquired all of the
outstanding stock of nineteen Controlled Entities in exchange for Common Stock
of the Company. The Controlled Entities are as follows:
<TABLE>
<CAPTION>
COMMON RECOGNIZED
CONTROLLED ENTITY (FORMER BUSINESS EFFECTIVE DATE SHARES PURCHASE
NAME) OF CONSOLIDATION ISSUED PRICE
- ---------------------------------- ------------------ --------- ----------
<S> <C> <C> <C>
USWeb San Francisco (XCom Corporation). March 16, 1997 383,209 $ 1,609
USWeb Seattle (Cosmix Corporation)..... April 1, 1997 119,774 503
USWeb Milwaukee (Fetch Interactive,
Inc.)................................. April 1, 1997 464,838 1,397
USWeb LA Metro (NewLink Corporation)... April 1, 1997 425,700 1,537
USWeb Atlanta (InterNetOffice, LLC).... May 1, 1997 510,646 1,578
USWeb Silicon Valley (NetWORKERS
Corporation).......................... May 1, 1997 135,415 569
USWeb DC (Infopreneurs Inc.)........... June 1, 1997 1,008,169 3,173
USWeb Phoenix (Netphaz Corporation).... June 1, 1997 235,205 776
USWeb Pittsburgh (Electronic Images,
Inc.)................................. July 1, 1997 1,665,525 6,205
USWeb Chicago Metro (Multimedia
Marketing & Design, Inc.)............. July 24, 1997 332,536 1,397
USWeb Hollywood (KandH, Inc.).......... August 29, 1997 151,624 1,023
USWeb Hollywood (DreamMedia, Inc.)..... August 29, 1997 359,094 2,424
USWeb Marin (Internet Cybernautics,
Inc.)................................. September 29, 1997 447,183 4,025
USWeb Long Island (Synergetix Systems
Integration, Inc.).................... September 30, 1997 151,716 1,365
USWeb Detroit (Online Marketing
Company).............................. September 30, 1997 95,730 861
USWeb San Mateo (Zendatta, Inc.)....... September 30, 1997 176,360 1,587
USWeb LA Central (W3-design)........... November 5, 1997 410,274 3,473
USWeb Houston (USWeb-Apex, Inc.)....... November 5, 1997 365,029 3,285
USWeb New York Central (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, each 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 identified
net tangible assets consisting primarily of cash, accounts receivable,
property and equipment and accounts payable. The historical carrying amounts
of such assets approximated their fair values. Approximately $9,472 of the
aggregate purchase price was allocated to in-process technology. Because such
in-process technology had not reached the stage of technological feasibility
at the acquisition dates and had no alternative future use, these amounts were
immediately charged to operations. Approximately $3,610 was allocated to
existing technology and is being amortized over its estimated useful life of
six months. The purchase price in excess of identified tangible and intangible
assets in the amount of $24,885 was allocated to goodwill and is being
amortized on an entity by entity basis over its estimated useful life of one
to two years.
F-24
<PAGE>
USWEB CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
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 2,813,193 shares of Series C
Mandatorily Redeemable Convertible Preferred Stock (excluding approximately
$1,690 allocated to detachable warrants to acquire 704,549 shares of Series C
Mandatorily Redeemable Convertible Preferred Stock). For acquisitions from
August 29, 1997 through November 5, 1997, the fair value of the Company's
Common Stock was estimated to be $6.75 to $9.00 per share based upon a number
of factors, including the private sale, in October 1997, of 222,222 shares of
Common Stock to an independent third party for $2,000. The fair values of
purchased existing and in-process technologies were determined by management
using a risk-adjusted income valuation approach.
The various purchase agreements require that fifty percent of the shares
issuable at the acquisition date be placed in escrow for a period of twelve
months. The shares placed in escrow will either by issued to the pervious
owners of the acquired entities or returned to the Company based upon the
results of the purchase price adjustments, as defined for each Controlled
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 Controlled Entity allows for the issuance
of additional stock-based consideration in the event a Controlled 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
presently unknown, 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 as adjustments to goodwill and will be amortized over the
remaining period of expected benefit.
The following unaudited pro forma consolidated statements of operations give
effect to these acquisitions as if they had occurred on January 1, 1997 by
consolidating the results of operations of the Controlled Entities with the
results of operations of USWeb for the year ended December 31, 1997. Certain
of the Controlled Entities have fiscal year ends other than December 31. In
such cases the Company has converted the Controlled, Entity's results of
operations to a December 31 year end or has concluded that converting such
operations to a calendar year basis would not have a material impact on the
accompanying consolidated pro forma results of operations. The pro forma
adjustments include the elimination of all intercompany transactions.
The unaudited pro forma consolidated statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods
presented and should not be construed as being representative of future
operating results.
The historical financial statements of the Company, USWeb San Francisco,
USWeb Milwaukee, USWeb LA Metro, USWeb Atlanta, USWeb DC, USWeb Pittsburgh,
USWeb Chicago Metro, USWeb Hollywood (formerly KandH, Inc.), USWeb Hollywood
(formerly DreamMedia, Inc.), USWeb Marin, USWeb Long Island, USWeb Detroit,
USWeb San Mateo, USWeb LA Central, USWeb Houston and USWeb New York Central
(formerly Reach Networks, Inc.) are included elsewhere in this Prospectus and
the unaudited pro forma consolidated financial information presented herein
should be read in conjunction with those financial statements and related
notes.
