<PAGE>
Filed Pursuant to Rule 424(B)(3)
Registration No. 333-38351
PROSPECTUS
- --------------------------------------------------------------------------------
16,666,667 SHARES
[LOGO OF USWEB(TM)
A STRATEGIC PARTNER FOR THE INFORMATION AGE.
APPEARS HERE]
COMMON STOCK
- --------------------------------------------------------------------------------
This is a Prospectus for 16,666,667 shares of Common Stock of USWeb
Corporation, which is currently doing business as USWeb/CKS. We have issued
approximately 10,200,000 of the shares in the past to pay for businesses we
have acquired. After this Registration Statement becomes effective, we intend
to issue the remaining shares in the future to pay for acquisitions of assets,
technologies or stock of additional businesses in the future.
We have not negotiated the terms of the future acquisitions yet, and there is
no deadline for issuing the remaining shares. We might pay for future
acquisitions using some combination of shares, cash and assumption of
liabilities. When we negotiate acquisitions, we consider many factors, which
are described in this Prospectus under the heading "Acquisition Strategy" on
page 19. We expect that the shares issued in any acquisition will be valued at
a price reasonably related to the market price of the Common Stock near the
time of the acquisition.
The shares offered hereby involve a high degree of risk. See "Risk Factors"
commencing on page 6.
The sale of the Common Stock has 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--saying otherwise is a
crime.
The date of this Prospectus is December 23, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION.................................................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... 3
TRADEMARKS............................................................... 3
PROSPECTUS SUMMARY....................................................... 4
The Company............................................................. 4
RISK FACTORS............................................................. 6
FORWARD-LOOKING STATEMENTS............................................... 13
USE OF PROCEEDS.......................................................... 13
MARKET INFORMATION....................................................... 13
DIVIDEND POLICY.......................................................... 14
CAPITALIZATION........................................................... 14
SELECTED CONSOLIDATED FINANCIAL DATA..................................... 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (AS RESTATED)............................................. 18
Overview................................................................ 18
Recent Events........................................................... 19
Acquisition of Internet Professional Services Firms and Strategic
Alliance............................................................... 19
Sources of Revenues..................................................... 22
Cost Structure.......................................................... 22
Results of Operations................................................... 22
Factors Affecting Operating Results..................................... 26
Recent Accounting Pronouncements........................................ 26
Year 2000............................................................... 27
BUSINESS................................................................. 29
Overview................................................................ 29
Industry Background..................................................... 29
The USWeb/CKS Solution.................................................. 31
Strategy................................................................ 31
Services................................................................ 33
Consulting Office Network Development................................... 34
Clients................................................................. 37
Knowledge Management.................................................... 38
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Marketing................................................................ 38
Strategic Relationships.................................................. 39
Operations............................................................... 39
Competition.............................................................. 40
Employees................................................................ 40
Facilities............................................................... 41
Legal Proceedings........................................................ 41
MANAGEMENT................................................................ 42
Executive Officers and Directors......................................... 42
Board Committees......................................................... 44
Director Compensation.................................................... 44
Compensation Committee Interlocks and Insider Participation.............. 44
Management Continuity Agreements......................................... 45
Limitation on Liability and Indemnification Matters...................... 45
Executive Compensation................................................... 47
Option Grants and Exercises in Last Fiscal Year.......................... 48
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End
Values.................................................................. 48
Employee Benefit Plans................................................... 49
CERTAIN TRANSACTIONS...................................................... 54
PRINCIPAL STOCKHOLDERS.................................................... 56
DESCRIPTION OF CAPITAL STOCK.............................................. 58
Common Stock............................................................. 58
Preferred Stock.......................................................... 58
Warrants................................................................. 58
Registration Rights...................................................... 59
Certain Anti-Takeover Effects of Provisions of the Certificate of
Incorporation, Bylaws and Delaware Law.................................. 59
PLAN OF DISTRIBUTION...................................................... 61
RESTRICTIONS ON RESALE.................................................... 61
LEGAL MATTERS............................................................. 61
EXPERTS................................................................... 62
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
2
<PAGE>
AVAILABLE INFORMATION
We filed with the Securities and Exchange Commission (the "Commission"),
Washington, D.C. 20549, a Registration Statement on Form S-4 (File No. 333-
38351) under the Securities Act of 1933, as amended (the "Securities Act"), and
the Commission's related rules and regulations. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information in the Registration Statement and the exhibits and schedules to the
Registration Statement. Statements in this Prospectus about the contents of any
contract or other document that is filed as an exhibit to the Registration
Statement are not necessarily complete. You should read the full text of those
contracts and documents for complete information. For further information with
respect to the Company and the Common Stock, you may inspect and copy the
exhibits and schedules to the Registration Statement at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices located at 7
World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can also
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. You will have to pay for the copies, and
the Commission determines the fee from time to time. Also, the Commission
maintains a World Wide Web site on the Internet at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants (including USWeb/CKS) that file electronically with the
Commission. USWeb/CKS Common Stock is quoted on Nasdaq, and you may also
inspect some of the reports, proxy and information statements and other
information at the office of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20066.
We intend to continue furnishing our stockholders with annual reports
containing financial statements audited by an independent accounting firm and
make available to our stockholders quarterly reports for the first three
quarters of each fiscal year containing interim unaudited financial
information.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We have included some information in this document by incorporating it from
other documents. If we make a statement in this Prospectus (or in any other
subsequently filed document that is or is deemed to be incorporated by
reference that conflicts or is inconsistent with any statement in a document we
have incorporated by reference) then the statements we make in this Prospectus
or a document incorporated in this Prospectus shall modify or supersede the
previous, conflicting or inconsistent statement. Any statement so modified or
superseded shall not be deemed to constitute a part of this Prospectus except
as so modified or superseded.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE
HEREIN) CONTAIN IMPORTANT BUSINESS AND FINANCIAL INFORMATION RELATED TO THE
COMPANY AND ARE AVAILABLE, WITHOUT CHARGE, UPON ORAL OR WRITTEN REQUEST BY ANY
PERSON TO WHOM THIS PROSPECTUS HAS BEEN DELIVERED, FROM USWEB CORPORATION,
2880 LAKESIDE DRIVE, SUITE 300, SANTA CLARA, CALIFORNIA 95054, ATTENTION:
INVESTOR RELATIONS; TELEPHONE NUMBER: (408) 987-3200. IN ORDER TO ASSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE AT LEAST 5 DAYS
BEFORE MAKING AN INVESTMENT DECISION.
TRADEMARKS
USWeb, USWeb/CKS, 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. CKS Group is also a registered trademark of CKS Group, Inc., a
wholly owned subsidiary of USWeb Corporation. CKS Partners, CKS Pictures and
CKS Interactive are registered trademarks of CKS Partners, Inc., a wholly owned
subsidiary of CKS Group, and CKS Onsite is a trademark of CKS Partners, Inc.
This Prospectus also includes product names, trade names and trademarks of
other companies.
3
<PAGE>
PROSPECTUS SUMMARY
Because this is a summary, it does not contain all of the information that
may be important to you. You should read the entire Prospectus, including the
financial statements and the exhibits filed as part of the associated
registration statement, before making a decision about USWeb/CKS stock.
This Prospectus contains "forward-looking statements" as defined under
federal securities laws. These forward-looking statements can be identified by
the use of terminology such as "believes," "expects," "anticipates," "plans,"
"may," "will," "projects," "continues," "estimates," "potential," "opportunity"
and so on. See "Forward-Looking Statements." Such forward-looking statements
are subject to risks and uncertainties. The Company's actual results or
experience could differ significantly from the forward-looking statements.
Factors that could cause or contribute to such differences include 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."
We have rewritten many portions of this Prospectus to reflect new "plain
English" requirements. However, you should not compare the wording in this
Prospectus to any older one and think that the meaning of the written
information is intended to be different unless the context shows that
information is new, updated or corrected. Mainly, we rewrote this Prospectus to
update the information about the company after combining with CKS Group and to
use the "plain English" style.
THE COMPANY
USWeb/CKS is a professional services firm with expertise in business
strategy, marketing communications, and Internet technology solutions. Our
clients are typically medium-sized and large companies. We have built a network
of consulting offices throughout the United States and in several countries
outside the United States. By combining our expertise with industry-specific
knowledge, we provide an integrated service offering to help clients define
strategies and implement innovative ways to build their businesses.We provide a
comprehensive range of Internet, Extranet and Web site solutions and services,
as well as marketing communications programs that use advanced technology and
new media.
Forrester Research Inc., a leading research firm, expects a shift to
electronic commerce that will drive the worldwide Internet development services
market from $4 billion in 1998 to $15 billion by 2002. To take advantage of the
opportunity presented by this market, we have invested substantial resources in
establishing a national network of consulting offices. Because of this
investment, we believe we have built one of the most recognized brands for
Internet professional services and developed a highly scalable organization
that can leverage central resources as our operations expand through
acquisitions and internal growth. We have pursued an aggressive domestic
acquisition program and are now focusing on strategic and international
opportunities.
Prior to joining together in December 1998, USWeb Corporation was a
recognized leader in the Internet services market and CKS Group, Inc. was an
integrated marketing services and technology company. Together as USWeb/CKS, we
offer a comprehensive range of services to deliver solutions designed to
improve our clients' business processes and to effectively market their
products and services.
4
<PAGE>
USWeb/CKS offers a comprehensive range of services to deliver Internet
solutions designed to improve clients' business processes and integrated
marketing communications services to help companies market their products,
services and messages. These services include
<TABLE>
<S> <C>
. strategy consulting . strategic corporate and product
. analysis and design positioning
. technology development . corporate identity and product
. implementation and integration branding
. audience development . new media and collateral systems
. maintenance . environmental design and packaging
. advertising and media placement
. consumer and trade promotions
</TABLE>
USWeb/CKS 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. We
have developed central resources to provide clients with Internet solutions
based on the most effective technologies and proven methodologies. The
USWeb/CKS Internet Strategy and Solutions Center aggregates and redeploys the
best practices, technologies and creative work delivered by USWeb/CKS
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/CKS operation.
USWeb/CKS 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. Our strategy is to provide clients
with services at all stages of their adoption of Internet solutions.
As of December 21, 1998, the Company had acquired 35 companies. We regularly
evaluate potential acquisition candidates, are currently holding preliminary
discussions with a number of such candidates and are in active negotiations
with a number of such other candidates. If, after due diligence review and
negotiation, such companies can be acquired on a basis considered fair to
USWeb/CKS and its stockholders, we may proceed with such acquisitions. We
expect most future acquisitions to include the issuance of additional shares of
Common Stock.
USWeb Corporation 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.uswebcks.com and its telephone number is (408) 987-3200. Unless the
context requires otherwise, USWeb and USWeb/CKS refer to USWeb Corporation, a
Delaware corporation, its subsidiaries and its Utah predecessor.
5
<PAGE>
RISK FACTORS
This Prospectus contains "forward-looking statements" as defined under
federal securities laws. These forward-looking statements can be identified by
the use of terminology such as "believes," "expects," "anticipates," "plans,"
"may," "will," "projects," "continues," "estimates," "potential," "opportunity"
and so on. See "Forward-Looking Statements." Such forward-looking statements
are subject to risks and uncertainties. USWeb/CKS's actual results or
experience could differ significantly from the forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed in this section as well as elsewhere in this Prospectus.
This section identifies risks that USWeb/CKS faces. If we are unable to
prevent these and other events that have a negative effect from occurring, then
USWeb/CKS will suffer. Negative events are likely to decrease the Company's
revenues, increase its costs, make its financial results poorer and decrease
its financial strength. Consequences of negative events are also likely to
cause the USWeb/CKS stock price to decline.
Limited Operating History. USWeb/CKS was founded in December 1995 and is
still evolving rapidly. Because we were founded only recently, USWeb/CKS has
only a limited operating history on which to base an evaluation of its business
and prospects. Companies in an early stage of development frequently encounter
extra risks, expenses and difficulties as they grow and evolve. These risks and
difficulties apply particularly to USWeb/CKS because its markets, Internet
professional services and integrated marketing communications, are new and
rapidly evolving. Two particular challenges facing USWeb/CKS in its early stage
of development are, one, an evolving business model and, two, the management of
both internal and acquisition-based growth. To address these risks, USWeb/CKS
must continue to develop the strength and quality of its operations, expand its
network of consulting offices, enhance its brands, respond to competitive
developments and continue to attract, retain and motivate qualified employees.
If USWeb/CKS fails to do any of these things well, the company may perform
poorly and its stock price could decline significantly and rapidly.
Accumulated Deficit. USWeb/CKS has operated with a net loss since it was
formed; USWeb/CKS's expenses have always exceeded its revenues. As of September
30, 1998 it had an accumulated deficit of $183.7 million. Although USWeb/CKS
has experienced revenue growth in recent months, it may not be able to sustain
that growth or those levels of revenue. You should not expect that operating
results in the future will be the same as in the past. They could be
significantly worse. In addition, we intend to continue to invest heavily in
acquisitions, infrastructure development and marketing. As a result, USWeb/CKS
expects to continue to incur substantial operating losses through at least
1999.
Potential Fluctuations in Quarterly Results. USWeb/CKS is likely to
experience significant fluctuations in its quarterly operating results. Many of
the factors affecting USWeb/CKS's operating results are outside of USWeb/CKS's
control. Some important factors affecting operating results are:
. the level of demand for Intranet, Extranet and Web site development
. the productivity of USWeb/CKS's consulting offices
. USWeb/CKS's success in finding and acquiring suitable acquisition
candidates
. USWeb/CKS's ability to attract and retain personnel with the strategic,
technical and creative skills required to service clients effectively
. the cost of advertising and related media
. the relative mix of lower cost full-time employees versus higher cost
independent contractors
. the amount and timing of expenditures by USWeb/CKS clients for Internet
professional services and integrated marketing communications
. client budgetary cycles
6
<PAGE>
. the amount and timing of capital expenditures and other costs relating
to the expansion of USWeb/CKS's operations
. the introduction of new products or services by USWeb/CKS or its
competitors
. pricing changes in the industry
. technical difficulties with respect to the use of the Internet or in
responding to customer's requests
. economic conditions specific to Internet technology usage
. government regulation and legal developments regarding the use of the
Internet
. general economic conditions
Also, we often must commit to expenses in advance of knowing what revenues
for a particular period will be. As a result, fluctuations in revenues can
cause amplified fluctuations in other financial measures, such as profit or
loss. We attempt to set expense levels on the basis of anticipated revenues,
but such financial planning is difficult for a number of reasons. One important
reason is that, because of USWeb/CKS's limited operating history and the rapid
growth and emerging nature of USWeb/CKS's markets, USWeb/CKS's historical
financial data is of limited value in planning future operating expenses.
Another reason is that USWeb/CKS's revenues are derived primarily from
consulting fees for Internet solution engagements, which are difficult to
forecast accurately. Because expenses are relatively fixed, any shortfall in
revenues will hurt USWeb/CKS's business, results of operations and financial
condition and may cause its stock price to decline significantly and rapidly.
We intend to increase expenses significantly to expand operations and enhance
USWeb/CKS's brand names. We also plan to increase other operating expenses as
required to support the operations of USWeb/CKS's consulting offices. If
USWeb/CKS experiences a shortfall in customer demand, or if our expenses
precede or are not rapidly followed by increased revenues, USWeb/CKS's
business, results of operations and financial condition, as well as its stock
price, may suffer significantly and rapidly.
USWeb merged with CKS Group, Inc. in December 1998. CKS Group's business has
historically grown at a lower rate than USWeb's and, although USWeb has
experienced recent growth in revenue in absolute terms, USWeb's growth rate has
slowed in recent periods. USWeb/CKS is expected to have an overall lower growth
rate in the future than it has historically both because of CKS's historically
lower growth rate and the decrease in growth rate associated with the increased
size of the company.
In addition, in order to compete effectively in its market, USWeb/CKS may
need to take actions that will change its business in significant ways. For
example, we may change pricing or service offerings, make key decisions about
technology directions or marketing strategies, or acquire additional businesses
or technologies. USWeb may also experience seasonality in demand for its
services. Any of these actions or effects could have a negative effect on
USWeb/CKS's business, results of operations and financial condition. Operating
results may fall below the expectations of securities analysts and investors.
In such event, the trading price of USWeb/CKS's Common Stock would likely fall
and investors might sue the company, causing increased litigation expenses and,
possibly, the payment of large damages or settlement fees.
Management of Growth; Integration of Acquisitions; CKS Group. USWeb/CKS's
rapid growth has placed a significant strain on USWeb/CKS's managerial,
operational, financial and other resources. This strain is likely to continue.
As of December 17, 1998, USWeb/CKS had over 1,950 employees. USWeb/CKS believes
that it will need to hire additional personnel to support its business.
USWeb/CKS's future success will depend, in part, upon its ability to manage its
growth effectively. Managing growth will require that USWeb/CKS continue to
implement and improve its operational, administrative and financial and
accounting systems and controls and to expand, train and manage its employee
base.
A key component of our growth strategy is the acquisition of Internet
professional service firms, particularly in locations outside the United
States. We also intend to pursue strategic acquisitions in the U.S.
7
<PAGE>
The successful implementation of this strategy depends on our ability to
identify suitable acquisition candidates, acquire those companies on acceptable
terms and integrate their operations successfully with those of USWeb/CKS.
Acquisitions involve a number of risks, including:
. adverse effects on operating results from increases in goodwill
amortization, acquired in-process technology, stock compensation expense
and increased compensation expense resulting from newly hired employees
. the diversion of management attention from other aspects of the business
. potential disputes with the sellers of one or more acquired entities
. possible failure to retain key acquired personnel
. client satisfaction or performance problems with an acquired entity
. diminishing the value of the USWeb/CKS brands or reputation if an
acquired company turns out to be a poor performer
. the assumption of most or all of the liabilities of the acquired
companies, some of which may be hidden, significant, or not reflected in
the final acquisition price.
Because USWeb/CKS has completed thirty-five acquisitions in the past two
years, we are currently facing all of these challenges. And since we are a
relatively new company, our ability to meet these challenges has not been
proven.
USWeb/CKS has only recently begun integrating with CKS Group. The combined
company will need to integrate:
. management, technical, creative and other personnel
. technical and creative service offerings
. sales and marketing efforts
. financial, accounting and other operational controls, procedures,
information systems and policies
The integration process will be further complicated by the need to integrate
widely dispersed operations and distinct corporate cultures. Because this is
the largest merger USWeb and CKS Group have been a part of and we have no
experience with a merger of this magnitude, stockholders should expect some
difficulties. The integration process will require the dedication of management
and other personnel and will distract their attention from the conduct of day-
to-day business activities. In addition, the integration process will require
the development of new service offerings and the pursuit of other business
acquisition opportunities. These factors, in turn, could interrupt or cause a
loss of momentum in the pre-merger activities of either or both companies or
lead customers to defer, reduce or cancel purchase decisions or to select other
vendors. Our business may also be disrupted by employee departures or
reductions in employee productivity due to uncertainty during the integration
process. The integration of USWeb and CKS Group will be made more difficult by
the large number of other relatively small businesses recently acquired by the
two companies, many of which the companies are still in the process of
integrating.
USWeb and CKS Group merged expecting to gain beneficial operating synergies.
This expectation is based on a number of assumptions, including that customers
want Internet professional services and marketing communications from a single
vendor, that the two companies will be able to sell their services to one
another's customers, that the combined business will be a more desirable
partner for Fortune 500 accounts and that there will be cost saving
opportunities. The merged company's success will also depend on the ability of
its executive officers and senior management to operate effectively, both
independently and as a group. Some members of management, including Robert Shaw
as Chief Executive Officer, have recently joined or will have new roles in the
merged company, which will add to the challenges of integration. If USWeb is
unable to integrate with CKS Group or previously acquired companies well, the
company will be less successful and its stock price could decline.
8
<PAGE>
We may compete with other companies with similar growth strategies, and some
of these competitors may be larger and have greater financial and other
resources than USWeb/CKS. Competition for acquisition targets could result in
increased prices for acquisition targets and a diminished pool of companies
available for acquisition.
If USWeb/CKS chooses to use cash for acquisitions in the future, it may need
to obtain additional financing, and such financing may not be available on
favorable terms, or at all. If, as planned, USWeb issues stock to complete
future acquisitions, existing stockholders will experience further ownership
dilution.
Competition; Low Barriers to Entry. The market for Internet professional
services and integrated marketing communications is relatively new, intensely
competitive, rapidly evolving and subject to rapid technological change.
USWeb/CKS's competitors include:
. large computer hardware, software and service vendors, such as IBM
. established advertising and media agencies, such as Ogilvy & Mather
. large information technology consulting service providers, such as
Cambridge Technology Partners
. telecommunications companies, such as AT&T
. major Internet and online service providers, such as America Online
. other Internet integrators and Web presence providers, such as UUNet
Some of these competitors offer a full range of Internet professional
services and integrated marketing communications and several others have
announced their intention to do so. In addition, there are relatively low
barriers to entry into USWeb/CKS's business (for example, no patent
protection). We expect to face additional competition from new entrants into
the market. Furthermore, many of our current and potential competitors have
longer operating histories, longer relationships with clients and significantly
greater financial, technical, marketing and public relations resources than we
do.
Recruitment and Retention of Personnel. USWeb/CKS's business of delivering
Internet professional services is labor intensive. Accordingly, USWeb/CKS's
success depends in part on its ability to identify, hire, train and retain
highly skilled consulting professionals. There is a shortage of these skilled
people, which is likely to continue for some time, and competition to hire them
is intense. USWeb/CKS's performance is also particularly dependent on the
continued services and performance of its executive officers and other key
employees. The loss of the services of any of its executive officers or other
key employees could hurt USWeb/CKS.
Dilution. USWeb/CKS has outstanding a large number of stock options and
warrants to purchase USWeb/CKS's Common Stock. Many of these options and
warrants were issued at a time when the stock price was lower than it is now
and therefore have exercise prices significantly below the current market
price. When and if these options and warrants are exercised, there will be
further dilution to stockholders. USWeb/CKS expects to continue its acquisition
program during the coming year and has registered the 16,666,667 shares of
Common Stock described in this Prospectus. We have issued approximately
10,200,000 of these shares in the past to pay for acquisitions, and we intend
to issue the remaining shares in the future to pay for other acquisitions.
USWeb/CKS may also be required to issue additional shares, stock options and
stock bonuses to the shareholders and employees of acquired companies at each
of six and twelve months after acquisition. For these reasons, USWeb/CKS's
acquisition program will result in further substantial ownership dilution to
investors. This dilution is in addition to dilution that occurs from employee
stock option and purchase programs and financing activities.
Need to Maintain and Strengthen the USWeb/CKS Brands. USWeb/CKS believes
that maintaining and strengthening its brands are important aspects 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 and integrated marketing communications. If
USWeb/CKS fails to promote and
9
<PAGE>
maintain its brands, or incurs excessive expenses in an attempt to promote and
maintain its brands, USWeb/CKS's business, results of operations and financial
condition will suffer and its stock price could decline.
Reliance Upon Key Strategic Relationships. USWeb/CKS has established a number
of strategic relationships with leading hardware and software companies, some
of which can be terminated on short notice by the parties. Maintenance of these
strategic relationships is based primarily on an ongoing mutual business
opportunity and a good overall working relationship rather than legal
contracts. The loss of any one of these strategic relationships could deprive
USWeb/CKS of the opportunity to gain early access to leading-edge technology,
market products cooperatively with the vendor, cross-sell additional services
and gain enhanced access to vendor training and support.
Uncertain Adoption of Internet Solutions; Dependence on Client Outsourcing.
The market for USWeb/CKS's services will depend upon the adoption of intranet,
extranet, Web site and Internet solutions by customers. Critical issues
concerning the use of Internet solutions (including security, reliability,
cost, ease of deployment and administration and bandwidth of the Internet
itself) remain unresolved and may affect the use of such technologies to solve
business problems. Some entities would have to make significant changes in the
way they do business to adapt to the Internet. Even if these issues are
resolved, businesses might not elect to outsource the design, development and
maintenance of their intranets, extranets and Web sites to Internet
professional services firms such as USWeb/CKS.
Rapid Technological Change. Technology in the Internet industry changes very
rapidly, and USWeb/CKS's products and services, as well as the skills of its
employees, could become obsolete quickly. USWeb/CKS's success will depend, in
part, on its ability to improve its existing services, develop new services and
solutions that address the increasingly sophisticated and varied needs of its
current and prospective clients, and respond to technological advances,
emerging industry standards and practices, and competitive service offerings.
Risks Associated with International Operations and Expansion. We have
recently begun expanding operations into international markets. However, we
have only limited experience in acquiring and managing international consulting
offices and in marketing services to international clients. We expect to incur
significant costs to do both. There are risks inherent in doing business on an
international level that could hurt our business, such as:
. unexpected changes in regulatory requirements which could raise the cost
of doing business, or even prevent doing business, or restrict
USWeb/CKS's ability to remove funds or its investments from a country
. economic downturns more sudden and dramatic than those generally
occurring in the U.S.
. changes in currency exchange rates, which could dramatically increase
the price of acquisitions where cash is used or significantly decrease
the profitability of operations where payment is in local currency
. difficulties in structuring acquisitions to make them similar to
previous U.S. acquisitions
. difficulties in staffing and managing foreign operations
. difficulties in using equity incentives for employees, which USWeb/CKS
relies on heavily but which are often less understood outside the U.S.
. differences in business customs
. longer payment cycles
. problems in collecting accounts receivable
. political instability and the risk of military conflict
Risks of Fixed-Price Engagements. We currently bill for most of our projects
on a "time and materials" basis. However, we intend to increase the percentage
of our work that is billed at a fixed-price and the
10
<PAGE>
percentage of revenues from these fixed-price engagements. If we fail to
estimate accurately the resources and time required for a project, to meet
client expectations about the services to be performed, or to complete projects
within budget, we would have cost overruns and, in some cases, penalties, which
could hurt our business.
Risks of Franchising. USWeb/CKS has entered into franchise agreements with
affiliates that manage a small number of its consulting offices. The
operational autonomy granted to each affiliate through the franchise structure
might inhibit USWeb/CKS's control over its market presence and the USWeb/CKS
brand or enable the affiliate to compete with company-owned offices for client
engagements. Further, despite implementation of contractual safeguards and
insurance against such a possibility, a court may hold USWeb responsible for
some action or liability of an affiliate. One claim is pending in a lawsuit
filed in California on June 10, 1998, by Larmark Inc. alleging, among other
claims, breach of contract against USWeb's former affiliate SystemLogic and
that SystemLogic entered into the contract on behalf of USWeb/CKS. USWeb/CKS
believes the claims are without merit and intends to defend itself vigorously
against the claims made.
Intellectual Property Risks. USWeb/CKS regards its copyrights, trademarks,
trade secrets (including its methodologies, practices and tools) and other
intellectual property rights as important to its success. If others infringe or
misappropriate USWeb/CKS's copyrights, trademarks or similar proprietary
rights, USWeb's business could be hurt. In addition, although USWeb/CKS does
not believe that it is infringing the intellectual property rights of others,
other parties might assert infringement claims against USWeb/CKS. Such claims,
even if not true, could result in significant legal and other costs and be a
distraction to management. Protection of intellectual property in many foreign
countries is weaker and less reliable than in the United States, so if
USWeb/CKS's business expands into foreign countries, risks associated with
intellectual property will increase.
Dependence on Key Accounts. CKS Group, a company that merged with USWeb/CKS
in December 1998, was dependent on its five largest clients for a substantial
portion of its revenues during the fiscal year ended November 30, 1997. If any
of CKS Group's major clients or any other client of USWeb/CKS that provides a
substantial portion of overall revenue does not remain a significant customer,
there could be an immediate adverse effect on the company's business. For
instance, one of CKS Group's major clients, Barnett Bank, was acquired during
the fourth quarter of 1997 and, as a result, substantially reduced its level of
spending with CKS Group. This reduction in spending contributed to a
significant decline in CKS Group's earnings during that quarter.
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, throughout 1999,
computer systems and software used by many companies, including customers and
potential customers of USWeb/CKS, may need to be upgraded to comply with such
"Year 2000" requirements. Although USWeb/CKS believes that its principal
internal systems are Year 2000 compliant, some systems are not yet certified,
and failure to provide Year 2000 compliant business solutions to USWeb/CKS's
customers could materially harm USWeb/CKS's business. Furthermore, USWeb/CKS
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 reduce funds available to purchase USWeb/CKS products and
services.
Future Capital Needs; Uncertainty of Additional Financing. USWeb/CKS's future
liquidity and capital requirements will depend upon numerous factors. Some of
these factors are: the timing and amount of funds required for or generated by
operations, the success and duration of USWeb/CKS's acquisition program, and
unanticipated opportunities. USWeb/CKS may seek to raise additional funds
through public or private financing, strategic relationships or other
arrangements. Such additional funding may not be available on terms acceptable
to USWeb/CKS, or at all. Furthermore, we may have to sell stock at prices lower
than
11
<PAGE>
those paid by existing stockholders, which would result in dilution, or we may
have to sell stock or bonds with rights superior to rights of holders of Common
Stock. Any debt financing might involve restrictive covenants that would limit
USWeb/CKS's operating flexibility. Strategic arrangements may require USWeb/CKS
to relinquish its rights to certain of its intellectual property. If adequate
funds are not available on acceptable terms, USWeb/CKS may be unable to develop
or enhance its services and products, take advantage of future opportunities or
respond to competitive pressures.
Government Regulation and Legal Uncertainties. Due to the increasing use of
the Internet, a number of laws and regulations concerning the Internet will
probably be adopted or changed at the local, state, national or international
levels. Such laws are likely to cover issues such as user privacy, freedom of
expression, pricing of products and services, taxation, advertising,
intellectual property rights, information security or the convergence of
traditional communications services with Internet communications. The adoption
or change of any such laws or regulations may decrease use of the Internet,
which could in turn decrease the demand for USWeb/CKS's services or increase
the cost of doing business or in some other manner harm USWeb/CKS's business.
Volatility of Stock Price. The market price of USWeb/CKS's Common Stock has
been and is likely to continue to be highly volatile and could be subject to
wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by USWeb/CKS or its
competitors, changes in financial estimates by securities analysts, overall
equity market conditions or other events or factors. Because USWeb/CKS stock is
more volatile than the market as a whole, USWeb/CKS stock is likely to be
disproportionately harmed by factors that significantly harm the market, such
as economic turmoil and military or political conflict, even if those factors
do not relate to our business. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been brought against that company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which would hurt USWeb/CKS's business.
Potential Liability to Clients. Many of our consulting engagements involve
projects that are critical to the operations of our clients' businesses. Any
failure or inability to meet a client's expectations in the performance of our
services could injure USWeb/CKS's business reputation or result in a claim for
substantial damages. Many of our projects involve use of material that is
confidential or proprietary client information. The successful assertion of one
or more large claims against USWeb/CKS for failing to protect such confidential
information or failing to complete a project properly and on time could
adversely affect USWeb/CKS, even if the insurance we have were to reduce the
immediate effect of the problem.
Litigation. A lawsuit has been filed against CKS Group, a company that
recently merged with USWeb, and certain of its officers and directors on behalf
of stockholders of CKS Group. The lawsuit alleges violations of the Securities
Exchange Act. USWeb/CKS, as successor to the liabilities of CKS Group, will be
at risk financially in this lawsuit. USWeb/CKS believes that this lawsuit is
without merit and intends to defend this action vigorously. However, if the
lawsuit is successful and insurance either does not cover the claim or is
insufficient in amount to cover amounts paid in connection with the claim, it
could hurt the financial position of USWeb/CKS. USWeb/CKS is also likely from
time to time to be the subject of typical lawsuits against companies of its
size and in its industry.
Conflicts of Interest. Conflicts of interest are inherent in certain segments
of the marketing communications industry, particularly in advertising. CKS
Group, a company that merged with USWeb/CKS in December 1998, has in the past,
and USWeb/CKS likely will in the future, be unable to pursue potential
advertising and other opportunities because it would mean offering similar
services to direct competitors. In addition, USWeb/CKS risks alienating
existing clients if it agrees to provide services to even indirect competitors
of existing clients. Because such conflicts may jeopardize revenues generated
from existing clients and preclude access to business prospects, such conflicts
could cause the company's operating results to suffer.
12
<PAGE>
Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. Our board of directors has the
authority to issue up to 1,000,000 shares of Preferred Stock and to determine
the various terms and rights of those shares without any further action by the
stockholders. The rights of holders of Common Stock are subject to the rights
of the holders of any such Preferred Stock that may be issued. 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 USWeb/CKS. We have no present plans to issue shares
of Preferred Stock. Some provisions of USWeb/CKS'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 USWeb/CKS. See
"Description of Capital Stock--Preferred Stock" and "--Certain Antitakeover
Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware
Law."
FORWARD-LOOKING STATEMENTS
This Prospectus contains "forward-looking statements" as defined under
securities laws. These forward-looking statements can be identified by the use
of terminology such as "believes," "expects," "anticipates," "plans," "may,"
"will," "projects," "continues," "estimates," "potential," "opportunity" and so
on. Such forward-looking statements are subject to risks and uncertainties. The
Company's actual results or experience could differ significantly from the
forward-looking statements. Factors that could cause or contribute to such
differences include 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."
These forward-looking statements may be found in the "Prospectus Summary,"
"Risk Factors," "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."
We make no express or implied representation or warranty as to the
attainability of the projected or estimated financial information referenced or
set forth herein as to the accuracy or completeness of the assumptions from
which such projected or estimated information is derived. Projections or
estimations of USWeb/CKS's future performance are necessarily subject to a high
degree of uncertainty and may vary materially and adversely from actual
results. Reference is made to the particular discussions set forth under "Risk
Factors" and "Management's Discussion and Analysis of Financial Conditions and
Results of Operations."
USE OF PROCEEDS
This Prospectus relates to shares of Common Stock that USWeb/CKS may issue
from time to time in connection with proposed acquisitions by USWeb/CKS or one
or more of its subsidiaries. USWeb/CKS will not receive any proceeds from these
offerings other than the value of the businesses or properties acquired by
USWeb/CKS or one or more of its subsidiaries in the proposed acquisitions.
MARKET INFORMATION
USWeb/CKS's Common Stock is traded on the Nasdaq National Market under the
symbol "USWB." Prior to the completion of USWeb's initial public offering on
December 5, 1997, there had been no established trading market for the Common
Stock. USWeb's Common Stock was first offered to the public at a price of $7.50
per share. The last reported sales price by the Nasdaq National Market for
USWeb/CKS's Common Stock on December 21, 1998 was $26.50.
13
<PAGE>
DIVIDEND POLICY
We never declared or paid any cash dividends on its capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do 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 our earnings levels, capital requirements, financial
condition and other factors deemed relevant by the Board of Directors. There
can be no assurance that we will pay any dividends in the future. In September
1998, USWeb adopted a stock repurchase program to buy shares of its common
stock in the open market. The Board of Directors authorized the repurchase of
up to the lesser of 1,000,000 shares or $15,000,000. As of December 21, 1998,
we have not repurchased any shares. The stock repurchase program will expire in
early 1999.
