<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Date of Report (date of earliest event reported): September 3, 1999
USWEB CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 000-23151 87-0551650
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer Identification
Incorporation or organization) Number)
</TABLE>
410 TOWNSEND STREET
SAN FRANCISCO, CA 94107
(Address of principal executive offices including Zip Code)
(415) 369-6700
(Registrant's telephone number, including area code)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On September 3, 1999, USWeb Corporation, a Delaware corporation (the
"Company"), completed the acquisition of substantially all of assets of
Mitchell Madison Group. Further details are contained in the Company's press
release dated September 7, 1999, attached as an exhibit hereto and
incorporated by reference herein.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
Report of Independent Accountants
To the Members of
Mitchell Madison Group LLC
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of cash flows and of invested capital present
fairly, in all material respects, the financial position of Mitchell Madison
Group, as defined in Note 1 to the financial statements (the "Company"), at
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
September 1, 1999
<PAGE>
MITCHELL MADISON GROUP
COMBINED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------- June 30,
1997 1998 1999
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 10,566 $ 18,328 $ 7,025
Accounts receivable, net of allowance of $52, $1,464
and $2,315 (unaudited), respectively 26,123 30,755 29,206
Prepaid expenses and other current assets 3,979 5,291 4,606
-------- -------- --------
Total current assets 40,668 54,374 40,837
Property and equipment, net 4,264 6,362 6,884
Goodwill, net of accumulated amortization of $429, $664
and $788 (unaudited), respectively 2,782 2,547 2,423
Other non-current assets 1,724 1,180 1,710
-------- -------- --------
$ 49,438 $ 64,463 $ 51,854
======== ======== ========
LIABILITIES AND INVESTED CAPITAL
Current Liabilities:
Accounts payable $ 4,652 $ 8,690 $ 5,916
Accrued expenses 21,578 24,019 22,014
Deferred revenue - 2,220 1,045
Income taxes payable 2,296 6,356 6,105
Lease obligation, current 312 117 91
Current portion of long-term debt 460 2,109 2,124
-------- -------- --------
Total current liabilities 29,298 43,511 37,295
Long-term debt 250 4,088 9,030
Lease obligation, non-current 92 160 144
Minority interest (34) (146) (289)
-------- -------- --------
Total liabilities 29,606 47,613 46,180
Commitments and contingencies
Invested capital 19,832 16,850 5,674
-------- -------- --------
$ 49,438 $ 64,463 $ 51,854
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
<PAGE>
MITCHELL MADISON GROUP
COMBINED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
------------------------------------- -------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Consulting fee revenues $ 87,589 $141,692 $ 180,883 $ 83,980 $ 82,406
Cost of consulting services 42,335 91,850 122,963 57,929 63,318
-------- -------- --------- -------- --------
Gross profit 45,254 49,842 57,920 26,051 19,088
-------- -------- --------- -------- --------
Operating expenses:
Marketing sales and support 10,412 15,798 20,257 9,204 7,427
General and administrative 29,191 36,170 44,933 18,440 20,350
Amortization of intangibles 147 222 235 175 124
-------- -------- --------- -------- --------
Total operating expenses 39,750 52,190 65,425 27,819 27,901
-------- -------- --------- -------- --------
Income (loss) from operations 5,504 (2,348) (7,505) (1,768) (8,813)
Interest and other income (expenses), net (75) 226 121 449 (58)
-------- -------- --------- -------- --------
Income (loss) before income taxes 5,429 (2,122) (7,384) (1,319) (8,871)
Provision for income taxes 500 1,796 4,856 3,847 2,296
Minority interest 17 216 112 (8) 143
-------- -------- --------- -------- --------
Net income (loss) $ 4,946 $ (3,702) $ (12,128) $ (5,174) $(11,024)
======== ======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
<PAGE>
MITCHELL MADISON GROUP
COMBINED STATEMENTS OF INVESTED CAPITAL
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Other Net Cash
Comprehensive Distributions Total Comprehensive
Contributed Retained Income by MMG Invested Income
Capital Earnings (Loss) LLC(1) Capital (Loss)
---------------- --------- ------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $10,290 $ 1,882 $ (436) $ (526) $ 11,210
Net income - 4,946 - - 4,946 $ 4,946
Net cash distributions
by MMG LLC - - - 2,704 2,704 -
Foreign currency translation
adjustment - - 1,238 - 1,238 1,238
---------------- ---------- ------------- ------------ ----------- -------------
Total comprehensive income $ 6,184
=============
Balance, December 31, 1996 10,290 6,828 802 2,178 20,098
Net loss - (3,702) - - (3,702) $ (3,702)
Net cash distributions
by MMG LLC - - - 3,947 3,947 -
Foreign currency translation
adjustment - - (511) - (511) (511)
---------- ----------- ---------- ---------- ---------- ----------
Total comprehensive loss
$ (4,213)
===========
Balance, December 31, 1997 10,290 3,126 291 6,125 19,832
Net loss - (12,128) - - (12,128) $(12,128)
Net cash distributions
by MMG LLC - - - 9,259 9,259 -
Foreign currency translation
adjustment - - (113) - (113) (113)
---------- ----------- ---------- ---------- ---------- ----------
Total comprehensive loss
$(12,241)
-----------
Balance, December 31, 1998 10,290 (9,002) 178 15,384 16,850
Net loss (unaudited) - (11,024) - - (11,024) $(11,024)
Net cash distributions
by MMG LLC - - - (120) (120) -
(unaudited)
Foreign currency translation
adjustment (unaudited) - - (32) - (32) (32)
---------- ----------- ---------- ---------- ---------- ----------
Total comprehensive loss
(unaudited)
$(11,056)
==========
Balance, June 30, 1999
(unaudited) $10,290 $(20,026) $ 146 $15,264 $ 5,674
========== =========== ========== ========== =========
(1) See Note 1.