F-25
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------
CONSOLI-
DATED
USWEB (A)
CORPORA- CONTROLLED ELIMI- ADJUST-
TION COMPANIES NATION MENTS PRO FORMA
-------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Services............... $ 18,366 $34,919 $(18,366) $ (621)(B) $ 34,298
Other.................. 912 -- -- (398)(B) 514
-------- ------- -------- -------- --------
Total revenues....... 19,278 34,919 (18,366) (1,019) 34,812
-------- ------- -------- -------- --------
Cost of revenues:
Services............... 13,468 22,603 (13,468) (211)(B) 22,392
Other.................. 1,294 -- -- -- 1,294
Stock compensation (1)
...................... 2,420 -- (2,420) 5,048 (C) 5,048
-------- ------- -------- -------- --------
Total cost of reve-
nues................ 17,182 22,603 (15,888) 4,837 28,734
-------- ------- -------- -------- --------
Gross profit............. 2,096 12,316 (2,478) (5,856) 6,078
-------- ------- -------- -------- --------
Operating expenses:
Marketing, sales and
support............... 20,672 8,112 (3,095) -- 25,689
General and administra-
tive.................. 10,271 7,669 (3,919) -- 14,021
Acquired in-process
technology (1) ....... 9,472 -- -- -- 9,472
Stock compensation (1)
...................... 6,698 -- (6,698) 15,768 (C) 15,768
Amortization of intan-
gible assets (1) ..... 9,476 -- (9,476) 22,176 (D) 22,176
-------- ------- -------- -------- --------
Total operating ex-
penses.............. 56,589 15,781 (23,188) 37,944 87,126
-------- ------- -------- -------- --------
Loss from operations..... (54,493) (3,465) 20,710 (43,800) (81,048)
Interest income.......... 233 35 -- -- 268
Interest expense......... (76) (83) -- -- (159)
Impairment of investee
carried at cost......... (4,000) -- -- -- (4,000)
-------- ------- -------- -------- --------
Net loss................. $(58,336) $(3,513) $ 20,710 $(43,800) $(84,939)
======== ======= ======== ======== ========
Pro forma net loss per
share:
Basic and diluted (E).. $ (4.78) $ (4.77)
======== ========
Weighted average shares
outstanding (E)....... 12,193 17,795
======== ========
</TABLE>
- -------------------
(1) Non-cash acquisition-related charges incurred as a result of the Company's
acquisition program. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 1 to Consolidated Financial
Statements.
See accompanying notes to Pro Forma Consolidated Financial Information
F-26
<PAGE>
USWEB CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
(IN THOUSANDS)
The following adjustments were applied to the Company's historical
consolidated financial statements and the Controlled Entities to arrive at the
pro forma consolidated financial information.
(A) To eliminate items of income and expense related to the Controlled
Entities which are included in the consolidated results of operations of
the Company from the date of the respective acquisition to December 31,
1997.
(B) To eliminate intercompany revenues and related expenses associated
with the Controlled Entities which had previously been Affiliates of the
Company.
(C) To record stock compensation expense related to stock bonus awards to
new employees in the amount of $62,118, which is recorded as expense over
the related service period of three years and is allocated between cost of
revenues and operating expenses based upon employee classification.
(D) To record amortization expense related to (i) capitalized technology
in the amount of $3,610, which is amortized over its estimated useful life
of 6 months, and (ii) goodwill in the amount of $24,885, which is amortized
on an entity by entity basis over its estimated useful life of one to two
years.
(E) 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 net loss by the weighted average number of
common shares outstanding during the period. The weighted average shares
outstanding excludes acquisition shares held in escrow which, based on
currently available information, are not probable of issuance and includes
shares which, based upon currently available information, are probable of
issuance at the end of the contingency periods. The computation of diluted
net loss per share excludes Mandatorily Redeemable Convertible Preferred
Stock prior to its conversion date and outstanding stock options and
warrants as their effect 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. Pro forma net loss
per share is computed on the basis described above and giving effect to
amortization of deferred compensation expense related to acquired companies
as if acquired on January 1, 1997.
F-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<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-92
<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-93
<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-94
<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-95
<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-96
<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-97
<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-98
<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-99
<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-100
<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-101
<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-102
<PAGE>
USWEB MARIN
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR 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-103
<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-104
<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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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-111
<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-112
<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-113
<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-114
<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-115
<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-116
<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-117
<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-118
<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-119
<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-120
<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-121
<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-122
<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-123
<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-124
<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-125
<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-126
<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-127
<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-128
<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-129
<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-130
<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-131
<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-132
<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-133
<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-134
<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-135
<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-136
<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-137
<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.