CAPITALIZATION
The following table sets forth the capitalization of USWeb Corporation as of
September 30, 1998 (i) on an actual basis, and (ii) pro forma to reflect the
acquisition by USWeb Corporation of CKS Group, Inc. This table should be read
in conjunction with the Consolidated Financial Statements and Unaudited Pro
Forma Combined Financial Information and Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------
ACTUAL PRO FORMA
---------- ---------
(RESTATED)
(IN THOUSANDS)
<S> <C> <C>
Lease obligations, long-term portion..................... $ 2,005 $ 2,771
Stockholders' equity:
Preferred Stock, $.001 par value, 1,000,000 shares
authorized; no shares issued and outstanding.......... -- --
Common Stock, $.001 par value, 100,000,000 shares
authorized actual;
200,000,000 shares authorized pro forma; 44,668,981
shares issued and outstanding actual; 67,071,420
shares issued and outstanding pro forma(1)............ 41 63
Additional paid-in capital............................. 406,859 489,650
Note receivable........................................ -- (198)
Accumulated deficit.................................... (183,676) (195,554)
--------- ---------
Total stockholders' equity........................... 223,224 293,961
--------- ---------
Total capitalization............................... $ 225,229 $ 296,732
========= =========
</TABLE>
- ---------------------
(1) Excludes, as of September 30, 1998, (i) 27,600,000 shares of Common Stock
reserved for issuance under the Company's stock option plans, of which
14,339,631 shares were issuable upon exercise of outstanding options at a
weighted average exercise price of $13.34 per share, (ii) the assumption of
4,687,058 outstanding options, related to the Company's acquisition of CKS
Group, Inc. as adjusted for the 1.5-to-1 exchange ratio, at a weighted
average exercise price of $9.79 per share, (iii) 2,718,809 shares of Common
Stock issuable upon exercise of outstanding warrants at a weighted average
exercise price of $19.57 per share, (iv) 333,333 shares of Common Stock
reserved for issuance under the Company's Affiliate Warrant Program, of
which 258,563 shares were issuable upon exercise of outstanding warrants at
a weighted average exercise price of $2.53 per share, (v) 3,000,000 shares
of Common Stock reserved for issuance under the Company's 1997 Employee
Stock Purchase Plan, of which 168,064 shares have been issued to date, and
(vi) additional shares of Common Stock that are considered probable of
issuance as stock bonuses and acquisition purchase price adjustments. See
"Risk Factors--Dilution," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisition of Internet
Professional Services Firms," "Business--Consulting Office Network
Development," "Management--Employee Benefit Plans" and Notes 1, 9 and 10 to
Consolidated Financial Statements.
14
<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, our audited consolidated financial statements included elsewhere
in this Prospectus. The selected consolidated financial data for the nine
months ended September 30, 1997 and 1998, are derived from unaudited financial
statements prepared by us and include all adjustments, consisting only of
normal recurring adjustments, which we believe are necessary for a fair
presentation of our results of operations for those periods. Operating results
for the nine months ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The unaudited pro forma combined statement of operations data for the year
ended December 31, 1997 and the nine months ended September 30, 1998, reflect
the effects of the acquisitions of XCom Corporation, Cosmix Corporation, Fetch
Interactive, Inc., NewLink Corporation, InterNetOffice, LLC, NetWORKERS
Corporation, Infopreneurs Inc., Netphaz Corporation, Electronic Images, Inc.,
Multimedia Marketing & Design Inc., KandH, Inc., DreamMedia, Inc., Internet
Cybernautics, Inc., Synergetix Systems Integration, Inc., Online Marketing
Company, Zendatta, Inc., W3design, USWeb-Apex, Inc., Reach Networks, Inc.,
InnoMate Online Marketing GmbH, Utopia Inc., Inter.logic.studios, inc., Quest
Interactive Media, Inc., Ensemble Corporation, Ikonic Interactive, Inc., Xplora
Limited, Kallista, Inc., Nutley Systems, Inc. (nSET), USWeb San Jose, Gray Peak
Technologies, Inc., Advanced Video Communications, Tucker Network Technologies,
Metrix Communications, Inc. and CKS Group, Inc., as if each of the acquisitions
had occurred on January 1, 1997. The unaudited pro forma balance sheet data
reflects the acquisition of CKS Group, Inc., as if such acquisition occurred on
September 30, 1998. All intercompany transactions have been eliminated in
consolidation.
15
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------------------- --------------------------
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
------------------ -------------------- ------------ -------------
1996 1997 1997 1998 1997(2) 1998(3)
-------- -------- -------- ---------- ------------ -------------
(RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA(1):
Revenues:
Services............... $ -- $ 18,366 $ 7,868 $ 72,643 $ 165,914 $ 173,387
Other.................. 1,820 912 808 443 403 443
-------- -------- -------- --------- --------- ---------
Total revenues(4).... 1,820 19,278 8,676 73,086 166,317 173,830
-------- -------- -------- --------- --------- ---------
Cost of revenues:
Services............... -- 13,468 6,196 46,705 109,182 112,040
Other.................. 208 1,294 1,180 700 1,294 700
Provision for loss on
contract.............. -- -- -- 2,094 -- 2,094
Stock compensation(5).. -- 2,420 966 9,415 20,992 15,744
-------- -------- -------- --------- --------- ---------
Total cost of
revenues............. 208 17,182 8,342 58,914 131,468 130,578
-------- -------- -------- --------- --------- ---------
Gross profit............ 1,612 2,096 334 14,172 34,849 43,252
-------- -------- -------- --------- --------- ---------
Operating expenses:
Marketing, sales and
support............... 12,764 20,672 14,119 17,903 35,008 23,669
General and
administrative........ 2,813 10,271 7,027 15,691 39,315 34,759
Acquired in-process
technology(5)......... -- 9,472 6,726 25,508 34,980 --
Stock compensation(5).. -- 6,698 3,500 23,962 38,588 35,227
Amortization of
intangible assets(5).. -- 9,476 4,321 44,539 101,065 52,016
-------- -------- -------- --------- --------- ---------
Total operating
expenses............ 15,577 56,589 35,693 127,603 248,956 145,671
-------- -------- -------- --------- --------- ---------
Loss from operations.... (13,965) (54,493) (35,359) (113,431) (214,107) (102,419)
Interest income......... 215 233 165 2,230 2,528 3,907
Interest expense........ (58) (76) (76) (331) (1,080) (903)
Impairment of investee
carried at cost........ -- (4,000) (4,000) -- (4,000) --
-------- -------- -------- --------- --------- ---------
Loss before income
taxes.................. (13,808) (58,336) (39,270) (111,532) (216,659) (99,415)
Provision for income
taxes(6)............... -- -- -- -- 5,635 5,210
-------- -------- -------- --------- --------- ---------
Net loss(6)............. $(13,808) $(58,336) $(39,270) $(111,532) $(222,294) $(104,625)
======== ======== ======== ========= ========= =========
Net loss per share:
Basic and
diluted(6)(7)(8)..... $ (10.35) $ (7.98) $ (8.10) $ (3.23) $ (5.24) $ (1.61)
======== ======== ======== ========= ========= =========
Weighted average shares
outstanding(7)(8)...... 1,334 7,312 4,845 34,521 42,448 65,137
======== ======== ======== ========= ========= =========
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------- -------------
DECEMBER 31,
----------------- SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998 1998
-------- ------- ------------- -------------
(RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DA-
TA(10):
Cash equivalents and short-term
investments.................... $ 3,220 $44,145 $ 53,652 $100,804
Working capital................. 73 40,516 64,565 88,804
Total assets.................... 7,482 79,250 254,420 407,399
Debt and lease obligations,
long-term portion.............. 436 372 2,005 2,771
Mandatorily Redeemable
Convertible Preferred Stock.... 16,200 -- -- --
Stockholders' equity (deficit).. (12,492) 66,689 223,224 293,961
</TABLE>
- ---------------------
(1) USWeb Corporation was incorporated on December 6, 1995 and had
insignificant activities from inception through December 31, 1995, which
have been included in the 1996 financial statements to facilitate
presentation.
(2) Includes CKS Group results for the years ended November 30, 1997.
(3) Includes CKS Group results for the nine-month period ended August 31,
1998.
(4) Pro forma combined revenue reflects a reclassification of CKS Group's
historical revenues which nets certain production revenues and related
costs to conform to USWeb's accounting policies and basis of presentation.
The effect of netting certain production revenues and related costs was to
decrease both revenues and cost of revenues by $38.6 million and $35.8
million for the year ended December 31, 1997 and the nine months ended
September 30, 1998. See Note 2 of Notes to Unaudited Pro Forma Combined
Financial Information.
(5) Non-cash acquisition-related charges incurred as a result of the Company's
acquisition program. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes 1 and 9 to
Consolidated Financial Statements.
(6) Pro forma net loss and pro forma net loss per share gives effect to the
pro forma tax provision recorded to present CKS Group's acquisition of a
partnership in January 1997, accounted for as a pooling of interests, as
if the partnership had been a C corporation fully subject to income taxes.
See Note 3 of Notes to Unaudited Pro Forma Combined Financial Information.
(7) See Note 2 of Notes to Consolidated Financial Statements for a description
of per share computation and weighted average shares outstanding
computation.
(8) See Note 4 of Notes to Unaudited Pro Forma Combined Financial Information
for description of per share computation and weighted average shares
outstanding computation.
(9) Includes CKS Group consolidated balance sheet data as of August 31, 1998.
(10) It is anticipated that USWeb will incur charges to operations related to
the CKS Merger currently estimated to be $34.0 million, principally in the
quarter in which the CKS Merger is consummated. These charges include
direct transaction costs, primarily for financial advisory and legal fees,
and costs associated with combining operations of the two companies. The
estimated charge is reflected in the unaudited pro forma combined balance
sheet data, but is not reflected in the unaudited pro forma combined
statement of operations data. This charge is a preliminary estimate only
and is subject to change.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(AS RESTATED)
We based the following discussion and analysis on the "Selected Consolidated
Financial Data," "Pro Forma Selected Consolidated Financial Data," "Pro Forma
Consolidated Financial Information" and our Consolidated Financial Statements.
All of that information is included in this Prospectus and you should read it
for greater detail and understanding. This discussion contains forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions, as well as financial trends.
The cautionary statements made below apply to all related forward-looking
statements wherever they appear in this Prospectus. Our 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 in other sections of this Prospectus.
The financial data that we discuss and analyze below is the historical data
of USWeb Corporation up to September 30, 1998 and so does not include the
financial data of CKS Group, which was acquired by USWeb in December 1998.
OVERVIEW
USWeb is a leading Internet professional services firm that provides
Intranet, Extranet and Web site solutions and services to businesses. We have
built a network of consulting offices and what we believe to be one of the most
recognized brands for Internet professional services. We offer a comprehensive
range of services to deliver Internet solutions designed to improve clients'
business processes. Our services include: strategy consulting; analysis and
design; project management; Intranet, Extranet and Web site design; e-commerce
business systems; application development; technology integration; graphic
design and user interface; online marketing and brand development; deployment
and hosting; maintenance and support; integration; audience development; and
maintenance. We market our services to medium and large companies.
From December 6, 1995 (inception) to March 31, 1997, the Company's operating
activities related primarily to recruiting personnel, raising capital,
preparing and securing approval of its Uniform Franchise Offering Circular and
conducting business as a franchisor of Internet professional service firms.
Each such firm that entered into a franchise agreement with us was designated
an "Affiliate." In March 1997, we entered into our last Affiliate agreement and
do not expect to enter into any additional Affiliate agreements. In the first
quarter of 1997, we initiated the second phase of our corporate development
strategy and began to acquire Internet professional services firms, starting
with certain qualified Affiliates. To date, we have derived our revenues from a
combination of service revenues generated by our company-owned offices and fees
paid by our Affiliates. Revenues from company-owned offices, represented
approximately 99% of our total revenues for the nine months ended September 30,
1998. This transition in business strategy from a franchising model to one
based on company-owned operations accounts for the primary differences in the
results of operations between the nine months ended September 30, 1998 and
1997. Because of this transition in business strategy, we believe that our
historical financial statements for periods ending on or before March 31, 1997
are not indicative of future operating results.
We have only a limited operating history upon which to base an evaluation of
our business and prospects. We and our 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 us include, but
are not limited to, an evolving business model and the management of both
internal and acquisition-based growth. To address these risks, we must, among
other things, continue to expand our network of consulting offices, continue to
develop the strength and quality of its operations, maximize the value
delivered to clients, enhance our brands, respond to competitive developments
and continue to attract, retain and motivate qualified
18
<PAGE>
employees. There can be no assurance that we will be successful in meeting
these challenges and addressing such risks, and the failure to do so could have
a material adverse effect on our business, results of operations and financial
condition. We have incurred net losses since inception and as of September 30,
1998, had an accumulated deficit of $183.7 million. Although we have
experienced revenue growth in recent months, such growth rates may not be
sustainable or indicative of future operating results. We expect to continue to
incur substantial operating losses through at least 1999, and we cannot be
certain that our business strategy will be successful or that we will be able
to achieve or sustain profitability. See "Risk Factors--Limited Operating
History; Accumulated Deficit."
RECENT EVENTS
We filed a Registration Statement on Form S-4 (Registration No. 333-63323) in
connection with the merger with CKS Group whereby our stockholders were asked
to approve an increase in the number of authorized shares of Common Stock by
100,000,000 shares and to approve the merger with CKS Group, which has resulted
in the issuance of approximately 24,954,011 shares of our Common Stock. At our
Special Meeting of Stockholders held on December 16, 1998, the stockholders
approved the issuance of USWeb shares of Common Stock in exchange for all
shares of CKS Group Common Stock and an amendment to USWeb Corporation
Certificate of Incorporation to increase the authorized number of shares of
Common stock by 100,000,000 shares.
In November 1998, we entered into an employment arrangement with an
individual who will serve as our Chief Executive Officer. As part of the
employment arrangement, we granted the individual options to purchase 1.2
million shares of the Company's Common Stock with an exercise price of $10.00
per share. The aggregate difference between the exercise price of the options
and the fair market value of the Common Stock on the date of grant,
approximating $8.3 million, will be recognized ratably as an operating expense
over the four-year vesting period of the related options.
In connection with the merger of USWeb and CKS Group, it is anticipated that
USWeb will incur charges to operations approximating $34.0 million, the
majority of which will be incurred in the quarter ended December 31, 1998.
These charges include direct transaction costs, primarily for financial
advisory and legal fees, and costs associated with combining the operations of
the two companies. This charge is a preliminary estimate and may change.
In August 1996, in connection with its acquisition of Schell/Mullaney, CKS
Group recorded goodwill totaling $4.6 million. In November 1997 and 1998, in
connection with additional purchase consideration resulting from earn-out
provisions, additional goodwill totaling $4.5 million and $4.5 million,
respectively, was recorded. As of September 30, 1998, the carrying amount of
Schell/Mullaney goodwill aggregated $13.1 million. In December 1998, due to
declining revenues and operating results of the acquired business, CKS Group
performed an evaluation of recoverability of the carrying amount of the
goodwill by comparing the undiscounted cash flows expected to be generated by
the acquired business to the carrying amount of the goodwill. Such evaluation
determined that the goodwill was impaired, and USWeb/CKS expects to record an
impairment charge of $11.1 million in its quarter ended December 31, 1998 to
write down the goodwill to its discounted cash flow value of $2.0 million.
ACQUISITION OF INTERNET PROFESSIONAL SERVICES FIRMS AND STRATEGIC ALLIANCE
We began acquiring selected Internet professional services firms in the first
quarter of 1997. We transitioned from a franchise-based business model to one
based on company-owned operations to provide greater economies of scale, enable
the consulting offices to focus on providing Internet professional services and
facilitate their growth by furnishing needed working capital. See Note 1 to
Consolidated Financial Statements.
We typically determine the purchase price of each acquisition candidate based
on strategic fit, geographic coverage, historical revenues, profitability,
financial condition and contract backlog, and our
19
<PAGE>
qualitative evaluation of the candidate's management team, operational
scalability and customer base. We typically acquire suitable candidates through
mergers in exchange for shares of our Common Stock. Generally, with respect to
past domestic acquisitions, at least fifty percent of the shares to be issued
are deposited into a one-year escrow and the remaining shares are delivered to
the acquired company's shareholders. The acquired company is valued again,
typically at each of six and twelve months after acquisition, and additional
shares are issued or escrowed shares are returned depending on whether the
valuation has increased or decreased. After all such purchase price adjustments
have been made, all shares remaining in escrow are issued to the acquired
company's shareholders. We expect to continue using this valuation and payment
methodology for a number of future acquisitions; however, in certain situations
we may use other methodologies as appropriate. For example, we may increasingly
use cash to pay for acquisitions and, in particular, we intend to increase our
use of cash in international acquisitions. The acquisition program will result
in further substantial ownership dilution to investors. See "Risk Factors--
Dilution" and Notes 1 and 12 of Notes to Consolidated Financial Statements.
The acquisitions have been accounted for using the purchase method of
accounting, although the merger with CKS Group has been accounted for using the
pooling-of-interests method. For each purchase acquisition to date, a portion
of the purchase price is allocated to the tangible and identifiable intangible
assets acquired and liabilities assumed based on their respective fair values
on the acquisition date. Identifiable intangible assets include (i) amounts
allocated to in-process technology and immediately charged to operations, (ii)
amounts allocated to completed technology and amortized on a straight-line
basis over the estimated useful life of the technology of six months to one
year, and (iii) amounts allocated to goodwill (primarily workforce in place)
and amortized on a straight-line basis over twelve to forty-two years. The
results of operations of the acquired entity are consolidated with ours as of
the date we acquire effective control of the entity, which generally occurs
prior to the formal legal closing of the transaction and the physical exchange
of acquisition consideration.
Target company employees and non-employee shareholders that enter into
consulting agreements are generally granted options to purchase shares of
USWeb's Common Stock, which typically become exercisable over a 36-month
period. These options have an exercise price per share equal to at least the
fair market value of a share of USWeb Common Stock on the date of grant.
Additional options generally are granted at the revaluation dates if the target
company's formula-based valuation increases. In most cases, each optionee is
also given the right to receive a stock bonus at the time an option is granted.
The stock bonus vests at the same rate as the corresponding option and is equal
in value to the aggregate exercise price of this option. The stock bonus is
payable at the earlier of three years from the date of grant or, to the extent
vested, upon termination of employment. The stock bonus amount is amortized
ratably over a 36-month period and recorded as compensation expense. This
charge is identified as "Stock Compensation" and allocated to cost of revenues
or operating expenses depending on whether the optionee is acting in a service
delivery or administrative capacity.
During the nine-month period ended September 30, 1998, USWeb options were
exchanged for outstanding vested options only with respect to the acquisitions
of Gray Peak Technologies, Inc. and Ikonic Interactive, Inc. In these
transactions, the value of such options was determined using the Black-Scholes
option pricing model and included in the determination of purchase price. For
transactions in which option vesting accelerated as a result of the merger
transaction, the vested options were required to be exercised prior to
acquisition and the resultant target company shares exchanged for USWeb Common
Stock. The exercise price of each option is equal to at least the fair market
value of a share of USWeb Common Stock on the date of grant and such options
generally vest over three years. Options granted to new employees at fair
market value in exchange for future services are accounted for in accordance
with APB Opinion No. 25, with no compensation expense recognized in our
consolidated financial statements. Options granted to consultants with non-
variable terms are valued on the date of grant using the Black-Scholes option
pricing model with the resulting compensation cost being allocated to cost of
revenues or operating expenses depending on whether the optionee is acting in a
services delivery or administrative capacity.
20
<PAGE>
In May 1998, we entered into a strategic alliance with NBC Multimedia, Inc.
("NBC") to expand production capabilities for NBC's interactive properties and
services. As part of the strategic alliance, NBC awarded us a multi-year
contract with expected revenues of approximately $11.0 million. In connection
with the strategic alliance, we issued warrants to NBC allowing them to
purchase 1,600,000 shares at $22.50 each and 500,000 shares at $25.43 each.
Warrants to purchase 1,050,000 shares are exercisable at any time prior to
their expiration in November 1999 (the "Fixed Warrants"). Warrants to purchase
the remaining 1,050,000 shares are subject to cancellation, or if previously
exercised, are subject to repurchase at the original purchase price, in the
event that the agreement is cancelled by NBC prior to May 2002 (the "Variable
Warrants"). Of the total value ascribed to the NBC warrants, $6.3 million was
attributable to the Fixed Warrants and recorded as part of stock compensation
in operating expenses in the quarter ended June 30, 1998, and $9.4 million was
attributable to the Variable Warrants. Because the inclusion of the value of
the Variable Warrants as a part of the NBC contract will result in an overall
loss on the contract, an accrual of $9.4 million was provided in the quarter
ended June 30, 1998 to recognize this loss. The Variable Warrants are subject
to future revaluation at each balance sheet date through the date the related
cancellation or repurchase rights lapse. During the quarter ended September 30,
1998, we recorded a recovery of the previously recognized loss totaling $7.3
million due to changes in the estimated fair value of the Variable Warrants.
Because of purchase accounting adjustments, stock compensation charges and
charges associated with the NBC warrants described above, we have incurred
significant non-cash expenses. For example, for the nine-month period ended
September 30, 1998, stock compensation expense included in cost of revenues
totaled $9.4 million, stock compensation expense included in operating expenses
totaled $24.0 million (including the $6.3 million associated with warrants
issued to NBC; see "Results of Operations--Stock Compensation") and
amortization of intangible assets totaled $44.5 million, all of which were
related to the acquisition of the thirty-three company-owned offices completed
since USWeb Corporation was formed. In addition, we have recognized an
aggregate cost of $25.5 million for acquired in-process technology related to
the 14 acquisitions during the nine-month period ended September 30, 1998. We
expect these acquisition-related non-cash expenses to continue on a basis
corresponding with the operation of the acquisition program.
To capitalize on the growth opportunities for a newly acquired consulting
office, we often hire additional Internet professionals during the three-month
period following the office's integration into our network. The amount of work
these new employees can complete at first is not as great as that accomplished
by seasoned employees because of the time spent on training and professional
development. Consequently, we expect 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. We feel that this
investment in training and professional development will contribute to our
long-term ability to meet growth targets.
Successful implementation of our acquisition strategy depends on our ability
to identify suitable acquisition candidates, acquire such companies on
acceptable terms and integrate their operations successfully. We may not be
able to do so. Moreover, in pursuing acquisitions we may compete with companies
with similar acquisition strategies, certain of which competitors may be larger
and have greater financial and other resources than we do. 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
our 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 our reputation, and any acquired subsidiary could
significantly under-perform relative to our expectations. For all of these
reasons, our pursuit of an overall acquisition strategy or any individual
completed, pending or future
21
<PAGE>
acquisition may have a material adverse effect on our business, results of
operations and financial condition. To the extent we choose to use cash
consideration in the future to pay for all or part of any acquisition, we may
be required to obtain additional financing, which may not be available on
favorable terms, if at all.
SOURCES OF REVENUES
We consolidate the financial statements of acquired entities beginning on the
date we assume effective control of those entities. Revenues primarily consist
of fees from consulting services engagements (including both time-and-materials
and fixed-price engagements). The services we offer include strategy
consulting; analysis and design; project management; Intranet, Extranet and Web
site design; e-commerce business systems; application development; technology
integration; graphic design and user interface; online marketing and brand
development; deployment and hosting; and maintenance and support. Revenues from
time-and-material engagements are recognized as incurred and revenues from
fixed-price engagements are recognized using the percentage-of-completion
method. Billable rates vary by the service provided and geographical region.
Although a majority of engagements are currently performed on a time and
materials basis, we intend to increase the percentage of engagements that are
based on a fixed-price. The pricing, management and execution of individual
engagements are the responsibility of the consulting office that performs or
coordinates the services.
USWeb operated under its Affiliate model from its inception in December 1995
through the first quarter of 1997. During that period, revenues were derived
almost exclusively from initial fees and monthly royalties from Affiliates.
Initial fees were typically recognized when received because all obligations
required of USWeb by the Affiliate agreement were substantially performed
concurrently with the execution of the agreement. Monthly royalty revenue is
recognized as reported by the Affiliate to USWeb. In the first quarter of 1997,
USWeb ended its program for attracting new Affiliates and initiated the
acquisition phase of its corporate development strategy. During the nine months
ended September 30, 1998, revenues from Affiliates were insignificant.
COST STRUCTURE
Consulting offices we own recognize revenues primarily using the percentage-
of-completion method. Direct costs, such as personnel salaries and benefits and
the cost of any third-party hardware or software included in an Internet
solution, and related overhead expenses, such as depreciation and occupancy
charges, associated with the generation of the revenues are classified as cost
of revenues. The technology, sales, marketing and administrative costs of each
company-owned office are classified as operating expenses. Corporate expenses
are primarily classified as operating expenses. Marketing and sales expenses
include product and service research, advertising, brand name promotions and
lead-generation activities, as well as the salary and benefits costs of the
personnel in these functions. General and administrative expenses include
accounting, legal and human resources costs.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
Revenues. Total revenues increased to $19.3 million for the year ended
December 31, 1997 from $1.8 million for the year ended December 31, 1996. This
increase is primarily attributable to beginning our acquisition program in the
first quarter of 1997. No service revenues have been recorded for the year
ended December 31, 1996 because during this period we did not have any company-
owned offices and instead we derived our revenues from initial fees and monthly
royalties from Affiliates. We anticipate 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 is primarily
22
<PAGE>
attributable to the cost of revenues associated with company-owned offices
subsequent to their respective acquisition dates. We anticipate that cost of
revenues will increase in absolute dollars as service fees generated by the
company-owned offices and the level of services increase, and as a result of
acquisitions of additional Internet professional service firms.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased to $20.7 million for the year ended December 31, 1997 from $12.8
million for the year ended December 31, 1996. Approximately $3.9 million of the
increase is due to the consolidation of the results of operations of acquired
Internet professional services firms with those of our Company throughout 1997,
$3.7 million was due to increases in personnel to support our growth in
operations and $1.3 million was due to our branding campaigns. These increases
were partially offset by decreases in marketing and operations activities of
$2.1 million resulting from the transition of the affiliate franchising model
to company-owned operations. In addition, during December 1997, we recognized a
non-cash charge of $1.3 million associated with the discounted sale of Common
Stock to Intel Corporation. We anticipate that marketing, sales and support
expenses will increase in future periods in absolute dollars as we continue to
pursue an aggressive brand building strategy and continue 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 is primarily
attributable to $3.7 million related to the consolidation of the results of
operations of acquired Internet professional services firms with those of our
Company throughout 1997, $2.2 million of increases in personnel and overhead
costs to support the internal growth in our Company's operations and a non-cash
severance related compensation charge of $1.1 million during the quarter ended
September 30, 1997 related to our decision to end its program for attracting
new Affiliates. We believe 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 our Company.
Acquired In-Process Technology. We recognized the cost of acquired in-process
technology totaling $9.5 million during the year ended December 31, 1997. We
did not record any such expenses for the year ended December 31, 1996, because
we did not acquire any entities during the 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. We anticipate that acquired
in-process technology expenses will increase in future periods in absolute
dollars as we continue 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. We did not record any such expenses for the year ended
December 31, 1996 because we did not acquire any entities during the period. We
anticipate that stock compensation expense will increase in future periods in
absolute dollars as we continue 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. We did not record any such expenses for the
year ended December 31, 1996 because we did not acquire any entities during the
period. We anticipate that costs related to the amortization of intangible
assets will increase in future periods in absolute dollars as we continue to
acquire Internet professional service firms.
Impairment of Investee. During June 1997, we recognized an impairment
provision totaling $4.0 million, representing the total amount of our cost
basis investment in Utopia Inc., an independent Internet consulting firm. In
assessing the level of impairment, we 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.
23
<PAGE>
Income Taxes. No provision for federal and state income taxes has been
recorded for either of the years ended December 31, 1997 and 1996 because we
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
our acquisition program and a $4.0 million impairment charge relating to an
investee carried at cost.
Nine Months Ended September 30, 1998 and 1997
Revenues. Total revenues increased to $73.1 million for the nine months ended
September 30, 1998, from $8.7 million for the nine months ended September 30,
1997. This increase is attributable to our acquisition program, which began in
the first quarter of 1997, combined with the increased number and relative size
of client engagements. We had completed 33 acquisitions as of September 30,
1998 compared to 16 as of September 30, 1997.
Cost of Revenues. Cost of revenues increased to $58.9 million for the nine
months ended September 30, 1998, from $8.3 million for the nine months ended
September 30, 1997. The increase in cost of revenues is primarily attributable
to the cost of revenues associated with acquired companies subsequent to their
respective acquisition dates which aggregated $28.4 million and to the
increased staffing for engagements that resulted in $12.1 million of additional
cost during the period. Also included in cost of revenues is an increase in
stock compensation of $8.4 million in connection with stock bonus awards to
employees of newly acquired entities and an accrual of $2.1 million to provide
for a loss on our contract with NBC (see Note 12 of Notes to Consolidated
Financial Statements). As a percentage of revenues, cost of revenues decreased
to 80% for the nine months ended September 30, 1998, from 96% for the
corresponding period in 1997. This decrease resulted from the further
integration of our acquisitions, many of which were fully integrated as of
September 30, 1998. Included in cost of revenues for the nine months ended
September 30, 1998 are non-cash charges aggregating $14.0 million, which
include an accrual to provide for a loss on our contract with NBC, stock
compensation resulting from our acquisition program and depreciation and
amortization of fixed assets and leasehold improvements. We anticipate that
cost of revenues will increase in absolute dollars as a result of acquisitions
of additional Internet professional service firms and as company-owned offices
accept additional engagements. In addition, we expect that the provision for
(recovery of) loss on contract will continue to reflect significant volatility
based on changes in the estimated fair value of the Variable Warrants.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased to $17.9 million for the nine months ended September 30, 1998, from
$14.1 million for the nine months ended September 30, 1997. Approximately $6.1
million of this increase is attributable to the consolidation of the results of
operation of additional Internet professional services firms with those of our
company during the period. This increase was partially offset by decreases in
marketing and operations activities of $1.9 million resulting from the
transition from the affiliate franchising model to company-owned operations. As
a percentage of revenues, marketing, sales and support expenses decreased to
24% of revenues for the nine months ended September 30, 1998, compared to 163%
for the corresponding period in 1997. This decrease resulted primarily from
economies of scale. Included in marketing, sales and support expenses for the
nine months ended September 30, 1998 are non-cash charges aggregating $244,000
related to depreciation and amortization of fixed assets and leasehold
improvements. We anticipate that marketing, sales and support expenses will
increase in future periods in absolute dollars as we continue to pursue an
aggressive brand building strategy and continues to acquire and consolidate the
results of additional Internet professional service firms.
General and Administrative Expenses. General and administrative expenses
increased to $15.7 million for the nine months ended September 30, 1998, from
$7.0 million for the nine months ended September 30,
24
<PAGE>
1997. This increase was primarily attributed to an increase of $5.3 million
resulting from the consolidation of the operations of acquired Internet
professional services firms with those of our Company during each period and
increases in personnel and overhead costs to support the internal growth in our
operations totaling $3.2 million. As a percentage of revenues, general and
administrative expenses decreased to 21% of revenues for the nine months ended
September 30, 1998, compared to 80% for the corresponding period in 1997. This
decrease resulted primarily from economies of scale. Included in general and
administrative expenses for the nine months ended September 30, 1998 are non-
cash charges aggregating $389,000 related to depreciation and amortization of
fixed assets and leasehold improvements. We believe that the absolute dollar
level of general and administrative expenses will increase in future periods as
a result of increased staffing and costs associated with acquiring and
consolidating the results of additional Internet professional service firms.
Acquired In-Process Technology. Acquired in-process technology increased to
$25.5 million for the nine months ended September 30, 1998, from $6.7 million
for the nine months ended September 30, 1997. This increase resulted from the
number and relative size of acquisitions completed in the nine months ended
September 30, 1998, compared to the corresponding period in 1997. The value of
the acquired in-process technology was determined using a combination of risk-
adjusted income approaches and independent valuations. The acquired in-process
technology related to each company had not reached the stage of technological
feasibility at the date of acquisition and had no alternative future use. We
anticipate that acquired in-process technology expenses in future periods will
vary in absolute dollars and as a percentage of revenues.
Stock Compensation. Stock compensation expense increased to $24.0 million for
the nine months ended September 30, 1998, from $3.5 million for the nine months
ended September 30, 1997. Included in stock compensation is $6.3 million
associated with the value of the Fixed Warrants granted to NBC in connection
with a strategic relationship (see Note 12 of Notes to Consolidated Financial
Statements) as well as costs relating to stock bonus awards to employees of
acquired entities. The increase in stock compensation expense for the nine
months ended September 30, 1998, as compared to the corresponding period in
1997, resulted from the value of the warrants associated with the NBC
agreement, as well as the increased number and relative size of our various
acquisitions. We anticipate that stock compensation expense will vary in future
periods.
Amortization of Intangible Assets. Amortization of intangible assets,
consisting primarily of purchased technology, and goodwill (primarily workforce
in place), increased to $44.5 million for the nine months ended September 30,
1998, from $4.3 million for the nine months ended September 30, 1997. This
increase resulted from the increased number and relative size of our
acquisitions completed prior to September 30, 1998. We anticipate that expenses
related to the amortization of intangible assets will increase in future
periods in absolute dollars as we continue to acquire additional Internet
professional service firms.
Interest Income and Expense. Net interest income increased to $2.2 million
for the nine months ended September 30, 1998, from $165,000 for the nine months
ended September 30, 1997. This increase resulted from interest earned on the
investment of the net proceeds of our public equity offerings, completed in
December 1997 and April 1998, offset by interest expense incurred on our debt
and lease obligations.
Income Taxes. No provision for federal and state income taxes has been
recorded for the nine months ended September 30, 1998 and 1997 because we
incurred net operating losses in each of those periods.
Impairment of Investee. During June 1997, we recognized an impairment
provision totaling $4.0 million, representing the total amount of our cost
basis investment in Utopia, Inc., an independent Internet consulting firm.
Net Loss. Net losses for the nine months ended September 30, 1998 and 1997
were $111.5 million and $39.3 million, respectively. The increase in the net
loss is primarily attributable to non-cash charges of
25
<PAGE>
$108.7 million for the nine months ended September 30, 1998, the majority of
which resulted from our acquisition program, compared to non-cash charges of
$16.3 million for the nine months ended September 30, 1997. Excluding the non-
cash charges, we had a net loss of $2.8 million for the nine months ended
September 30, 1998, compared to a net loss of $23.0 million for the nine-month
period in the prior year.