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
<PAGE>
MITCHELL MADISON GROUP
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
------------------------------------------ --------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,946 $(3,702) $(12,128) $ (5,174) $(11,024)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization expense 1,308 2,396 2,255 1,313 1,395
Provision for doubtful accounts 34 (421) 1,412 610 851
Income (loss) applicable to minority interest (17) (216) (112) 8 (143)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (7,886) (6,807) (6,044) (21,213) 698
(Increase) decrease in prepaid expenses and
other assets (1,739) (1,567) (1,312) 45 685
Increase (decrease) in accounts payable 1,327 1,951 4,038 387 (2,774)
Increase (decrease) in accrued expenses 7,250 9,311 2,441 9,961 (2,005)
Increase (decrease) in deferred revenue - - 2,220 - (1,175)
Increase (decrease) in income taxes payable 500 1,796 4,060 3,198 (251)
------- ------- -------- -------- --------
Net cash provided by
(used in) operating activities 5,723 2,741 (3,170) (10,865) (13,743)
------- ------- -------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment (2,445) (2,593) (4,118) (928) (1,793)
Cash used in acquisitions, net of cash acquired (2,985) - - - -
------- ------- -------- -------- --------
Net cash used in investing activities (5,430) (2,593) (4,118) (928) (1,793)
------- ------- -------- -------- --------
Cash flows from financing activities:
Collection of loans from (repayment of loans
on behalf of) members, net 1,653 139 544 (143) (530)
Cash distributions by MMG LLC, net 2,704 3,947 9,259 4,044 (120)
Principal payments on capital Principal
payments on capital leases (225) (302) (127) (182) (42)
(Payments to) proceeds from A.T. Kearney 685 (1,638) (625) (268) -
Borrowings (repayments) under
revolving credit agreement (3,500) - 6,000 3,000 5,000
Repayment of long-term debt (1,969) (268) - - -
Proceeds from (repayments of) other loans, net - 85 112 (10) (43)
------- ------- -------- -------- --------
Net cash provided by (used in)
financing activities (652) 1,963 15,163 6,441 4,265
------- ------- -------- -------- --------
Effect of exchange rates on cash
and cash equivalents 1,238 (511) (113) (885) (32)
------- ------- -------- -------- --------
Net increase in cash and
cash equivalents 879 1,600 7,762 (6,237) (11,303)
Cash and cash equivalents at beginning of period 8,087 8,966 10,566 10,566 18,328
------- ------- -------- -------- --------
Cash and cash equivalents at end of period $ 8,966 $10,566 $ 18,328 $ 4,329 $ 7,025
======= ======= ======== ======== ========
Supplemental cash flow disclosure:
Cash paid for interest $ 427 $ 485 $ 512 $ 123 $ 504
======= ======= ======== ======== ========
Cash paid for taxes $ 1,005 $ 103 $ 796 $ 649 $ 2,547
======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
<PAGE>
MITCHELL MADISON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(In thousands)
Note 1 - ORGANIZATION:
The Company
Mitchell Madison Group ("the Company") is engaged in the business of
providing consulting services, including risk management, technology management,
business strategy and organizational effectiveness, to a variety of clients
conducting business primarily in the financial services industry.
The Company consists of a ninety-nine percent (99%) interest in Mitchell
Madison Group (Del.) LLC ("MMG Del.") and its ninety-nine percent (99%) owned
operating subsidiary Mitchell Madison Group ("MMG US") and a one-hundred percent
(100%) interest in Mitchell Madison Group Limited, and Mitchell Madison Group
U.K. Holding Limited including its eight operating subsidiaries, Mitchell
Madison Group U.K. Limited ("MMG UK Ltd."), Mitchell Madison Group SNC, Mitchell
Madison Group GmbH, Mitchell Madison Group (Australia) (Pty.) Limited, Mitchell
Madison Consulting Company, Mitchell Madison Group S.L., Mitchell Madison Group
(Switzerland) GmbH and Mitchell Madison Group S.A. (Pty.) Ltd. The Company is
wholly owned by Mitchell Madison Group LLC ("MMG LLC"), a Cayman Islands
exempted company. The individual owners of MMG LLC ("MMG LLC Members") are also
employees of the Company. One percent (1%) of both MMG Del. and MMG US is
ultimately owned by an individual who is also a MMG LLC Member.