F-138
<PAGE>
USWEB LA CENTRAL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-139
<PAGE>
USWEB LA CENTRAL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
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-140
<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-141
<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-142
<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-143
<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-144
<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-145
<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-146
<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-147
<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-148
<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-149
<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-150
<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-151
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED APRIL 30, JULY 31,
---------------------- -------------------
1996 1997 1996 1997
--------- ----------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net cash flows from operating ac-
tivities
Net loss........................ $(186,237) $(1,617,718) $(77,682) $(179,111)
Adjustments to reconcile net
loss to net cash provided by
operating activities
Product line discontinuance... -- 360,154 -- --
Depreciation and amortization. 254,701 288,077 70,187 29,178
Provision for doubtful ac-
counts....................... 81,036 193,773 -- --
Stock grant compensation...... 10,378 -- -- --
Changes in operating assets
and liabilities
Accounts receivable......... (248,731) 542,152 (224,280) 22,581
Unbilled costs and accrued
earnings................... -- (38,000) -- (73,704)
Deferred taxes.............. 68,756 (1,460) (1,460) --
Other receivables and pre-
payments................... (4,075) 69,025 11,678 (20,250)
Accounts payable............ 610,082 109,775 231,233 120,496
Accrued expenses............ (210,000) 139,107 87,122 12,808
Deferred revenue............ (211,576) 26,667 -- 71,056
Income taxes................ (143,062) -- -- --
Other assets................ 861 438 -- (1,001)
--------- ----------- -------- ---------
Net cash provided by (used in)
operating activities........... 22,133 71,990 96,798 (17,947)
--------- ----------- -------- ---------
Cash flows from investing activi-
ties
Capital expenditures............ (406,915) (109,210) (19,174) 1,692
Purchase of investment.......... (25,000) -- -- --
--------- ----------- -------- ---------
Net cash used in investing ac-
tivities....................... (431,915) (109,210) (19,174) 1,692
--------- ----------- -------- ---------
Cash flows from financing activi-
ties
Net increase (decrease) in
borrowings from stockholders... 170,109 391 (42,165) 21,820
--------- ----------- -------- ---------
Net cash provided by (used in)
financing activities........... 170,109 391 (42,165) 21,820
--------- ----------- -------- ---------
Net increase (decrease) in cash
and cash equivalents............. (239,673) (36,829) 35,459 5,565
Cash and cash equivalents, begin-
ning of period................... 279,833 40,160 40,160 3,331
--------- ----------- -------- ---------
Cash and cash equivalents, end of
period........................... $ 40,160 $ 3,331 $ 75,619 $ 8,896
========= =========== ======== =========
Cash paid during the period for:
Interest........................ $ -- $ 6,394 $ -- $ --
========= =========== ======== =========
Income taxes.................... $ 33,240 $ 267 $ 267 $ --
========= =========== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-152
<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-153
<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-154
<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-155
<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-156
<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-157
<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-158
<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-159
<PAGE>
USWEB INTERNET STRATEGY
AND SOLUTIONS CENTER
At this center USWeb has assembled core expertise across a wide range of
technical, communications and media disciplines. This team envisions the future
of the Internet and its impact on business, acquires and organizes knowledge
gained from USWeb's practices around the world and creates core systems,
strategies and ideas for USWeb practices and clients. Emerging from this center
are the tools and programs that enable USWeb to scale its operations.
1. SOLUTIONS LIBRARY
Partially pre-built Internet
solutions targeted at specific
vertical markets and
business functions.
2. PROJECT REGISTRY
A comprehensive database of client engagements.
3. SITECAST
Internet live seminar
broadcasts on how businesses can use Internet
technologies to improve business processes.
4. EXECUTIVE BRIEFINGS
Executive seminars,
solutions demonstrations and discussions
regarding innovative Internet
technologies.
5. TECHNOLOGY LIBRARY
Proprietary reusable
software and content
objects.
[LOGO OF USWEB]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPEC-
TUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RE-
LIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. EXCEPT WHERE OTHERWISE INDI-
CATED, THIS PROSPECTUS SPEAKS AS OF THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................................................... 3
Risk Factors........................................................... 8
Forward-Looking Statements............................................. 16
Use of Proceeds........................................................ 17
Dividend Policy........................................................ 17
Price Range of Common Stock............................................ 17
Capitalization......................................................... 18
Dilution............................................................... 19
Selected Consolidated Financial Data................................... 20
Pro Forma Selected Consolidated Financial Data......................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 24
Business............................................................... 33
Management............................................................. 47
Certain Transactions................................................... 57
Principal and Selling Stockholders..................................... 59
Description of Capital Stock........................................... 61
Shares Eligible for Future Sale........................................ 64
Underwriting........................................................... 66
Legal Matters.......................................................... 67
Experts................................................................ 67
Available Information.................................................. 68
Index to Consolidated Financial Statements and Pro Forma Financial
Information........................................................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,000,000 SHARES
[LOGO OF USWEB]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
WESSELS, ARNOLD & HENDERSON
FIRST ALBANY CORPORATION
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
--------
<S> <C>
Registration Fee...................................................... $ 31,805
NASD Fee.............................................................. 10,782
Nasdaq National Market listing fee.................................... 17,500
Printing and Engraving................................................ 200,000
Legal Fees and Expenses............................................... 160,000
Accounting Fees and Expenses.......................................... 240,000
Blue Sky Fees and Expenses............................................ 7,500
Transfer Agent Fees................................................... 10,000
Miscellaneous......................................................... 22,413
--------
Total............................................................... $700,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to the Certificate of Incorporation of the Registrant; the
Bylaws of the Registrant; Section 145 of the Delaware General Corporation Law;
and the form of indemnification agreement filed herewith as Exhibit 10.1
which, among other things, and subject to certain conditions, authorize the
Registrant to indemnify, or indemnify by their terms, as the case may be, the
directors and officers of the Registrant against certain liabilities and
expenses incurred by such persons in connection with claims made by reason of
their being such a director or officer.
The form of the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides for indemnification by the Underwriters and
their controlling persons, on the one hand, and of the Registrant and its
controlling persons on the other hand, for certain liabilities arising under
the Securities Act of 1933, as amended (the "Act"), the Securities Exchange
Act of 1934, as amended or otherwise.
The Registrant maintains director's and officer's insurance providing
indemnification for certain of the Registrant's directors, officers,
affiliates, partners or employees for certain liabilities.