FACTORS AFFECTING OPERATING RESULTS
Our operating results may fluctuate significantly in the future as a result
of a variety of factors, many of which are outside the our control. These
factors include:
. the level of demand for Intranet, Extranet and Web site development;
. the productivity of our consulting offices;
. Our success in finding and acquiring suitable acquisition candidates;
. Our 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 our clients for Internet
professional services;
. client budgetary cycles;
. the amount and timing of capital expenditures and other costs relating
to the expansion of our operations;
. the introduction of new products or services by us or our 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, we may
from time to time make certain pricing, service, technology or marketing
decisions or business or technology acquisitions that could hurt us. We may
also experience seasonality in our business in the future, resulting in
diminished revenues as a consequence of decreased demand for Internet
professional services during summer and year-end vacation and holiday periods.
Due to all of the foregoing factors, in future periods our operating results
may fall below the expectations of securities analysts and investors. If that
happens, the trading price of our Common Stock would likely drop. See "Risk
Factors--Potential Fluctuations in Quarterly Results."
RECENT ACCOUNTING PRONOUNCEMENTS
We adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" in the nine months ended
September 30, 1998. SFAS No. 130 requires us to report in our financial
statements, in addition to our net income (loss), comprehensive income (loss),
which includes all changes in equity during a period from non-owner sources
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. During the nine months September 30, 1998, such items were
not significant, and our comprehensive loss approximated its net loss.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
adoption of SFAS No. 131 is required for fiscal years beginning after December
15, 1997. SFAS No. 131 requires that companies report separately in their
financial statements certain financial and descriptive information about
operating segments, if applicable. We do not expect the adoption of SFAS No.
131 to have any impact on our consolidated financial results and is currently
assessing the disclosure requirements of the new pronouncement.
26
<PAGE>
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. We have not yet determined the impact,
if any, of adopting SOP 98-1, which will be effective for the year ending
December 31, 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. SFAS 133 requires that all derivatives
be recognized in the balance sheet at their fair market value and the
corresponding derivative gains or losses be either reported in the statement of
operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivatives. We have not yet determined the
effect, if any, of adopting SFAS 133, which will be effective for our fiscal
year 2000.
YEAR 2000
Many computer systems and software and electronic products are coded to
accept only two-digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. In addition, certain systems and products do not correctly
process "leap year" dates. As a result, in the next 14 months, computer systems
and software ("IT Systems") and other property and equipment not directly
associated with information systems ("Non-IT Systems"), such as elevators,
phones, other office equipment used by many companies may need to be upgraded,
repaired or replaced to comply with such "Year 2000" requirements, and "leap
year" requirements.
USWeb Corporation has conducted an internal review of most of its internal
corporate headquarters IT Systems, including finance, human resources, Intranet
applications and payroll systems. USWeb Corporation has contacted most of the
vendors of its internal corporate headquarters IT Systems to determine
potential exposure to Year 2000 issues and has obtained certificates from such
vendors assuring Year 2000 compliance. Although we have determined that most of
our principal internal corporate headquarters IT Systems are Year 2000
compliant, certain of such internal systems, including our Windows NT operating
system and internal networking systems are not Year 2000 compliant or have not
been evaluated by us. We have not yet made an assessment of the status of the
IT Systems at our subsidiaries or the Non-IT Systems for our corporate
headquarters and our subsidiaries.
As part of the integration of USWeb and CKS Group in connection with the
merger, we have appointed a task force (the "Task Force") to oversee Year 2000
and leap year issues of USWeb/CKS. The task force is expected to review all IT
Systems and Non-IT Systems that have not been determined to be Year 2000 and
leap year compliant and will attempt to identify and implement solutions to
ensure such compliance. We expect to evaluate our systems for Year 2000 and
leap year compliance in accordance with the DISC PD2000-1 Year 2000 compliance
standards established by the British Standards Institute. To date, we have
spent an immaterial amount to remediate our Year 2000 issues. We presently
estimate that the total cost of addressing our Year 2000 and leap year issues
will be immaterial. These estimates were derived using numerous assumptions,
including the assumption that we already identified our most significant Year
2000 and leap year issues and that the plans of our third-party suppliers will
be fulfilled in a timely manner without cost to us. However, these assumptions
may not be accurate, and actual results could differ materially from those
anticipated.
USWeb/CKS has been informed by most of its suppliers that such suppliers will
be Year 2000 compliant by the Year 2000. Any failure of these third parties
systems to timely achieve Year 2000 compliance could materially harm
USWeb/CKS's business, financial condition, results of operations and prospects.
27
<PAGE>
USWeb/CKS has not determined the state of compliance of certain third-party
suppliers of services such as phone companies, long distance carriers,
financial institutions and electric companies. The failure of any one of such
third party suppliers to achieve Year 2000 compliance could severely disrupt
our ability to carry on business as well as disrupt the business of our
customers.
Failure to provide Year 2000 and leap year compliant business solutions to
our customers or to receive such business solutions from our suppliers could
result in liability to USWeb/CKS or otherwise materially harm our business,
results of operations, financial condition and prospects. Furthermore, we
believe that the purchasing patterns of customers and potential customers may
be affected by Year 2000 issues as companies expend significant resources to
correct or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase products and
services such as those offered by USWeb/CKS, which could materially harm
USWeb/CKS's business, results of operations and financial condition. USWeb/CKS
could be affected through disruptions in the operation of the enterprises with
which USWeb/CKS interacts or from general widespread problems or an economic
crisis resulting from noncompliant Year 2000 systems. Despite our efforts to
address the Year 2000 effect on our internal systems and business operations,
such effect could result in a material disruption of our business or have a
material adverse effect on our financial condition or results of operations.
USWeb/CKS has not developed a contingency plan to respond to any of the
foregoing consequences of internal and external failures to be Year 2000 and
leap year compliant, but we expect the Task Force will develop such a plan.
28
<PAGE>
BUSINESS
The following Business section contains forward-looking statements. These
statements include, without limitation, the development of electronic commerce
and related Internet professional services markets, a description of our
efforts to develop and implement new services and products, our acquisition
strategy and industry trends. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of a variety
of factors, including those factors described in the section entitled "Risk
Factors" and elsewhere in this Prospectus, some of which our beyond our
control. See "Forward-Looking Statements." References in this Business section
to "USWeb," "USWeb/CKS," "we," "our" and "us" are to USWeb Corporation.
OVERVIEW
USWeb/CKS is professional services firm with expertise in business strategy,
marketing communications, and Internet technology solutions. Our clients are
typically medium-sized and large companies. We have built a network of
consulting offices throughout the United States and in several countries
outside the United States. By combining our expertise with industry-specific
knowledge, we provide an integrated service offering to help clients define
strategies and implement innovative ways to build their businesses. We provide
a comprehensive range of Intranet, Extranet and Web site solutions and
services, as well as marketing communications programs that use advanced
technology solutions and new media. Our Internet professional services include
strategy consulting; analysis and design; technology development;
implementation and integration; audience development and maintenance. Our
marketing communications services include strategic corporate and product
positioning, corporate identity and product branding, new media, collateral
systems, environmental design, packaging, advertising, media placement, direct
marketing, and consumer and trade promotions.
Prior to joining together in December 1998, USWeb Corporation was a
recognized leader in the Internet services market and CKS Group, Inc. was an
integrated marketing services and technology company. Together as USWeb/CKS, we
offer a comprehensive range of services to deliver solutions designed to
improve our clients' business processes and to effectively market their
products and services.
INDUSTRY BACKGROUND
Intranets, Extranets and Web sites (collectively, "Internet solutions")
provide companies with a new set of tools for improving basic business
processes such as communications, data transmission, marketing, transaction
processing and customer service. An Intranet enables a company's employees to
receive corporate information and training efficiently, communicate through e-
mail, use the internal network's business applications, and access proprietary
information and legacy databases. An Extranet can extend part or all of the
functionality of a secure Intranet to selected business partners outside of the
company, such as customers, suppliers or distributors. Forrester Research, Inc.
("Forrester") estimates that the worldwide market to build business-to-business
Internet sites that support transactions and dynamic trading processes will
increase from $253 million in 1998 to $2.7 billion in 2002. Web sites, which
are accessible by the general public, can present advertising and marketing
materials in new and compelling fashions, display products and services in
electronic catalogs, offer products and services for sale online, process
transactions and fulfill orders, provide customers with rapid and accurate
responses to their questions, and gather customer feedback efficiently.
Forrester expects the shift to electronic commerce will drive the worldwide
Internet development services market from $4 billion in 1998 to $15 billion by
2002. We believe that the market size estimates in this paragraph are based on
reasonable assumptions about the number of companies that will adopt Internet
and e-Commerce solutions and the speed and cost of such implementation;
however, actual development of these markets will be dependent on many factors
outside our control.
Businesses are rapidly adopting Internet solutions. Companies implementing
Internet solutions often must rely on fundamentally new business approaches
because these solutions utilize new technologies and
29
<PAGE>
allow companies to implement a broad scope of business process improvements.
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.
Similarly, recent trends are changing the marketing communications
requirements of businesses throughout the world. Businesses must also be able
to rapidly develop and execute marketing strategies because shortening product
life cycles reduce preparation time for marketing campaigns. New media,
including Internet-related services, as well as CDROMs, laptop PC presentations
and interactive kiosks, have emerged as an integral component of marketing and
communication strategy. These new media and the increasing complexity of
sophisticated digital delivery, storage and multimedia enhancement tools and
technologies enable companies to improve the effectiveness of communications,
but pose additional challenges to businesses striving to link business strategy
with rapidly changing technologies.
To perform the multitude of Internet professional services and integrated
marketing communications services 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 limit
workforces in the information technology management and marketing areas.
Accordingly, many businesses have chosen to outsource a significant portion of
the design, development and maintenance of their Intranets, Extranets and Web
sites and the development and implementation of their marketing strategies to
independent professionals. These independent professionals can leverage
accumulated strategic, technical and creative talent and track developments in
a field characterized by extremely short technology, process and content
lifecycles.
Companies seeking to establish Internet solutions may turn to their
traditional marketing or technology service providers for assistance. However,
most of these providers have neither a proven track record of successful
Internet solution deployment nor the full portfolio of strategy, technology,
marketing and creative skills required to serve client needs effectively. Most
advertising and marketing communications agencies lack the extensive technical
skills, such as application development and legacy system and database
integration, required to produce the increasingly complex and functional
solutions demanded by clients. Most national information technology consulting
service providers have sizable corporate infrastructures and have therefore
chosen to focus on multi-million dollar engagements such as Year 2000 projects
and client/server enterprise resource planning software deployments, not
Internet solution consulting engagements. Most large computer technology
product and service vendors lack the creative and marketing skills required to
build audiences and deliver unique and compelling content, and are further
constrained by their need to recommend their proprietary brands. Internet
access service providers, whose core strength is in providing Internet access
and site hosting rather than solution development, typically lack both the
necessary creative and application development skills. A number of small
Internet professional services firms have emerged to address the significant
and rapidly growing market for Internet solutions. However, the small size and
capital constraints of most of these firms restrict their ability to supply
clients with the necessary depth and integration of strategic, technical and
creative skills. Furthermore, many of these providers tend to develop expertise
in a limited number of vertical markets because of the need to leverage
30
<PAGE>
the information and experiences gained from the relatively small number of
Internet solution engagements they have completed.
We believe that the rapidly increasing demand for Internet solutions and
integrated marketing communications services, 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 and integrated
marketing communications 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/CKS SOLUTION
Our mission is to provide clients with the vision, expertise and resources
required to develop new strategies and improve business processes using
Internet solutions and integrated marketing communications. To capitalize on
the opportunity presented by the rapid growth in demand for such solutions we
have built and are continuing to expand a professional services firm with over
50 company-owned and Affiliate offices as of December 21, 1998. In contrast to
the fragmented group of other organizations attempting to serve this demand, we
are an integrated international firm, with local offices that can develop close
client relationships and an understanding of client needs. Each consulting
office benefits from the resources of our overall 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 a centralized index of best demonstrated
practice methodologies, a technology library of proprietary reusable software
and content objects, a central project registry and executive briefing programs
for client decision makers.
We believe that our operational model enables us to scale rapidly by
leveraging our central resources as our operations expand. First, we believe
that our aggregation and deployment of the accumulated experience and expertise
of our network of offices provides clients with enhanced business solutions.
Second, our ability to leverage central technology and operational resources
enables us 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, our brand development
campaign, which reinforces the message that USWeb/CKS is a secure, reliable,
high quality choice for the provision of marketing communications and Internet
professional services, increases our ability to access and influence key client
decision makers.
STRATEGY
Our objective is to become and remain the leading global Internet
professional services and integrated marketing communications firm. Our
strategy to achieve this objective includes the following elements:
Use Integration as a Tool for Building Relationships. Our client
relationships have typically begun with a single assignment that might
encompass corporate identity or packaging, an electronic commerce system, or a
World Wide Web site. Such single project relationships have allowed clients to
experience our services with minimal long-term risk. In many instances, with
clients such as Fujitsu PC Corporation, Apple Computer, and Audi of America,
Inc., we have been successful in expanding relationships beyond the single-
project assignment to include additional projects in other disciplines. We
intend to aggressively promote the benefits of our integrated services offering
and leverage our integrated approach as a tool for building and enhancing
client relationships.
31
<PAGE>
Continue to Expand Network of Company-Owned Offices. We are continuing to
build our network of company-owned offices through acquisitions and internal
growth. Acquisition efforts are focused on strategic and international
opportunities. We believe 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 us
with a substantial competitive advantage. As of December 21, 1998, USWeb/CKS
had company-owned offices in 45 locations across the United States, as well as
offices in Dusseldorf, Munich and Hamburg, Germany, Vienna, Austria, Boulogne
and Paris, France, Zurich, Switzerland and offices near London and in Bracknell
in the United Kingdom.
Strengthen Position as a Leading Internet Professional Services Firm. We are
continuing to strengthen our position as a leading Internet professional
services firm in order to provide clients with superior Internet solutions. We
intend 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.
Our investment in tools and technologies has been an important factor in
recruiting and retaining talented employees who are attracted to our
technology-driven culture. We are continuing to develop a library of partially
pre-built Internet solutions that combine our methodologies, services and
reusable software and content objects with third-party software. Our consulting
offices intend to continue leveraging our nationwide presence, operational
scale and professional marketing tools, which provide each consulting office
with resources and credibility to convince client decision makers that we can
provide successful Internet solutions to meet the most demanding business
needs. We also intend to remain focused on delivering the Internet solution
best suited to a client's needs.
Creative Excellence. We strive to provide creative solutions in all areas of
marketing communications to meet or exceed the highest standards of service
within each individual discipline. We have received numerous honors and awards,
including Addy Awards, Margaret Larsen Awards for Design, Murphy Awards, Telly
Awards and a Communication Arts Design Annual Award. In order to maintain high
levels of creativity and quality, we place great importance on recruiting and
retaining talented employees. Our investment in tools and technologies has been
an important factor in recruiting and retaining talented employees who are
attracted to our technology-driven culture.
Develop Additional Strategic Relationships. We intend to continue developing
strategic relationships because they enable us 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. We have 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 comarketing 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. We provide 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 our
consulting offices to focus on their core competency of providing superior
client services. These centrally provided services include business development
programs, operations management guides, client support assistance, carrier-
grade site hosting, human resources programs, financial reporting and
forecasting, performance appraisals and standardized methodologies.
Increase Outsourcing Service Offerings. We intend to expand the range of our
service offerings related to managing our clients' information technology
operations. We believe that growing adoption of the Internet and its related
technologies, often by companies whose core expertise does not include
information technology, and growing complexity of electronic infrastructures,
will result in an increase in the outsourcing of such services. We intend to
leverage our relationships with leading technology companies to offer clients a
variety of Internet application modules, which we will customize to the needs
of each client. We further
32
<PAGE>
intend to maintain a data center where the client systems can be operated with
high reliability and efficiency.
Capitalize on Market Opportunities in New Media. We strive to maintain our
leadership position in the development and application of new media marketing
communication services and products. We believe that the proliferation of the
Internet and other new media will continue to provide us with substantial
opportunities. These new media services and products enable companies to better
focus their marketing messages and may ultimately facilitate one-on-one
marketing to specific individuals. Towards this end, we seek to provide clients
with integrated new media design and development services as well as support in
implementing and maintaining key content delivery technologies.
SERVICES
We offer a comprehensive range of services to deliver marketing
communications and 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. We bill most of our engagements
on a time and materials basis, although we have delivered several solutions on
a fixed-price basis, and we intend to increase the percentage of engagements
provided on such a basis.
Internet Solution Development and Deployment. Our Internet solution
development and deployment methodology consists of six phases:
. Strategy Consulting. We work closely with the client to conduct a
thorough study of our 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. We
then deliver our 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,
we translate 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 us, our
clients receive vendor-neutral solutions prepared by Internet-focused
consultants. We research, test and evaluate virtually all major Internet
technologies and tools to design system and process architectures that
successfully meet client needs. Our 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, we build a testable
version of the client's solution based on the blueprint produced in the
analysis and design phase. We design, code, integrate and test 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. Our 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, our professionals benefit from access to an
extensive library of reusable software and content objects.
. Implementation and Integration. In the implementation phase, we test the
solution created in the development phase and ready it to be deployed
into a full production system. We deliver the system to the client,
install it, convert and initialize all necessary data, perform
acceptance testing and put the system into operation. We also integrate
Intranet solutions with back-office legacy systems to ensure that each
client's critical applications are secure and seamless. We maintain
third-party vendor relationships that offer our clients secure, state-
of-the-art, high-availability Intranet, Extranet
33
<PAGE>
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. W can work with the client to develop a strategy
for achieving our online marketing objectives by increasing Web site
traffic, strengthening brand awareness and generating sales leads. We
provide online media planning and purchasing services and advice
regarding online public relations. We have 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. We 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. Our 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.
Marketing Communication Services. Depending on the scope of the assignment,
our marketing communications services range from execution of a discrete
marketing project, such as designing product packaging, to taking
responsibility for the overall marketing message through multiple methods. Our
marketing communications services include the following:
. Strategic Corporate and Product Positioning, Corporate Identity, and
Product Branding. We work with the client to analyze the client's
products or services and the market for those services, and to develop a
unique selling proposition for either a company or product that
differentiates it from the competition. We also work to develop a
creative look and feel that establishes the appropriate corporate or
brand personality.
. New Media and Collateral Systems. We develop media to be delivered to
end users in digital form, including the World Wide Web, the Internet,
proprietary online services, CDROMs, laptop PC presentations, and
interactive kiosks. We develop and implement literature systems
including, for example, individual brochures, flyers and data sheets.
. Environmental Design; Packaging. We provide creative design, development
and management of virtual and physical images as well as information and
entertainment environments, including the development of public
exhibition spaces and retail store formats. We also provide creative
design, development, and production of individual retail packages or
integrated retail packaging systems.
. Advertising and Media Placement. We design broadcast and/or print
advertising to generate awareness of a company, product, or service over
an extended period of time. We provide strategic planning, negotiation
and purchase of both traditional and new media.
. Promotions. We develop marketing programs, including marketing
communications campaigns and merchandising materials, which are designed
to generate demand among a specific target audience, to increase sales
among consumers, or to provide information and incentives to specific
industry trade groups in a limited time frame.
CONSULTING OFFICE NETWORK DEVELOPMENT
We have established and are continuing to expand a network of consulting
offices. As of December 21, 1998, we had 59 consulting offices, 52 of which
were company-owned and 7 of which were owned by Affiliates. The number of
Affiliate offices has decreased over time because we have acquired some of our
Affiliates, consolidation some of our offices and discontinued some of our
franchise relationships. We believe 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
us with a substantial competitive advantage. We promote internal growth through
expansion and improvement of the Strategy and Solutions Center, new and
existing strategic partnerships, and rigorous management of business
fundamentals.
34
<PAGE>
We are pursuing a selective acquisition program, particularly in strategic
and international opportunities. We have frequently used a standardized
transaction structure that includes a purchase price adjustment feature to
provide target company management with an incentive to improve and expand their
organizations. We also generally grant stock options to all employees of a
target company to provide them with an incentive to contribute to the success
of our overall organization.
We have retained a team of professionals dedicated to identifying potential
acquisition candidates and implementing our acquisition methodology. This team
identifies those Internet professional services firms that meet our acquisition
criteria, engages in a series of meetings and due diligence activities with
each candidate to explore whether the candidate meets our criteria for growth
potential and operating strategy, and completes the acquisition of a
significant percentage of those candidates. We stress to each desired candidate
the advantages of merging with us, including client recognition and acceptance
of the USWeb brands, additional funding required to pursue profitably large,
long-term client opportunities and strategic partnerships with leading
hardware, software and content vendors. Following the closing of each
acquisition, we strive to rapidly integrate the new subsidiary into our
operations by deploying a conversion team to integrate financial, marketing and
operating procedures, providing access to USWeb Central, our secure Intranet,
and delivering a thorough orientation to all employees.
We regularly evaluate potential acquisition candidates, are currently holding
preliminary discussions with a number of such candidates and from time to time
are in active negotiations with a number of other candidates. If, after due
diligence review and negotiation, such companies can be acquired on a basis
considered fair to us and our stockholders, we may proceed with such
acquisitions. We expect most of our future acquisitions to include the issuance
of additional shares of our Common Stock. We filed a "shelf" Registration
Statement on Form S-4 of which this Prospectus is a part to register 16,666,667
shares of our Common Stock for use in future acquisitions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Acquisition of Internet Professional Services Firms."
As of December 21, 1998, we had acquired or had signed acquisition agreements
with the following companies:
<TABLE>
<CAPTION>
MONTH OF
NAME OFFICE LOCATIONS CONSOLIDATION (1)
- ---- ---------------- -----------------
<S> <C> <C>
Schell/Mullaney (2).......... New York, NY August 1996
Donovan & Green (2).......... New York, NY January 1997
McKinney & Silver (2)........ Raleigh, NC January 1997
Xcom Corporation............. San Francisco, CA
San Diego, CA March 1997
CKS Group Holding
(Deutschland) (2)........... Munich and Hamburg, Germany March 1997
Gormley & Partners (2)....... Greenwich, CN March 1997
Cosmix Corporation........... Seattle, WA April 1997
Fetch Interactive, Inc....... Milwaukee, WI April 1997
NewLink Corporation.......... Los Angeles, CA April 1997
NetWORKERS Corporation....... Santa Clara, CA May 1997
InterNetOffice, LLC.......... Atlanta, GA
Austin, TX May 1997
Infopreneurs Inc............. Washington, D.C. June 1997
Netphaz Corporation.......... Phoenix, AZ June 1997
SiteSpecific (2)............. New York, NY June 1997
Electronic Images, Inc....... Pittsburgh, PA July 1997
Multimedia Marketing & Design
Inc......................... Chicago, IL July 1997
DreamMedia, Inc. (3)......... Hollywood, CA August 1997
KandH, Inc. (3).............. Hollywood, CA August 1997
Internet Cybernautics, Inc... Sausalito, CA September 1997
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
MONTH OF
NAME OFFICE LOCATIONS CONSOLIDATION (1)
- ---- ---------------- -----------------
<S> <C> <C>
Synergetix Systems Integration,
Inc............................. Long Island, NY September 1997
Online Marketing Company......... Detroit, MI September 1997
Zendatta, Inc.................... San Mateo, CA September 1997
USWeb--Apex, Inc................. Houston, TX November 1997
W3-design........................ Culver City, CA November 1997
Reach Networks, Inc.............. New York, NY November 1997
InnoMate Online Marketing GmbH... Dusseldorf, Germany February 1998
Utopia, Inc...................... Boston, MA March 1998
Inter.logic.studios, inc.(4)..... Atlanta, GA March 1998
Quest Interactive Media, Inc.
(4)............................. Memphis, TN March 1998
Ensemble Corporation............. Dallas, TX March 1998
Ikonic Interactive, Inc.......... San Francisco, CA
New York, N.Y. March 1998
Xplora Limited................... Windsor, United Kingdom April 1998
Kallista, Inc.................... Chicago, IL May 1998
Nutley Systems, Inc. (nSET)...... Seattle, WA May 1998
Advanced Video Communications
(AVC)........................... Boston, MA May 1998
USWeb San Jose................... San Jose, CA May 1998
Gray Peak Technologies, Inc...... New York, NY June 1998
Boston, MA
Reston, VA
Iselin, NJ
Wanchoi, Hong Kong
Tucker Network Technologies...... So. Norwalk, CT July 1998
Metrix Communications, Inc....... St. Paul, MN August 1998
Irvine, CA
Sysicom.......................... Paris, France December 1998
CKS Group, Inc................... Cupertino, CA December 1998
</TABLE>
- ---------------------
(1) We consolidate the target entity's financial statements as of the date we
establish effective control of the target entity, which date generally
precedes the legal completion of the merger.
(2) Acquired by CKS Group prior to our acquisition of CKS Group in December
1998.
(3) DreamMedia, Inc. and KandH, Inc. combined their operations into a single
wholly owned subsidiary of USWeb upon the consummation of the acquisitions.
W3-design has also combined its operations with these entities.
(4) Inter.logic.studios, inc. and Quest Interactive Media, Inc. combined their
operations into a single wholly owned subsidiary of USWeb upon the
consummation of the acquisitions.
We believe that there are many other potential acquisition candidates in the
U.S. and abroad that satisfy our acquisition criteria. As of the date of this
Prospectus, we are currently discussing on a non-binding basis the acquisitions
of several companies. To penetrate foreign markets, we may use joint ventures
as well as acquisitions, so as to capitalize on a foreign partner's local
knowledge and reputation as well as the USWeb/CKS brands and central technical,
marketing and administrative resources. Our acquisition strategy involves a
number of risks and uncertainties, and we cannot be sure that we will be able
to identify suitable acquisition candidates, acquire such companies on
acceptable terms or integrate their operations successfully with ours. As we
issue stock to complete future acquisitions, our existing stockholders
experience ownership dilution. In addition, to the extent we choose to pay cash
consideration for such acquisitions, we may be required to obtain additional
financing. We cannot be sure 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," "--Future
Capital Needs; Uncertainty of Additional Financing."
36
<PAGE>
In addition to our company-owned offices, as of December 21, 1998, we had 4
franchisees ("Affiliates") which collectively managed an aggregate of 7
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 our
intellectual property and proprietary information, including the USWeb/CKS
brands and our Internet solution development methodology. In exchange for these
rights, most Affiliates paid us an initial fee and all Affiliates make monthly
royalty payments to us. Monthly royalties are equal to the greater of (i) a
minimum monthly payment or (ii) the aggregate of a five percent royalty and a
two percent marketing promotion payment, each based on the Affiliate's adjusted
gross revenues. For the year ended December 31, 1997 and the nine months ended
September 30, 1998, initial fees and monthly royalty payments together
represented less than 1% of our total revenues. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Revenues recognized by Affiliates are subject to royalty payments to us. Such
royalty payments are included in "Other revenue" in our consolidated results of
operations. Revenues and related expenses recognized by the company-owned
offices are consolidated and included in "Service revenue" and appropriate
expense categories in our consolidated results of operations.
We selected a franchise business model as the first phase of our corporate
development strategy because it enabled us to rapidly scale our operations and
build our brand with relatively low risk and capital commitment while
leveraging the existing infrastructure, expertise and client relationships of
the Affiliates. We launched the second phase of our market entry strategy, the
acquisition of those Affiliates and other Internet professional services firms
that meet our acquisition criteria, in the first quarter of 1997. We last
enrolled an Affiliate in March 1997 and do not intend to enter into any
additional Affiliate agreements. We 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 entails certain risks to
our business. See "Risk Factors--Risks of Franchising."
CLIENTS
We market our services to medium-sized and large companies, which we define
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. We tailor our professional services to meet the
specific needs of these clients. No individual customer accounted for more than
10% of our total revenues for the year ended December 31, 1997 and the nine
months ended September 30, 1998.
We provide Internet professional services to clients in a variety of
industries, as indicated by the selected clients set forth below, each of which
was responsible for at least $50,000 in services revenues for the year ended
December 31, 1997.
<TABLE>
<S> <C> <C>
Amgen Chevron Polk Audio
Apple Computer Fujitsu PC Real Estate Tax Services
Audi of America Harley-Davidson Silicon Graphics
Bantam Doubleday Dell Ingram Micro Thomasville Furniture
Barnes & Noble Marcus & Millichap Time
Catalina Marketing Microsoft Toshiba
Charles Schwab New York Magazine World Economic Forum
</TABLE>
Clients typically begin their adoption of Internet solutions by establishing
a basic Web site costing several thousand dollars and then implement
increasingly powerful business solutions, which can include
37
<PAGE>
business-critical, fully integrated Intranets or Extranets costing several
million dollars. Our strategy is to provide clients with services at all stages
of their adoption of Internet solutions. We target clients whose Internet
technology consulting needs will result in contracts ranging from $150,000 to
$3,000,000 per engagement. Our 30 largest clients spent approximately $150,000
to $3,000,000 each for our services, on a pro forma basis, for the year ended
December 31, 1997.
KNOWLEDGE MANAGEMENT
In order to provide clients with more effective services and solutions, we
aggregate and redeploy the best methodologies, technologies and creative work
delivered by our consulting offices. We believe that our knowledge management
system provides our consulting offices with a competitive advantage by giving
them efficient, real time access to these assets, allowing them to leverage the
capabilities of our entire operation in their efforts on behalf of each client.
This centrally managed resource is made available to the consulting offices
through USWeb/CKS Central, our secure Intranet.
Within USWeb/CKS Central, we have constructed a project registry database in
which each client engagement is summarized and registered, enabling each
consulting office to rapidly find 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.
We have also established an executive briefing program that enables our
consulting offices to provide their key clients with executive seminars,
solution demonstrations and discussions with our senior executives. These
sessions provide key client decision makers with first-hand experience on the
ways Internet solutions can significantly improve business processes.
In each area where methodologies, technologies and content are aggregated, we
have 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
Our marketing efforts are dedicated to demonstrating the benefits of Internet
solutions, and the proven effectiveness of our organization in providing such
solutions, to key decision makers in client organizations. We believe that a
strong USWeb/CKS brand provides our 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. Our marketing programs are also highly scalable because
most advertising campaigns and marketing tools are developed by our corporate
marketing group and can be delivered to all of the consulting offices without
requiring significant additional expenses.
Our marketing program includes the following initiatives:
Enhance USWeb/CKS Brands. The continued strengthening of the USWeb/CKS brands
is crucial to the achievement of our objective of becoming the most recognized
provider of Internet professional services to medium-sized and large business
clients. Our brand development programs are designed to reinforce the message
that we are a national company with a local presence that can provide a
complete range of services to build and deploy business solutions and that we
have a proven track record of doing so. We are continuing to build and
differentiate our brands through the use of publicity campaigns that include
Internet, print and radio advertising; national seminars and executive
briefings; Internet broadcasts; extensive marketing tools and educational
"white papers"; and co-marketing programs with strategic partners.
Generate Client Leads. Our marketing campaigns are intended to generate
client leads for our consulting offices in several ways. In addition, we have
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.
38
<PAGE>
Develop Marketing and Sales Tools for Consulting Offices. We have 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 our consulting offices by providing them with
centralized expert advice and consistent, professional marketing tools.
STRATEGIC RELATIONSHIPS
We have entered into, and intend to continue entering into, strategic
relationships with a limited number of leading Internet hardware, software and
content companies. We believe that these relationships, which typically are
non-exclusive, enable us to deliver clients more effective solutions with
greater efficiency because the strategic relationships provide us 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. We
also believe that these relationships are important because they leverage the
strong brand and technology positions of these market leaders.
We have strategic relationships with Intel, Microsoft, Hewlett-Packard,
Pandesic, Sun Microsystems and Reuters. Our contractual agreements with these
parties 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, our business, results of operations and financial
condition may be materially adversely affected.
In early 1998, we assisted in the formation of HyCurve, Inc., formerly 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. HyCurve, Inc.
licensed the USWeb brands from us and we contributed certain training
materials. In April 1998, we made a minority equity investment in HyCurve, Inc.
and added management experience through board representation.
OPERATIONS
Our organization includes our headquarters in Santa Clara, California and as
of December 21, 1998, 52 company-owned and Affiliate consulting offices in the
U.S. and 7 international offices. Each consulting office is responsible for
providing Internet professional services to its clients, either alone or in
conjunction with one or more other offices. The managers of each office also
make all client sales, engagement pricing, and staffing decisions for that
office. However, our executive officers take an active role in directing the
activities of all consulting offices.
Our headquarters manages the Strategy and Solutions Center, our marketing
campaigns, the strategic relationships with partner companies and the
acquisition program. Our headquarters also provides consulting offices with
operational support in financial management and reporting, human resources,
office administration, and management performance improvement tools. We also
negotiate with product, office equipment and financing vendors to deliver
quality products to consulting offices at favorable prices. Finally, we have
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.
Our headquarters also manages USWeb Central, our Intranet and the company's
primary channel for enterprise-wide interaction and communication. We developed
and maintain 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 our centrally managed resources, such as the Strategy
and Solutions Center libraries, sales and marketing tools, vendor information
and operational assistance. We believe that
39
<PAGE>
USWeb Central is both scalable and critical to our strategy of strengthening
our position as a leading Internet professional services firm because USWeb
Central is the primary mechanism by which we are 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. We
expect competition to persist, intensify and increase in the future. Our
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 Foote, Cone & Belding and Ogilvy & Mather; Internet integrators and Web
presence providers such as iXL, Organic Online, Poppe Tyson and Proxicom; large
information technology consulting service providers such as Andersen
Consulting, Cambridge Technology Partners and EDS; telecommunications companies
such as AT&T and MCI; Internet and online service providers such as America
Online, ICG Netcom and UUNet; and software vendors such as Lotus, Microsoft,
Netscape, Novell and Oracle. Although only a few of these competitors have to
date offered a full range of Internet professional services, several have
announced their intention to offer comprehensive Internet technology solutions.
In the market for integrated marketing communications, our competitors
include national and regional advertising agencies as well as specialized and
integrated marketing communication firms. With respect to new media, many
national advertising agencies have internally developed or acquired new media
capabilities. In addition, there are a growing number of new competitors that
either provide integrated or specialized services (e.g., corporate identity and
packaging, advertising services or World Wide Web site design) or are
technologically proficient, especially in the new media arena.
We believe that the principal competitive factors in our market are strategic
expertise, technical knowledge and creative skills, brand recognition,
reliability of the delivered solution, client service and price. Most of our
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 we
have and could decide at any time to increase their resource commitments to our
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 our competitors may better position them to compete in this market
as it matures. Competition of the type described above could materially
adversely affect our business, results of operations and financial condition.
There are relatively low barriers to entry into our business. For example, we
have no significant proprietary technology that would preclude or inhibit
competitors from entering the Internet professional services or integrated
marketing communications services market. We expect to face additional
competition from new entrants into the market in the future. We cannot be sure
that existing or future competitors will not develop or offer services that
provide significant performance, price, creative or other advantages over those
offered by us. Moreover, in pursuing acquisition opportunities we may compete
with other companies with similar growth strategies, certain of which
competitors may be larger and have greater financial and other resources than
we have. Competition for these acquisition targets likely could also result in
increased prices of acquisition targets and a diminished pool of companies
available for acquisition.