On July 30,1999, MMG LLC entered into an Asset Purchase Agreement (the
"Agreement") with USWeb Corporation ("USWeb") pursuant to which USWeb agreed to
purchase the net assets of the Company, excluding certain assets and
obligations, in exchange for 7,200 shares of USWeb common stock and a cash
payment of $10,000. An additional 7,200 of shares will be issued over a two-
year period to MMG LLG Members who remain as employees of USWeb during that
two-year period.
Invested capital includes accumulated equity as well as net amounts due to
MMG LLC and two entities not being acquired by USWeb, International Sourcing
Services ("ISS") and Hudson Charles Group LLC ("HCG LLC") resulting from cash
transfers and other intercompany activity. USWeb will not assume net amounts
due to MMG LLC, ISS and HCG LLC as a result of these cash transfers and other
intercompany activity in accordance with the asset purchase agreement.
NOTE 2 - Significant Accounting Policies:
Basis of presentation and use of estimates
The assets, liabilities and results of operations of the Company were
included in the historical consolidated financial statements of MMG LLC. The
accompanying combined financial statements and related notes have been prepared
from MMG LLC's historical accounting records and reflect the combined historical
financial position, results of operations and cash flows of the Company. These
financial statements are not necessarily indicative of results that would have
occurred if the Company had been a separate stand-alone entity during the
periods presented or of future results of the Company.
The accompanying combined financial statements have been prepared in
accordance with generally accepted accounting principles. The preparation of
financial statements in accordance with generally accepted accounting principles
requires, among other things, the use of management's estimates and assumptions
which 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 revenue and expenses during the reporting period.
Actual results could differ from those estimates. The significant estimates
that affect the financial statements include but are not limited to, doubtful
accounts, realizability of advances to MMG LLC Members and employees and
recoverability of long-term assets such as goodwill.
<PAGE>
MITCHELL MADISON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
(In thousands)
Principles of combination
The combined financial statements include the accounts of the Company and all
majority-owned subsidiaries. All significant intercompany transactions with
combined entities have been eliminated. The minority interest balances
represent the minority member's proportionate share (1%) of the deficiency of
both MMG Del. and MMG US at the end of each period presented.
Fair value of financial instruments and concentration of credit risk
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value because of their short maturities. The carrying amount
of the Company's debt obligations approximate the fair value of such instruments
based upon management's best estimate of interest rates that would be available
to the Company for similar debt obligations.
Two of the Company's clients accounted for approximately 18% and 17% of the
Company's consulting fee revenues for the year ended December 31, 1996. None of
the Company's clients accounted for 10% or more of the Company's consulting fee
revenues for the years ended December 31, 1997 and 1998.
Three clients accounted for 22%, 15% and 12% and two clients accounted for
11% and 10% of the Company's consulting fees receivable balance at December 31,
1996 and 1997, respectively. None of the Company's clients accounted for 10% or
more of the Company's consulting fees receivable balance at December 31, 1998.
Unaudited interim financial statements
The financial statements for the six-month periods ended June 30, 1998 and
1999 and as of June 30, 1999 are unaudited but have been prepared in accordance
with generally accepted accounting principles ("GAAP") for interim financial
statements and accordingly do not include all disclosures required by GAAP for
annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations of any interim
period are not necessarily indicative of the results of operations for the full
year.
Revenue recognition
The Company derives its revenues primarily from consulting service agreements
(both fixed-price and time-and-materials agreements). Revenues on time-and-
material agreements are recognized as costs are incurred. Revenues on fixed
price agreements are recognized over the period of the arrangement using the
percentage of completion method using labor hours incurred as the measure of
progress towards completion.
Cash and cash equivalents
Investments with original maturities of three months or less are considered
to be cash equivalents. The carrying amount of such investments approximates
fair value.
Goodwill
The cost of acquired businesses in excess of the fair value of the tangible
assets and liabilities acquired ("goodwill") is amortized using the straightline
method over estimated lives of up to 15 years. For the years ended December 31,
1996, 1997 and 1998 amortization expense related to goodwill was $147, $222 and
$235, respectively.
<PAGE>
MITCHELL MADISON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
(In thousands)
Depreciation and amortization
Property and equipment owned by the Company is depreciated principally using
the straight-line method over the estimated useful life of the assets, which
generally range from three to seven years. Leasehold improvements are amortized
over the service life of the improvement. Assets recorded under capital leases
are amortized over the shorter of lease terms or useful lives under methods that
are consistent with the Company's depreciation policy for owned assets.