The indemnification provisions in the Bylaws, and the indemnification
agreements entered into between the Registrant and its directors and executive
officers, may be sufficiently broad to permit indemnification of the
Registrant's officers and directors for liabilities arising under the 1933
Act.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- -------
<S> <C>
Form of Underwriting Agreement......................................... 1.1
Amended and Restated Certificate of Incorporation...................... 3.1
Bylaws of Registrant................................................... 3.2
Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.......................... 10.1
</TABLE>
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since the Registrant's inception on December 6, 1995, the Registrant has
sold and issued the following securities:
1. In December 1995, the Registrant issued and sold an aggregate of
5,000,000 shares of Common Stock to its founders for an aggregate of
$5,000 pursuant to Restricted Stock Purchase Agreements in reliance on
the exemption from registration provided by Section 4(2) of the
Securities Act.
2. During the period from December 6, 1995 through November 24, 1997, the
Registrant granted options to purchase an aggregate of 541,667 shares of
Common Stock (options for 116,188 of which are outstanding) to 57
directors, employees and consultants pursuant to the Registrant's 1996
Stock Option Plan in reliance on Rule 701 promulgated under the
Securities Act.
3. During the period from December 6, 1995 through November 24, 1997, the
Registrant granted options to purchase an aggregate of 1,572,054 shares
of Common Stock (options for 1,532,087 of which are outstanding) to 241
directors, employees and consultants pursuant to the Registrant's 1996
Equity Compensation Plan in reliance on Rule 701 promulgated under the
Securities Act.
4. During the period from December 6, 1995 through November 24, 1997, the
Registrant granted options to purchase an aggregate of 7,949,681 shares
of Common Stock (all of which are outstanding) to 306 directors,
employees and consultants pursuant to the Registrant's 1997 Acquisition
Stock Option Plan in reliance on Rule 701 promulgated under the
Securities Act or in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act.
5. During the period from December 6, 1995 through September 30, 1997, the
Registrant granted warrants to purchase an aggregate of 223,536 shares
of Common Stock (warrants for 223,536 of which are outstanding) to 144
Affiliates pursuant to the Registrant's Affiliate Warrant Program in
reliance on Rule 701 promulgated under the Securities Act.
6. On February 20, 1996, the Registrant issued and sold 6,172,833 shares of
Series A Preferred Stock in a private placement to Crosspoint Venture
Partners (1996), The Cutler Group and SOFTBANK Holdings Inc. for
aggregate consideration of $10,000,008 in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act.
7. On December 30, 1996, the Registrant issued and sold 3,103,333 shares of
Series B Preferred Stock in a private placement to SOFTBANK Holdings,
Inc. for aggregate consideration of $6,250,000 in reliance on the
exemption from registration provided by Section 4(2) of the Securities
Act.
8. On May 2, May 28 and June 3, 1997, the Registrant issued and sold an
aggregate of 2,818,193 shares of Series C Preferred Stock and warrants
to purchase 704,549 shares of Series C Preferred Stock in a private
placement to 16 investors for aggregate consideration of $17,500,981 in
reliance on the exemption from registration provided by Section 4(2) of
the Securities Act.
9. During the period from February 9, 1996 through July 10, 1997, the
Registrant issued warrants to purchase an aggregate of 53,333 shares of
Series A Preferred Stock at an exercise price of $1.62 per share to 6
individuals in connection with a real estate lease agreement. The
warrants expire, if not earlier exercised, ten years from their date of
issuance. Issuance of the warrants to purchase Series A Preferred Stock
was made in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act.
10. On July 19, 1996 the Registrant issued a warrant to purchase up to
18,055 shares of Common Stock at an exercise price of $0.90 per share
to 1 individual in connection with a consulting agreement. The warrant
expires, if not earlier exercised, on July 18, 2001. Issuance of the
warrant to purchase Common Stock was made in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act.
11. On December 4, 1996 the Registrant issued a warrant to purchase up to
33,333 shares of Common Stock at an exercise price of $3.75 per share
to 1 individual in connection with a consulting agreement. The warrant
expires, if not earlier exercised, on December 3, 2001. Issuance of the
II-2
<PAGE>
warrant to purchase Common Stock was made in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act.
12. On May 2, May 28 and June 3, 1997, the Registrant issued warrants to
purchase an aggregate of 704,549 shares of Series C Preferred Stock at
an exercise price of $7.50 per share to the investors who participated
in the Series C Preferred Stock private placement. The warrants expire,
if not earlier exercised, no later than May 2, May 28 and June 3, 2000,
respectively. Issuance of warrants to purchase Series C Preferred Stock
was made in reliance on Section 4(2) of the Securities Act.
13. On July 24, 1997, the Registrant issued and sold 464,838 shares of
Common Stock in a private placement to 1 investor in connection with
the acquisition of Fetch Interactive, Inc. This issuance of Common
Stock was made in reliance on Section 4(2) of the Securities Act.
14. On June 26, 1997, the Registrant issued and sold 119,774 shares of
Common Stock in a private placement to 24 investors in connection with
the acquisition of USWeb Cosmix, Inc. This issuance of Common Stock was
made in reliance on Section 4(2) of the Securities Act.
15. On August 19, 1997 the Registrant issued and sold 135,415 shares of
Common Stock in a private placement to 4 investors in connection with
the acquisition of Networkers Web Consulting Incorporated. This
issuance of Common Stock was made in reliance on Section 4(2) of the
Securities Act.