EMPLOYEES
As of December 21, 1998 we had 1,953 employees, of which 92 were located at
our headquarters in Santa Clara, California, 49 were located at the former CKS
Group headquarters in Cupertino, California and 1,812 were located in
consulting offices. The combined headquarters employees included 26 in sales
and marketing and 104 in finance and administration. None of our employees is
represented by a labor union. We have experienced no work stoppages and believe
our relationship with our employees is good. Competition for qualified
personnel in the industry in which we compete is intense. We believe that our
40
<PAGE>
future success will depend in part on our continued ability to attract, hire or
acquire and retain qualified employees.
FACILITIES
Our principal administrative, sales, marketing, training, and research and
development facilities occupy approximately 27,100 square feet under lease in
Santa Clara, California, and a portion of the company's 93,000 square foot
leased facility in Cupertino, California. All company-owned offices also lease
their facilities. We believe our current facilities are adequate to meet our
needs for the foreseeable future. No facilities have been identified for
acquisition in connection with potential acquisition candidates, and we do not
anticipate acquiring property or buildings in the foreseeable future.
LEGAL PROCEEDINGS
On November 5, 1998, a putative class action lawsuit captioned Wilson v. CKS
Group, Inc., et al. was filed in the United States District Court for the
Northern District of California against CKS Group and three of its former
officers and directors (Mark Kvamme, Thomas Suiter and Carlton Baab). The
complaint alleges that during the period March 20, 1997 to November 7, 1997
(the "Class Period"), the defendants violated the Securities Exchange Act and
the SEC rules and regulations thereunder by issuing false and misleading
statements about CKS Group's operations, revenues and earnings which allegedly
inflated CKS Group's reported revenues, earnings and stock price. The complaint
further alleges that those who purchased CKS Group's stock suffered damages
when on November 7, 1997, the price of CKS Group Common Stock dropped,
allegedly causing losses to the members of the class. The plaintiff seeks to
recover damages in an unspecified amount (together with interest and attorneys'
fees) on behalf of all purchasers of CKS Group Common Stock during the Class
Period. Discovery in the case has not yet begun. USWeb/CKS believes that this
lawsuit is without merit and intends to defend this action vigorously. We do
not believe that the outcome of the stockholder class action described above is
likely to be material to us.
Larmark Inc. filed a complaint on June 10, 1998 in the Superior Court of
California for the County of Los Angeles naming us as a defendant and alleging,
among other claims, breach of contract against our former Affiliate,
SystemLogic, in Santa Monica, California, and that we are liable for the acts
of this former franchisee. We believe the claims against us are without merit
and intend to defend ourselves vigorously against the claims made.
As is typical for companies in our business and of our size, we are from time
to time the subject of lawsuits. Certain of such legal proceedings may be
covered under insurance policies or indemnification agreements. Based upon
information presently available, we believe that the final outcome of such
proceedings should not have a material adverse effect upon our business,
financial condition or results of operations. However, due to the inherent
uncertainties of litigation, there is a risk that the outcome of pending or any
future litigation could have a material adverse effect on our business,
financial condition or results of operations.
41
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
December 21, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Mark Kvamme..................... 37 Chairman of the Board and Director
Robert W. Shaw.................. 50 Chief Executive Officer and Director
Tobin Corey..................... 38 President and Director
Carolyn V. Aver................. 39 Executive Vice President, Chief Financial
Officer and Secretary
Joe Firmage..................... 28 Chief Strategist and Director
Sheldon Laube................... 48 Executive Vice President and Chief
Technology Officer
Thomas Suiter................... 44 Chief Creative Officer and Director
Kurt Garbe...................... 38 Vice President and Chief Operating Officer,
Professional Services Division
Bob Wise........................ 37 Vice President and Chief Operating Officer,
Electronic Services Division
James Daley..................... 62 Director
Robert Hoff(1)(2)............... 46 Director
Joseph Marengi.................. 44 Director
Gary Rieschel(2)................ 41 Director
Klaus Schwab.................... 59 Director
</TABLE>
- ---------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Mark Kvamme became Chairman of the Board and a director of USWeb/CKS upon
consummation of the USWeb-CKS merger in December 1998. In 1989, Mr. Kvamme
became a Partner in CKS Group and from 1991 until December 1998 served as the
Chairman of its Board of Directors and Chief Executive Officer. Prior to
joining CKS Group, Mr. Kvamme held management and marketing positions at Wyse
Technology, a terminal and personal computer manufacturer, International
Solutions, Inc., a computer products distributor, and Apple Computer, a
personal computer manufacturer.
Mr. Robert W. Shaw joined USWeb in November 1998 as Chief Executive Officer
and a director. Prior to joining USWeb, Mr. Shaw served as Executive Vice
President of Worldwide Consulting Services and Vertical Markets of Oracle
Corporation since February 1997, and Senior Vice President of Worldwide
Applications and Services of Oracle Corporation from August 1995 to January
1997. From June 1992 to July 1995, Mr. Shaw served as Senior Vice President of
Global Services of Oracle Corporation. Prior to joining Oracle Corporation, Mr.
Shaw served as a Vice President of the West Coast Information Systems group of
Booz-Allen & Hamilton from June 1989 to June 1992.
Mr. Tobin Corey co-founded the Company in December 1995 and has served as its
President since June 1996 and as a Director since April 1998. Prior to June
1996, Mr. Corey served as its Executive Vice President, Marketing. From 1994 to
December 1995, Mr. Corey served as Vice President of Marketing for the NetWare
Products Division of Novell. From 1991 through 1994, Mr. Corey served as
Director of Marketing for the Desktop Division of Novell.
Ms. Carolyn Aver joined the Company in May 1998 as the Company's Executive
Vice President, Chief Financial Officer and Secretary. From May 1997 to May
1998, Ms. Aver was Vice President and Chief Financial Officer of BackWeb
Technologies, an Internet technology company. Prior to joining BackWeb
42
<PAGE>
Technologies, Ms. Aver acted as Vice President and Chief Financial Officer of
ParcPlace-Digitalk from March 1993 to May 1997. Ms. Aver was also employed by
AutoDesk, Inc. from October 1984 to March 1993 where she served in various
capacities including Controller, Chief Financial Officer and Vice President,
Finance.
Mr. Joseph Firmage co-founded USWeb in December 1995 and served as its
Chairman and Chief Executive Officer from that time until November 1998.
Thereafter, Mr. Firmage continued as a director and was appointed Chief
Strategist of USWeb. From August 1994 to December 1995, Mr. Firmage served as a
Vice President of Strategic Planning of the Systems Group of Novell. Prior to
joining Novell, Mr. Firmage founded Serius Corporation ("Serius"), where he
served as Chief Executive Officer from 1989 through 1993, when Serius was sold
to Novell.
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. Thomas Suiter became Chief Creative Officer and a director of USWeb/CKS
upon consummation of the merger with CKS Group in December 1998. From 1991
until 1998, Mr. Kvamme served as Chief Creative Officer of CKS Group and a
member of its board of directors. Mr. Suiter also held the position of
President, CKS Partners from May 1996 to November 1997. Before joining CKS, Mr.
Suiter held management, marketing and creative positions at Landor Associates,
a branding and strategy advisor, and Apple Computer, a personal computer
manufacturer.
Mr. Kurt Garbe joined USWeb in October 1997 as Executive Partner, Client
Services--Western Region. Mr. Garbe became Vice President and Chief Operating
Officer, Professional Services Division in October 1998. Prior to joining
USWeb, Mr. Garbe served for several months as Vice President, Business
Development of Animation Science, a developer of animation and computer
graphics software. Prior to joining Animation Science, Mr. Garbe served as
General Manager and Vice President of Worldwide Professional Services at
Synopsys, Inc., a provider of electronic design and automation tools from
September 1995 to June 1997. Prior to joining Synopsys, Mr. Garbe was Vice
President and Partner at Gemini Consulting from 1991 to 1995, prior to which he
spent four years at Booz-Allen & Hamilton in the Information Industry Practice.
Mr. Bob Wise joined USWeb in October 1997 as Executive Partner, Client
Services--Eastern Region. In October 1998, Mr. Wise became Vice President and
Chief Operating Officer, Electronic Services Division. Prior to joining USWeb,
Mr. Wise served as Vice President of Worldwide Consulting at Novell from May
1996 to October 1997. Prior to joining Novell, Mr. Wise co-founded USConnect, a
network of systems integrators in January 1996 and served as its Chief
Executive Officer until May 1996.
Mr. James Daley has served as a Director of USWeb since July 1998. Mr. Daley
held a variety of management and senior leadership roles during more than 35
years of service at Price Waterhouse LLP ("PW"), one of the world's largest
professional services firms. Most notably, Mr. Daley served as the firm's co-
chairman and its chief operating officer from 1988 to 1995, during which time
PW's Management Consulting Practice experienced substantial growth.
Mr. Robert Hoff has served as a Director of the Company since February 1996.
He has been a general partner of Crosspoint Venture Partners, a private venture
capital investment company, since September 1983. Mr. Hoff also serves as a
director of PairGain Technologies, Inc. and Onyx Acceptance Corporation.
Mr. Joseph Marengi has served as a Director of USWeb since August 1998. Mr.
Marengi currently serves as senior vice president and group general manager for
Dell Computer Corporation, a personal computer manufacturer. Prior to joining
Dell, Mr. Marengi served as president and chief operating officer
43
<PAGE>
for Novell, Inc., a network software company. He joined Novell in 1989 through
the acquisition of Excelan and quickly moved through successive promotions
including executive vice president of worldwide sales and field operations. As
executive vice president, he was directly responsible for setting up the major
account, licensing and consulting programs, and for overseeing the company's
international expansion.
Mr. 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. Klaus Schwab has served as Director of USWeb since June 1998. Mr. Schwab
is president of the World Economic Forum, an international membership
organization integrating leaders from business, government and academia into a
partnership committed to improving the state of the world. He also serves as
vice-chairman of the UN Committee for Development Planning and is a board
member of the Earth Council, the Foundation Board of the UNESCO's World
Foundation for AIDS Research and Prevention, as well as a member of the Board
of Trustees of the Peres Center for Peace. Mr. Schwab has been a professor of
Business Policy at the University of Geneva since 1972.
Executive officers of the Company are appointed by the Board of Directors and
serve at the discretion of the Company's Board. There are no family
relationships among any of the directors or executive officers of the Company.
BOARD COMMITTEES
The Board of Directors has established an audit committee and a compensation
committee. The audit committee recommends the selection of independent auditors
to the Board of Directors, reviews the scope and results of the audit and other
services provided by USWeb/CKS's independent accountants, and reviews
USWeb/CKS's accounting practices and its systems of internal accounting
controls (the "Audit Committee"). The Audit Committee currently consists of one
member, Mr. Robert Hoff. Another member is expected to be appointed at the next
meeting of the Board of Directors.
The compensation committee, consisting of Mr. Hoff and Mr. Rieschel, reviews
and approves the salaries, bonuses and other compensation payable to
USWeb/CKS's executive officers and administers and makes recommendations
concerning USWeb/CKS's employee benefit plans (the "Compensation Committee").
DIRECTOR COMPENSATION
USWeb/CKS reimburses its directors for all out-of-pocket expenses incurred in
the performance of their duties as directors of USWeb/CKS. USWeb/CKS currently
does not pay fees to its directors for attendance at meetings. USWeb/CKS also
grants stock options to directors. See "--Employee Benefit Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of USWeb/CKS 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 USWeb/CKS's Board of Directors
or Compensation Committee. See "Certain Transactions" for a description of
transactions between USWeb/CKS and entities affiliated with members of the
Compensation Committee.
44
<PAGE>
MANAGEMENT CONTINUITY AGREEMENTS
USWeb/CKS has entered into Management Continuity Agreements with each of
Messrs. Firmage, Corey and Laube. Pursuant to the agreements with each of
Messrs. Firmage and Corey and, if USWeb/CKS (a) terminates his employment
without cause at any time more than 60 days before or more than 18 months after
a "change in control" (as defined in the agreement), USWeb/CKS shall provide
severance pay to him equal to his 12 months' base compensation or (b) if
USWeb/CKS terminates his employment or he voluntarily terminates his employment
at any time 60 days or less before or within 18 months after a change in
control, USWeb/CKS shall provide him severance pay equal to the greater of his
base compensation for the year immediately preceding or the year coinciding
with the year of payment of such severance pay. In either case, USWeb/CKS shall
also provide health insurance coverage to the extent provided immediately prior
to his termination until the earlier of 12 months following such termination or
the date that he receives health insurance coverage from another employer. In
the event of a change of control, USWeb/CKS shall provide a release of all
repurchase rights over unvested stock and an acceleration of the vesting period
for any unvested options. In the event that he is terminated as a result of
death or disability (regardless of whether there is a change in control), any
repurchase rights of USWeb/CKS 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 and Mr. Laube's at will employment.
Pursuant to the agreement with Mr. Laube, if USWeb/CKS terminates his
employment without cause (a) at any time more than 60 days before or more than
18 months after a "change in control" (as defined in the agreement), USWeb/CKS
shall provide severance pay equal to his 12 months' base compensation or (b) at
any time 60 days or less before or within 18 months after a change in control,
USWeb/CKS shall provide severance pay equal to the greater of his base
compensation for the year immediately preceding or the year coinciding with the
year of payment of such severance pay. In either case, USWeb/CKS shall also
provide health insurance coverage to the extent provided immediately prior to
his termination until the earlier of 12 months following such termination or
the date that he receives health insurance coverage from another employer. In
the event of a change of control, USWeb/CKS shall provide a release of all
repurchase rights over unvested stock and an acceleration of the vesting period
for any unvested options. In the event that he is terminated as a result of
death or disability (regardless of whether there is a change in control), any
repurchase rights of USWeb/CKS with respect to 50% of the shares that he holds
shall lapse and options that he holds shall become vested as to an additional
50% of the shares subject to such options. In the event that he is terminated
for good business reasons during the initial two-year period, he is entitled to
receive severance pay equal to 24 months' base compensation together with a
release of all repurchase rights over unvested stock and an acceleration of the
vesting period for any unvested options (as defined in the agreement). In
addition to his base compensation of $260,000, he is entitled to receive a
quarterly bonus of $25,000 so long as he is employed by USWeb/CKS.
On November 3, 1998, USWeb extended an offer of employment to Robert Shaw to
become Chairman of the Board and Chief Executive Officer of USWeb, and Mr. Shaw
accepted the offer on November 4, 1998. Pursuant to the offer, if USWeb
terminates Mr. Shaw's employment without cause at any time within one year
after the commencement of his employment with USWeb, then USWeb shall provide
severance pay equal to the higher of the base salary for the then remaining
period of employment or one year's base salary. If Mr. Shaw's employment
terminates without cause during the first year of his employment with USWeb,
Mr. Shaw's option to purchase 1,200,000 shares of USWeb Common Stock shall be
vested pro ratably.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
USWeb's Certificate of Incorporation, USWeb's Bylaws, Section 145 of the
Delaware General Corporation Law and the form of indemnification agreement
entered into between USWeb/CKS and certain of its directors and officers,
subject to certain conditions, authorize USWeb/CKS to indemnify, or indemnify
45
<PAGE>
by their terms, as the case may be, the directors and officers of USWeb/CKS
against certain liabilities and expenses incurred by such persons in connection
with claims made by reason of their being such a director or officer.
USWeb/CKS has obtained directors' and officers' insurance providing
indemnification for certain of USWeb/CKS's directors, officers, affiliates,
partners or employees for certain liabilities.
USWeb/CKS has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in USWeb's
Bylaws. These agreements, among other things, indemnify USWeb/CKS's directors
and executive officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of USWeb/CKS,
arising out of such person's services as a director or executive officer of
USWeb/CKS, any subsidiary of USWeb/CKS or any other company or enterprise to
which the person provides services at the request of USWeb/CKS. USWeb/CKS
believes that these provisions and agreements are necessary to attract and
retain qualified directors and executive officers.
Other than as described in "Business--Legal Proceedings" and below, at
present, there is no pending litigation or proceeding involving any director,
officer, employee or agent of USWeb/CKS where indemnification is expected to be
required or permitted.
On November 5, 1998, a putative class action lawsuit captioned Wilson v. CKS
Group, Inc., et al. was filed in the United States District Court for the
Northern District of California against CKS Group and three of its officers and
directors (Mark Kvamme, Thomas Suiter and Carlton Baab). The complaint alleges
that during the period March 20, 1997 to November 7, 1997 (the "Class Period"),
the defendants violated the Securities Exchange Act and the SEC rules and
regulations thereunder by issuing false and misleading statements about CKS
Group's operations, revenues and earnings which allegedly inflated CKS Group's
reported revenues, earnings and stock price. The complaint further alleges that
those who purchased CKS Group's stock suffered damages when on November 7,
1997, the price of CKS Group Common Stock dropped, allegedly causing losses to
the members of the class. The plaintiff seeks to recover damages in an
unspecified amount (together with interest and attorneys' fees) on behalf of
all purchasers of CKS Group Common Stock during the Class Period. USWeb/CKS
believes that this lawsuit is without merit and intends to defend this action
vigorously.
46
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by USWeb Corporation during the fiscal years ended December 31, 1996 and 1997
to USWeb Corporation's Chief Executive Officer and each of USWeb Corporation's
four other executive officers (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
--------------------- ------------
SECURITIES
NAME AND PRINCIPAL UNDERLYING OTHER ANNUAL ALL OTHER
POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION COMPENSATION
------------------ ---- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Joseph Firmage(1)....... 1997 $200,000 $ -- 105,000 $ -- $ 168(4)
Chairman and Chief 1996 200,000(2) -- -- 115,216(3) 140(4)
Executive Officer and
Director
Tobin Corey............. 1997 200,000 -- 105,000 -- 139,230(6)
President 1996 197,307(5) 5,582 -- 48,787(3) 193(4)
James Heffeman(7)....... 1997 200,000 -- 60,000 -- 1,517(4)
Executive Vice 1996 191,667(5) -- -- -- 1,313(4)
President,
Chief Financial Officer
Secretary and Director
Sheldon Laube........... 1997 259,992 100,000 30,000 -- 816(4)
Executive Vice 1996 241,886(5) 100,000 -- -- 508(4)
President and Chief
Technology Officer
Kenneth Campbell(8)..... 1997 126,641 -- -- -- 668(4)
Executive Vice 1996 220,000 -- -- -- 840(4)
President, Affiliate
Operations
</TABLE>
- ---------------------
(1) Mr. Firmage resigned as Chairman and Chief Executive Officer of USWeb
Corporation in November 1998, when Robert Shaw was appointed as Chief
Executive Officer of USWeb Corporation. Mr. Shaw's annual salary is
$700,000. Mr. Firmage is a director of USWeb/CKS and is Chief Strategist of
USWeb/CKS.
(2) Does not include $16,666 earned in 1995 but not paid until 1996.
(3) Consists of payments made in reimbursement for relocation expenses for Mr.
Firmage and Mr. Corey.
(4) Consists of life insurance premiums paid on behalf of Mr. Firmage, Mr.
Corey, Mr. Heffernan, Mr. Laube and Mr. Campbell.
(5) The annual base salaries for Mr. Corey, Mr. Heffernan and Mr. Laube are
$200,000, $200,000 and $260,000, respectively. The figures listed represent
payment for actual employment during 1996, which was slightly less than 12
months.
(6) Consists of $230 of life insurance premiums paid on behalf of Mr. Corey and
$139,000 of loan forgiveness. See "Certain Transactions."
(7) Mr. Heffernan resigned as Executive Vice President, Chief Financial Officer
and Secretary in May 1998, when Carolyn Aver was appointed to these
positions. Ms. Aver's annual salary is $200,000. Mr. Heffernan will end his
service as a director in connection with the proposed USWeb/CKS Merger.
(8) Mr. Campbell resigned from USWeb Corporation effective July 29, 1997. See
"Certain Transactions" for a description of the terms of the general
release agreement with Mr. Campbell. The annual base salary for Mr.
Campbell was $220,000. The figure listed represents payment for actual
employment during 1997, which was slightly less than seven months.
47
<PAGE>
OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
The following table sets forth the stock options granted during the fiscal
year ended December 31, 1997 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL
SECURITIES OPTIONS RATES OF STOCK
UNDERLYING GRANTED TO PRICE APPRECIATION
OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM(3)
GRANTED IN FISCAL PRICE EXPIRATION -------------------
NAME (#)(1) YEAR(2) ($/SH.) DATE 5% ($) 10% ($)
---- ---------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Joseph Firmage(4)....... 105,000 6.4% $9.75 11/13/07 $643,831 $1,631,594
Tobin Corey............. 105,000 6.4% $9.75 11/13/07 $643,831 $1,631,594
James Heffernan(5)...... 60,000 3.7% $9.75 11/13/07 $367,903 $ 932,339
Sheldon Laube........... 30,000 1.8% $9.75 11/13/07 $183,952 $ 466,170
Kenneth Campbell(5)..... -- -- -- -- -- --
</TABLE>
- ---------------------
(1) These options were granted under USWeb/CKS'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 USWeb/CKS'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
USWeb/CKS's estimate of its future stock price.
(4) Mr. Firmage resigned as Chairman and Chief Executive Officer in November
1998, when Robert Shaw was appointed to these positions.
(5) Mr. Heffernan resigned as Executive Vice President, Chief Financial Officer
and Secretary in May 1998, when Carolyn Aver was appointed to these
positions. Mr. Heffernan ended his service as a director in December 1998
upon consummation of the merger between USWeb Corporation and CKS Group.
Mr. Campbell resigned from USWeb Corporation effective July 29, 1997. See
"Certain Transactions" for a description of the terms of the general
release 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
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL YEAR IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE END(#) FISCAL YEAR END($)(2)
ON REALIZED ------------------------- -------------------------
NAME EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joseph Firmage(3)....... -- -- -- 105,000 -- --
Tobin Corey............. -- -- -- 105,000 -- --
James Heffernan......... -- -- -- 60,000 -- --
Sheldon Laube........... -- -- -- 30,000 -- --
Kenneth Campbell........ -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Market value of underlying securities on the exercise date minus the
exercise price.
(2) Market value of underlying securities at December 31, 1997 minus the
exercise price.
(3) Mr. Firmage resigned as Chairman and Chief Executive Officer in November
1998, when Robert Shaw was appointed to these positions.
48
<PAGE>
EMPLOYEE BENEFIT PLANS
1996 Stock Option Plan
Our 1996 Stock Option Plan (the "1996 Plan") was adopted by the Board of
Directors in December 1995 and approved by our 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 our
employees and consultants (including officers and directors) and to employees
and consultants of our 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. We do 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 USWeb/CKS'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
USWeb/CKS'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 USWeb/CKS with or
into another corporation, or a sale of substantially all of USWeb/CKS'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 21, 1998, we had outstanding options to purchase 39,666 shares
of Common Stock under the 1996 Plan having a weighted average exercise price of
$0.67 per share. As of December 21, 1998, options to purchase an aggregate of
372,622 shares of Common Stock under the 1996 Plan had been exercised.
1996 Equity Compensation Plan
Our 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
49
<PAGE>
amended (the "Code"), and for the granting to employees and consultants of
nonstatutory stock options and stock purchase rights ("SPRs"). The 1996 Equity
Plan was approved by the Board of Directors in October 1996 and by the
stockholders in December 1996 and amended in September and November 1997 and
May 1998. Unless terminated sooner by the Board of Directors, the 1996 Equity
Plan will terminate automatically in December 2006. A total of 7,000,000 shares
of Common Stock, plus annual increases equal to the lesser of (i) 400,000
shares, (ii) 4% of the outstanding shares, or (iii) a lesser amount determined
by the Board of Directors are currently reserved for issuance pursuant to the
1996 Equity Plan.
The 1996 Equity Plan may be administered by the Board of Directors or a
committee of the Board (the "Administrator"), which Administrator shall, in the
case of options intended to qualify as "performance-based compensation" within
the meaning of Section 162(m) of the Code, consist of two or more "outside
directors" within the meaning of Section 162(m) of the Code. The Administrator
has the power to determine the terms of the options or SPRs granted, including
the exercise price, the number of shares subject to each option or SPR, the
exercisability thereof and the form of consideration payable upon such
exercise. In addition, the committee has the authority to amend, suspend or
terminate the 1996 Equity Plan, provided that no such action may impair the
rights of any optionee under the 1996 Equity Plan unless mutually agreed.
Notwithstanding the foregoing, no existing employee, director or consultant may
be granted options to purchase more than an aggregate of 150,000 shares of
Common Stock in any fiscal year and no newly hired employee, director or
consultant may be granted options to purchase more than an aggregate of 300,000
shares of Common Stock in any fiscal year. The 1996 Equity Plan also provides
for certain non-employee directors to receive a one-time initial option grant
of 25,000 shares that becomes exercisable over 48 months so long as the
individual remains a director and for all non-employee directors to receive
option grants for 7,000 shares that become exercisable over 12 months upon
their reelection each year.
Unless otherwise determined by the Administrator, options and SPRs granted
under the 1996 Equity Plan are not generally transferable by the optionee, and
each option or SPR is exercisable during the lifetime of the optionee only by
such optionee. Options granted under the 1996 Equity Plan must generally be
exercised within three months of the end of the optionee's status as an
employee or consultant of USWeb/CKS, 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 USWeb/CKS a repurchase option exercisable upon
the voluntary or involuntary termination of the purchaser's employment with
USWeb/CKS for any reason (including death or disability). The purchase price
for shares repurchased pursuant to such restricted stock purchase agreement
shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to USWeb/CKS. 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 USWeb/CKS'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 USWeb/CKS with
or into another corporation, a sale of substantially all of USWeb/CKS's assets
or a like transaction involving USWeb/CKS, 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
50
<PAGE>
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 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 21, 1998, the Company had outstanding options to purchase
3,809,435 shares of Common Stock under the 1996 Equity Plan having a weighted
average exercise price of $13.71 per share. As of December 21, 1998, options to
purchase 101,139 shares of Common Stock under the 1996 Equity Plan had been
exercised.
1997 Acquisition Stock Option Plan
Our 1997 Acquisition Stock Option Plan (the "1997 Plan") was approved by the
Board of Directors in February 1997 and amended in July and November 1997 and
May 1998. The 1997 Plan provides for the grant of incentive stock options,
within the meaning of Section 422 of the Code, to employees (including officers
and employee directors) and for the grant of nonstatutory stock options and
SPRs to employees, directors and consultants. Unless terminated sooner by the
Board of Directors, the 1997 Plan will terminate automatically in February
2007. A total of 20,000,000 shares of Common Stock, plus annual increases equal
to the lesser of (i) 400,000 shares, (ii) 4% of the outstanding shares, or
(iii) a lesser amount determined by the Board of Directors, are currently
reserved for issuance pursuant to the 1997 Plan.
The 1997 Plan may be administered by the Board of Directors or a committee of
the Board (the "Administrator"). The Administrator has the power to determine
the terms of the options or SPRs granted, including the exercise price of the
option or SPR, the number of shares subject to each option or SPR, the
exercisability thereof and the form of consideration payable upon such
exercise. In addition, the Administrator has the authority to amend, suspend or
terminate the 1997 Plan, provided that such action may not impair the rights of
any optionee under the 1997 Plan unless mutually agreed.
Options and SPRs granted under the 1997 Plan are generally not transferable
by the optionee, and each option or SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1997 Plan must
generally be exercised within three months after the end of optionee's status
as an employee, director or consultant of USWeb/CKS, 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 USWeb/CKS a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment with USWeb/CKS for any reason (including death or disability). The
purchase price for shares repurchased pursuant to the restricted stock purchase
agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to USWeb/CKS. 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
51
<PAGE>
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 USWeb/CKS, 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.
The 1997 Plan provides that in the event of a merger of USWeb/CKS with or
into another corporation, or a sale of substantially all of USWeb/CKS'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 21, 1998, USWeb/CKS had outstanding options to purchase
10,102,768 shares of Common Stock under the 1997 Plan having a weighted average
exercise price of $14.00 per share. As of December 21, 1998, options to
purchase 2,026,339 shares of Common Stock under the 1997 Plan had been
exercised.
1997 Employee Stock Purchase Plan
Our 1997 Employee Stock Purchase Plan (the "ESPP") was adopted by the Board
of Directors in September 1997 and amended in May 1998. A total of 3,000,000
shares of Common Stock has been reserved for issuance under the ESPP, plus
annual increases equal to the lesser of (i) 50,000 shares, (ii) 4% of the
outstanding shares on such date or (iii) a lesser amount determined by the
Board of Directors.
The ESPP, which is intended to qualify under Section 423 of the Code,
contains consecutive, overlapping, 24-month offering periods. Each offering
period includes four six-month purchase periods. The offering periods generally
start on the first trading day on or after May 1 and November 1 of each year,
except for the first such offering period which commences on the first trading
day on or after the effective date of this Offering and ends on the last
trading day on or before October 31, 1999.
Employees are eligible to participate if they are customarily employed by
USWeb/CKS 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
USWeb/CKS, 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.
52
<PAGE>
Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each purchase period. The price of stock
purchased under the ESPP is 85% of the lower of the fair market value of the
Common Stock at the beginning of the offering period or at the end of the
purchase period. In the event the fair market value at the end of a purchase
period is less than the fair market value at the beginning of the offering
period, the participants will be withdrawn from the current offering period
following exercise and automatically re-enrolled in a new offering period. The
new offering period will use the lower fair market value as of the first date
of the new offering period to determine the purchase price for future purchase
periods. Participants may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with USWeb/CKS.
Rights granted under the ESPP are generally not transferable by a participant
unless otherwise provided under the ESPP. The ESPP provides that, in the event
of a merger of USWeb/CKS with or into another corporation or a sale of
substantially all of USWeb/CKS's assets, each outstanding option may be assumed
or substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering
period then in progress will be shortened and a new exercise date will be set.
The ESPP will terminate by its own terms in September 2007. The Board of
Directors has the authority to amend or terminate the ESPP, except that no such
action may adversely affect any outstanding rights to purchase stock under the
ESPP.
Assumed Company Options
As of December 21, 1998, the Company had outstanding options for 5,663,622
shares of Common Stock that were assumed in connection with acquisitions and
have a weighted average exercise price of $9.70 per share.
Affiliate Warrant Program
In June 1996, we established the Affiliate Warrant Program (the "Program")
with the intent of attracting new Affiliates and to create performance
incentives for such Affiliates. Under the Program, each Affiliate that signed
an Affiliate agreement on or before March 31, 1997 was granted a warrant to
purchase shares of USWeb/CKS's Common Stock upon execution of the Affiliate
agreement and earns additional warrants to purchase shares of Common Stock at
the rate of one share of Common Stock per $50 of Affiliate adjusted gross
revenue, as defined. The exercise price of all warrants issued and issuable to
an individual Affiliate was set at the time of signing of the Affiliate
agreement. Warrants vest 25% after one year and then ratably each month over
the following 36 month period. Warrants are exercisable for a maximum period of
five years from the effective date of the Affiliate agreement. Warrants may not
be exercised prior to the earlier of the closing of this offering or any
acquisition of USWeb/CKS. A total of 333,333 shares of Common Stock has been
reserved for issuance under the Program, and USWeb/CKS does not intend to
increase this amount. As of December 21, 1998, the Company had issued warrants
under the program to purchase an aggregate of 279,668 shares of Common Stock at
a weighted average exercise price of $2.45 per share. See Note 10 to
Consolidated Financial Statements.
53
<PAGE>
CERTAIN TRANSACTIONS
Since its inception, USWeb Corporation 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,
USWeb Corporation 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 USWeb Corporation'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 USWeb Corporation's
directors, five percent stockholders and their respective affiliates:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED PREFERRED PREFERRED SERIES C COMMON
INVESTOR STOCK STOCK 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) Gary Rieschel, Executive Managing Director of SOFTBANK Holdings, an
affiliate of SOFTVEN No. 2 Investment Enterprise Partnership, serve on
USWeb/CKS's Board of Directors. Jeffrey Ballowe served on USWeb
Corporation's Board of Directors until the consummation of the USWeb/CKS
merger.
(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 served on USWeb
Corporation'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.
In December 1995, USWeb Corporation entered into Restricted Stock Purchase
Agreements with each of Joseph Firmage, Tobin Corey, James Heffernan and
Kenneth Campbell. In January 1996, USWeb Corporation entered a Restricted Stock
Purchase Agreement with Sheldon Laube. Pursuant to these Restricted Stock
Purchase Agreements, Messrs. Firmage, Corey, Heffernan, Laube and Campbell
acquired the number of shares of USWeb Corporation's Common Stock set forth
opposite their names in the table below:
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
EXECUTIVE OFFICER 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>
54
<PAGE>
The shares of Common Stock subject to the Restricted Stock Purchase
Agreements were issued in exchange for cash. The Restricted Stock Purchase
Agreements provide USWeb/CKS 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 USWeb/CKS's right of repurchase each month after the date of
purchase. Further, USWeb/CKS retains a right of first refusal to purchase any
shares issued pursuant to a Restricted Stock Purchase Agreement until 90 days
after the effective date of this offering.
USWeb/CKS has entered into indemnification agreements with each of its
directors and executive officers. These agreements require USWeb/CKS 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, USWeb Corporation extended a loan of $70,000 (with interest
accruing at 5% per annum) to Tobin Corey, to cover the expenses of Mr. Corey's
relocation to California from Utah (the "Corey Loan"). In July 1997, USWeb
Corporation forgave the Corey Loan, together with accrued interest and a tax
gross-up, for a total amount forgiven of $139,000.
In August 1997, USWeb Corporation entered into a General Release Agreement
with Kenneth Campbell (the "Campbell Release Agreement"). Pursuant to the terms
of the Campbell Release Agreement, Mr. Campbell received an amount equal to his
base salary of $220,000, payable semimonthly over the 12 month period beginning
August 1, 1997. In addition, on Mr. Campbell's termination date, USWeb
Corporation paid Mr. Campbell $15,229, an amount equal to the value of his
accrued and unused vacation. Further, pursuant to the terms of the Campbell
Release Agreement, USWeb Corporation accelerated vesting of certain shares of
Common Stock held by Mr. Campbell so that, as of the date of the Campbell
Release Agreement, Mr. Campbell held 413,047 shares. The Company repurchased
the remaining 349,502 shares of Common Stock held by Mr. Campbell at a price of
$0.0003 per share.
In November 1997, USWeb Corporation granted the following options to
executive officers pursuant to the 1996 Equity Plan: 105,000 shares to Joseph
Firmage, 105,000 shares to Tobin Corey, 60,000 shares to James Heffernan and
30,000 shares to Sheldon Laube. Each option has an exercise price of $9.75 per
share and becomes exercisable over 36 to 60 months.
In November 1998, USWeb granted an option to Robert Shaw to purchase
1,200,000 shares of USWeb Common Stock having an exercise price of $10 per
share that vests and becomes exercisable as to 25% of the shares subject to the
option one year after commencement of his employment with USWeb Corporation and
as of 1/48th of the shares subject to the option each month thereafter until
vested in full.