Income taxes
No provision has been made in the financial statements for U.S. federal state
or local income taxes. As a Delaware Limited Liability Company, MMG Del. is
treated as a partnership for income tax purposes and is not subject to income
tax in the U.S. The tax effect of MMG Del.'s activities flow to and are the
responsibility of MMG Del.'s members. MMG Del. is subject to certain other
state and city taxes that are charged to operations as incurred. The Company
has made provision for non-U.S. income taxes of $500, $1,796 and $4,856 for the
years ended December 31, 1996, 1997 and 1998, respectively. As stated in the
Agreement, the majority of the tax liabilities of the Company will not be
assumed by USWeb.
Foreign currency translation
The Company's foreign businesses' assets and liabilities are translated at
exchange rates in effect at the balance sheet date, while results of operations
are translated at average exchange rates for the respective period. The
resulting translation gains and losses are included as part of MMG LLC's equity
investment.
Accounting for impairments
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company reviews long-lived assets and goodwill
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. Any impairment loss on
such assets, as well as long-lived assets to be disposed of, is measured as the
amount by which the carrying value of its assets exceeds the fair value of the
assets less disposal cost, if applicable.
Comprehensive income
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." The Company's only items of other comprehensive income are foreign
currency translation gains and losses.
Segment information
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 uses a management
approach to report financial and descriptive information about a company's
operating segments. Operating segments are revenue-producing components of the
enterprise for which separate financial information is produced internally for
management. Under this definition the Company operated in a single segment,
the provision of consulting services, for all years presented.
<PAGE>
MITCHELL MADISON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
(In thousands)
Recent accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is
effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to capitalize
and amortize specific costs. The Company does not expect the adoption of this
standard to have a material effect on the Company's financial position or
results of operation.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
Up activities". SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. SOP 98-5 requires costs of start up activities
and organization costs to be expensed as occurred. The adoption of this
standard will result in approximately $436 of start-up costs being expensed in
1999.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes a new model for accounting for derivatives and hedging
activities and supercedes and amends a number of existing accounting
standards. SFAS No. 133 requires that all derivatives be recognized in the
balance sheet at their fair market value and the corresponding derivative
gains or losses be either reported in the statement of operations or as a
deferred item depending on the type of hedge relationship that exists with
respect to such derivatives. In July 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 137
deferred the effective date until the first quarter ending June 30, 2000. The
Company will adopt SFAS No. 133 in its quarter ending June 30, 2000 and does
not expect the adoption of this pronouncement to have a material impact on its
financial condition or results of operations.
NOTE 3 - PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1998
---------- ----------
<S> <C> <C>
Computers and office equipment $4,215 $ 5,559
Leasehold improvements 1,595 3,679
Furniture and fixtures 1,721 2,411
------ -------
7,531 11,649
Less - Accumulated depreciation and amortization 3,267 5,287
------ -------
$4,264 $ 6,362
====== =======
</TABLE>
Depreciation expense, including capitalized lease amortization, was $1,161,
$1,647 and $2,020 for the years ended December 31, 1996, 1997 and 1998,
respectively.
Property and equipment at year end include the following amounts for
capitalized leases:
<PAGE>
MITCHELL MADISON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
(In thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1998
---------- ----------
<S> <C> <C>
Computers and office equipment $ 744 $ 805
Furniture and fixtures 265 436
------ -------
1,009 1,241
Less - Accumulated depreciation and amortization 636 1,193
------ -------
$ 373 $ 48
====== =======
</TABLE>
Amortization expense related to capital leases was $240, $309 and $557 for
the years ended December 31, 1996, 1997 and 1998, respectively.
NOTE 4 - DEBT:
The components of debt are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1998
---------- ----------
<S> <C> <C>
PNC Bank revolving credit agreement $ - $ 6,000
A.T. Kearney note payable 625 -
Other loans 85 197
------ -------
710 6,197
Less - Current portion 460 2,109
------ -------
Total long-term debt $ 250 $ 4,088
====== =======
</TABLE>
Estimated principal payments due on total debt outstanding at December 31,
1998 are as follows:
<TABLE>
<S> <C>
1999 $ 2,109
2000 3,983
2001 78
2002 27
-------
Total $ 6,197
=======
</TABLE>
In October 1998, the Company, together with MMG LLC and certain other
subsidiary companies of MMG LLC (collectively "MMG"), entered into a new $20,000
revolving credit agreement (the "Revolver"), as amended, with PNC Bank National
Association ("PNC Bank") which extends through September 9, 2000, and which
replaces the prior credit agreement with PNC Bank. Under the terms of the
Revolver, interest is charged on outstanding loans using the Federal Funds
Effective Rate or LIBOR, as selected by MMG, plus margins of 1/2% and 1 1/2%,
respectively. Amounts outstanding in the form of Letters of Credit are charged
an annual rate of 1 1/2%. Upon execution of the Revolver, MMG US paid a one-
time underwriting and agency fee of $335. Under the terms of the Revolver, MMG
US pays an annual agency fee of $35 and an annual commitment fee of three-tenths
of 1% on the unused portion of the Revolver. The amount outstanding under the
Revolver at December 31, 1998 was $6,000. In addition, approximately $8,000 of
the Revolver at December 31, 1998 was used for a Letter of Credit in connection
with the security required for the Company's New York office.