16. On August 22, 1997, the Registrant issued and sold 425,700 shares of
Common Stock in a private placement to 3 investors in connection with
the acquisition of NewLink Communications Corporation. This issuance of
Common Stock was made in reliance on Section 4(2) of the Securities
Act.
17. On August 25, 1997, the Registrant issued and sold 510,646 shares of
Common Stock in a private placement to 15 investors in connection with
the acquisition of InterNetOffice, LLC. This issuance of Common Stock
was made in reliance on Section 4(2) of the Securities Act.
18. On September 2, 1997, the Registrant issued and sold 1,665,525 shares
of Common Stock in a private placement to 4 investors in connection
with the acquisition of Electronic Images, Inc. This issuance of Common
Stock was made in reliance on Section 4(2) of the Securities Act.
19. On September 4, 1997, the Registrant issued and sold 332,536 shares of
Common Stock in a private placement to 1 investor in connection with
the acquisition of Multimedia Marketing & Design Inc. This issuance was
made in reliance on Section 4(2) of the Securities Act.
20. On October 6, 1997, the Registrant sold 95,730 shares of Common Stock
in a private placement to 3 investors in connection with the
acquisition of Online Marketing Company. This issuance was made in
reliance on Section 4(2) of the Securities Act.
21. Pursuant to an agreement executed on September 30, 1997, on October 2,
1997, the Registrant issued 1,008,169 shares of Common Stock in a
private placement to 10 investors in connection with the acquisition of
Infopreneurs, Inc. This issuance was made in reliance on Section 4(2)
of the Securities Act.
22. Pursuant to an agreement executed on September 29, 1997, on October 8,
1997, the Registrant issued 235,205 shares of Common Stock in a private
placement to 11 investors in connection with the acquisition of
NETPHAZ, L.L.C. This issuance was made in reliance on Section 4(2) of
the Securities Act.
23. Pursuant to an agreement executed on September 30, 1997, on October 10,
1997, the Registrant issued 447,183 shares of Common Stock in a private
placement to 47 investors in connection with the acquisition of
Internet Cybernautics, Inc. This issuance was made in reliance on Rule
506 promulgated under the Securities Act.
24. Pursuant to an agreement executed on September 30, 1997, on October 10,
1997, the Registrant issued 222,222 shares of Common Stock in a private
placement to one accredited investor, for
II-3
<PAGE>
aggregate consideration of $2,000,000. This issuance of Common Stock was
made in reliance on Section 4(2) of the Securities Act.
25. As of September 30, 1997, the Registrant had issued an aggregate of
317,077 shares of Common Stock pursuant to the exercise of options
issued under the 1996 Equity Compensation Plan in reliance on Rule 701
promulgated under the Securities Act.
26. During the period from December 1, 1996 through January 24, 1997, the
Registrant issued an aggregate of 533,333 shares of Common Stock in a
private placement to Storie Partners for aggregate consideration of
$2,000,000 in reliance on an exemption from registration provided by
Section 4(2) of the Securities Act.
27. Pursuant to an agreement executed on October 10, 1997, on November 10,
1997, the Registrant issued 410,273 shares of Common Stock in a private
placement to four investors in connection with the acquisition of W3-
design. This issuance was made in reliance on Section 3(a)(10) of the
Securities Act.
28. Pursuant to an agreement executed on October 29, 1997, on November 7,
1997, the Registrant issued 365,028 shares of Common Stock in a private
placement to one investor in connection with the acquisition of USWeb-
Apex, Inc. This issuance was made in reliance on Section 3(a)(10) of
the Securities Act.
29. Pursuant to an agreement executed on October 29, 1997, on November 13,
1997, the Registrant issued 511,656 shares of Common Stock in a private
placement to 26 investors in connection with the acquisition of USWeb
New York Central. This issuance was made in reliance on Section
3(a)(10) of the Securities Act.
30. On January 22, 1998, the Registrant issued 42,237 shares of Common
Stock in a private placement to one corporation in connection with a
strategic relationship. This issuance was made in reliance on Section
4(2) of the Securities Act.
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
2.1+ Agreement and Plan of Reorganization dated as of March 16, 1997 by and
among the Registrant, USWeb Acquisition Corporation 101 and XCom Corpo-
ration.
2.2+ Agreement and Plan of Reorganization dated as of March 31, 1997 by and
among the Registrant, USWeb Acquisition Corporation 103 and Fetch Inter-
active, Inc.
2.3+ Agreement and Plan of Reorganization dated as of March 31, 1997 by and
among the Registrant, USWeb Acquisition Corporation 106 and Newlink Com-
munications Corporation.
2.4+ Agreement and Plan of Reorganization dated as of April 30, 1997 by and
among the Registrant, USWeb Acquisition Corporation 107 and
InterNetOffice, LLC.
2.5+ Agreement and Plan of Reorganization dated as of March 31, 1997 by and
among the Registrant, USWeb Acquisition Corporation 102 and Infopreneurs
Inc.
2.6+ Agreement and Plan of Reorganization dated as of August 28, 1997 by and
among the Registrant, USWeb Acquisition Corporation 108 and Electronic
Images, Inc.
2.7+ Agreement and Plan of Reorganization dated as of July 1, 1997 by and
among the Registrant, USWeb Acquisition Corporation 110 and Multimedia
Marketing & Design Inc.
2.8+ Agreement and Plan of Reorganization dated as of August 29, 1997 by and
among the Registrant, USWeb Acquisition Corporation 111 and KandH., Inc.