During 1998, USWeb received approximately $300,000 from International Space
Sciences Organization, Inc. ("ISSO"), a research and information dissemination
organization for Web-related consulting, design and hosting services. Joseph
Firmage, a director of USWeb/CKS, is the Chief Executive Officer and sole
director of ISSO.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of USWeb Common Stock as of December 21, 1998 for (i) each
person or entity who is known by USWeb/CKS to beneficially own more than 5% of
the outstanding USWeb/CKS Common Stock, (ii) each of USWeb/CKS's directors,
(iii) each USWeb/CKS Named Executive Officer and (iv) all directors and
executive officers of USWeb as a group:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
DIRECTORS, USWEB NAMED EXECUTIVE OFFICERS, SHARES SHARES
5% STOCKHOLDERS AND ALL USWEB BENEFICIALLY BENEFICIALLY
EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP OWNED (1) OWNED (1)
------------------------------------------- ------------ ------------
<S> <C> <C>
SOFTVEN No. 2 Investment Enterprise Partnership..... 5,458,324 7.80
24-1 Nihonbashi-Hakozakicho
Chuo-Ku
Tokyo, 103 Japan
Gary Rieschel (2)................................... 5,458,324 7.80
Mark Kvamme (3)..................................... 2,331,506 3.33
Robert Shaw (4)..................................... -- --
Tobin Corey (5)..................................... 610,772 *
Carolyn Aver (6).................................... 300,000 *
Joseph Firmage (7).................................. 816,866 1.17
Sheldon Laube (8)................................... 562,449 *
Thomas Suiter (9)................................... 1,712,753 2.45
Kurt Garbe (10)..................................... 249,233 *
Robert Wise (11).................................... 232,887 *
James Daley (12).................................... 35,000 *
Robert Hoff (13).................................... 1,543,719 2.21
Joseph Marengi (14)................................. 30,000 *
Klaus Schwab (15)................................... 25,000 *
All executive officers and directors as a group
(17 persons) (16) ................................. 13,908,508 19.54%
</TABLE>
- ---------------------
* less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by that
person that are currently exercisable or exercisable within 60 days of
December 21, 1998 are deemed outstanding. Such shares, however, are not
deemed outstanding for the purposes of computing the percentage ownership
of each other person. Except as indicated in the footnotes to this table
and pursuant to applicable community property laws, each stockholder named
in the table above has sole voting and investment power with respect to
the shares set forth opposite such stockholder's name.
(2) Consists of 5,458,324 shares of USWeb/CKS Common Stock held by SOFTVEN No.
2 Investment Enterprise Partnership. Gary Rieschel, Executive Managing
Director of SOFTBANK Holdings, an affiliate of SOFTVEN No. 2 Investment
Enterprise Partnership, serves on the USWeb Board. Mr. Rieschel disclaims
beneficial ownership of such shares.
(3) Includes options to purchase 60,000 shares of the USWeb/CKS's Common
Stock, which are exercisable within 60 days.
(4) Mr. Shaw became Chief Executive Officer and a director of USWeb
Corporation in November 1998.
(5) Includes 105,000 shares representing options exercisable for USWeb/CKS
Common Stock within 60 days, which if exercised before being fully vested,
are subject to repurchase by USWeb/CKS.
(6) Represents options exercisable within 60 days for 300,000 shares of
USWeb/CKS Common Stock, which if exercised before being fully vested, are
subject to repurchase by USWeb/CKS.
(7) Includes 105,000 shares representing options exercisable for USWeb/CKS
Common Stock within 60 days, which if exercised before being fully vested,
are subject to repurchase by USWeb/CKS.
56
<PAGE>
(8) Includes 30,000 shares representing options exercisable for USWeb/CKS
Common Stock within 60 days, which if exercised before being fully vested,
are subject to repurchase by USWeb/CKS.
(9) Includes options to purchase 45,000 shares of the USWeb/CKS's Common
Stock, which are exercisable within 60 days.
(10) Includes options exercisable within 60 days representing 244,400 shares of
USWeb/CKS Common Stock, which if exercised before being fully vested are
subject to repurchase by USWeb/CKS.
(11) Includes options exercisable within 60 days representing 228,696 shares of
USWeb/CKS Common Stock, which if exercised before being fully vested are
subject to repurchase by USWeb/CKS.
(12) Represents options exercisable within 60 days for 35,000 shares of
USWeb/CKS Common Stock, which if exercised before being fully vested, are
subject to repurchase by USWeb/CKS.
(13) 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.
(14) Represents options exercisable within 60 days for 30,000 shares of
USWeb/CKS Common Stock, which if exercised before being fully vested, are
subject to repurchase by USWeb/CKS.
(15) Represents options exercisable within 60 days for 25,000 shares of
USWeb/CKS Common Stock, which if exercised before being fully vested, are
subject to repurchase by USWeb/CKS.
(16) See notes (2)-(15) above.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a
summary and is qualified in its entirety by the provisions of the Certificate
of Incorporation and Bylaws.
The authorized capital stock of the Company is 201,000,000 shares, consisting
of 200,000,000 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 21, 1998 there were 69,964,945 shares of Common Stock
outstanding held of record by approximately 864 stockholders.
The holders of Common Stock are entitled to one vote per share held of record
on all matters submitted to a vote of the stockholders. The stockholders do not
have a right to take action by written consent nor may they cumulate votes in
connection with the election of directors subject to preferences that may be
applicable to any then outstanding Preferred Stock holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preferences of any outstanding shares of
Preferred Stock, if any. The Common Stock has no preemptive rights, conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
the offering will be, fully paid and nonassessable. The rights of holders of
Common Stock are subject to, and may be adversely affected by, the rights of
any series of Preferred Stock which the Company may issue in the future.
PREFERRED STOCK
The Company has 1,000,000 shares of undesignated Preferred Stock authorized,
none of which were issued or outstanding as of December 21, 1998. The Board of
Directors has the authority to issue 1,000,000 shares of Preferred Stock in one
or more series, and to fix the rights, designations, preferences, privileges,
qualifications and restrictions thereof, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences
and sinking fund terms, any or all of which may be greater than the rights of
the Common Stock without any further action by the stockholders. The issuance
of Preferred Stock could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation. Such issuance could have the effect of decreasing
the market price of the Common Stock. The issuance of Preferred Stock may have
the effect of delaying, deterring or preventing a change in control of the
Company with any further action by the stockholders. The Company has no present
plans to issue any shares of Preferred Stock.
WARRANTS
As of December 21, 1998, the Company had warrants outstanding to purchase
3,117,550 shares of its Common Stock at a weighted average exercise price per
share of $17.33.
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.
58
<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
The holders of approximately 14 million shares of Common Stock, including
approximately 2.9 million shares of Common Stock issuable upon the conversion
of outstanding warrants, are entitled to certain rights with respect to the
registration of such shares under the Securities Act. Under the terms of the
agreement between USWeb/CKS and the holders of such registrable securities, if
USWeb/CKS 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 USWeb/CKS to file additional registration
statements on Form S-3 at USWeb/CKS'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 USWeb/CKS'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 USWeb/CKS. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of
USWeb/CKS's Common Stock. These provisions of Delaware law and USWeb/CKS'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 USWeb/CKS (including unsolicited takeover
attempts), even though such a transaction may offer USWeb/CKS's stockholders
the opportunity to sell their stock at a price above the prevailing market
price. The Certificate of Incorporation allows USWeb/CKS 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
USWeb/CKS 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
59
<PAGE>
distribution to all stockholders of the corporation, (iv) any transaction
involving the corporation that has the effect of increasing the proportionate
share of the stock of any class or series, or securities convertible into the
stock of any class or series, of the corporation that is owned directly or
indirectly by the Interested Stockholder, or (v) any receipt by the Interested
Stockholder of the benefit (except proportionately as a stockholder) of any
loans, advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
Section 203 does not apply to a business corporation if (i) before a person
becomes an Interested Stockholder, the board of directors of the corporation
approves the transaction in which the Interested Stockholder became an
Interested Stockholder or approved the business combination, or (ii) upon
consummation of the transaction that resulted in the Interested Stockholder
becoming an Interested Stockholder, the Interested Stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commences, other than certain the affirmative vote of the holders
of at least two-thirds of the outstanding voting stock of the corporation not
owned by the Interested Stockholder.
Certificate of Incorporation and Bylaws
USWeb/CKS's Bylaws also require that special meetings of the stockholders of
USWeb/CKS may be called only by the Board of Directors, the Chief Executive
Officer of USWeb/CKS or by any person or persons holding shares representing at
least 20% of the outstanding capital stock. USWeb/CKS's Bylaws also require
advance written notice, which must be received by the Secretary of USWeb/CKS
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. USWeb/CKS'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 USWeb/CKS.
USWeb/CKS'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 USWeb/CKS's voting stock or a majority of directors in
office, although less than a quorum. See "Risk Factors--Effect of Certain
Charter Provisions; Antitakeover Effects of Incorporation, Bylaws and Delaware
Law."
Transfer Agent and Registrar
The Transfer Agent and Registrar of the USWeb Common Stock is ChaseMellon
Shareholder Services, LLC, and its telephone number is (415) 743-1423.
60
<PAGE>
PLAN OF DISTRIBUTION
USWeb/CKS will issue the Common Stock from time to time in connection with
acquisition by USWeb/CKS of other businesses, assets or securities. It is
expected that the terms of the acquisitions involving the issuance of
securities covered by this Prospectus will be determined by negotiations with
the owners or controlling persons of the businesses, assets or securities to be
acquired by USWeb/CKS. USWeb/CKS will pay all the expenses of preparing and
distributing this Prospectus. USWeb/CKS does not plan to pay any underwriting
discounts or commissions in connection with acquisitions. We regularly pay a
financial advisor's or finder's fee in acquisition transactions.
RESTRICTIONS ON RESALE
The Common Stock offered hereby is registered under the Securities Act, but
this registration does not cover resale or distribution by the person who
receives Common Stock issued by USWeb/CKS in its acquisitions. Affiliates of
entities acquired by USWeb/CKS who do not become affiliates of USWeb/CKS may
not resell Common Stock registered under the Registration Statement to which
this Prospectus relates except pursuant to an effective registration statement
under the Securities Act covering such shares, or in compliance with Rule 145
promulgated under the Securities Act or another applicable exemption from the
registration requirements of the Securities Act. Generally, Rule 145 permits
such affiliates to sell such shares immediately following the acquisition in
compliance with certain volume limitations and manner of sale requirements.
Under Rule 145, sales by such affiliates during any three-month period cannot
exceed the greater of (i) 1% of the shares of Common Stock of USWeb/CKS
outstanding and (ii) the average weekly reported volume of trading of such
shares of Common Stock on all national securities exchanges during the four
calendar weeks preceding the proposed sale. These restrictions will cease to
apply under most other circumstances if the affiliate has held the Common Stock
for at least two years, provided that the person or entity is not then an
affiliate of USWeb/CKS. Individuals who are not affiliates of the entity being
acquired and do not become affiliates of USWeb/CKS will not be subject to
resale restrictions under Rule 145 and, unless otherwise contractually
restricted, may resell Common Stock immediately following the acquisition
without an effective registration statement under the Securities Act. The
ability of affiliates to resell shares of the Common Stock under Rule 145 will
be subject to USWeb/CKS having satisfied its reporting requirements under the
Securities Exchange Act of 1934, as amended, for specified periods prior to the
time of sale.
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
shares of Common Stock offered hereby will be passed upon for USWeb/CKS by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California.
61
<PAGE>
EXPERTS
The consolidated financial statements of USWeb Corporation at December 31,
1996 and 1997, and for the years then ended, and the supplemental consolidated
financial statements of USWeb Corporation at December 31, 1996 and 1997 and for
each of the three years in the period ended December 31, 1997, have been
included in this Prospectus in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of CKS Group, Inc. as of November 30,
1996 and 1997, and for each of the years in the three-year period ended
November 30, 1997, have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
appearing elsewhere herein, and upon the authority of said firm as experts in
auditing and accounting.
The financial statements of McKinney & Silver as of December 31, 1995 and
1996 and for the years ended December 31, 1995 and 1996, not separately
presented in this Prospectus, have been audited by Ernst & Young LLP,
independent auditors whose report thereon appears herein. Such financial
statements, to the extent they have been included in the financial statements
of CKS Group, Inc., have been so included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
62
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Overview.................................................................. F-6
Unaudited pro forma combined balance sheet as of September 30, 1998....... F-8
Unaudited pro forma combined statement of operations...................... F-9
Unaudited pro forma combined statement of operations--years ended December
31, 1995 and 1996........................................................ F-10
Unaudited pro forma combined statement of operations--year ended December
31, 1997................................................................. F-11
Unaudited pro forma combined statement of operations--nine months ended
September 30, 1997....................................................... F-12
Unaudited pro forma combined statement of operations--nine months ended
September 30, 1998....................................................... F-13
Notes to unaudited pro forma combined financial information............... F-14
USWEB CORPORATION
Report of Independent Accountants......................................... F-21
Consolidated Balance Sheet................................................ F-22
Consolidated Statement of Operations...................................... F-23
Consolidated Statement of Stockholders' Equity (Deficit).................. F-24
Consolidated Statement of Cash Flows...................................... F-25
Notes to Consolidated Financial Statements................................ F-26
USWEB CORPORATION--SUPPLEMENTAL
Supplemental Consolidated Balance Sheet................................... F-46
Supplemental Consolidated Statement of Operations......................... F-47
Supplemental Consolidated Statement of Stockholders' Equity............... F-48
Supplemental Consolidated Statement of Cash Flows......................... F-49
Notes to Supplemental Consolidated Financial Statements................... F-50
USWEB SAN FRANCISCO (FORMERLY XCOM CORPORATION)
Report of Independent Accountants......................................... F-70
Balance Sheet............................................................. F-71
Statement of Operations................................................... F-72
Statement of Shareholders' Equity......................................... F-73
Statement of Cash Flows................................................... F-74
Notes to Financial Statements............................................. F-75
USWEB MILWAUKEE (FORMERLY FETCH INTERACTIVE, INC.)
Report of Independent Accountants......................................... F-78
Balance Sheet............................................................. F-79
Statement of Operations................................................... F-80
Statement of Stockholders' Deficit........................................ F-81
Statement of Cash Flows................................................... F-82
Notes to Financial Statements............................................. F-83
USWEB LA METRO (FORMERLY NEWLINK CORPORATION)
Report of Independent Accountants......................................... F-87
Balance Sheet............................................................. F-88
Statement of Operations................................................... F-89
Statement of Shareholders' Equity......................................... F-90
Statement of Cash Flows................................................... F-91
Notes to Financial Statements............................................. F-92
</TABLE>
F-1
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
USWEB ATLANTA (FORMERLY INTERNETOFFICE, LLC)
Report of Independent Accountants......................................... F-95
Balance Sheet............................................................. F-96
Statement of Operations................................................... F-97
Statement of Stockholders' Equity......................................... F-98
Statement of Cash Flows................................................... F-99
Notes to Financial Statements............................................. F-100
USWEB DC (FORMERLY INFOPRENEURS INC.)
Report of Independent Accountants......................................... F-103
Consolidated Balance Sheet................................................ F-104
Consolidated Statement of Operations...................................... F-105
Consolidated Statement of Stockholders' Deficit........................... F-106
Consolidated Statement of Cash Flows...................................... F-107
Notes to Consolidated Financial Statements................................ F-108
USWEB PITTSBURGH (FORMERLY ELECTRONIC IMAGES, INC.)
Report of Independent Accountants......................................... F-111
Balance Sheet............................................................. F-112
Statement of Operations................................................... F-113
Statement of Shareholders' Equity......................................... F-114
Statement of Cash Flows................................................... F-115
Notes to Financial Statements............................................. F-116
USWEB CHICAGO METRO (FORMERLY MULTIMEDIA MARKETING & DESIGN INC.)
Report of Independent Accountants......................................... F-121
Balance Sheet............................................................. F-122
Statement of Operations................................................... F-123
Statement of Shareholders' Equity......................................... F-124
Statement of Cash Flows................................................... F-125
Notes to Financial Statements............................................. F-126
USWEB HOLLYWOOD (FORMERLY KANDH, INC.)
Report of Independent Accountants......................................... F-128
Balance Sheet............................................................. F-129
Statement of Operations................................................... F-130
Statement of Shareholders' Equity......................................... F-131
Statement of Cash Flows................................................... F-132
Notes to Financial Statements............................................. F-133
USWEB HOLLYWOOD (FORMERLY DREAMMEDIA, INC.)
Report of Independent Accountants......................................... F-134
Balance Sheet............................................................. F-135
Statement of Operations................................................... F-136
Statement of Shareholders' Equity......................................... F-137
Statement of Cash Flows................................................... F-138
Notes to Financial Statements............................................. F-139
</TABLE>
F-2
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
USWEB MARIN (FORMERLY INTERNET CYBERNAUTICS, INC.)
Report of Independent Accountants......................................... F-141
Balance Sheet............................................................. F-142
Statement of Operations................................................... F-143
Statement of Shareholders' Equity (Deficit)............................... F-144
Statement of Cash Flows................................................... F-145
Notes to Financial Statements............................................. F-146
USWEB LONG ISLAND (FORMERLY SYNERGETIX SYSTEMS INTEGRATION, INC.)
Report of Independent Accountants......................................... F-151
Balance Sheet............................................................. F-152
Statement of Operations................................................... F-153
Statement of Shareholders' Equity......................................... F-154
Statement of Cash Flows................................................... F-155
Notes to Financial Statements............................................. F-156
USWEB DETROIT (FORMERLY ONLINE MARKETING COMPANY)
Report of Independent Accountants......................................... F-160
Balance Sheet............................................................. F-161
Statement of Operations................................................... F-162
Statement of Shareholders' Equity (Deficit)............................... F-163
Statement of Cash Flows................................................... F-164
Notes to Financial Statements............................................. F-165
USWEB SAN MATEO (FORMERLY ZENDATTA, INC.)
Report of Independent Accountants......................................... F-168
Balance Sheet............................................................. F-169
Statement of Operations................................................... F-170
Statement of Shareholders' Equity......................................... F-171
Statement of Cash Flows................................................... F-172
Notes to Financial Statements............................................. F-173
USWEB LA CENTRAL (FORMERLY W3-DESIGN)
Report of Independent Accountants......................................... F-175
Balance Sheet............................................................. F-176
Statement of Operations................................................... F-177
Statement of Shareholders' Equity......................................... F-178
Statement of Cash Flows................................................... F-179
Notes to Financial Statements............................................. F-180
USWEB HOUSTON (FORMERLY USWEB-APEX, INC.)
Report of Independent Accountants......................................... F-183
Combined Balance Sheet.................................................... F-184
Combined Statement of Operations.......................................... F-185
Combined Statement of Shareholders' Equity................................ F-186
Combined Statement of Cash Flows.......................................... F-187
Notes to Combined Financial Statements.................................... F-188
</TABLE>
F-3
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
USWEB NEW YORK CENTRAL (FORMERLY REACH NETWORKS, INC.)
Report of Independent Accountants......................................... F-190
Consolidated Balance Sheet................................................ F-191
Consolidated Statement of Operations...................................... F-192
Consolidated Statement of Stockholders' Equity (Deficit).................. F-193
Consolidated Statement of Cash Flows...................................... F-194
Notes to Consolidated Financial Statements................................ F-195
INTER.LOGIC.STUDIOS, INC.
Report of Independent Accountants......................................... F-202
Balance Sheet............................................................. F-203
Statement of Operations................................................... F-204
Statement of Shareholders' Equity......................................... F-205
Statement of Cash Flows................................................... F-206
Notes to Financial Statements............................................. F-207
QUEST INTERACTIVE MEDIA, INC.
Report of Independent Accountants......................................... F-210
Balance Sheet............................................................. F-211
Statement of Operations................................................... F-212
Statement of Shareholders' Deficit........................................ F-213
Statement of Cash Flows................................................... F-214
Notes to Financial Statements............................................. F-215
ENSEMBLE CORPORATION
Report of Independent Accountants......................................... F-218
Balance Sheet............................................................. F-219
Statement of Operations................................................... F-220
Statement of Shareholders' Equity......................................... F-221
Statement of Cash Flows................................................... F-222
Notes to Financial Statements............................................. F-223
IKONIC INTERACTIVE, INC.
Report of Independent Accountants......................................... F-228
Balance Sheet............................................................. F-229
Statement of Operations................................................... F-230
Statement of Shareholders' Deficit........................................ F-231
Statement of Cash Flows................................................... F-232
Notes to Financial Statements............................................. F-233
USWEB SAN JOSE
Report of Independent Accountants......................................... F-238
Balance Sheet............................................................. F-239
Statement of Operations................................................... F-240
Statement of Shareholder's Equity (Deficit)............................... F-241
Statement of Cash Flows................................................... F-242
Notes to Financial Statements............................................. F-243
</TABLE>
F-4
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
GRAY PEAK TECHNOLOGIES, INC.
Report of Independent Accountants......................................... F-246
Balance Sheet............................................................. F-247
Statement of Operations................................................... F-248
Statement of Changes in Stockholders' Equity (Deficit).................... F-249
Statement of Cash Flows................................................... F-250
Notes to Financial Statements............................................. F-251
CKS GROUP, INC.
Reports of Independent Auditors........................................... F-258
Consolidated Balance Sheets............................................... F-260
Consolidated Statements of Income......................................... F-261
Consolidated Statements of Stockholders' Equity........................... F-262
Consolidated Statements of Cash Flows..................................... F-263
Notes to Consolidated Financial Statements................................ F-264
</TABLE>
F-5
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
On December 17, 1998, USWeb Corporation ("USWeb") merged with CKS Group, Inc.
("CKS Group") in a transaction accounted for as a pooling of interests. Under
terms of the agreement, all issued and outstanding shares of CKS Group were
exchanged for shares of USWeb Common Stock on a ratio whereby each share of CKS
Group Common Stock was exchanged for 1.5 shares of USWeb Common Stock.
During the period from March 16, 1997 to September 30, 1998, USWeb completed
the acquisitions of thirty-three Internet consulting services firms in various
transactions accounted for as purchases. Collectively, the companies acquired
through September 30, 1998 accounted for as purchases are referred to herein as
the "Acquired Entities." The aggregate purchase price of the Acquired Entities
was approximately $246.3 million.
The acquisition prices of the Acquired Entities were allocated, on an entity-
by-entity basis, to the assets acquired, including tangible and intangible
assets and liabilities assumed based upon the fair values of such assets and
liabilities on the dates of the acquisitions. Approximately $12.3 million of
the aggregate purchase was allocated to identified net tangible assets
consisting primarily of cash, accounts receivable, property and equipment, and
accounts payable. The historical carrying amounts of such assets approximated
their fair values on the dates of acquisition. Approximately $35.0 million of
the acquisition price was allocated to in-process technology. Because such in-
process technology had not reached the stage of technological feasibility at
the acquisition dates and had no alternative future use, these amounts were
immediately charged to operations. Approximately $11.1 million of the aggregate
purchase price was allocated to existing technology and is being amortized over
the estimated useful life of six months. Approximately $187.9 million of the
purchase price was allocated to goodwill, primarily workforce in place, and is
being amortized over its estimated useful life of twelve to forty-two months.
Between January 1, 1997 and June 17, 1997, CKS Group acquired two entities in
the advertising industry under separate transactions that were accounted for as
poolings of interests. The aggregate consideration for these transactions was
1,082,399 shares of CKS Group Common Stock. Accordingly, the historical
financial statements of CKS Group for all periods have been restated to give
retroactive effect to these acquisitions.
During the period from August 1, 1996 to March 12, 1997, CKS Group acquired
four entities in the advertising industry under separate transactions that were
accounted for as purchases. The total acquisition prices of the acquired
companies were allocated, on an entity-by-entity basis, to the assets acquired,
including tangible and intangible assets and liabilities assumed based upon
their fair values on the dates of the acquisitions. Approximately $3.5 million
of the aggregate purchase was allocated to identifiable net tangible assets
consisting primarily of cash, accounts receivable, property and equipment, and
accounts payable. The historical carrying amounts of such assets approximated
their fair values on the dates of acquisition. The purchase price in excess of
identified tangible assets, in the amount of $24.4 million, was allocated to
goodwill. Such goodwill is considered to be primarily associated with its
customer base, brand recognition, and workforce in place. Consistent with
similar mergers within the advertising industry, goodwill is being amortized,
on an entity-by-entity basis, over its estimated useful life of twenty years.
The results of operations of the four entities acquired by CKS Group are
included in the consolidated results of operations of CKS Group from the dates
of their respective acquisitions.
The accompanying unaudited pro forma combined balance sheet gives effect to
the Merger of USWeb and CKS Group, as if such transaction occurred on September
30, 1998. The unaudited pro forma
F-6
<PAGE>
combined balance sheet combines the unaudited consolidated balance sheet of
USWeb as of September 30, 1998, with the unaudited consolidated balance sheet
of CKS Group as of August 31, 1998.
The accompanying unaudited pro forma combined statement of operations
presents the results of operations of USWeb for the years ended December 31,
1996 and 1997 and the nine-month periods ended September 30, 1997 and 1998,
combined with the statement of operations of CKS Group for the three years
ended November 30, 1997, and the nine-month periods ended August 31, 1997 and
1998, as if USWeb and CKS Group had merged at the beginning of such periods.
Additionally, the pro forma combined statement of operations reflects the
acquisition by USWeb of the Acquired Entities as if such entities had been
acquired on January 1, 1997.
The operating results of USWeb and CKS Group for any period are not
necessarily indicative of the results for any subsequent period.
F-7
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
(NOTE 4) PRO FORMA
USWEB CKS GROUP ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
(RESTATED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 23,810 $ 29,817 $ -- $ 53,627
Short-term investments........ 29,842 17,335 -- 47,177
Accounts receivable, net...... 34,361 54,025 -- 88,386
Other current assets.......... 5,743 2,802 -- 8,545
Deferred income taxes......... -- 1,736 -- 1,736
--------- -------- -------- ---------
Total current assets........ 93,756 105,715 -- 199,471
Property and equipment, net... 11,624 5,867 -- 17,491
Intangible assets, net........ 144,941 34,925 -- 179,866
Deferred income taxes and
other assets................. 4,099 6,472 -- 10,571
--------- -------- -------- ---------
$ 254,420 $152,979 $ -- $ 407,399
========= ======== ======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable.............. $ 4,879 $ 36,052 $ -- $ 40,931
Accrued expenses.............. 20,924 6,560 34,000 (A) 61,484
Deferred revenue.............. 990 3,485 -- 4,475
Income taxes payable.......... -- 1,218 -- 1,218
Debt and leases, current...... 2,398 161 -- 2,559
--------- -------- -------- ---------
Total current liabilities... 29,191 47,476 34,000 110,667
Lease obligations, non-current.. 2,005 766 -- 2,771
--------- -------- -------- ---------
31,196 48,242 34,000 113,438
--------- -------- -------- ---------
Stockholders' equity:
Common Stock.................. 41 15 -- 63
Additional paid-in capital.... 406,859 82,798 -- 489,650
Note receivable............... -- (198) -- (198)
Retained earnings (deficit)... (183,676) 22,122 (34,000)(A) (195,554)
--------- -------- -------- ---------
Total stockholders' equity . 223,224 104,737 (34,000) 293,961
--------- -------- -------- ---------
$ 254,420 $152,979 $ -- $ 407,399
========= ======== ======== =========
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information
F-8
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- --------------------
1995 1996 1997 1997 1998
------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Services................. $43,656 $64,569 $ 165,914 $ 120,357 $ 173,387
Other.................... -- 1,820 403 304 443
------- ------- --------- --------- ---------
Total revenues......... 43,656 66,389 166,317 120,661 173,830
------- ------- --------- --------- ---------
Cost of revenues:
Services................. 28,842 41,115 109,182 77,508 112,040
Other.................... -- 208 1,294 1,180 700
Provision for loss on
contract................ -- -- -- -- 2,094
Stock compensation....... -- -- 20,992 15,744 15,744
------- ------- --------- --------- ---------
Total cost of revenues. 28,842 41,323 131,468 94,432 130,578
------- ------- --------- --------- ---------
Gross Profit 14,814 25,066 34,849 26,229 43,252
------- ------- --------- --------- ---------
Operating expenses:
Marketing, sales and sup-
port.................... 932 14,963 35,008 24,309 23,669
General and administra-
tive.................... 7,304 12,633 39,315 28,734 34,759
Acquired in-process tech-
nology.................. -- -- 34,980 34,980 --
Stock compensation....... -- -- 38,588 28,941 35,227
Amortization of intangi-
ble assets.............. -- 74 101,065 79,130 52,016
------- ------- --------- --------- ---------
Total operating ex-
penses................ 8,236 27,670 248,956 196,094 145,671
------- ------- --------- --------- ---------
Income (loss) from opera-
tions..................... 6,578 (2,604) (214,107) (169,865) (102,419)
Interest income............ 385 2,612 2,528 1,602 3,907
Interest expense........... (89) (341) (1,080) (688) (903)
Impairment of investment... -- -- (4,000) (4,000) --
------- ------- --------- --------- ---------
Income (loss) before income
taxes..................... 6,874 (333) (216,659) (172,951) (99,415)
Provision for income tax-
es--Note 3................ 2,823 5,108 5,635 4,845 5,210
------- ------- --------- --------- ---------
Net income (loss)--Note 3.. $ 4,051 $(5,441) $(222,294) $(177,796) $(104,625)
======= ======= ========= ========= =========
Pro forma net income (loss)
per share:
Basic.................... $ 0.29 $ (0.25) $ (5.24) $ (4.46) $ (1.61)
======= ======= ========= ========= =========
Diluted.................. $ 0.24 $ (0.25) $ (5.24) $ (4.46) $ (1.61)
======= ======= ========= ========= =========
Weighted average shares:
Basic.................... 13,764 21,803 42,448 39,891 65,137
======= ======= ========= ========= =========
Diluted.................. 16,898 21,803 42,448 39,891 65,137
======= ======= ========= ========= =========
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information
F-9
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1996
------------------------------ -------------------------------
CKS GROUP USWEB/CKS CKS GROUP USWEB/CKS
USWEB PRO FORMA PRO FORMA USWEB PRO FORMA PRO FORMA
HISTORICAL (NOTE 3) COMBINED HISTORICAL (NOTE 3) COMBINED
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Services............... $ -- $43,656 $43,656 $ -- $ 64,569 $ 64,569
Other.................. -- -- -- 1,820 -- 1,820
------- ------- ------- -------- -------- --------
Total revenues........ -- 43,656 43,656 1,820 64,569 66,389
------- ------- ------- -------- -------- --------
Cost of revenues:
Services............... -- 28,842 28,842 -- 41,115 41,115
Other.................. -- -- -- 208 -- 208
------- ------- ------- -------- -------- --------
Total cost of reve-
nues................. -- 28,842 28,842 208 41,115 41,323
------- ------- ------- -------- -------- --------
Gross profit............ -- 14,814 14,814 1,612 23,454 25,066
------- ------- ------- -------- -------- --------
Operating expenses:
Marketing, sales and
support............... -- 932 932 12,764 2,199 14,963
General and administra-
tive.................. -- 7,304 7,304 2,813 9,820 12,633
Amortization of intan-
gible assets.......... -- -- -- -- 74 74
------- ------- ------- -------- -------- --------
Total operating ex-
penses............... -- 8,236 8,236 15,577 12,093 27,670
------- ------- ------- -------- -------- --------
Income (loss) from oper-
ations................. -- 6,578 6,578 (13,965) 11,361 (2,604)
Interest income......... -- 385 385 215 2,397 2,612
Interest expense........ -- (89) (89) (58) (283) (341)
------- ------- ------- -------- -------- --------
Income (loss) before
income taxes........... -- 6,874 6,874 (13,808) 13,475 (333)
Provision for income
taxes--Note 3.......... -- 2,823 2,823 -- 5,108 5,108
------- ------- ------- -------- -------- --------
Net income (loss)--Note
3...................... $ -- $ 4,051 $ 4,051 $(13,808) $ 8,367 $ (5,441)
======= ======= ======= ======== ======== ========
Pro forma net income
(loss) per share:
Basic.................. $ -- $ 0.44 $ 0.29 $ (10.35) $ 0.61 $ (0.25)
======= ======= ======= ======== ======== ========
Diluted................ $ -- $ 0.36 $ 0.24 $ (10.35) $ 0.58 $ (0.25)
======= ======= ======= ======== ======== ========
Weighted average shares:
Basic.................. -- 9,176 13,764 (B) 1,334 13,646 21,803 (B)
======= ======= ======= ======== ======== ========
Diluted................ -- 11,265 16,898 (B) 1,334 14,435 21,803 (B)
======= ======= ======= ======== ======== ========
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information
F-10
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
USWEB
----------------------------------------------------------
(F) CKS GROUP USWEB/CKS
ACQUIRED (C) PRO FORMA PRO FORMA
HISTORICAL ENTITIES ELIMINATIONS ADJUSTMENTS PRO FORMA (NOTE 3) COMBINED
---------- -------- ------------ ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Services............... $ 18,366 $ 71,803 $(18,366) $ (913)(E) $ 70,890 $ 95,024 $ 165,914
Other.................. 912 -- -- (509)(E) 403 -- 403
-------- -------- -------- --------- --------- -------- ---------
Total revenues....... 19,278 71,803 (18,366) (1,422) 71,293 95,024 166,317
-------- -------- -------- --------- --------- -------- ---------
Cost of revenues:
Services............... 13,468 50,299 (13,468) (1,050)(E) 49,249 59,933 109,182
Other.................. 1,294 -- -- -- 1,294 -- 1,294
Stock compensation .... 2,420 -- (2,420) 20,992 (D) 20,992 -- 20,992
-------- -------- -------- --------- --------- -------- ---------
Total cost of reve-
nues................ 17,182 50,299 (15,888) 19,942 71,535 59,933 131,468
-------- -------- -------- --------- --------- -------- ---------
Gross profit............ 2,096 21,504 (2,478) (21,364) (242) 35,091 34,849
-------- -------- -------- --------- --------- -------- ---------
Operating expenses:
Marketing, sales and
support............... 20,672 13,895 (2,261) -- 32,306 2,702 35,008
General and administra-
tive.................. 10,271 14,867 (3,291) -- 21,847 17,468 39,315
Acquired in-process
technology ........... 9,472 -- (9,472) 34,980 (D) 34,980 -- 34,980
Stock compensation .... 6,698 -- (6,698) 38,588 (D) 38,588 -- 38,588
Amortization of intan-
gible assets.......... 9,476 -- (9,476) 97,578 (D) 97,578 3,487 101,065
-------- -------- -------- --------- --------- -------- ---------
Total operating ex-
penses.............. 56,589 28,762 (31,198) 171,146 225,299 23,657 248,956
-------- -------- -------- --------- --------- -------- ---------
Income (loss) from oper-
ations................. (54,493) (7,258) 28,720 (192,510) (225,541) 11,434 (214,107)
Interest income......... 233 182 (1) -- 414 2,114 2,528
Interest expense........ (76) (479) 40 -- (515) (565) (1,080)
Impairment of Invest-
ment................... (4,000) -- -- -- (4,000) -- (4,000)
-------- -------- -------- --------- --------- -------- ---------
Income (loss) before in-
come taxes............. (58,336) (7,555) 28,759 (192,510) (229,642) 12,983 (216,659)
Provisions for income
taxes-Note 3........... -- -- -- -- -- 5,635 5,635
-------- -------- -------- --------- --------- -------- ---------
Net income (loss)-Note
3...................... $(58,336) $ (7,555) $ 28,759 $(192,510) $(229,642) $ 7,348 $(222,294)
======== ======== ======== ========= ========= ======== =========
Pro forma net income
(loss) per share:
Basic.................. $ (7.98) $ (11.20) $ 0.50 $ (5.24)
======== ========= ======== =========
Diluted................ $ (7.98) $ (11.20) $ 0.47 $ (5.24)
======== ========= ======== =========
Weighted average shares:
Basic.................. 7,312 20,498 14,633 42,448 (B)
======== ========= ======== =========
Diluted................ 7,312 20,498 15,590 42,448 (B)
======== ========= ======== =========
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information
F-11
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
USWEB
----------------------------------------------------------
(F) CKS GROUP, USWEB/CKS
ACQUIRED (C) INC. PRO FORMA
HISTORICAL COMPANIES ELIMINATIONS ADJUSTMENTS PRO FORMA HISTORICAL COMBINED
---------- --------- ------------ ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Services............... $ 7,868 $49,614 $(7,868) $ -- $ 49,614 $70,473 $ 120,357
Other.................. 808 -- -- (504)(E) 304 -- 304
-------- ------- ------- --------- --------- ------- ---------
Total revenues....... 8,676 49,614 (7,868) (504) 49,918 70,743 120,661
-------- ------- ------- --------- --------- ------- ---------
Cost of revenues:
Services............... 6,196 34,472 (6,196) (319)(E) 34,153 43,355 77,508
Other.................. 1,180 -- -- -- 1,180 -- 1,180
Stock compensation..... 966 -- (966) 15,744 (D) 15,744 -- 15,744
-------- ------- ------- --------- --------- ------- ---------
Total cost of
revenues............ 8,342 34,472 (7,162) 15,425 51,077 43,355 94,432
-------- ------- ------- --------- --------- ------- ---------
Gross profit............ 334 15,142 (706) (15,929) (1,159) 27,388 26,229
-------- ------- ------- --------- --------- ------- ---------
Operating expenses:
Marketing, sales and
support............... 14,119 9,742 (1,472) -- 22,389 1,920 24,309
General and
administrative........ 7,027 11,405 (1,994) -- 16,438 12,296 28,734
Acquired in-process
technology............ 6,726 -- (6,726) 34,980 (D) 34,980 -- 34,980
Stock compensation..... 3,500 -- (3,500) 28,941 (D) 28,941 -- 28,941
Amortization of
intangible assets..... 4,321 -- (4,321) 75,948 (D) 75,948 3,182 79,130
-------- ------- ------- --------- --------- ------- ---------
Total operating
expenses............ 35,693 21,147 (18,013) 139,869 178,696 17,398 196,094
-------- ------- ------- --------- --------- ------- ---------
Income (loss) from
operations............. (35,359) (6,005) 17,307 (155,798) (179,855) 9,990 (169,865)
Interest income......... 165 133 (5) -- 293 1,309 1,602
Interest expense........ (76) (324) 33 -- (367) (321) (688)
Impairment of
investment............. (4,000) -- -- -- (4,000) -- (4,000)
-------- ------- ------- --------- --------- ------- ---------
Income (loss) before
income taxes........... (39,270) (6,196) 17,335 (155,798) (183,929) 10,978 (172,951)
Provision for income
taxes--Note 3.......... -- -- -- -- -- 4,845 4,845
-------- ------- ------- --------- --------- ------- ---------
Net income (loss)--Note
3...................... $(39,270) $(6,196) $17,335 $(155,798) $(183,929) $ 6,133 $(177,796)
======== ======= ======= ========= ========= ======= =========
Pro forma Basic and in-
come (loss) per share.. $ (8.10) $ (10.18) $ 0.42 $ (4.46)
======== ========= ======= =========
Weighted average shares
outstanding............ 4,845 18,076 14,543 39,891 (B)
======== ========= ======= =========
Pro forma Diluted net
income (loss)
per share.............. $ (8.10) $ (10.18) $ 0.39 $ (4.46)
======== ========= ======= =========
Weighted average to
shares outstanding..... 4,845 18,076 15,705 39,891 (B)
======== ========= ======= =========
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information
F-12
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
USWEB
-----------------------------------------------------------
(F) USWEB/CKS
ACQUIRED (C) CKS GROUP PRO FORMA
HISTORICAL ENTITIES ELIMINATIONS ADJUSTMENTS PRO FORMA HISTORICAL COMBINED
---------- -------- ------------ ----------- --------- ---------- ---------
(RESTATED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Services............... $ 72,643 $27,271 $ (9,393) $ -- $ 90,521 $82,866 $ 173,387
Other.................. 443 -- -- -- 443 -- 443
--------- ------- -------- --------- --------- ------- ---------
Total revenues....... 73,086 27,271 (9,393) -- 90,964 82,866 173,830
--------- ------- -------- --------- --------- ------- ---------
Cost of revenues:
Services............... 46,705 18,893 (6,506) -- 59,092 52,948 112,040
Other.................. 700 -- -- -- 700 -- 700
Provision for loss on
contract.............. 2,094 -- -- -- 2,094 -- 2,094
Stock compensation..... 9,415 -- (9,415) 15,744 (D) 15,744 -- 15,744
--------- ------- -------- --------- --------- ------- ---------
Total cost of
revenues............ 58,914 18,893 (15,921) 15,744 77,630 52,948 130,578
--------- ------- -------- --------- --------- ------- ---------
Gross profit............ 14,172 8,378 6,528 (15,744) 13,334 29,918 43,252
--------- ------- -------- --------- --------- ------- ---------
Operating expenses:
Marketing, sales and
support............... 17,903 5,561 (1,492) -- 21,972 1,697 23,669
General and
administrative........ 15,691 4,956 (1,420) -- 19,227 15,532 34,759
Acquired in-process
technology............ 25,508 -- (25,508) -- -- -- --
Stock compensation..... 23,962 -- (23,962) 35,227 (D) 35,227 -- 35,227
Amortization of
intangible assets..... 44,539 -- (44,539) 50,779 (D) 50,779 1,237 52,016
--------- ------- -------- --------- --------- ------- ---------
Total operating
expenses............ 127,603 10,517 (96,921) 86,006 127,205 18,466 145,671
--------- ------- -------- --------- --------- ------- ---------
Income (loss) from
operations............. (113,431) (2,139) 103,449 (101,750) (113,871) 11,452 (102,419)
Interest income......... 2,230 141 -- -- 2,371 1,536 3,907
Interest expense........ (331) (230) 36 -- (525) (378) (903)
Impairment of
investment............. -- -- -- -- -- -- --
--------- ------- -------- --------- --------- ------- ---------
Income (loss) before
income taxes........... (111,532) (2,228) 103,485 (101,750) (112,025) 12,610 (99,415)
Provision for income
taxes.................. -- -- -- -- -- 5,210 5,210
--------- ------- -------- --------- --------- ------- ---------
Net income (loss)....... $(111,532) $(2,228) $103,485 $(101,750) $(112,025) $ 7,400 $(104,625)
========= ======= ======== ========= ========= ======= =========
Net income (loss) per
share:
Basic.................. $ (3.23) $ (2.66) $ 0.48 $ (1.61)
========= ========= ======= =========
Diluted................ $ (3.23) $ (2.66) $ 0.45 $ (1.61)
========= ========= ======= =========
Weighted average shares:
Basic.................. 34,521 42,119 15,345 65,137 (B)
========= ========= ======= =========
Diluted................ 34,521 42,119 16,335 65,137 (B)
========= ========= ======= =========
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information
F-13
<PAGE>
USWEB CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
NOTE 1--PERIODS PRESENTED
USWeb's fiscal year ends on December 31. CKS Group's fiscal year ends on
November 30. The accompanying unaudited pro forma combined statement of
operations information gives effect to the merger of USWeb and CKS Group as if
such merger occurred as of the beginning of the earliest year presented. The
accompanying unaudited pro forma combined statement of operations information
also gives effect to the acquisition by USWeb of thirty-three Internet
consulting business, acquired between March 17, 1997 and August 17, 1998, as if
such acquisitions occurred on January 1, 1997. USWeb was incorporated on
December 5, 1995 and had no significant operations during the period from its
date of incorporation through the year ended December 31, 1995. Certain
immaterial transactions, which occurred between USWeb's date of incorporation
and December 31, 1995, have been included in the results of operations for the
year ended December 31, 1996. The pro forma combined statement of operations
for the year ended December 31, 1995 reflects the results of operations of CKS
for the fiscal year ended November 30, 1995. The pro forma combined statement
of operations for the year ended December 31, 1996, reflects the results of
operations of USWeb for the year ended December 31, 1996, combined with the
results of operations of CKS Group for the fiscal year ended November 30, 1996.