<PAGE>
MITCHELL MADISON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
(In thousands)
The terms of the Revolver require that MMG must abide by certain covenants
including, among others, maintaining defined levels of net worth, maintaining
certain financial ratios, and limiting payments of dividends and related
distributions. MMG also grants PNC Bank a continuing security interest in
certain of its assets.
NOTE 5 - OPERATING LEASE COMMITMENTS:
The Company is subject to operating lease commitments for office space and
certain computer equipment. The leases expire at various dates through 2008.
Operating lease expenses totaled $1,495, $3,326 and $4,954 for occupancy and
$440, $1,472 and $1,397 for equipment for the years ended December 31, 1996,
1997 and 1998, respectively. Future minimum lease payments under operating
leases are as follows:
<TABLE>
<CAPTION>
Occupancy Equipment
--------- ---------
<S> <C> <C>
1999 $11,072 $2,289
2000 10,911 1,975
2001 10,633 1,226
2002 10,335 394
2003 7,262 76
Thereafter 36,037 -
------- ------
Total $86,250 $5,960
======= ======
</TABLE>
NOTE 6 - BENEFIT PLANS:
MMG US maintains a 401(k) defined contribution plan whereby employees may
contribute up to 20% of their compensation annually (subject to limitations
established by ERISA). Additionally, MMG US may, at its discretion, make
matching contributions to the 401(k) defined contribution plan on behalf of
employees. Contributions made by MMG US vest after one year. MMG US made no
discretionary contributions to the 401(k) defined contribution plan in 1996,
1997, or 1998.
MMG US also maintains a Money Purchase Plan (the "MP Plan"), a defined
contribution plan covering all full-time employees and certain management level
employees with whom MMG US has employment agreements (see Note 7). All
employees become eligible to participate in the MP Plan within 45 days of
joining MMG US. Under the MP Plan, MMG US contributes to each participant's
account 7.7% of the participant's compensation in the case of employees not
under employment contracts and approximately 13.33% of the participant's
compensation in the case of employees under employment contracts (subject to
limitations established by ERISA). For the years ended December 31, 1996, 1997
and 1998, MMG US recorded compensation charges of $1,780, $2,760 and $4,013,
respectively, related to its contribution liability under the MP Plan.
MMG UK Ltd. also maintains a benefit plan similar to the MP Plan (the "MMG UK
Pension Scheme") for employees of MMG UK Ltd. For the years ended December 31,
1996, 1997 and 1998, MMG UK Ltd. recorded compensation charges of $252, $548 and
$663, respectively, related to its contribution liability under the MMG UK
Pension Scheme.
<PAGE>
MITCHELL MADISON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
(In thousands)
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
Employment agreements
The Company maintains employment agreements with certain management level
employees. The employment agreements provide for the payment of minimum
compensation levels. The employment agreements also define incentive bonuses in
excess of the minimum compensation levels which are contingent upon the
Company's performance and which may be paid at the Company's discretion. Under
these agreements, the Company has recorded compensation expense of approximately
$1,915, $3,338 and $2,487 in incentive bonuses for the years ended December 31,
1996, 1997 and 1998, respectively. The employment agreements also provide for
additional discretionary incentive bonuses, subject to certain conditions, which
upon approval could be paid in future years. No provision has been made for
these potential future incentive bonuses at December 31, 1997 or 1998.
Settlement costs
The Company is involved in various claims in connection with departures of
MMG LLC Members. The Company does not believe that it is a party to any
proceedings at the present time that could have a material adverse effect on the
business, financial position, results of operations or cash flows of the
Company. This opinion is based on considerations including the status of
present settlement terms and costs.
Costs related to the settlement of claims in connection with the departure of
MMG LLC Members were $2,340 in 1998. Future settlement costs over a period of
up to six years in connection with the departure of MMG LLC Members are expected
to be approximately $2,300. As part of the Agreement, USWeb is not assuming the
liabilities associated with the settlement of such claims.
NOTE 8 - RELATED PARTY TRANSACTIONS:
Several of the entities maintain agreements with each other which allow for
the borrowing of consultants (at rates approximating market) for engagements
which are outside the country of the entities' local billing office. Various
advances are also made between the entities. Intercompany advances generally
bear interest at the prime rate as defined by the Federal Reserve Board. All
intercompany charges (including interest) between the entities have been
eliminated in combination.