2.9+ Agreement and Plan of Reorganization dated as of August 29, 1997 by and
among the Registrant, USWeb Acquisition Corporation 111 and DreamMedia,
Inc.
2.10+ Agreement and Plan of Reorganization dated as of September 26, 1997 by
and among the Registrant, USWeb Acquisition Corporation 113 and Internet
Cybernautics, Inc.
2.11+ Agreement and Plan of Reorganization dated as of July 31, 1997 by and
among the Registrant, USWeb Acquisition Corporation 114 and Synergetic
Systems Integration, Inc.
2.12+ Agreement and Plan of Reorganization dated as of September 30, 1997 by
and among the Registrant, USWeb Acquisition Corporation 119 and Online
Marketing Company.
2.13+ Agreement and Plan of Reorganization dated as of September 30, 1997 by
and among the Registrant, USWeb Acquisition Corporation 117 and
Zendatta, Inc.
2.14+ Agreement and Plan of Reorganization dated as of October 10, 1997 by and
among the Registrant, USWeb Acquisition Corporation 118 and W3-design.
2.15+ Agreement and Plan of Reorganization dated as of October 29, 1997 by and
among the Registrant, USWeb Acquisition Corporation 122 and USWeb-Apex,
Inc.
2.16+ Agreement and Plan of Reorganization dated as of October 24, 1997 by and
among the Registrant, USWeb Acquisition Corporation 112 and Reach Net-
works, Inc.
3.1+ Amended and Restated Certificate of Incorporation of the Registrant.
3.2+ Bylaws of the Registrant.
4.1+ Form of Registrant's Common Stock Certificate.
4.2+ Amended and Restated Investors' Rights Agreement dated May 2, 1997 among
the Registrant and the other parties named therein.
4.3+ Form of Registrant's Series A Preferred Stock Purchase Warrant.
4.4+ Form of Registrant's Series C Preferred Stock Purchase Warrant.
4.5+ Form of Registrant's Common Stock Purchase Warrant.
4.6+ Form of Registrant's Signing Warrant.
4.7+ Form of Registrant's AGR Warrant.
4.8+ Form of Amended and Restated Investor Rights Agreement dated November 7,
1997 among the Registrant and the other parties named therein.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
5.1* Opinion of Wilson Sonsini Goodrich & Rosati regarding legality of se-
curities being issued.
10.1+ Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.
10.2+ 1996 Stock Option Plan and related agreements.
10.3+ 1996 Equity Compensation Plan and related agreements.
10.4+ 1997 Acquisition Stock Option Plan and related agreements.
10.5+ 1997 Employee Stock Purchase Plan.
10.6+ Form of Restricted Stock Purchase Agreement between the Registrant and
certain executive officers.
10.7+ Management Continuity Agreement between the Registrant and Joseph P.
Firmage.
10.8+ Management Continuity Agreement between the Registrant and Tobin Co-
rey.
10.9+ Management Continuity Agreement between the Registrant and Sheldon
Laube.
10.10+ Management Continuity Agreement between the Registrant and James J.
Heffernan.
10.11+ Form of Affiliate Agreement.
10.12+ Loan and Security Agreement dated September 29, 1997 between the Reg-
istrant and Silicon Valley Bank.
10.13+ Amendment, dated November 5, 1997 to Loan and Security Agreement dated
September 29, 1997 between the Registrant and Silicon Valley Bank.
10.14+ Intel-USWeb Relationship Agreement dated as of November 7, 1997 be-
tween the Registrant and Intel Corporation.
10.15** Lease Agreement dated December 16, 1996 by and between the Company and
LAKESIDE DRIVE, INC. for 2880 Lakeside Drive, Santa Clara, CA 95054.
10.16** First Amendment to Lease Agreement dated July 23, 1997 by and between
the Company and LAKESIDE DRIVE, INC. for 2880 Lakeside Drive, Santa
Clara, CA 95054.
11.1 Statement of calculation of net loss per share.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
23.2 Consent of Price Waterhouse LLP, Independent Accountants (see page II-
9).
24.1 Power of Attorney (see page II-8).
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
+ Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 333-36827).
* To be filed by amendment.
** Incorporated by reference from the Company's Registration Statement on Form
S-4 (No. 333-38351).
II-6
<PAGE>
(b) Financial Statement Schedules
None.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions referenced in Item 14 of this Registration
Statement or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus 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.
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SANTA
CLARA, STATE OF CALIFORNIA, ON THIS 24TH DAY OF FEBRUARY 1998.