The pro forma combined statement of operations for the year ended December 31,
1997, reflects the results of operations of USWeb for the year ended December
31, 1997, combined with the results of operations of CKS Group for the fiscal
year ended November 30, 1997, and the results of operations of the Acquired
Entities for their respective years ended December 31, 1997. The pro forma
combined statement of operations for the nine-month periods ended September 30,
1997 and 1998, reflect the results of operations of USWeb for the nine-month
periods ended September 30, 1997 and 1998, combined with the results of
operations of CKS Group for the nine-month periods ended August 31, 1997 and
1998, and the results of operations of the Acquired Entities for their
respective nine-month periods ended September 30, 1997 and 1998.
The pro forma combined balance sheet as of September 30, 1998, combines the
assets, liabilities and stockholders' equity of USWeb at September 30, 1998
with the assets, liabilities and stockholders' equity of CKS Group as of August
31, 1998.
NOTE 2--CONFORMING ADJUSTMENTS
The historical statement of operations information of CKS Group for the three
years ended November 30, 1997, and for the nine-month periods ended August 31,
1997 and 1998, has been reclassified to conform to USWeb's accounting policies
and basis of presentation. Such reclassifications included the netting of
certain production revenues and related costs, which were separately disclosed
in CKS Group's historical financial statements, and the classification of
certain costs between operating expense categories. The effect of netting
certain production revenues and related costs was to decrease both revenues and
cost of revenues by $14.7 million, $23.6 million, $38.6 million, $29.2 million
and 35.8 million for the years ended December 31, 1995, 1996 and 1997 and the
nine-month periods ended September 30, 1997 and 1998, respectively.
NOTE 3--CKS GROUP PRO FORMA STATEMENT OF OPERATIONS
CKS Group's statement of operations for the years ended December 31, 1995,
1996 and 1997 and the nine-month period ended September 30, 1997, represents
its historical results except for the provision for income taxes and net
income. The provision for income taxes represents the pro forma provision for
income taxes of CKS Group for the years ended December 31, 1995, 1996 and 1997
and the nine-month period ended September 30, 1997. In January 1997 CKS Group
acquired, in a transaction accounted for as a pooling of interests, a
partnership whose earnings were taxed at the individual partner level;
therefore no provision for income taxes had been recorded for income
attributable to the partnership. The pro forma income tax provision of CKS
Group, and the resulting pro forma net income of CKS Group, is presented as if
the partnership had been a C corporation fully subject to income taxes for all
periods presented. The pro forma provision for income taxes relates solely to
the taxable income generated by CKS Group during the periods presented.
F-14
<PAGE>
USWEB CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
NOTE 4. --THE FOLLOWING ADJUSTMENTS WERE APPLIED TO THE HISTORICAL FINANCIAL
STATEMENTS OF USWEB, CKS GROUP AND THE ACQUIRED ENTITIES TO ARRIVE
AT THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION.
(A) To record an accrual for the estimated costs resulting from the merger
of USWeb and CKS Group. It is anticipated that USWeb will incur charges to
operations related to the Merger, currently estimated to be $34.0 million,
principally in the quarter in which the Merger is consummated. These charges
include direct transaction costs, primarily for financial advisory and legal
fees, and costs associated with combining operations of the two companies. The
estimated charge is reflected in the unaudited pro forma combined balance
sheet data, but is not reflected in the unaudited pro forma combined statement
of operations data. This charge is a preliminary estimate only and is subject
to change.
Estimated transaction, merger and integration costs include the following:
<TABLE>
<S> <C>
Merger Costs:
Financial Advisory Fees.................................... $18,000,000
Legal and Accounting Professional Fees..................... 2,500,000
Financial Printer Fees..................................... 700,000
Shareholder Costs.......................................... 500,000
Various filing fees........................................ 300,000
Integration Costs:
Lease termination costs.................................... 3,000,000
Write off of fixed assets.................................. 1,500,000
Severance and retention.................................... 3,500,000
Initial branding and marketing costs....................... 3,500,000
Other...................................................... 500,000
-----------
Total.................................................... $34,000,000
===========
</TABLE>
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. Additionally, the amounts shown above include certain
integration costs expected to be incurred which do not qualify for immediate
accrual as merger costs under existing authoritative literature. Such costs
include costs associated with severance, moving and integrating facilities,
initial branding and marketing costs and other related non-recurring charges.
To date the Company has not identified employees or positions to be eliminated
or relocated, nor has the Company determined what benefits will be provided to
any terminated employees. Accordingly, the actual amounts to be incurred may
differ from the above estimates. Such costs will be recognized when incurred
in accordance with EITF 94-3.
(B) Basic and diluted weighted average shares outstanding were calculated
based upon the pro forma basic and diluted shares weighted average outstanding
of USWeb for each respective period, increased by the historical basic and
diluted shares weighted average shares outstanding of CKS Group for each
respective period, as adjusted for the 1.5 to 1 exchange ratio. The number of
shares included in CKS's historical diluted net income per share computation
includes the dilutive effect of potential common stock associated with stock
options. Because the Company is in a net loss position on a pro forma combined
basis for the years ended December 31, 1997 and 1996 and for the nine months
ended September 30, 1997 and 1998, inclusion of potential common stock in the
computation of pro forma net loss per share is anti-dilutive; therefore, the
potential common stock is excluded from the share amounts, and pro forma net
loss per share is the same for both basic and dilutive.
F-15
<PAGE>
(C) To eliminate items of income and expense related to the Acquired Entities
which are included in the consolidated results of operations of USWeb from the
date of respective acquisition to December 31, 1997 and September 30, 1998,
respectively.
(D) To adjust the amortization expense associated with intangible assets, to
record stock compensation, and to record the charges for acquired in-process
technology to reflected such amounts in the pro forma combined statement of
operations as if the acquisitions of the Acquired Entities which occurred
during the respective period presented had occurred as of the beginning of such
period.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED 30,
DECEMBER 31, ---------------
1997 1997 1998
------------ ------- -------
<S> <C> <C> <C>
Acquired in-process technology as if all companies
had been acquired on January 1, 1997............. $34,980 $34,980 $ --
======= ======= =======
Amortization of intangible assets, as if all
companies had been acquired on January 1, 1997:
Amortization of acquired technology............. $11,058 $11,058 $ --
Amortization of goodwill, primarily workforce in
place ......................................... 85,520 64,890 50,779
------- ------- -------
$97,578 $75,948 $50,779
======= ======= =======
Stock Compensation, as if all companies had been
acquired on January 1, 1997:
Allocated to cost of revenues................... $20,992 $15,744 $15,744
Allocated to operating expenses................. 38,588 28,941 35,227
------- ------- -------
$59,580 $44,685 $50,971
======= ======= =======
</TABLE>
Acquired in-process technology represents the fair value of in-process
technology at the date of the respective acquisitions that had not reached the
stage of technological feasibility and had no alternative future use.
Accordingly, such amounts were written off on the date of acquisition which,
for the purposes of the unaudited pro forma financial statements, has been
assumed to be January 1, 1997.
Amortization of intangible assets includes amortization of acquired
technology, and goodwill (primarily workforce in place) over their respective
lives as if each acquisition had occurred on January 1, 1997. Acquired
technology is amortized over its estimated useful life of six months. Goodwill,
primarily workforce in place, is amortized over its estimated useful lives of
twelve to forty-two months.
Stock compensation represents the vested portion of stock bonuses to be paid
to certain employees of the acquired companies. Such bonuses vest over a
thirty-six month period. Stock compensation represents the vested portion of
such bonuses as if each of the companies had been acquired on January 1, 1997.
Stock compensation is allocated between costs of revenues and operating
expenses based upon the related classification of the employees entitled to
receive such bonuses.
(E) To eliminate intercompany revenues and related expenses associated with
the Acquired Entities that had previously been Affiliates of USWeb.
F-16
<PAGE>
(F) The following tables combine, for the year ended December 31, 1997 and
the nine-month periods ended September 30, 1997 and 1998:
(i) the historical results of operations of USWeb for each respective
period with
(ii) the historical results of operations of the Acquired entities for
the period prior to their acquisition date.
The total of these combined amounts ("Total pro forma before adjustments") is
adjusted in the unaudited pro forma combined statement of operations to
eliminate the portion of revenues, cost of revenues, and operating expenses
included in such total for the periods subsequent to the Acquired Entities'
acquisition date through the end of the respective periods presented. The
resulting amounts presented in the unaudited pro forma combined statement of
operations reflect the results of operations of USWeb and the results of
operations of the Acquired Entities as if each acquisition had occurred on
January 1, 1997, or the date of inception, if later.
F-17
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUES COST OF REVENUES
---------------------- -------------------------------
STOCK
COMPEN- GROSS
SERVICES OTHER TOTAL SERVICES OTHER SATION TOTAL PROFIT
-------- ----- ------- -------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
USWeb Historical... $18,366 $912 $19,278 $13,468 $1,294 $2,420 $17,182 $ 2,096
------- ---- ------- ------- ------ ------ ------- -------
Acquired Entities:
XCom Corp......... 274 -- 274 59 -- -- 59 215
Fetch Interac-
tive.............. 608 -- 608 515 -- -- 515 93
NewLink Corp...... 203 -- 203 59 -- -- 59 144
InterNetOffice,
LLC............... 392 -- 392 252 -- -- 252 140
Infopreneurs
Inc............... 331 -- 331 218 -- -- 218 113
Electronic Im-
ages, Inc......... 2,896 -- 2,896 2,115 -- -- 2,115 781
Multimedia Mar-
keting & Design
Inc. ............. 327 -- 327 226 -- -- 226 101
K&H, Inc.......... 338 -- 338 80 -- -- 80 258
DreamMedia, Inc... 684 -- 684 266 -- -- 266 418
Internet Cybernautics,
Inc............... 2,427 -- 2,427 1,575 -- -- 1,575 852
Synergetix Systems
Intregration,
Inc............... 647 -- 647 466 -- -- 466 181
Online Marketing
Company........... 426 -- 426 314 -- -- 314 112
Zendatta, Inc..... 1,072 -- 1,072 651 -- -- 651 421
W3-design......... 1,657 -- 1,657 869 -- -- 869 788
USWeb--Apex,
Inc............... 835 -- 835 487 -- -- 487 348
Reach Networks,
Inc............... 2,041 -- 2,041 827 -- -- 827 1,214
Inter.logic.studios
inc. ............. 1,712 -- 1,712 808 -- -- 808 904
Quest Interactive
Media, Inc. ...... 717 -- 717 352 -- -- 352 365
Ensemble Corp..... 6,745 -- 6,745 4,408 -- -- 4,408 2,337
Ikonic Interac-
tive, Inc......... 9,598 -- 9,598 5,184 -- -- 5,184 4,414
USWeb San Jose.... 811 -- 811 407 -- -- 407 404
Gray Peak Technologies,
Inc. ............. 2,532 -- 2,532 2,728 -- -- 2,728 (196)
Utopia, Inc. ..... 1,585 -- 1,585 3,079 -- -- 3,079 (1,494)
Xplora Ltd. ...... 1,973 -- 1,973 1,022 -- -- 1,022 951
Kallista, Inc. ... 1,633 -- 1,633 1,347 -- -- 1,347 286
Tucker Network
Technologies,
Inc. ............. 4,798 -- 4,798 3,006 -- -- 3,006 1,792
Metrix Communica-
tions, Inc. ...... 2,856 -- 2,856 1,992 -- -- 1,992 864
Other entities.... 3,319 -- 3,319 3,519 -- -- 3,519 (200)
------- ---- ------- ------- ------ ------ ------- -------
Subtotal Acquired
Entities........ 53,437 -- 53,437 36,831 -- -- 36,831 16,606
------- ---- ------- ------- ------ ------ ------- -------
Pro forma amounts
before
adjustments....... $71,803 $912 $72,715 $50,299 $1,294 $2,420 $54,013 $18,702
======= ==== ======= ======= ====== ====== ======= =======
<CAPTION>
OPERATING EXPENSES
---------------------------------------------------------
GENERAL ACQUIRED AMORTIZA- INCOME
MARKETING, AND IN-PROCESS STOCK TION OF (LOSS)
SALES AND ADMINI- TECHNO- COMPEN- INTANGIBLE FROM
SUPPORT STRATIVE LOGY SATION ASSETS TOTAL OPERATIONS
---------- -------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
USWeb Historical... $20,672 $10,271 $9,472 $6,698 $9,476 $56,589 $(54,493)
---------- -------- ---------- ------- ---------- ------- ----------
Acquired Entities:
XCom Corp......... 70 86 -- -- -- 156 59
Fetch Interac-
tive.............. 168 151 -- -- -- 319 (226)
NewLink Corp...... 14 9 -- -- -- 23 121
InterNetOffice,
LLC............... 31 64 -- -- -- 95 45
Infopreneurs
Inc............... 85 77 -- -- -- 162 (49)
Electronic Im-
ages, Inc......... 150 400 -- -- -- 550 231
Multimedia Mar-
keting & Design
Inc. ............. 47 25 -- -- -- 72 29
K&H, Inc.......... 110 -- -- -- -- 110 148
DreamMedia, Inc... 43 181 -- -- -- 224 194
Internet Cybernautics,
Inc............... 1,286 1,335 -- -- -- 2,621 (1,769)
Synergetix Systems
Intregration,
Inc............... 42 57 -- -- -- 99 82
Online Marketing
Company........... 64 90 -- -- -- 154 (42)
Zendatta, Inc..... 99 214 -- -- -- 313 108
W3-design......... 383 536 -- -- -- 919 (131)
USWeb--Apex,
Inc............... 71 108 -- -- -- 179 169
Reach Networks,
Inc............... 142 608 -- -- -- 750 464
Inter.logic.studios
inc. ............. 134 202 -- -- -- 336 568
Quest Interactive
Media, Inc. ...... 373 62 -- -- -- 435 (70)
Ensemble Corp..... 590 951 -- -- -- 1,541 796
Ikonic Interac-
tive, Inc......... 2,241 2,424 -- -- -- 4,665 (251)
USWeb San Jose.... 222 173 -- -- -- 395 9
Gray Peak Technologies,
Inc. ............. 1,253 559 -- -- -- 1,812 (2,008)
Utopia, Inc. ..... 1,023 912 -- -- -- 1,935 (3,429)
Xplora Ltd. ...... 234 612 -- -- -- 846 105
Kallista, Inc. ... 90 92 -- -- -- 182 104
Tucker Network
Technologies,
Inc. ............. 71 270 -- -- -- 341 1,451
Metrix Communica-
tions, Inc. ...... 591 967 -- -- -- 1,558 (694)
Other entities.... 4,268 3,702 -- -- -- 7,970 (8,170)
---------- -------- ---------- ------- ---------- ------- ----------
Subtotal Acquired
Entities........ 13,895 14,867 -- -- -- 28,762 (12,156)
---------- -------- ---------- ------- ---------- ------- ----------
Pro forma amounts
before
adjustments....... $34,567 $25,138 $9,472 $6,698 $9,476 $85,351 $(66,649)
========== ======== ========== ======= ========== ======= ==========
</TABLE>
F-18
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUES COST OF REVENUES
---------------------- -------------------------------
STOCK
COMPEN- GROSS
SERVICES OTHER TOTAL SERVICES OTHER SATION TOTAL PROFIT
-------- ----- ------- -------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
USWeb Historical. $ 7,868 $808 $ 8,676 $ 6,196 $1,180 $966 $ 8,342 $ 334
------- ---- ------- ------- ------ ---- ------- -------
Acquired Enti-
ties:
XCom Corp....... 274 -- 274 59 -- -- 59 215
Fetch
Interactive..... 608 -- 608 515 -- -- 515 93
NewLink Corp.... 203 -- 203 59 -- -- 59 144
InterNetOffice, LLC. 392 -- 392 252 -- -- 252 140
Infopreneurs
Inc............. 331 -- 331 218 -- -- 218 113
Electronic Images, Inc.. 2,896 -- 2,896 2,115 -- -- 2,115 781
Multimedia Marketing &
Design Inc. .... 327 -- 327 226 -- -- 226 101
K&H, Inc. ...... 188 -- 188 73 -- -- 73 115
DreamMedia,
Inc............. 380 -- 380 257 -- -- 257 123
Internet Cybernautics,
Inc............. 2,426 -- 2,426 1,575 -- -- 1,575 851
Synergetix Systems
Intregration,
Inc. ........... 646 -- 646 466 -- -- 466 180
Online Marketing
Company......... 426 -- 426 314 -- -- 314 112
Zendatta, Inc. . 1,072 -- 1,072 725 -- -- 725 347
W3-design....... 1,653 -- 1,653 754 -- -- 754 899
USWeb--
Apex, Inc. ..... 735 -- 735 404 -- -- 404 331
Reach Networks, Inc. . 1,741 -- 1,741 724 -- -- 724 1,017
Inter.logic.studios inc. . 930 -- 930 549 -- -- 549 381
Quest Interactive Media,
Inc. ........... 391 -- 391 240 -- -- 240 151
Ensemble Corp... 4,800 -- 4,800 2,906 -- -- 2,906 1,894
Ikonic Interactive, Inc.. 8,022 -- 8,022 4,349 -- -- 4,349 3,673
USWeb San Jose.. 527 -- 527 246 -- -- 246 281
Gray Peak Technologies,
Inc............. 1,291 -- 1,291 1,362 -- -- 1,362 (71)
Utopia, Inc. ... 1,333 -- 1,333 2,606 -- -- 2,606 (1,273)
Xplora Ltd. .... 1,259 -- 1,259 606 -- -- 606 653
Kallista, Inc. . 1,111 -- 1,111 814 -- -- 814 297
Tucker Network
Technologies, Inc. . 3,554 -- 3,554 2,107 -- -- 2,107 1,447
Metrix Communications,
Inc. ........... 1,696 -- 1,696 1,262 -- -- 1,262 434
Other entities.. 2,534 -- 2,534 2,493 -- -- 2,493 41
------- ---- ------- ------- ------ ---- ------- -------
Subtotal Acquired
Entities...... 41,746 -- 41,746 28,276 -- -- 28,276 13,470
------- ---- ------- ------- ------ ---- ------- -------
Pro forma amounts
before
adjustments...... $49,614 $808 $50,422 $84,472 $1,180 $966 $36,618 $13,804
======= ==== ======= ======= ====== ==== ======= =======
<CAPTION>
OPERATING EXPENSES
---------------------------------------------------------
GENERAL ACQUIRED AMORTIZA- INCOME
MARKETING, AND IN-PROCESS STOCK TION OF (LOSS)
SALES AND ADMINI- TECHNO- COMPEN- INTANGIBLE FROM
SUPPORT STRATIVE LOGY SATION ASSETS TOTAL OPERATIONS
---------- -------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
USWeb Historical. $14,119 $ 7,027 $6,726 $3,500 $4,321 $35,693 $(35,359)
---------- -------- ---------- ------- ---------- ------- ----------
Acquired Enti-
ties:
XCom Corp....... 70 86 -- -- -- 156 59
Fetch
Interactive..... 168 151 -- -- -- 319 (226)
NewLink Corp.... 14 9 -- -- -- 23 121
InterNetOffice, LLC. 31 64 -- -- -- 95 45
Infopreneurs
Inc............. 85 77 -- -- -- 162 (49)
Electronic Images, Inc.. 150 400 -- -- -- 550 231
Multimedia Marketing &
Design Inc. .... 47 25 -- -- -- 72 29
K&H, Inc. ...... 100 -- -- -- -- 100 15
DreamMedia,
Inc............. 35 41 -- -- -- 76 47
Internet Cybernautics,
Inc............. 1,286 1,335 -- -- -- 2,621 (1,770)
Synergetix Systems
Intregration,
Inc. ........... 41 58 -- -- -- 99 81
Online Marketing
Company......... 64 89 -- -- -- 153 (41)
Zendatta, Inc. . 100 209 -- -- -- 309 38
W3-design....... 343 478 -- -- -- 821 78
USWeb--
Apex, Inc. ..... 61 96 -- -- -- 157 174
Reach Networks, Inc. . 118 481 -- -- -- 599 418
Inter.logic.studios inc. . 98 108 -- -- -- 206 175
Quest Interactive Media,
Inc. ........... 104 38 -- -- -- 142 9
Ensemble Corp... 444 1,070 -- -- -- 1,514 380
Ikonic Interactive, Inc.. 1,737 1,878 -- -- -- 3,615 58
USWeb San Jose.. 98 91 -- -- -- 189 92
Gray Peak Technologies,
Inc............. 367 281 -- -- -- 648 (719)
Utopia, Inc. ... 834 628 -- -- -- 1,462 (2,735)
Xplora Ltd. .... 123 461 -- -- -- 584 69
Kallista, Inc. . 70 72 -- -- -- 142 155
Tucker Network
Technologies, Inc. . 44 196 -- -- -- 240 1,207
Metrix Communications,
Inc. ........... 393 723 -- -- -- 1,116 (682)
Other entities.. 2,717 2,260 -- -- -- 4,977 (4,936)
---------- -------- ---------- ------- ---------- ------- ----------
Subtotal Acquired
Entities...... 9,742 11,405 -- -- -- 21,147 (7,677)
---------- -------- ---------- ------- ---------- ------- ----------
Pro forma amounts
before
adjustments...... $28,861 $18,432 $6,726 $3,500 $4,321 $56,840 $(43,036)
========== ======== ========== ======= ========== ======= ==========
</TABLE>
F-19
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUES COST OF REVENUES
---------------------- ----------------------------------------
PROVISION
FOR LOSS STOCK
ON COMPEN- GROSS
SERVICES OTHER TOTAL SERVICES OTHER CONTRACT SATION TOTAL PROFIT
-------- ----- ------- -------- ----- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
USWeb Historical... $72,643 $443 $73,086 $46,705 $700 $2,094 $9,415 $58,914 $14,172
------- ---- ------- ------- ---- ------ ------ ------- -------
Acquired Entities:
Inter.logic.studios
inc............... 614 -- 614 305 -- -- -- 305 309
Quest Interactive
Media, Inc. ...... 257 -- 257 133 -- -- -- 133 124
Ensemble Corp..... 1,983 -- 1,983 1,215 -- -- -- 1,215 768
Ikonic Interactive,
Inc............... 2,242 -- 2,242 1,160 -- -- -- 1,160 1,082
USWeb San Jose.... 333 -- 333 304 -- -- -- 304 29
Gray Peak
Technologies,
Inc. ............. 3,564 -- 3,564 3,939 -- -- -- 3,939 (375)
Utopia, Inc....... 254 -- 254 41 -- -- -- 41 213
Xplora Ltd........ 982 -- 982 499 -- -- -- 499 483
Kallista, Inc..... 598 -- 598 281 -- -- -- 281 317
Tucker Network
Technologies,
Inc............... 3,159 -- 3,159 1,948 -- -- -- 1,948 1,211
Metrix
Communications,
Inc............... 2,864 -- 2,864 1,773 -- -- -- 1,773 1,091
Other entities.... 1,028 -- 1,028 789 -- -- -- 789 239
------- ---- ------- ------- ---- ------ ------ ------- -------
Subtotal
Acquired
Entities........ 17,878 -- 17,878 12,387 -- -- -- 12,387 5,491
------- ---- ------- ------- ---- ------ ------ ------- -------
Pro forma amounts
before adjustments. $90,521 $443 $90,964 $59,092 $700 $2,094 $9,415 $71,301 $19,663
======= ==== ======= ======= ==== ====== ====== ======= =======
<CAPTION>
OPERATING EXPENSES
----------------------------------------------------------
GENERAL ACQUIRED AMORTIZA- INCOME
MARKETING, AND IN-PROCESS STOCK TION OF (LOSS)
SALES AND ADMINI- TECHNO- COMPEN- INTANGIBLE FROM
SUPPORT STRATIVE LOGY SATION ASSETS TOTAL OPERATIONS
---------- -------- ---------- ------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
USWeb Historical... $17,903 $15,691 $25,508 $23,962 $44,539 $127,603 $(113,431)
---------- -------- ---------- ------- ---------- -------- -----------
Acquired Entities:
Inter.logic.studios
inc............... 71 71 -- -- -- 142 167
Quest Interactive
Media, Inc. ...... 92 92 -- -- -- 184 (60)
Ensemble Corp..... 154 304 -- -- -- 458 310
Ikonic Interactive,
Inc............... 437 473 -- -- -- 910 172
USWeb San Jose.... 58 65 -- -- -- 123 (94)
Gray Peak
Technologies,
Inc. ............. 1,756 926 -- -- -- 2,682 (3,057)
Utopia, Inc....... 650 434 -- -- -- 1,084 (871)
Xplora Ltd........ 142 217 -- -- -- 359 124
Kallista, Inc..... 24 24 -- -- -- 48 269
Tucker Network
Technologies,
Inc............... 130 180 -- -- -- 310 901
Metrix
Communications,
Inc............... 415 575 -- -- -- 990 101
Other entities.... 140 175 -- -- -- 315 (76)
---------- -------- ---------- ------- ---------- -------- -----------
Subtotal
Acquired
Entities........ 4,069 3,536 -- -- -- 7,605 (2,114)
---------- -------- ---------- ------- ---------- -------- -----------
Pro forma amounts
before adjustments. $21,972 $19,227 $25,508 $23,962 $44,539 $135,208 $(115,545)
========== ======== ========== ======= ========== ======== ===========
</TABLE>
F-20
<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.
As described in Note 12, on December 17, 1998, USWeb Corporation merged with
CKS Group, Inc. in a transaction accounted for as a pooling of interests. The
accompanying supplemental consolidated financial statements give retroactive
effect to the merger of USWeb Corporation with CKS Group, Inc.