In December 1995, MMG US loaned $3,589 to MMG LLC Members. Interest on the
outstanding principal amount of these loans is assessed based on an annual rate
of 12%. Loans receivable from MMG LLC Members at December 31, 1997 and 1998
were $1,724 and $1,180, respectively. MMG US expects to collect the remaining
loans outstanding from MMG LLC Members over a five-year period.
The Company received consulting fees of $2,805 and $4,836 in 1997 and 1998,
respectively, from Global Sourcing Services LLC, a 50% owned joint venture of
MMG LLC.
<PAGE>
MITCHELL MADISON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
(In thousands)
NOTE 9 - OPERATIONS BY GEOGRAPHIC AREA:
<TABLE>
<CAPTION>
Year ended or at December 31,
----------------------------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
United States $55,004 $ 76,512 $122,125
International 32,585 65,180 58,758
------- -------- --------
$87,589 $141,692 $180,883
======= ======== ========
Long-Lived Assets:
United States $ 3,993 $ 4,271 $ 5,147
International 4,717 4,499 4,942
------- -------- --------
$ 8,710 $ 8,770 $ 10,089
======= ======== ========
</TABLE>
NOTE 10 - SUPPLEMENTAL FINANCIAL DATA:
Accrued expenses at year end includes the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1997 1998
---------- ----------
<S> <C> <C>
Accrued compensation and other employee benefits $ 7,538 $ 8,646
Accrued bonuses 3,523 6,522
Accrued legal and professional fees 2,838 1,148
Payroll and VAT taxes payable 1,850 1,898
Other 5,829 5,805
------- -------
$21,578 $24,019
======= =======
</TABLE>
<PAGE>
Item 7(b)
USWEB CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(In thousands)
The following unaudited pro forma condensed combined balance sheet gives effect
to the acquisition of Mitchell Madison Group ("MMG") by USWeb Corporation
("USWeb/CKS" or the "Company") in a transaction accounted for as a purchase
business combination in accordance with Accounting Principles Board Opinion No.
16 ("Business Combination") as if it occurred on June 30, 1999 (the
"Acquisition"). The Acquisition was consummated on September 3, 1999;
accordingly the results of operations subsequent to June 30, 1999 will reflect
the allocation of the final purchase price. Under the purchase method of
accounting, 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 date.
The accompanying unaudited pro forma condensed combined balance sheet combines
the unaudited consolidated balance sheets of USWeb/CKS as of June 30, 1999 with
the unaudited consolidated balance sheet of MMG as of the same date.
The unaudited pro forma condensed combined financial statements are presented
for illustrative purposes only and are not necessarily indicative of the
combined financial position or results of operations in future periods or the
results that actually would have been realized had USWeb/CKS and MMG been a
combined company during the specified periods.
<TABLE>
<CAPTION>
MMG
USWeb/CKS --- Pro Forma Pro Forma
June 30, 1999 June 30, 1999 Adjustments Combined
------------- ------------- ----------- --------
ASSETS
------
Current assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents................................. $ 46,658 $ 7,025 $(10,000) C $ 43,683
Short-term investments.................................... 35,981 35,981
Accounts receivable, net.................................. 137,890 29,206 167,096
Other current assets...................................... 12,653 4,606 (2,808) A 14,451
Deferred income taxes..................................... 637 - - 637
--------- ------- -------- ---------
Total current assets................................... 233,819 40,837 (12,808) 261,848
Property and equipment, net................................. 26,589 6,884 33,473
Intangible assets, net...................................... 198,899 2,423 210,446 B 411,768
Deferred income taxes and other assets...................... 18,896 1,710 (1,710) 18,896
--------- ------- -------- ---------
$ 478,203 $51,854 $195,928 $ 725,985
========= ======= ======== =========
LIABILITIES
-----------
Current liabilities:
Accounts payable.......................................... $ 48,863 $ 5,916 $ - $ 54,779
Accrued expenses.......................................... 68,027 22,014 19,956 A,D,G 109,997
Deferred revenue.......................................... 7,834 1,045 8,879
Income taxes payable...................................... 2,528 6,105 (3,894) A 4,739
Borrowings and lease obligations, current................. 3,076 2,215 9,030 K 14,321
--------- ------- -------- ----- ---------
Total current liabilities.............................. 130,328 37,295 25,092 192,715
Lease obligations, non-current.............................. 2,721 144 2,865
Long-term debt.............................................. 9,030 (9,030) K -
Minority interest........................................... - (289) 289 G -
--------- ------- -------- ---------
133,049 46,180 16,351 195,580
--------- ------- -------- ---------
Stockholders' equity........................................
Common stock.............................................. 72 7 B 79
Additional paid-in capital................................ 666,500 185,244 B,F 851,744
Accumulated deficit....................................... (321,418) (321,418)
MMG's invested capital.................................... - 5,674 (5,674) E -
--------- ------- -------- ---------
Total stockholders' equity............................. 345,154 5,674 179,577 530,405
--------- ------- -------- ---------
$ 478,203 $51,854 $195,928 $ 725,985
========= ======= ======== =========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
16
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
The following unaudited pro forma condensed combined statements of operations
combine the Company's operating results for the year ended December 31, 1998 and
six month period ended June 30, 1999 with MMG's operating results for the same
periods to reflect the Acquisition as if it occurred on January 1, 1998.