USWEB CORPORATION
/s/ James Heffernan
By: __________________________________
JAMES HEFFERNAN
EXECUTIVE VICE PRESIDENT, CHIEF
FINANCIAL OFFICER, SECRETARY AND
DIRECTOR
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joseph P. Firmage and James J. Heffernan his
attorney-in-fact for him in any and all capacities, to sign any amendments to
this Registration Statement, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact, or
his substitute, may do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURES TITLE DATE
/s/ Joseph Firmage Chairman of the February 24, 1998
- ------------------------------------ Board and Chief
JOSEPH FIRMAGE Executive Officer
(Principal
Executive Officer)
/s/ James Heffernan Executive Vice February 24, 1998
- ------------------------------------ President, Chief
JAMES HEFFERNAN Financial Officer,
Secretary and
Director
(Principal
Financial and
Accounting
Officer)
/s/ Jeffrey Ballowe Director February 24, 1998
- ------------------------------------
JEFFREY BALLOWE
/s/ Robert Hoff Director February 24, 1998
- ------------------------------------
ROBERT HOFF
/s/ Gary Rieschel Director February 24, 1998
- ------------------------------------
GARY RIESCHEL
/s/ Barry Rubenstein Director February 24, 1998
- ------------------------------------
BARRY RUBENSTEIN
II-8
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports dated January 20, 1998,
relating to the consolidated financial statements of USWeb Corporation,
September 17, 1997 related to the financial statements of USWeb San Francisco,
September 12, 1997 related to the financial statements of USWeb Milwaukee,
September 17, 1997 related to the financial statements of USWeb LA Metro,
September 18, 1997 related to the financial statements of USWeb Atlanta,
September 18, 1997 related to the financial statements of USWeb DC,
September 18, 1997 related to the financial statements of USWeb Pittsburgh,
October 31, 1997 related to the financial statements of USWeb Chicago Metro,
October 31, 1997 related to the financial statements of USWeb Hollywood
(formerly KandH, Inc.), October 29, 1997 related to the financial statements
of USWeb Hollywood (formerly DreamMedia, Inc.), October 17, 1997 related to
the financial statements of USWeb Marin, October 31, 1997 related to the
financial statements of USWeb Long Island, October 24, 1997 related to the
financial statements of USWeb Detroit, October 15, 1997 related to the
financial statements of USWeb San Mateo, October 31, 1997 related to the
financial statements of USWeb LA Central, November 4, 1997 related to the
financial statements of USWeb Houston, November 5, 1997 related to the
financial statements of USWeb New York Central (formerly Reach Networks,
Inc.), which appear in such Prospectus. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
Price Waterhouse LLP
San Jose, California
February 20, 1998
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
1.1* Form of Underwriting Agreement.
2.1+ Agreement and Plan of Reorganization dated as of March
16, 1997 by and among the Registrant, USWeb Acquisition
Corporation 101 and XCom Corporation.
2.2+ Agreement and Plan of Reorganization dated as of March
31, 1997 by and among the Registrant, USWeb Acquisition
Corporation 103 and Fetch Interactive, Inc.
2.3+ Agreement and Plan of Reorganization dated as of March
31, 1997 by and among the Registrant, USWeb Acquisition
Corporation 106 and Newlink Communications Corporation.
2.4+ Agreement and Plan of Reorganization dated as of April
30, 1997 by and among the Registrant, USWeb Acquisition
Corporation 107 and InterNetOffice, LLC.
2.5+ Agreement and Plan of Reorganization dated as of March
31, 1997 by and among the Registrant, USWeb Acquisition
Corporation 102 and Infopreneurs Inc.
2.6+ Agreement and Plan of Reorganization dated as of August
28, 1997 by and among the Registrant, USWeb Acquisition
Corporation 108 and Electronic Images, Inc.
2.7+ Agreement and Plan of Reorganization dated as of July 1,
1997 by and among the Registrant, USWeb Acquisition Cor-
poration 110 and Multimedia Marketing & Design Inc.
2.8+ Agreement and Plan of Reorganization dated as of August
29, 1997 by and among the Registrant, USWeb Acquisition
Corporation 111 and KandH., Inc.
2.9+ Agreement and Plan of Reorganization dated as of August
29, 1997 by and among the Registrant, USWeb Acquisition
Corporation 111 and DreamMedia, Inc.
2.10+ Agreement and Plan of Reorganization dated as of Septem-
ber 26, 1997 by and among the Registrant, USWeb Acquisi-
tion Corporation 113 and Internet Cybernautics, Inc.
2.11+ Agreement and Plan of Reorganization dated as of July 31,
1997 by and among the Registrant, USWeb Acquisition Cor-
poration 114 and Synergetic Systems Integration, Inc.
2.12+ Agreement and Plan of Reorganization dated as of Septem-
ber 30, 1997 by and among the Registrant, USWeb Acquisi-
tion Corporation 119 and Online Marketing Company.
2.13+ Agreement and Plan of Reorganization dated as of Septem-
ber 30, 1997 by and among the Registrant, USWeb Acquisi-
tion Corporation 117 and Zendatta, Inc.
2.14+ Agreement and Plan of Reorganization dated as of October
10, 1997 by and among the Registrant, USWeb Acquisition
Corporation 118 and W3-design.
2.15+ Agreement and Plan of Reorganization dated as of October
29, 1997 by and among the Registrant, USWeb Acquisition
Corporation 122 and USWeb-Apex, Inc.
2.16+ Agreement and Plan of Reorganization dated as of October
24, 1997 by and among the Registrant, USWeb Acquisition
Corporation 112 and Reach Networks, Inc.
3.1+ Amended and Restated Certificate of Incorporation of the
Registrant.
3.2+ Bylaws of the Registrant.
4.1+ Form of Registrant's Common Stock Certificate.
4.2+ Amended and Restated Investors' Rights Agreement dated
May 2, 1997 among the Registrant and the other parties
named therein.
4.3+ Form of Registrant's Series A Preferred Stock Purchase
Warrant.
4.4+ Form of Registrant's Series C Preferred Stock Purchase
Warrant.
4.5+ Form of Registrant's Common Stock Purchase Warrant.
</TABLE>
<PAGE>
EXHIBIT INDEX--(CONTINUED)
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
4.6+ Form of Registrant's Signing Warrant.
4.7+ Form of Registrant's AGR Warrant.
4.8+ Form of Amended and Restated Investor Rights Agreement
dated November 7, 1997 among the Registrant and the other
parties named therein.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati regarding le-
gality of securities being issued.
10.1+ Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive offi-
cers.