In our opinion, the accompanying supplemental consolidated balance sheet and
the related supplemental consolidated statements of operations, of changes in
stockholders' equity 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 three years in the period ended December 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 misstatements. 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
San Jose, California
January 20, 1998,
except as to the
pooling of interests
with CKS Group, Inc.
which is as of
December 17, 1998
F-21
<PAGE>
USWEB CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(RESTATED)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 3,220 $ 44,145 $ 23,810
Short-term investments.................... -- -- 29,842
Accounts receivable, net.................. 137 7,903 34,361
Other current assets...................... 54 657 5,743
-------- -------- ---------
Total current assets.................... 3,411 52,705 93,756
Property and equipment, net................. 1,084 6,202 11,624
Intangible assets, net...................... -- 19,019 144,941
Investment in affiliate..................... 2,850 -- --
Other assets................................ 137 1,324 4,099
-------- -------- ---------
$ 7,482 $ 79,250 $ 254,420
======== ======== =========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................... $ 906 $ 2,923 $ 4,879
Accrued expenses.......................... 2,190 7,997 20,924
Deferred revenue ......................... -- 470 990
Debt and lease obligations, current....... 242 799 2,398
-------- -------- ---------
Total current liabilities............... 3,338 12,189 29,191
Lease obligations, non-current.............. 436 372 2,005
-------- -------- ---------
3,774 12,561 31,196
-------- -------- ---------
Commitments and contingencies (Notes 1 and
11)
Mandatorily Redeemable Convertible Preferred
Stock...................................... 16,200 -- --
-------- -------- ---------
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value,
1,000,000 shares authorized;
no shares issued and outstanding......... -- -- --
Common Stock, $0.001 par value,
100,000,000 shares authorized;
6,381,000, 33,811,085 and 44,668,981
shares issued
and outstanding.......................... 2 29 41
Additional paid-in capital................ 2,714 138,804 406,859
Note receivable........................... (1,400) -- --
Accumulated deficit....................... (13,808) (72,144) (183,676)
-------- -------- ---------
Total stockholders' equity (deficit).... (12,492) 66,689 223,224
-------- -------- ---------
$ 7,482 $ 79,250 $ 254,420
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ --------------------
1996 1997 1997 1998
-------- -------- -------- ----------
(RESTATED)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Services............................ $ -- $ 18,366 $ 7,868 $ 72,643
Other............................... 1,820 912 808 443
-------- -------- -------- ---------
Total revenues.................... 1,820 19,278 8,676 73,086
-------- -------- -------- ---------
Cost of revenues:
Services............................ -- 13,468 6,196 46,705
Other............................... 208 1,294 1,180 700
Provision loss on contract.......... -- -- -- 2,094
Stock compensation.................. -- 2,420 966 9,415
-------- -------- -------- ---------
Total cost of revenues............ 208 17,182 8,342 58,914
-------- -------- -------- ---------
Gross profit.......................... 1,612 2,096 334 14,172
-------- -------- -------- ---------
Operating expenses:
Marketing, sales and support........ 12,764 20,672 14,119 17,903
General and administrative.......... 2,813 10,271 7,027 15,691
Acquired in-process technology...... -- 9,472 6,726 25,508
Stock compensation.................. -- 6,698 3,500 23,962
Amortization of intangible assets... -- 9,476 4,321 44,539
-------- -------- -------- ---------
Total operating expenses.......... 15,577 56,589 35,693 127,603
-------- -------- -------- ---------
Loss from operations.................. (13,965) (54,493) (35,359) (113,431)
Interest income....................... 215 233 165 2,230
Interest expense...................... (58) (76) (76) (331)
Impairment of investee carried at
cost................................. -- (4,000) (4,000) --
-------- -------- -------- ---------
Net loss.............................. $(13,808) $(58,336) $(39,270) $(111,532)
======== ======== ======== =========
Net loss per share (Note 2):
Basic and diluted................... $ (10.35) $ (7.98) $ (8.10) $ (3.23)
======== ======== ======== =========
Weighted average shares outstanding. 1,334 7,312 4,845 34,521
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL ACCUMU- STOCKHOLDERS'
------------------ PAID-IN NOTE LATED EQUITY
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT (DEFICIT)
---------- ------ ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Common
Stock.................. 5,000,000 $ -- $ 1 $ -- $ -- $ 1
Issuance of Common Stock
for trade name rights.. 66,667 -- -- -- -- --
Conversion of notes
payable into
Common Stock........... 500,000 1 499 -- -- 500
Issuance of Common Stock
for note receivable.... 533,333 1 1,999 (2,000) -- --
Collection of note
receivable............. -- -- -- 600 -- 600
Exercise of stock
options................ 281,000 -- 30 -- -- 30
Issuance of Affiliate
warrants............... -- -- 169 -- -- 169
Stock compensation
expense................ -- -- 16 -- -- 16
Net loss................ -- -- -- -- (13,808) (13,808)
---------- ----- -------- ------- --------- --------
Balance December 31,
1996................... 6,381,000 2 2,714 (1,400) (13,808) (12,492)
Exercise of stock
options................ 103,079 -- 500 -- -- 500
Common Stock issued for
acquired businesses.... 7,949,683 8 41,384 -- -- 41,392
Issuance of Common
Stock, net ............ 7,638,889 7 51,202 -- -- 51,209
Conversion of
Mandatorily Redeemable
Convertible Preferred
Stock.................. 12,094,359 12 32,478 -- -- 32,490
Repurchase of Common
Stock.................. (355,925) -- -- -- -- --
Issuance of Affiliate
warrants............... -- -- 150 -- -- 150
Collection of note
receivable............. -- -- -- 1,400 -- 1,400
Stock compensation
expense................ -- -- 10,376 -- -- 10,376
Net loss................ -- -- -- -- (58,336) (58,336)
---------- ----- -------- ------- --------- --------
Balance December 31,
1997................... 33,811,085 29 138,804 -- (72,144) 66,689
Common Stock issued for
acquired businesses
(Unaudited)............ 7,517,143 8 177,396 -- -- 177,404
Options assumed through
acquisitions........... -- -- 11,860 -- -- 11,860
Issuance of Common
Stock, net (Unaudited)
....................... 1,791,655 2 32,481 -- -- 32,483
Exercise of stock
options and warrants... 1,570,401 2 10,541 -- -- 10,543
Repurchase of Common
Stock (Unaudited)...... (21,353) -- (617) -- -- (617)
Issuance of warrants
(Unaudited)............ -- -- 9,156 -- -- 9,156
Stock compensation
expense (Unaudited).... -- -- 27,238 -- -- 27,238
Net loss (Unaudited).... -- -- -- -- (111,532) (111,532)
---------- ----- -------- ------- --------- --------
Balance September 30,
1998 (Unaudited)....... 44,668,931 $ 41 $406,859 $ -- $(183,676) $223,224
========== ===== ======== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ --------------------
1996 1997 1997 1998
-------- -------- -------- ----------
(UNAUDITED)
(RESTATED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................ $(13,808) $(58,336) $(39,270) $(111,532)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization......... 263 1,464 776 3,167
Provision for doubtful accounts....... -- 819 700 381
Provision for loss on contract........ -- -- -- 2,094
Stock, option and warrant costs and
expenses............................. 185 10,376 5,873 33,524
Discounted sale of Common Stock....... -- 1,250 -- --
Amortization of intangible assets..... -- 9,476 4,321 44,539
Acquired in-process technology........ -- 9,472 6,726 25,508
Impairment of investee carried at
cost................................. -- 4,000 4,000 --
Changes in assets and liabilities:
Accounts receivable.................. (137) (4,080) (2,209) (16,440)
Other current assets................. (54) (187) (394) (3,241)
Other assets......................... (137) (690) (118) (1,889)
Accounts payable..................... 906 177 (297) (1,173)
Accrued expenses..................... 2,190 2,194 3,328 (3,983)
Deferred revenues.................... -- 470 -- (202)
-------- -------- -------- ---------
Net cash used in operating
activities......................... (10,592) (23,595) (16,564) (29,247)
-------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment... (1,059) (3,335) (1,663) (5,104)
Cash received from acquisitions, net of
cash used.............................. -- 1,129 (1,150) 959
Purchase of investment in affiliate..... (2,850) (1,150) 968 --
Purchase of short-term investments...... -- -- -- (62,241)
Proceeds from activities/sales of short-
term investments....................... -- -- -- 32,399
-------- -------- -------- ---------
Net cash used in investing
activities......................... (3,909) (3,356) (1,845) (33,987)
-------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of
Mandatorily Redeemable
Convertible Preferred Stock............ 16,200 16,290 16,288 --
Proceeds from issuance of Common Stock.. 31 50,459 -- 41,959
Proceeds from bank borrowings........... -- 2,000 -- --
Repayment of bank borrowings............ -- (2,000) -- --
Proceeds from issuance of notes payable. 500 -- -- --
Proceeds from collection of note
receivable............................. 600 1,400 1,400 --
Proceeds from capital lease financing... 599 431 -- 2,570
Principal payments on capital lease..... (209) (704) (560) (1,630)
-------- -------- -------- ---------
Net cash provided by financing
activities......................... 17,721 67,876 17,128 42,899
-------- -------- -------- ---------
Increase in cash and cash equivalents.... 3,220 40,925 (1,281) (20,335)
Cash and cash equivalents, beginning of
period.................................. -- 3,220 3,220 44,145
-------- -------- -------- ---------
Cash and cash equivalents, end of period. $ 3,220 $ 44,145 $ 1,939 $ (23,810)
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--THE COMPANY:
USWeb Corporation ("USWeb" or the "Company") was incorporated in Utah on
December 6, 1995 ("inception") and reincorporated in Delaware on December 2,
1997. Through a nationwide network of wholly-owned subsidiaries and franchised
Affiliates, the Company provides Internet professional services including
strategy consulting, analysis and design, technology development,
implementation and integration, audience development and maintenance.
During the year ended December 31, 1997, the Company recognized the
acquisition of all the outstanding stock of nineteen businesses, including
certain franchised Affiliates, ("Acquired Entities") in separate transactions
in exchange for shares of the Company's Common Stock. The Acquired Entities as
of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
COMMON RECOGNIZED
EFFECTIVE SHARES PURCHASE
ACQUIRED ENTITY DATE ISSUED PRICE
- --------------- ------------------ --------- ----------
<S> <C> <C> <C>
XCom Corporation..................................... March 16, 1997 383,209 $ 1,609
Cosmix Corporation................................... April 1, 1997 119,774 503
Fetch Interactive, Inc. ............................. April 1, 1997 464,838 1,397
NewLink Corporation.................................. April 1, 1997 425,700 1,537
InterNetOffice, LLC.................................. May 1, 1997 510,646 1,578
NetWORKERS Corporation............................... May 1, 1997 135,415 569
Infopreneurs Inc. ................................... June 1, 1997 1,008,169 3,173
Netphaz Corporation.................................. June 1, 1997 235,205 776
Electronic Images, Inc. ............................. July 1, 1997 1,665,525 6,205
Multimedia Marketing & Design Inc. .................. July 24, 1997 332,536 1,397
KandH, Inc. ......................................... August 29, 1997 151,624 1,023
DreamMedia, Inc. .................................... August 29, 1997 359,094 2,424
Internet Cybernautics, Inc .......................... September 29, 1997 447,183 4,025
Synergetix Systems Integration, Inc. ................ September 30, 1997 151,716 1,365
Online Marketing Company............................. September 30, 1997 95,730 861
Zendatta, Inc. ...................................... September 30, 1997 176,360 1,587
W3-design............................................ November 5, 1997 410,274 3,473
USWeb--Apex, Inc. ................................... November 5, 1997 365,029 3,285
Reach Networks, Inc. ................................ November 13, 1997 511,656 4,605
--------- -------
7,949,683 $41,392
========= =======
</TABLE>
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the recognized purchase price has been allocated
to the tangible and identifiable intangible assets acquired and liabilities
assumed on the basis of their fair values on the acquisition dates.
Approximately $3,425 of the aggregate recognized purchase price was allocated
to net tangible assets consisting primarily of cash, accounts receivable,
property and equipment and accounts payable. The historical carrying amounts of
such net assets approximated their fair values. Approximately $9,472 was
allocated to in-process technology and was immediately charged to operations
because such in-process technology had not reached the stage of technological
feasibility at the acquisition dates and had no alternative future use.
Approximately $3,610 was allocated to existing technology and is being
amortized over its estimated useful life of six months to one year.
Approximately $24,885 was allocated to goodwill, primarily workforce in-place,
and is being amortized over its estimated useful life of one to two years. See
Note 2.
F-26
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The acquisitions of the Acquired Entities have been primarily structured as
tax free exchanges of stock, therefore, the differences between the recognized
fair values of the acquired assets, including intangible assets, and their
historical tax bases is not deductible for income tax purposes.
The fair value of the Company's Common Stock issued as consideration for the
acquisitions was determined, based upon a number of considerations. For
acquisitions recognized through July 24, 1997, the fair value of the Company's
Common Stock was estimated to be $4.20 per share, determined primarily by
reference to the $15,811 amount allocated to 2,818,193 shares of Series C
Mandatorily Redeemable Convertible Preferred Stock (excluding approximately
$1,690 allocated to detachable warrants to acquire 704,549 shares of Series C
Mandatorily Redeemable Convertible Preferred Stock). See Note 7. For
acquisitions recognized from August 29, 1997 through November 13, 1997, the
fair value of the Company's Common Stock was estimated to be $6.75 to $9.00 per
share based upon a number of factors, including growth in the Company's
business and the private sale, in October, 1997, of 222,222 shares of Common
Stock to an independent third party at a price of $9.00 per share. See Note 8.
The various purchase agreements require that fifty percent of the shares
issuable at the acquisition dates be placed in escrow for a period of twelve
months. The shares placed in escrow will either be issued to the previous
owners of the acquired entities or returned to the Company based upon the
results of the purchase price adjustments, as defined for each Acquired Entity.
The Company has excluded from the recognized purchase price calculations
approximately 818,500 shares that it estimates are not probable of issuance at
the end of the respective escrow periods. Additionally, the purchase price
adjustment for each Acquired Entity allows for the issuance of additional
stock-based consideration in the event an Acquired Entity's valuation
calculated at the six and twelve month dates following the acquisition
increases. The number of additional shares that are potentially issuable at the
completion of the six and twelve month valuation periods is not presently
known, however, management estimates that approximately 418,000 additional
shares are probable of issuance at the completion of the respective valuation
periods. Any purchase price changes resulting from such adjustments will be
recognized at the then fair value of the shares as adjustments to goodwill and
will be amortized over the remaining period of expected benefit. As of December
31, 1997, no adjustments have been made to the escrow shares for any
acquisition.
The terms of the signed definitive agreements for each acquisition provide
for the transfer of effective control of the target entity on dates that
precede the legal consummation of the transaction and physical exchange of
consideration. On the designated effective dates, the Company (1) assumes
effective control and the risks and rewards of ownership including the rights
to all revenues and responsibility for all operating costs and expenses,
(2) the target company employees become employees of the Company and (3) the
terms of purchase price adjustment provisions become effective. For business
acquisitions recognized through December 31, 1997, the purchase accounting
effects and operating results of transactions occurring between the designated
effective dates and the legal closing dates were not material.
F-27
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following unaudited pro forma consolidated amounts give effect to these
acquisitions as if they occurred on January 1, 1996, and on January 1, 1997 (or
date of inception, if later).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1996 1997
---------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues.............................................. $ 19,765 $ 34,812
Net loss.............................................. (57,069) (84,939)
Net loss per share:
Basic and diluted.................................... $ (9.24) $ (8.04)
Weighted average shares outstanding.................. 6,175,000 10,571,000
</TABLE>
Prior to June 30, 1997 the Company had invested $4,000 for a less than 20%
investment in Utopia, Inc. ("Utopia") an Internet consulting company located in
Boston, Massachusetts. The Company's investment was accounted for on the cost
basis. Through June 30, 1997, Utopia had incurred significant losses, was
experiencing significant cash flow deficits and had a net asset deficiency.
During June 1997, the Company determined that it was unlikely that the Company
would recover any of its investment in Utopia and, accordingly, recorded an
impairment loss equal to the carrying amount of its investment.
On October 9, 1997, the Company entered into a non-binding term sheet to
purchase specified assets of Utopia. Under the preliminary terms of the
arrangement, the Company would acquire selected computer hardware and software
assets and would agree to enter at will employment agreements with most Utopia
employees. In addition, the Company would obtain all rights and
responsibilities relating to specified Utopia customer contracts effective
October 1, 1997. In consideration for the acquired net assets, the Company
would agree to assume a note payable to Utopia's former majority shareholder in
the amount of $3,000. The Company has determined that the acquisition, if
consummated, will be accounted for as an acquisition of a business. The Company
will account for the acquisition using the purchase method of accounting, and,
accordingly, the purchase price will be allocated to the various assets,
including intangible assets acquired and liabilities assumed on the basis of
their fair values at the date of acquisition. Substantially all of the purchase
price is expected to be allocated to goodwill and will be amortized over its
estimated useful life of one year.
The note payable to be assumed by the Company would be payable in cash on
October 1, 1998 and would bear interest at a referenced prime rate plus 1%.
Beginning ninety days subsequent to the closing of the Company's public
offering, the note would be convertible, at the option of the holder, into
restricted shares of the Company's Common Stock based upon the fair value of
such stock at the conversion date.
The purchase price consideration would be subject to adjustment at six and
twelve month intervals subsequent to the closing, based upon the standard
valuation formula used in the Company's acquisition program. The increase in
value, if any, attributable to the period subsequent to the closing would be
payable in shares of and options to purchase shares of the Company's Common
Stock.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the
F-28
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Principles of Consolidation
The accompanying financial statements, include the consolidated accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
The Company's financial statements as of December 31, 1995 and for the period
from December 6, 1995 ("Inception") through December 31, 1995 reflect
immaterial transactions; such activities have been included in the 1996
financial statements to facilitate presentation.
Cash, Cash Equivalents and Short-Term Investments
The Company invests its excess cash in debt instruments of the U.S.
Government, its agencies, and in high-quality corporate issuers. All highly
liquid instruments with an original maturity of three months or less are
considered cash equivalents, those with original maturities greater than three
months and current maturities less than twelve months from the balance sheet
date are considered short-term investments.
At September 30, 1998, short-term investments in marketable securities were
classified as available-for-sale and consisted of 76% corporate debt
securities, 2% debt securities of the U.S. Government and its agencies and 22%
foreign debt securities. At September 30, 1998, the fair value of the
investments approximated cost. Fair value is determined based upon the quoted
market prices of the securities as of the balance sheet date (unaudited).
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
three years. Leasehold improvements are amortized using the straight-line
method over the shorter of the estimated useful lives of the assets or the
remaining lease term, not to exceed five years.
Intangible Assets
Goodwill resulting from the acquisition of Internet technology businesses is
estimated by management to be primarily associated with the acquired workforce
and technological know how. Accordingly, a significant portion of the purchase
price of each acquisition is considered to relate to workforce in-place. As a
result of the rapid technological changes occurring in the Internet industry
and the intense competition for qualified Internet professionals, recorded
goodwill is amortized on the straight-line basis over the estimated periods of
benefit, which range from one to two years. For certain acquisitions where the
Company expects to issue additional shares at the end of the 12 month purchase
price adjustment periods, amortization rates have been increased to reflect
amortization of the total expected consideration based upon the estimated fair
value of the incremental shares at the end of the purchase price adjustment
periods.
At each balance sheet date, the Company assesses the value of recorded
goodwill for possible impairment based upon a number of factors, including
turnover of the acquired workforce and the undiscounted value of expected
future operating cash flows in relation to its net investment in each
subsidiary. Since inception, the Company has not recorded any provisions for
possible impairment of intangible assets.
F-29
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Completed technologies obtained through acquisition or merger are capitalized
and amortized on the straight-line basis over the estimated period of benefit
of six months to one year.
Costs of in-process technology acquired prior to the achievement of
technological feasibility determined using the working model approach, and any
costs associated with internally developed proprietary technologies prior to
the achievement of technological feasibility determined using the working model
approach are expensed in the period incurred.
Investments
Investments where the Company has an equity interest of less than 20% and
does not have the ability to exert significant influence are accounted for
using the cost method. At each balance sheet date, the Company assesses the
value recorded for cost-based investments and recognizes any identified
impairment.
Revenue Recognition
The Company derives its revenues from consulting service agreements
(including both fixed price and time and materials agreements), initial
franchise fees, monthly royalties from Affiliates and hosting service fees. The
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. Monthly royalties are determined by
aggregating a five percent royalty and a two percent marketing promotion fee,
each of which is calculated based on each Affiliate's adjusted gross revenues,
as defined, and are recognized as the fees are earned and become receivable
from the Affiliate.
Revenues from web-site hosting services are included in Other Revenues, have
been insignificant to date and are recognized monthly as services are provided.
Advertising Costs
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising costs for the
years ended December 31, 1996 and 1997 totaled $3,223 and $4,060, respectively.
Affiliate Warrants
The fair value of warrants granted to Affiliates upon the execution of a
franchise agreement are measured at the grant date using the Black-Scholes
formula and are recognized when material, over the
F-30
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 cost
is recognized based on the difference, if any, on the date of grant between
the fair value of the Company's stock and the amount an employee must pay to
acquire the stock.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
Net Loss Per Share and Supplemental Pro Forma Net Loss Per Share
The Company computes net loss per share in accordance with the provisions of
SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin No. 98.
Under SFAS No. 128 and SAB No. 98, basic net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
shares outstanding during the period. The weighted average shares used to
compute basic net loss per share include outstanding shares of Common Stock
from the date of issuance and shares vested under stock bonus arrangements
computed for each period by dividing cumulative amortization of deferred
compensation expense by the weighted average price of the Company's Common
Stock during the period. The computation excludes (i) for the year ended
December 31, 1997, 2,051,000 equivalent acquisition-related shares held in
escrow ("Acquisition Shares"), (ii) for the years ended December 31, 1996 and
1997, 4,286,000 and 2,830,000, respectively, of equivalent shares of Common
Stock subject to repurchase rights ("Restricted Shares") and (iii) for the
years ended December 31, 1996 and 1997, 5,375,000 and 10,278,000,
respectively, of equivalent shares of Mandatorily Redeemable Convertible
Preferred Stock ("Preferred Stock") prior to their conversion into Common
Stock on December 5, 1997. In addition, the calculation of diluted net loss
per share excludes Common Stock issuable upon exercise of employee stock
options and upon exercise of outstanding warrants, as their effect in all
periods presented is antidilutive.
In future periods, the weighted average shares used to compute basic and
diluted earnings per share are expected to include (i) Acquisition Shares as
they are released from escrow, generally 12 months from the date of
acquisition, and (ii) Restricted Shares as the repurchase rights lapse over
the remaining restriction period. In addition, the weighted average shares
used to compute diluted earnings per share will include the incremental shares
of Common Stock relating to outstanding options and warrants to the extent
such incremental shares are dilutive. The Company believes that the
Acquisition Shares are probable of
F-31
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
issuance and that the remaining purchase rights on Restricted Shares will lapse
upon the continued employment by the owners of such shares. The following table
presents the unaudited supplemental pro forma net loss per share giving effect
to the inclusion of the Acquisition Shares and Restricted Shares in the
determination of weighted average shares outstanding. Such supplemental pro
forma net loss per share should not be considered in isolation or as a
substitute for other information prepared in accordance with generally accepted
accounting principles:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1997
--------- ----------
(UNAUDITED)
<S> <C> <C>
Supplemental pro forma net loss per share:
Net loss................................................. $(13,808) $ (58,336)
Net loss per share:
Basic and diluted....................................... $ (2.46) $ (4.78)
Weighted average shares outstanding..................... 5,620,000 12,193,000
</TABLE>
Reverse Stock Split
In December 1997, the Board of Directors approved a one-for-three reverse
stock split of the outstanding shares of Common Stock. All share and per share
information have been retroactively adjusted to reflect the reverse stock
split.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company limits its exposure to credit loss by
depositing its cash and cash equivalents with high credit quality financial
institutions. The Company believes the risk with respect to trade receivables
is mitigated, to some extent, by the fact that the Company's customer base is
geographically dispersed and is highly diversified. The Company has not
experienced any significant credit losses to date.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The adoption of the both statements
are required for fiscal years beginning after December 15, 1997. Under SFAS No.
130, companies are required to report in the financial statements, in addition
to net income, comprehensive income including, as applicable, foreign currency
items, minimum pension liability adjustments and unrealized gains and losses on
certain investments in debt and equity securities. SFAS No. 131 requires that
companies report separately, in the financial statements, certain financial and
descriptive information about operating segments, if applicable. The Company
does not expect the adoption of SFAS No. 130 or SFAS No. 131 to have any
financial impact on its consolidated financial statements and is currently
assessing the impact of the disclosure provisions of the new pronouncements.
The Company complies with the provisions of Emerging Issues Task Force Issue
No. 96-18 ("EITF 96-18") with respect to stock options granted to non-employees
who are consultants to the Company. EITF 96-18 requires variable plan
accounting with respect to such non-employee stock options, whereby
compensation associated with such options is measured on the date such options
vest, and incorporates the current fair market value of the Company's Common
Stock into the option valuation model. Compensation expenses associated with
such non-employee stock options granted to date have not been significant.
F-32
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Interim Results (Unaudited)
The accompanying interim financial statements as of September 30, 1998 and
for the nine months ended September 30, 1997 and 1998 are unaudited. In the
opinion of management, the unaudited interim financial statements have been
prepared on the same basis as the annual financial statements and reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the financial position as of September 30, 1998 and the results
of the Company's operations and its cash flows for the nine months ended
September 30, 1997 and 1998. The financial data and other information disclosed
in these notes to condensed consolidated financial statements related to these
periods are unaudited. The results for the nine months ended September 30, 1998
are not necessarily indicative of the results to be expected for the year
ending December 31, 1998.
NOTE 3--SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- ----------------
1996 1997 1997 1998
------ ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Supplemental disclosures:
Cash paid for interest.................... $ 58 $ 76 $ 52 $ 243
Non-cash financing and investing activities:
Common Stock issued for note receivable... 2,000 -- -- --
Notes payable converted into Common Stock. 500 -- -- --
Equipment acquired through capital lease.. 288 578 -- --
Common Stock issued for acquisitions...... -- 40,263 29,330 190,179
Common Stock issued for services.......... -- 1,250 -- --
Assumption of liabilities for acquisition. -- -- -- 4,976
Issuance of warrants...................... -- -- -- 9,156
</TABLE>
F-33
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1996 1997 1998
------ -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable, net:
Accounts receivable....................... $ 137 $ 8,722 $ 38,759
Less: allowance for doubtful accounts..... -- (819) (4,398)
------ -------- --------
$ 137 $ 7,903 $ 34,361
====== ======== ========
Property and equipment, net:
Computers and equipment................... $1,149 $ 6,490 $ 13,926
Furniture and fixtures.................... 124 834 1,609
Leasehold improvements.................... 74 605 983
------ -------- --------
1,347 7,929 16,518
Less: accumulated depreciation and amorti-
zation................................... (263) (1,727) (4,894)
------ -------- --------
$1,084 $ 6,202 $ 11,624
====== ======== ========
Intangible assets, net:
Goodwill, primarily workforce in place.... $ -- $ 24,885 $187,897
Purchased technology...................... -- 3,610 11,058
------ -------- --------
-- 28,495 198,955
Less: accumulated amortization............ -- (9,476) (54,014)
------ -------- --------
$ -- $ 19,019 $144,941
====== ======== ========
Accrued expenses:
Compensation and benefits................. $ 549 $ 1,900 $ 7,936
Accrued financing costs................... -- 1,450 --
Marketing costs........................... 1,271 1,155 1,883
Professional fees......................... -- 466 2,738
Other..................................... 370 3,026 8,367
------ -------- --------
$2,190 $ 7,997 $ 20,924
====== ======== ========
</TABLE>
NOTE 5--NOTES PAYABLE:
In January 1996, the Company received $500 in exchange for unsecured
convertible promissory notes. The notes were part of a bridge financing
arrangement associated with the Series A financing, were payable on demand and
bore interest at 6% per annum. The notes were repayable, at the option of the
holder, by the issuance of the Company's Common or Preferred Stock. In February
1996 in connection with the Series A financing, the holder exercised its
conversion option and the notes were extinguished through the issuance of
500,000 shares of the Company's Common Stock.
On October 6, 1997, the Company entered into a credit facility with a bank
that allows the Company to borrow up to a maximum of $3,000 to finance various
equipment purchases. Advances accrue interest at the bank's prime lending rate
plus 1% (9.5% at December 31, 1997) and are repayable over a thirty-six month
period. As of December 31, 1997, borrowings outstanding under the credit
facility approximated $431. The credit facility is secured by the assets of the
Company and expires on September 29, 2001. In addition, the bank requires the
Company to comply with certain financial covenants relating to profitability
and cash flow ratios; the Company was in compliance with all covenants at
December 31, 1997.
F-34
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In November 1997, the Company obtained a bridge loan facility from a bank.
Under the terms of the facility the Company borrowed $2,000 (the maximum amount
available), which was secured by substantially all of the Company's assets. The
loan accrued interest at the bank's prime rate plus 1%. On December 10, 1997,
the Company repaid the outstanding amount, plus interest of $14.
NOTE 6--INCOME TAXES:
No provision for income taxes has been recognized for the years ended
December 31, 1997 and 1996, as the Company incurred net operating losses for
income tax purposes and has no carryback potential.
Deferred tax assets of approximately $17,000 at December 31, 1997, consist
primarily of federal and state net operating loss carryforwards. Based on a
number of factors, including the lack of a history of profits and the fact that
the Company competes in a developing market that is characterized by rapidly
changing technology, management believes that there is sufficient uncertainty
regarding the realization of deferred tax assets such that a full valuation
allowance has been provided.
The Company's various acquisitions have been structured as tax free stock
exchanges, therefore, the differences between the historical bases and the fair
value recognized by the Company, including intangible assets, are not
deductible for income tax purposes.
At December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $42,000 and $26,000, respectively, available to
reduce future taxable income, which expire in varying amounts through 2012. The
Company's ability to utilize net operating loss carryforwards and tax credits
are subject to limitations as set forth in applicable federal and state tax
laws. As specified in the Internal Revenue Code, an ownership change of more
than 50% by a combination of the Company's significant stockholders during any
three-year period would result in certain limitations on the Company's ability
to utilize its net operating loss and credit carryforwards.
NOTE 7--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
At December 31, 1996, a total of 9,329,500 shares of Mandatorily Redeemable
Convertible Preferred Stock were authorized for issuance, of which 6,226,167
and 3,103,333 shares were designated as Series A and Series B, respectively. In
1996, the Company issued 6,172,833 shares of Series A and 3,103,333 shares of
Series B Mandatorily Redeemable Convertible Preferred Stock ("Series A" and
"Series B") for cash at $1.62 and $2.01 per share, respectively. In 1997, the
Company authorized an additional 3,400,000 shares of Mandatorily Redeemable
Convertible Preferred Stock designated as Series C and issued 2,818,193 shares
of Series C Mandatorily Redeemable Convertible Preferred Stock ("Series C") for
cash at $6.21 per share. Holders of Series A, Series B and Series C were
entitled to receive noncumulative dividends at the annual rate of $0.10, $0.12
and $0.37 per share, respectively, or, if greater (as determined on an as-
converted basis), an amount equal to that paid on the outstanding shares of
Common Stock, when, as and if declared by the Board of Directors. No such
dividends were declared. In the event of liquidation (but not upon a merger,
sale or acquisition of the Company), holders of Series A, Series B and Series C
were entitled to a per share distribution in preference to holders of Common
Stock equal to the original issue price of $1.62, $2.01, and $6.21,
respectively, plus any declared but unpaid dividends. On December 5, 1997, the
Company completed its initial public offering of its Common Stock. At that
time, all of the Company's Mandatorily Redeemable Convertible Preferred Stock
outstanding was converted into an aggregate of 12,094,359 shares of Common
Stock.
F-35
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 8--STOCKHOLDERS' EQUITY:
Preferred Stock
The Company is authorized to issue 100,000,000 shares of $.001 par value
Common Stock and 1,000,000 shares of $.001 par value Preferred Stock, and the
Board of Directors has the authority to issue the undesignated Preferred Stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof.
Common Stock
During 1996, 5,000,000 shares of Common Stock were purchased by the Company's
five founders ("the Founders Shares"). In the event that any one of the
founders ceased to be an employee of the Company, the Company had the right to
repurchase ("the Repurchase Right"), at the original purchase price, a
declining percentage of the shares issued. During August 1997, a Company
Founder terminated his employment. In connection with the termination the
Company accelerated the vesting of 111,205 shares of Founder's Stock and
accordingly recognized a charge in the amount of $1,080. Additionally, 349,502
shares of unvested Founder's Stock were repurchased by the Company at their
original issuance price of $.0003 per share. In the event of a change in
control of the Company, the Founders Shares shall become immediately vested in
full and the Repurchase Rights shall lapse.
On September 30, 1997, the Company sold 222,222 shares of Common Stock in a
private transaction to an independent third party in exchange for a note
receivable in the amount of $2,000. On October 14, 1997, the note receivable
was collected in full.
On December 5, 1997, the Company completed its initial public offering of
5,750,000 shares of its Common Stock. Net proceeds to the Company aggregated
approximately $38,309. In addition, the Company sold 1,666,666 shares of Common
Stock to Intel Corporation in a private placement that closed contemporaneously
with the Offering. Net proceeds to the Company aggregated approximately $9,650.
In connection with the discounted sale of Common Stock to Intel Corporation,
the Company recognized a $1,250 non-cash charge that is included in marketing,
sales and support expense.
Warrants
In connection with the lease of its facility in January 1996, the Company
issued warrants to purchase 20,000 shares of Series A at $1.62 per share. Upon
completion of the Company's initial public offering, these warrants were
exchanged for warrants to purchase Common Stock. The fair value of the warrants
was not material on the date of grant. The warrants are exercisable at any time
prior to their expiration in February 2006. No warrants had been exercised at
December 31, 1997.
In connection with a master lease agreement in May 1996, the Company issued
warrants to purchase 33,333 shares of Series A at $1.62 per share. Upon
completion of the Company's initial public offering, these warrants were
exchanged for warrants to purchase Common Stock. The fair value of the warrants
was not material on the date of grant. The warrants are exercisable at any time
prior to their expiration in May 2001. No warrants had been exercised at
December 31, 1997.
In July 1996, the Company issued warrants to purchase 18,055 shares of Common
Stock at $0.90 per share to an individual employed as a consultant to the
Company. The fair value of the warrants was not material on the date of grant.
The warrants are exercisable at any time prior to their expiration in July
2001. No warrants had been exercised at December 31, 1997.
F-36
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In December 1996, the Company issued warrants to purchase 33,333 shares of
Common Stock at $3.75 per share to an individual employed as a consultant to
the Company. The fair value of the warrants was not material on the date of
grant. The warrants are exercisable at any time prior to their expiration in
December 2001. No warrants had been exercised at December 31, 1997.
In connection with the issuance of the Series C shares, the Company issued
warrants to purchase a total of 704,549 shares of Series C at $7.50 per share.
Upon completion of the Company's initial public offering, these warrants were
exchanged for warrants to purchase Common Stock. The warrants are exercisable
at any time prior to their expiration in May 2000. Approximately $1,690 of the
proceeds received from the issuance of Series C were allocated to the Series C
warrants. The accretion of the amount allocated to the Series C warrants for
the year ended December 31, 1997 was immaterial. No warrants had been exercised
at December 31, 1997.