<TABLE>
<CAPTION>
Six months ended June 30, 1999
---------------------------------------------------------
USWeb/CKS MMG Pro Forma Pro Forma
Adjustments Combined
------------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues............................................................ $185,078 $ 82,406 $ - $ 267,484
-------- -------- -------- ---------
Cost of revenues:
Services.......................................................... 115,111 63,318 178,429
Provision for (recovery of) loss on contract...................... (4,491) (4,491)
Stock compensation................................................ 9,171 - 34,176 H 43,347
-------- -------- -------- ---------
Total cost of revenues......................................... 119,791 63,318 34,176 217,285
-------- -------- -------- ---------
Gross profit........................................................ 65,287 19,088 (34,176) 50,199
-------- -------- -------- ---------
Operating expenses:
Marketing, sales and support...................................... 18,069 7,427 25,496
General and administrative........................................ 30,933 20,350 51,283
Acquired in-process technology.................................... 2,212 2,212
Stock compensation................................................ 18,668 8,544 H 27,212
Amortization of intangible assets................................. 64,887 124 20,910 I 85,921
Merger and integration costs...................................... 5,316 - 5,316
-------- -------- -------- ---------
Total operating expenses....................................... 140,085 27,901 29,454 197,440
-------- -------- -------- ---------
Loss from operations................................................ (74,798) (8,813) (63,630) (147,241)
Interest income (expense), net...................................... 1,921 (58) - 1,863
-------- -------- -------- ---------
Loss before income taxes............................................ (72,877) (8,871) (63,630) (145,378)
Provision for income taxes.......................................... 1,371 2,296 3,667
Minority interest................................................... - 143 (143) G -
-------- -------- -------- ---------
Net loss............................................................ $(74,248) $(11,024) $(63,773) $(149,045)
======== ======== ======== =========
Net loss per share:
Basic and diluted................................................. $(1.02) $(1.84)
======== =========
Weighted average shares outstanding............................... 72,648 J 80,802
======== =========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
17
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------------
USWeb/CKS MMG Pro Forma Pro Forma
Adjustments Combined
------------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues......................................................... $ 228,600 $180,883 $ - $ 409,483
--------- -------- --------- ---------
Cost of revenues:
Services....................................................... 146,251 122,963 269,214
Provision for (recovery of) loss on contract................... 9,994 9,994
Stock compensation............................................. 13,037 - 68,353 H 81,390
--------- -------- --------- ---------
Total cost of revenues...................................... 169,282 122,963 68,353 360,598
--------- -------- --------- ---------
Gross profit..................................................... 59,318 57,920 (68,353) 48,885
--------- -------- --------- ---------
Operating expenses:
Marketing, sales and support................................... 27,761 20,257 48,018
General and administrative..................................... 44,694 44,933 89,627
Acquired in-process technology................................. 25,508 25,508
Stock compensation............................................. 31,760 17,088 H 48,848
Amortization of intangible assets.............................. 74,538 235 41,819 I 116,592
Merger and integration costs................................... 28,822 28,822
Impairment of goodwill......................................... 11,079 - - 11,079
--------- -------- --------- ---------
Total operating expenses.................................... 244,162 65,425 58,907 368,494
--------- -------- --------- ---------
Loss from operations............................................. (184,844) (7,505) (127,260) (319,609)
Interest income, net............................................. 4,302 121 - 4,423
--------- -------- --------- ---------
Loss before income taxes......................................... (180,542) (7,384) (127,260) (315,186)
Provision for income taxes....................................... 7,739 4,856 12,595
Minority interest................................................ - 112 (112) G -
--------- -------- --------- ---------
Net loss......................................................... $(188,281) $(12,128) $(127,372) $(327,781)
========= ======== ========= =========
Net loss per share:
Basic and diluted.............................................. $(3.07) $(4.03)
========= =========
Weighted average shares outstanding............................ 61,329 J 81,328
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
18
<PAGE>
USWEB CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(In thousands, except share amounts)
Note 1 - Pro Forma Adjustments and Assumptions
On September 3, 1999, USWeb/CKS acquired MMG for a total consideration of
approximately $217,867, comprising $10,000 in cash, 7,210,160 shares of the
Company's common stock valued at $170,882, warrants to purchase 1,666,500 shares
of USWeb/CKS common stock issued to financial advisors valued at $14,369 and
other acquisition costs aggregating approximately $22,616 (see (D) below). The
acquisition agreement also provides for additional payments of up to 7,210,160
shares of the Company's common stock payable over a two-year period to those
former MMG partners ("Members") who remain employees of the combined entity
during that period. The Acquisition has been accounted for as a purchase
business combination and, accordingly, the purchase price has been allocated to
the tangible and identifiable intangible assets acquired and liabilities assumed
on the basis of their estimated fair values on the acquisition date.