10.2+ 1996 Stock Option Plan and related agreements.
10.3+ 1996 Equity Compensation Plan and related agreements.
10.4+ 1997 Acquisition Stock Option Plan and related agree-
ments.
10.5+ 1997 Employee Stock Purchase Plan.
10.6+ Form of Restricted Stock Purchase Agreement between the
Registrant and certain executive officers.
10.7+ Management Continuity Agreement between the Registrant
and Joseph P. Firmage.
10.8+ Management Continuity Agreement between the Registrant
and Tobin Corey.
10.9+ Management Continuity Agreement between the Registrant
and Sheldon Laube.
10.10+ Management Continuity Agreement between the Registrant
and James J. Heffernan.
10.11+ Form of Affiliate Agreement.
10.12+ Loan and Security Agreement dated September 29, 1997 be-
tween the Registrant and Silicon Valley Bank.
10.13+ Amendment, dated November 5, 1997 to Loan and Security
Agreement dated September 29, 1997 between the Registrant
and Silicon Valley Bank.
10.14+ Intel-USWeb Relationship Agreement dated as of November
7, 1997 between the Registrant and Intel Corporation.
10.15** Lease Agreement dated December 16, 1996 by and between
the Company and LAKESIDE DRIVE, INC. for 2880 Lakeside
Drive, Santa Clara, CA 95054.
10.16** First Amendment to Lease Agreement dated July 23, 1997 by
and between the Company and LAKESIDE DRIVE, INC. for 2880
Lakeside Drive, Santa Clara, CA 95054.
11.1 Statement of calculation of net loss per share.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati (included in
Exhibit 5.1).
23.2 Consent of Price Waterhouse LLP, Independent Accountants
(see page II-9).
24.1 Power of Attorney (see page II-8).
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
+ Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 333-36827).
*To be filed by amendment.
** Incorporated by reference from the Company's Registration Statement on Form
S-4 (No. 333-38351).
<PAGE>
EXHIBIT 11.1
USWEB CORPORATION
CALCULATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
HISTORICAL (1) PRO FORMA (2)
------------------ -------------
YEAR ENDED
DECEMBER 31, YEAR ENDED
------------------ DECEMBER 31,
1996 1997 1997
-------- -------- -------------
<S> <C> <C> <C>
Net loss.................................... $(13,808) $(58,336) $(84,939)
-------- -------- --------
Weighted average common shares outstanding.. 5,620 11,547 15,719
Add: Common shares probable of issuance at
the end of contingency periods based upon
earn-out criteria.......................... -- 162 418
Shares deemed outstanding under stock bonus
arrangements for employees of acquired com-
panies..................................... -- 484 1,658
-------- -------- --------
Total weighted average common shares out-
standing................................... 5,620 12,193 17,795
======== ======== ========
Basic and diluted net loss per share........ $ (2.46) $ (4.78) $ (4.77)
======== ======== ========
</TABLE>
- ---------------------
(1) 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 net loss by the weighted average number of common
shares outstanding during the period. The weighted average shares
outstanding excludes acquisition shares held in escrow that, based on
currently available information, are not probable of issuance and includes
shares which, based upon currently available information, are probable of
issuance at the end of the contingency periods. The computation of Diluted
net loss per share excludes Mandatorily Redeemable Convertible Preferred
Stock prior to its conversion date and outstanding stock options and
warrants as their effect 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) Pro forma net loss per share is computed on the basis described in (1)
above and giving effect to amortization of deferred compensation expense
related to acquired companies as if acquired on January 1, 1997.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
USWeb Acquisition Corporation 101
USWeb Acquisition Corporation 102
USWeb Milwaukee Corporation
USWeb Seattle Corporation
USWeb Silicon Valley Corporation
USWeb Acquisition Corporation 106
USWeb Atlanta Corporation
USWeb Pittsburgh Corporation
USWeb Phoenix Corporation
USWeb Chicago Corporation
USWeb Acquisition Corporation 111
USWeb Acquisition Corporation 112
USWeb Marin Corporation
USWeb Acquisition Corporation 114
USWeb Acquisition Corporation 115
USWeb Acquisition Corporation 116
USWeb Active Solutions Practice Corporation
USWeb Acquisition Corporation 118
USWeb Detroit Corporation
USWeb Acquisition Corporation 120
USWeb Acquisition Corporation 121
USWeb Houston Corporation
USWeb Acquisition Corporation 123
USWeb Acquisition Corporation 124
Ophelia 97 Vermogensverwaltungs GmbH
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 44,145 3,220
<SECURITIES> 0 0
<RECEIVABLES> 8,722 137
<ALLOWANCES> 819 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 52,705 3,411
<PP&E> 7,929 1,347
<DEPRECIATION> 1,727 263
<TOTAL-ASSETS> 79,250 7,482
<CURRENT-LIABILITIES> 12,189 3,338
<BONDS> 0 0
0 16,200
0 0
<COMMON> 29 2
<OTHER-SE> 66,660 (12,494)
<TOTAL-LIABILITY-AND-EQUITY> 79,250 7,482
<SALES> 0 0
<TOTAL-REVENUES> 19,278 1,820
<CGS> 0 0
<TOTAL-COSTS> 17,182 208
<OTHER-EXPENSES> 56,589 15,577
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 76 58
<INCOME-PRETAX> (58,336) (13,808)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (58,336) (13,808)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (58,336) (13,808)
<EPS-PRIMARY> (4.78) (2.46)
<EPS-DILUTED> (4.78) (2.46)
</TABLE>