The following adjustments have been reflected in the unaudited pro forma
condensed combined financial statements:
(A) To record assets and obligations to be excluded from the Acquisition in
accordance with the acquisition agreement.
(B) To allocate the purchase price to the fair value of the acquired assets and
liabilities of MMG at June 30, 1999. This adjustment is for illustrative
pro forma purposes only. Actual fair values will be based on financial
information as of the acquisition date (September 3, 1999). Assuming the
transaction had occurred on June 30,1999, the allocation would have been as
follows:
Fair value of assets acquired and
liabilities assumed $ 7,421
Workforce-in-place 63,600
Customer list 9,000
Goodwill 137,846
--------
$217,867
--------
Valuation of the intangible assets acquired was determined by an
independent third-party appraiser and consists of workforce-in-place and
customer list. The excess of purchase price over tangible and
identifiable intangible assets acquired and liabilities assumed has been
recorded as goodwill.
(C) To reflect cash payment of $10,000 for the acquisition of MMG.
(D) To record the accrual of estimated costs resulting from the Acquisition. It
is anticipated that USWeb/CKS will incur charges related to the business
combination with MMG currently estimated to be $22.6 million. These charges
include direct transaction costs, primarily for financial advisory and
legal fees, and costs associated with exiting certain activities of MMG and
involuntary termination benefits to certain MMG employees. The estimated
charge is reflected in the unaudited pro forma condensed combined balance
sheet and it is being amortized as part of goodwill in the unaudited pro
forma consolidated statements of operations over its estimated life of 60
months. This charge is a preliminary estimate only and is subject to
change.
Estimated transaction, merger and integration costs include the following:
Merger Costs:
Financial advisory fees $ 9,516
Legal and accounting professional fees 1,850
Financial printer fees 500
Various filing fees 250
Integration Costs:
Lease termination cost 6,500
Write off of fixed cost 1,000
Severance and retention 2,000
Other 1,000
-------
Total $22,616
Actual amounts ultimately incurred could differ from estimated amounts due
to the actual time incurred by professional advisors, including attorneys
and accountants, as well as negotiations between the Company and its
vendors, including landlords.
19
<PAGE>
(E) To eliminate MMG's historical invested capital.
(F) To reflect the issuance of the Company's common stock and warrants for the
acquisition of MMG.
(G) To eliminate 1% minority interest as a result of the purchase of 100% of
MMG's capital ownership.
(H) To record stock compensation charge related to the issuance of up to
7,210,160 additional shares of the Company's common stock payable on the
first and the second closing date anniversaries. This charge is being
amortized over its vesting period of 24 months and is allocated between
cost of revenues and operating expenses based upon Members
classification.
(I) To record amortization expense of intangible assets resulted from the
purchase business combination of MMG as if the business combination had
occurred on January 1, 1998 at the estimated useful lives between
5 to 7 years.
(J) Pro forma weighted average number of shares include common stock issued to
MMG at the consummation of the Acquisition as well as the number of
additional shares issuable to MMG Members who remain in the employment of
USWeb/CKS at the first and second closing date anniversaries assuming that
the acquisition took place on January 1, 1998.
(K) To reflect the assumption of MMG's borrowings by the Company resulting into
the conversion of those debts from long-term to current.
20
<PAGE>
Exhibit Number Description
- -------------- -----------
2.1(A) Asset Purchase Agreement by and among Mitchell Madison
Group, L.L.C., USWeb Corporation and USWeb Acquisition
Corporation 137.
2.2(B) Amendment No. 1 to the Asset Purchase Agreement by and
among Mitchell Madison Group, L.L.C., USWeb Corporation
and USWeb Acquisition Corporation 137.
99.1(B) USWeb Corporation Press Release, dated September 7, 1999.
- --------------------
(A) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999.
(B) Incorporated by reference from the Company's Current Report on Form 8-K
filed September 17, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: November 12, 1999 USWEB CORPORATION
By: /S/ CAROLYN V. AVER
----------------------
Carolyn V. Aver
Executive Vice President,
Chief Financial Officer and Secretary
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
2.1 (A) Asset Purchase Agreement by and among Mitchell Madison
Group, L.L.C., USWeb Corporation and USWeb Acquisition
Corporation 137.
2.2 (B) Amendment No. 1 to the Asset Purchase Agreement by and
among Mitchell Madison Group, L.L.C., USWeb Corporation
and USWeb Acquisition Corporation 137.
99.1(B) USWeb Corporation Press Release, dated September 7, 1999.
- -------------------
(A) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999.
(B) Incorporated by reference from the Company's Current Report on Form 8-K
filed September 17, 1999.