NOTE 9--STOCK-BASED COMPENSATION:
At December 31, 1997, the Company has three stock-based compensation plans,
which are described below. The Company applies APB No. 25 and related
Interpretations and SFAS No. 123 with respect to grants to other than employees
in accounting for its plans. During the period from June through October 1996,
the Company granted options to purchase an aggregate of 98,667 shares of Common
Stock at exercise prices ranging from $0.30 to $0.90 per share and recorded
$165 of unearned compensation relating to such options. This amount is being
amortized over the four-year vesting period of the related options. Had
compensation cost for the Company's three stock-based compensation plans been
determined based on the minimum and fair values at the grant dates for awards
under those plans consistent with the methods prescribed by SFAS No. 123, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1997
--------- --------
<S> <C> <C>
Net Loss:
As reported.............................................. $(13,808) $(58,336)
Pro forma................................................ (13,815) (59,281)
Net loss per share:
Basic and diluted, as reported........................... $ (10.35) $ (7.98)
Basic and diluted, pro forma............................. (10.36) (8.11)
</TABLE>
STOCK OPTION PLANS
1996 Stock Option Plan
The Company has reserved an aggregate of 600,000 shares of Common Stock for
issuance under its 1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan
provides for grants of options to employees and consultants (including officers
and directors) of the Company, its parent and its subsidiaries.
The exercise price of options granted under the 1996 Plan is determined by
the 1996 Plan Administrator, as defined. With respect to incentive stock
options granted under the 1996 Plan, the exercise price must be at least equal
to the fair market value per share of the Common Stock on the date of grant,
and the exercise price of any incentive stock option granted to a participant
who owns more than 10% of the voting power of all classes of the Company's
outstanding capital stock must be equal to at least 110% of fair market value
of the Common Stock on the date of grant.
F-37
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Each option outstanding under the 1996 Plan may be exercised in whole or in
part at any time. Exercised but unvested shares are subject to repurchase by
the Company. Options generally vest, assuming continued service by the optionee
as an employee or consultant, at the rate of 25% of the shares subject to the
option on the first anniversary of the commencement of vesting date and 1/48th
of the shares each month thereafter, such that all shares under the option vest
in full four years from the date of commencement of vesting, assuming continued
service as an employee or consultant. Options outstanding under the 1996 Plan
generally have a term of ten years.
1996 Equity Compensation Plan
The Company's 1996 Equity Compensation Plan (the "1996 Equity Plan") provides
for the granting to employees of incentive stock options, and for the granting
to employees and consultants of nonstatutory stock options and stock purchase
rights ("SPRs"). A total of 2,000,000 shares of Common Stock are currently
reserved for issuance pursuant to the 1996 Equity Plan.
The 1996 Equity Plan Administrator, as defined, has the power to determine
the terms of the options or SPRs granted, including the exercise price, the
number of shares subject to each option or SPR, the exercisability thereof, and
the form of consideration payable upon such exercise.
Each option outstanding under the 1996 Equity Plan may be exercised in whole
or in part at any time. Exercised but unvested shares are subject to repurchase
by the Company. Options generally vest, assuming continued service by the
optionee as an employee or consultant, at the rate of 25% of the shares subject
to the option on the first anniversary of the commencement of vesting date and
1/48th of the shares each month thereafter, such that all shares under the
option vest in full four years from the date of commencement of vesting,
assuming continued service as an employee or consultant. Options outstanding
under the 1996 Equity Plan generally have a term of ten years.
The restricted stock purchase agreement pursuant to which the SPR is
exercised shall grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the purchaser's employment with the
Company for any reason (including death or disability).
The repurchase option shall lapse at a rate determined by the 1996 Equity
Plan Administrator. The exercise price of all incentive stock options granted
under the 1996 Equity Plan must be at least equal to the fair market value of
the Common Stock on the date of grant. The exercise price of nonstatutory stock
options and SPRs granted under the 1996 Equity Plan is determined by the 1996
Equity Plan Administrator, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation", the exercise price
must at least be equal to the fair market value of the Common Stock on the date
of grant. With respect to any participant who owns stock possessing more than
10% of the voting power of all classes of the Company's outstanding capital
stock, the exercise price of any incentive stock option granted must equal at
least 110% of the fair market value on the grant date and the term of such
incentive stock option must not exceed five years. The term of all other
options granted under the 1996 Equity Plan may not exceed ten years. As of
December 31, 1997, no SPRs had been granted.
1997 Acquisition Stock Option Plan
The Company's 1997 Acquisition Stock Option Plan (the "1997 Plan") provides
for the grant of incentive stock options to employees (including officers and
employee directors) and for the grant of nonstatutory stock options and SPRs to
employees, directors and consultants. A total of 10,000,000 shares of Common
Stock, plus annual increases equal to the lesser of (i) 400,000 shares, (ii) 5%
of the outstanding shares, or (iii) a lesser amount determined by the Board of
Directors, are currently reserved for issuance pursuant to the 1997 Plan.
F-38
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The 1997 Plan Administrator, as defined, has the power to determine the terms
of the options or SPRs granted, including the exercise price of the option or
SPR, the number of shares subject to each option or SPR, the exercisability
thereof, and the form of consideration payable upon such exercise.
The restricted stock purchase agreement pursuant to which the SPR is
exercised shall grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the purchaser's employment with the
Company for any reason (including death or disability). The repurchase option
shall lapse at a rate determined by the Administrator.
The exercise price of all incentive stock options granted under the 1997 Plan
must be at least equal to the fair market value of the Common Stock on the date
of grant. The exercise price of nonstatutory stock options and SPRs granted
under the 1997 Plan is determined by the 1997 Plan Administrator, but with
respect to nonstatutory stock options intended to qualify as "performance-based
compensation", the exercise price must at least be equal to the fair market
value of the Common Stock on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all classes of
the outstanding capital stock of the Company, its parent and its subsidiaries,
the exercise price of any incentive stock option granted must equal at least
110% of the fair market value on the grant date and the term of such incentive
stock option must not exceed five years. The term of all other options granted
under the 1997 Plan may not exceed ten years. As of December 31, 1997, no SPRs
had been granted.
Fair Value Estimates
For purposes of complying with the disclosure provisions of SFAS No. 123,
prior to the Company's initial public offering in December 1997, the fair value
of each option grant was determined on the date of grant using the minimum
value method. Subsequent to the offering, the fair value was determined using
the Black-Scholes option pricing model. Except for the volatility assumption,
which was only used under the Black-Scholes model, the following weighted-
average assumptions were used for grants during the years ended December 31,
1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1997
------- ---------
<S> <C> <C>
Dividend yield................................................ 0.0% 0.0%
Volatility.................................................... 0.0% 60.0%
Risk-free interest rate....................................... 6.1% 6.0%-6.2%
Expected life................................................. 4 years 4 years
</TABLE>
F-39
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
A summary of the status of the Company's three fixed stock option plans as of
December 31, 1996 and 1997, and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1996 1997
------------------------ -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
FIXED STOCK OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------- -------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of period............... -- $ -- 234,833 1.84
Granted.................. 567,500 .83 9,559,746 8.11
Exercised................ (281,000) .10 (103,079) 4.85
Canceled................. (51,667) .22 (199,097) 6.21
-------- ---------
Outstanding at end of pe-
riod.................... 234,833 1.84 9,492,403 8.03
======== =========
Options exercisable at
end of period........... 234,833 2,698,610
======== =========
Weighted-average minimum
and fair values of
options granted during
the period.............. $ .07 $ 1.47
======== =========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$.03.................... 4,688 8.1 years $ .03 4,688 $ .03
$.30.................... 69,167 8.4 years .30 69,167 .30
$.90.................... 29,167 8.7 years .90 29,167 .90
$3.75................... 9,834 8.8 years 3.75 9,834 3.75
$6.75 to $9.75.......... 9,379,547 9.2 years 8.12 2,585,754 8.51
--------- ---------
9,492,403 2,698,610
========= =========
</TABLE>
Acquisition Stock Bonus Plan
During the year ended December 31, 1997, the Company agreed to issue bonuses
contingent on future employment that are payable only in shares of Common Stock
to employees previously employed by Acquired Entities (each a "New Employee").
Under the agreements, the stock bonuses vest over a thirty-six month period
from the date of first employment by the Company and will be paid at the
conclusion of the vesting period. However, to the extent that a New Employee's
status as an employee is terminated, the New Employee will be entitled only to
the vested portion of the stock bonus and such bonus shall become due and
payable upon such New Employee's termination. The aggregate stock bonus for
awards through December 31, 1997, totaled $62,118, and will be paid in shares
of Common Stock at the fair market value of the Common Stock at the date of
issuance. Stock bonus awards are recognized as compensation expense over the
thirty-six month vesting periods and comprise stock compensation expense in the
accompanying consolidated financial statements. Stock compensation recorded
related to vested stock bonuses aggregated $9,118 and $27,091 (unaudited) for
the year ended December 31, 1997, and the nine months ended September 30, 1998,
respectively. Of these amounts, $2,420 and $9,415, respectively, have been
recorded in cost of revenues, with the remainder recorded in operating
expenses.
F-40
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Employee Stock Purchase Plan
In September 1997, the Board of Directors approved the 1997 Employee Stock
Purchase Plan (the "Purchase Plan"). A total of 1,000,000 shares of Common
Stock have been reserved for issuance under this plan. Terms of the plan permit
eligible employees to purchase Common Stock through payroll deductions of up to
15% of the employee's compensation. Amounts deducted and accumulated by the
participant are used to purchase shares of the Company's Common Stock at 85% of
the lower of the fair value of the Common Stock at the beginning or the end of
the offering period, as defined. During the year ended December 31, 1997, the
weighted average fair value of rights granted under the Plan was $2.86 per
share. There were no shares issued under the Purchase Plan during 1997.
NOTE 10--AFFILIATE WARRANT PROGRAM:
In June 1996, the Company adopted the Affiliate Warrant Program (the
"Program") with the intent of attracting new Affiliates to the USWeb network
and to create performance incentives for such Affiliates. Under the Program,
each Affiliate was granted a warrant to purchase a fixed number of shares of
the Company's Common Stock upon execution of the franchise agreement (a
"Signing Warrant") and earns warrants ("AGR Warrants") to purchase additional
shares of Common Stock at the rate of one share of Common Stock per fifty
dollars of Affiliate adjusted gross revenue, as defined. The exercise price of
all warrants issued and issuable to an individual Affiliate was set at the time
of signing of the franchise agreement. Warrants vest 25% after one year and
then ratably each month over the remaining thirty-six month period. Warrants
are exercisable for a maximum period of five years from the effective date of
the Affiliate agreement. Warrants may not be exercised prior to the earlier of
the closing of an initial public offering of the Company's Common Stock or an
acquisition of the Company. A total of 333,333 shares of Common Stock have been
reserved for issuance under the Program. No Signing Warrants are available for
grant after March 31, 1997. However, all Affiliates entering into an Affiliate
agreement prior to of such date will continue to be entitled to AGR Warrants
upon generating qualifying revenues until such time when no warrants remain
available for grant.
During the years ended December 31, 1996 and 1997, the Company issued Signing
Warrants to purchase shares of Common Stock, AGR Warrants to purchase shares of
Common Stock and recognized costs estimated using the Black-Scholes formula as
follows:
<TABLE>
<CAPTION>
DESCRIPTION 1996 1997
----------- -------------- --------------
<S> <C> <C>
Signing Warrants............................... 106,834 shares 4,000 shares
AGR Warrants................................... 17,918 shares 138,532 shares
Estimated cost................................. $167 $150
</TABLE>
F-41
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 11--COMMITMENTS AND CONTINGENCIES:
Leases
The Company and its subsidiaries lease facilities under non-cancelable
operating leases which expire through 2011. The leases provide for escalating
monthly payments which are being charged to operations ratably over the lease
terms. In addition to the minimum lease payments, the Company is responsible
for property taxes, insurance and certain other operating costs. The Company
also leases certain equipment under long-term lease agreements that are
classified as capital leases. These capital leases terminate at various dates
through January 2002.
Total equipment acquired under capitalized leases was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- ------
<S> <C> <C>
Computers and equipment....................................... $ 702 $1,234
Furniture and fixtures........................................ 108 154
----- ------
810 1,388
Less: accumulated depreciation................................ (214) (877)
----- ------
$ 596 $ 511
===== ======
</TABLE>
The Company has a master lease agreement with a leasing company which expires
in 1999. The agreement provides a line of credit of $600 for capital equipment
purchases. At December 31, 1997, approximately $1 was available under this
agreement for equipment purchases.
Future minimum lease payments under all non-cancelable operating and capital
leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER OPERATING CAPITAL
31, LEASES LEASES
----------- --------- -------
<S> <C> <C>
1998..................................................... $ 2,556 $ 466
1999..................................................... 2,505 309
2000..................................................... 2,297 30
2001..................................................... 2,080 10
2002..................................................... 1,775 1
Thereafter............................................... 6,857 --
------- -----
Total minimum payments.................................... $18,070 816
=======
Less: amount representing interest........................ (76)
-----
Present value of capital lease obligations................ 740
Less: current portion..................................... (368)
-----
Lease obligations, long-term.............................. $ 372
=====
</TABLE>
Rent expense under operating leases totaled $278 and $1,429 for the years
ended December 31, 1996 and 1997, respectively.
Litigation
As is typical for companies in USWeb's business and of USWeb's size, USWeb is
from time to time the subject of lawsuits. USWeb does not believe that the
outcome of any pending litigation is likely to be material to USWeb, but due to
the inherent uncertainties of litigation, there is a risk that the outcome of
pending or any future litigation could have a material adverse effect on the
USWeb business, financial condition, cash flows, or results of operations.
F-42
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 12--SUBSEQUENT EVENTS (UNAUDITED)
Strategic Alliances
In May 1998, the Company entered into a strategic alliance with NBC
Multimedia, Inc., (NBC) to expand production capabilities for NBC's interactive
properties and services. As part of the strategic alliance, the Company was
awarded a multi-year contract, where revenues earned under the contract are
expected to approximate $10,952. In connection with the strategic alliance, the
Company issued warrants to NBC allowing them to purchase 1,600,000 and 500,000
shares of the Company's Common Stock at $22.50 and $25.43 per share,
respectively. Warrants to purchase 1,050,000 shares are exercisable at any time
prior to their expiration in November 1999. Warrants to purchase the remaining
shares (1,050,000 shares) are subject to cancellation, or if previously
exercised, are subject to repurchase at the original exercise price, in the
event that the agreement is cancelled by NBC prior to May 2002. The warrants
subject to cancellation or repurchase are exercisable for a period extending
from the date of grant to one month beyond the date when the Company's
cancellation or repurchase rights lapse. The cancellation or repurchase rights
lapse as follows: 525,000 shares in November 1999, 315,000 shares in May 2000,
105,000 shares in May 2001 and 105,000 shares in May 2002. No warrants had been
exercised at September 30, 1998.
Restatement
The accompanying restated unaudited consolidated balance sheet as of
September 30, 1998, and the accompanying restated unaudited consolidated
statement of operations for the nine month period ended September 30, 1998,
have been restated to reflect changes in the classification and amounts
recognized for the estimated fair value of certain warrants granted to NBC
Multimedia. Inc ("NBC") during May 1998 (see Note 12). In its quarterly report
on Form 10-Q for the quarter ended June 30, 1998, the Company recognized the
fair value of all warrants granted to NBC totaling $12,568, as stock
compensation and a component of operating expenses. In recent discussions with
USWeb, the Staff of the Securities and Exchange Commission (the "Staff")
expressed their view that the $6,286 estimated fair value of warrants granted
with fixed terms was properly recognized as stock compensation and a component
of operating expenses, but that the $6,282 initial fair value of warrants with
variable terms (the "Variable Warrants") should be included in the
determination of any contract loss on the NBC arrangement and therefore,
excluded from operating expenses. In addition, the Staff expressed their view
that the amount previously recognized for the estimated fair value of the
Variable Warrants should be revised and that at each future reporting date, the
provision for contract loss should be adjusted for any increases of decreases
in the estimated fair value of the Variable Warrants determined using the
Black-Scholes option pricing model.
While the Company believes that its original accounting policy was in
accordance with generally accepted accounting principles, it has accepted the
Staff's view with respect to these matters. Accordingly, the effect of this
restatement on operating results for the quarter and six month periods ended
June 30, 1998, is to reclassify $6,282 for the stock compensation component of
operating expenses to the provision for loss on contract component of cost of
revenues; and to recognize an additional provision for loss on contract in the
amount of $3,148. For the three and six month periods ended June 30, 1998, the
restatement increased the Company's net loss by $3,148, or $0.09 and $0.10 per
basic and diluted share, respectively. As a result of a decrease in the
estimated fair value of the Variable Warrants, for the three and nine month
periods ended September 30, 1998, the restatement decreased the previously
reported net loss by $7,336 and $4,188, or $0.18 and $0.12 per diluted share,
respectively. These restatements had no effect on previously reported net cash
flows for any period, or on previously reported net income or net loss
excluding non-cash charges for any period.
F-43
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CKS Merger
On December 17, 1998, the Company completed its acquisition of all of the
outstanding stock of CKS Group, Inc. (CKS Group) in a transaction accounted for
as a pooling of interests. Under terms of the agreement, each outstanding share
of CKS Group's Common Stock was exchanged for 1.5 shares of the Company's
Common Stock. Additionally, the Company assumed all outstanding options to
purchase CKS Group's Common Stock and assumed CKS Group's employee stock
purchase plan, adjusted for the 1.5 to 1 ratio. See accompanying Supplemental
Consolidated Financial Statements.
Acquisitions
During the period from January 1, 1998 to December 16, 1998, the Company
recognized the acquisition of all the outstanding stock of InnoMate Online
Marketing GMBH, Inter.logic.studios, inc., Quest Interactive Media, Inc.,
Ensemble Corporation, Ikonic Interactive, Inc., Xplora Limited, Kallista, Inc.,
USWeb San Jose, Gray Peak Technologies, Inc., Nutley Systems, Inc. (nSET),
Advanced Video Communications, Tucker Network Technologies, Inc., Metrix
Communications, Inc. and Sysicom in separate transactions in exchange for a
total of 8,979,441 shares of the Company's Common Stock, the assumption of
certain stock options and, in the case of Sysicom, $5,000 in cash, for an
aggregate purchase price of $216,312, excluding acquisition expenses.
Additionally, the Company recognized the acquisition of Utopia (see Note 1)
whereby the Company acquired various assets in exchange for the assumption by
the Company of specified liabilities and payment of a promissory note for an
aggregate purchase price of $4,976. With respect to the acquisitions of Gray
Peak Technologies, Inc. and Ikonic Interactive, Inc., outstanding vested stock
options of these acquired entities were exchanged for options to purchase the
Company's Common Stock. In these transactions, the value of such options was
determined using the Black-Scholes option pricing model and included in the
determination of purchase price.
The acquisitions will be accounted for using the purchase method of
accounting, and accordingly, the purchase price will be allocated to the
tangible and identifiable intangible assets acquired liabilities assumed on the
basis of their fair values. Approximately $9,917 of the aggregate recognized
purchase price was allocated to net tangible assets consisting primarily of
cash, accounts receivable, property and equipment and accounts payable. The
historical carrying amounts of such net assets approximate their fair values.
Approximately $27,509 was allocated to in-process technology and will be
immediately charged to operations because such in-process technology has not
reached the stage of technological feasibility at the acquisition dates and has
no alternative future use. Approximately $8,448 was allocated to existing
technology and will be amortized over its estimated useful life of six months
to one year. Approximately $170,438 of the purchase price was allocated to
goodwill, primarily workforce in place, and will be amortized over its
estimated useful lives of twelve to forty-two months.
Follow-on Offering
On April 7, 1998, the Company completed a follow-on offering whereby the
Company sold 1,581,216 shares of Common Stock. Net proceeds to the Company from
the follow-on offering aggregated approximately $31,151, after deducting
underwriters' discounts and expenses of the offering. In addition, various
option and warrant holders who participated as selling stockholders in the
offering exercised 387,118 stock options and warrants to purchase 56,547 shares
of Common Stock. Net proceeds to the Company from the exercise of stock options
and warrants aggregated approximately $2,698.
F-44
<PAGE>
USWEB CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Share authorization
On December 16, 1998, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of Common Stock by 100,000,000 shares to 200,000,000 shares.
Stock repurchase program
In September 1998, the Company adopted a stock repurchase program to buy
shares of its Common Stock in the open market. The Board of Directors
authorized the repurchase of up to the lesser of 1,000,000 shares or $15,000.
The stock repurchase program will expire in 1999.
Litigation
On November 5, 1998, a putative class action lawsuit was filed in the United
States District Court for the Northern District of California against CKS Group
and three of its officers and directors. The complaint alleges that during the
period March 20, 1997 to November 7, 1997 (the "Class Period"), the defendants
violated the Securities Exchange Act and the SEC rules and regulations
thereunder by issuing false and misleading statements about CKS Group's
operations, revenues and earnings which allegedly inflated CKS Group's reported
revenues, earnings and stock price. The complaint further alleges that those
who purchased CKS Group's stock suffered damages when on November 7, 1997, the
price of CKS Group Common Stock dropped, allegedly causing losses to the
members of the class. The plaintiff seeks to recover damages in an unspecified
amount (together with interest and attorney's fees) on behalf of all purchasers
of CKS Group Common Stock during the Class Period. The Company believes that
this lawsuit is without merit and intends to defend this action vigorously.
Certain of such legal proceedings may be covered under insurance policies or
indemnification agreements. Based upon information presently available, the
Company believes that the final outcome of such proceedings will not have a
material adverse effect upon the Company's business, results of operations or
financial condition.
Larmark Inc. filed a complaint on June 10, 1998 in the Superior Court of
California for the County of Los Angeles naming USWeb as a defendant and
alleging, among other claims, breach of contract against USWeb's former
Affiliate, SystemLogic, in Santa Monica, California, and that USWeb is liable
for the acts of this former franchisee. USWeb believes the claims against it
are without substantial merit and intends to defend itself vigorously against
the claims made.
Employment agreement
In November 1998, the Company entered into an employment arrangement with an
individual who will serve as the Company's Chief Executive Officer. As part of
the employment agreement, the Company granted the individual options to
purchase 1.2 million shares of the Company's Common Stock with an exercise
price of $10.00 per share. The aggregate difference between the exercise price
of the options and the fair market value of the Common Stock, approximating
$8.3 million, will be recognized ratably as an operating expense over the four
year vesting period of the related options.
F-45
<PAGE>
USWEB CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 22,605 $ 62,368 $ 53,627
Short-term investments..................... 37,960 24,029 47,177
Accounts receivable, net................... 25,580 62,546 88,386
Other current assets....................... 961 2,606 8,545
Deferred income taxes...................... 1,038 1,400 1,736
-------- -------- --------
Total current assets..................... 88,144 152,949 199,471
Property and equipment, net.................. 5,655 12,051 17,491
Intangible assets, net....................... 5,937 49,247 179,866
Deferred income taxes and other assets....... 3,287 11,464 10,571
-------- -------- --------
$103,023 $225,711 $407,399
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 22,298 $ 41,084 $ 40,931
Accrued expenses........................... 10,569 17,734 27,484
Deferred revenue........................... 3,257 2,887 4,475
Income taxes payable....................... 426 -- 1,218
Debt and leases, current................... 675 1,564 2,559
-------- -------- --------
Total current liabilities................ 37,225 63,269 76,667
Lease obligations, non-current............... 1,161 1,111 2,771
-------- -------- --------
38,386 64,380 79,438
-------- -------- --------
Commitments and contingencies (Note 8)
Mandatorily Redeemable Convertible Preferred
Stock....................................... 16,200 -- --
Stockholders' equity
Preferred Stock: $0.001 par value;
1,000,000 shares authorized; and no shares
issued and outstanding at December 31,
1996 and 1997 and September 30, 1998...... -- -- --
Common Stock: $0.001 par value; 100,000,000
shares authorized; 27,724,500, 56,108,585
and 67,396,931 (unaudited) shares issued
and outstanding at December 31, 1996 and
1997 and September 30, 1998............... 23 51 63
Additional paid-in capital................. 54,422 218,900 489,650
Note receivable............................ (1,692) (198) (198)
Accumulated deficit........................ (4,316) (57,422) (161,554)
-------- -------- --------
Total stockholders' equity............... 48,437 161,331 327,961
-------- -------- --------
$103,023 $225,711 $407,399
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-46
<PAGE>
USWEB CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------
1995 1996 1997 1997 1998
------- ------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Services.................... $43,656 $64,569 $113,390 $ 78,611 $ 155,509
Other....................... -- 1,820 912 808 443
------- ------- -------- -------- ---------
Total net revenues........ 43,656 66,389 114,302 79,419 155,952
------- ------- -------- -------- ---------
Cost of net revenues:
Services.................... 28,842 41,115 73,401 49,551 99,653
Other....................... -- 208 1,294 1,180 700
Provision for loss on
contract................... -- -- -- -- 2,094
Stock compensation.......... -- -- 2,420 966 9,415
------- ------- -------- -------- ---------
Total cost of net
revenues................. 28,842 41,323 77,115 51,697 111,862
------- ------- -------- -------- ---------
Gross profit.................. 14,814 25,066 37,187 27,722 44,090
------- ------- -------- -------- ---------
Operating expenses:
Marketing, sales and
support.................... 932 14,963 23,374 16,039 19,600
General and administrative.. 7,304 12,633 27,734 19,323 31,223
Acquired in-process
technology................. -- -- 9,472 6,726 25,508
Stock compensation.......... -- -- 6,698 3,500 23,962
Amortization of intangible
assets..................... -- 74 12,963 7,503 45,776
------- ------- -------- -------- ---------
Total operating expenses.. 8,236 27,670 80,246 53,091 146,069
------- ------- -------- -------- ---------
Income (loss) from operations. 6,578 (2,604) (43,059) (25,369) (101,979)
Interest income............... 385 2,612 2,347 1,474 3,766
Interest expense.............. (89) (341) (641) (397) (709)
Impairment of investee carried
at cost...................... -- -- (4,000) (4,000) --
------- ------- -------- -------- ---------
Net income (loss) before
income taxes................. 6,874 (333) (45,353) (28,292) (98,922)
Provision for income taxes.... 1,065 3,026 5,317 4,527 5,210
------- ------- -------- -------- ---------
Net income (loss)......... $ 5,809 $(3,359) $(50,670) $(32,819) $(104,132)
======= ======= ======== ======== =========
Net income (loss) per share:
Basic....................... $ 0.42 $ (0.15) $ (1.73) $ 1.23 $ (1.81)
======= ======= ======== ======== =========
Diluted..................... $ 0.34 $ (0.15) $ (1.73) $ 1.23 $ (1.81)
======= ======= ======== ======== =========
Weighted average shares
Basic....................... 13,764 21,803 29,262 26,660 57,539
======= ======= ======== ======== =========
Diluted..................... 16,898 21,803 29,262 26,660 57,539
======= ======= ======== ======== =========
Unaudited pro forma data:
Net income (loss) before
income taxes,
as reported................ $ 6,874 $ (333) $(45,353) $(28,292)
Pro forma provision for
income taxes............... 2,823 5,108 5,635 4,845
------- ------- -------- --------
Pro forma net income (loss). $ 4,051 $(5,441) $(50,988) $(33,137)
======= ======= ======== ========
Pro forma basic net income
(loss) per share........... $ 0.29 $ (0.25) $ (1.74) $ (1.24)
======= ======= ======== ========
Pro forma diluted net income
(loss) per share........... $ 0.24 $ (0.25) $ (1.74) $ (1.24)
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-47
<PAGE>
USWEB CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES RETAINED
COMMON STOCK ADDITIONAL RECEIVABLE EARNINGS/ TOTAL
------------------ PAID-IN FROM ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT EQUITY
---------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 15,817,500 $16 $ 942 $ (371) $ 2,192 $ 2,779
Issuance of Series A
Common Stock........... 1,108,500 1 1,923 -- -- 1,924
Issuance of Common
Stock, net............. 55,500 -- 80 8 -- 88
Compensation related to
stock options.......... -- -- 156 -- -- 156
Collection of
stockholder note
receivable............. -- -- -- 71 -- 71
Distributions to
stockholders........... -- -- -- -- (4,477) (4,477)
Net income.............. -- -- -- -- 5,809 5,809
---------- --- -------- ------- --------- ---------
Balance at November 30,
1995................... 16,981,500 17 3,101 (292) 3,524 6,350
Issuance of Common Stock
warrants............... -- -- 269 -- -- 269
Tax benefit from
disqualifying
dispositions........... -- -- 926 -- -- 926
Distributions to
stockholders........... -- -- (499) -- (4,481) (4,980)
Issuance of Common
Stock, net............. 10,462,000 6 50,449 (2,000) -- 48,455
Collection of note
receivable............. -- -- -- 600 -- 600
Exercise of stock
options................ 281,000 -- 30 -- -- 30
Stock compensation
expense................ -- -- 146 -- -- 146
Net loss................ -- -- -- -- (3,359) (3,359)
---------- --- -------- ------- --------- ---------
Balance at December 31,
1996................... 27,724,500 23 54,422 (1,692) (4,316) 48,437
Tax benefit from
disqualifying
dispositions........... -- -- 3,343 -- -- 3,343
Distributions to
stockholders........... -- -- -- -- (2,172) (2,172)
Deferred issuance of
common stock related to
business acquisitions.. -- -- 5,582 -- -- 5,582
Deferred tax asset
recorded in connection
with taxable pooling of
interests.............. -- -- 9,346 -- -- 9,346
Repurchase of Common
Stock and cancellation
of note receivable from
stockholder............ (9,000) -- (94) 94 -- --
Change in subsidiaries'
fiscal year-ends....... -- -- -- -- (264) (264)
Exercise of stock
options................ 103,079 -- 500 -- -- 500
Common Stock issued for
acquired businesses.... 8,201,683 8 46,122 -- -- 46,130
Issuance of Common
Stock, net............. 7,993,964 8 56,410 -- -- 56,418
Conversion of
Mandatorily Redeemable
Preferred Stock........ 12,094,359 12 32,478 -- -- 32,490
Issuance of Affiliate
warrants............... -- -- 150 -- -- 150
Collection of note
receivable............. -- -- -- 1,400 -- 1,400
Stock compensation
expense................ -- -- 10,641 -- -- 10,641
Net loss................ -- -- -- -- (50,670) (50,670)
---------- --- -------- ------- --------- ---------
Balance at December 31,
1997................... 56,108,585 51 218,900 (198) (57,422) 161,331
Tax benefit from
disqualifying
dispositions
(Unaudited)............ -- -- 111 -- -- 111
Common Stock issued for
acquired businesses
(Unaudited)............ 7,517,143 8 189,120 -- -- 189,128
Issuance of Common
Stock, net (Unaudited). 2,200,802 2 34,497 -- -- 34,499
Exercise of stock
options and warrants
(Unaudited)............ 1,570,401 2 10,541 -- -- 10,543
Issuance of warrants
(Unaudited)............ -- -- 9,156 -- -- 9,156
Stock compensation
expense (Unaudited).... -- -- 27,325 -- -- 27,325
Net loss (Unaudited).... -- -- -- -- (104,132) (104,132)
---------- --- -------- ------- --------- ---------
Balance at September 30,
1998 (Unaudited)....... 67,396,931 $63 $489,650 $ (198) $(161,554) $ 327,961
========== === ======== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-48
<PAGE>
USWEB CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------
1995 1996 1997 1997 1998
------- ------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)............ $ 5,809 $(3,359) $(50,670) $(32,819) $(104,132)
Adjustments to reconcile net
income (loss) to net cash
used in operating
activities:
Depreciation and
amortization............... 1,000 1,444 14,271 7,323 50,691
Provision for doubtful
accounts................... -- -- 819 700 381
Provision for loss on
contract................... -- -- -- -- 2,094
Stock, option and warrant
costs and expenses......... 156 315 11,891 5,964 33,612
Acquired in-process
technology................. -- -- 9,472 6,726 25,508
Impairment of investee
carried at cost............ -- -- 4,000 4,000 --
Deferred income taxes....... (476) (1,097) (856) (859) 3,332
Tax benefit from
disqualifying dispositions. -- 926 3,343 2,502 111
Changes in assets and
liabilities:
Accounts receivable........ (1,038) (9,932) (23,506) (6,472) (15,750)
Other assets............... (949) (739) (1,254) (570) (5,680)
Accounts payable........... (1,783) 13,101 13,010 (5,749) (3,282)
Accrued expenses........... 1,543 6,249 (335) 1,134 (5,572)
Deferred revenue........... (240) 246 517 (702) 866
Income taxes payable....... 1,125 (1,253) (847) 366 1,218
------- ------- -------- -------- ---------
Net cash provided by (used
in)
operating activities..... 5,147 5,901 (20,145) (18,456) (16,603)
------- ------- -------- -------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of property and
equipment................... (1,574) (3,070) (5,103) (2,680) (6,575)
Cash received (used in)
acquisitions................ -- 55 (12,611) (14,890) (5,526)
Purchase of investment in
affiliate................... -- (2,850) (1,150) 968 --
Purchase of short-term
investments................. -- (39,710) (21,175) (17,259) (88,644)
Proceeds from sales of short-
term investments............ -- 1,750 34,934 32,620 65,509
------- ------- -------- -------- ---------
Net cash used in investing
activities............... (1,574) (43,825) (5,105) (1,241) (35,236)
------- ------- -------- -------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of
Common and
Preferred Stock, net........ 1,979 59,276 71,957 17,520 44,591
Distributions to
stockholders................ (4,444) (4,635) (2,398) (1,736) (1,856)
Proceeds from bank borrowings
and notes payable........... -- 500 2,000 -- --
Repayment of bank borrowings. (676) (382) (3,414) -- --
Proceeds from collection of
notes receivable............ 71 563 1,400 (259) (577)
Proceeds from capital lease
financing................... -- 599 431 -- 2,570
Principal payments on capital
lease....................... -- (209) (704) (560) (1,630)
------- ------- -------- -------- ---------
Net cash provided by (used
in)
financing activities..... (3,070) 55,712 69,272 14,965 43,098
------- ------- -------- -------- ---------
Increase (decrease) in cash
and cash equivalents......... 503 17,788 44,022 (4,732) (8,741)
Change in subsidiary fiscal
years........................ -- -- (4,259) (4,259) --
Cash and cash equivalents,
beginning of period.......... 4,314 4,817 22,605 22,605 62,368
------- ------- -------- -------- ---------
Cash and cash equivalents, end
of period.................... $ 4,817 $22,605 $ 62,368 $ 13,614 $ 53,627
======= ======= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-49
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--THE COMPANY:
USWeb Corporation ("USWeb" or the "Company") provides Internet professional
services including strategy consulting, analysis and design, technology
development, implementation and integration, audience development and
maintenance. The Company also provides strategic corporate and product
positioning, corporate identity and product branding, new media, systems
integration, environmental design, packaging, collateral systems, advertising,
direct marketing, consumer promotions, trade promotions and media placement
services.
On December 17, 1998, USWeb completed its acquisition of CKS Group, Inc.
("CKS Group") in a transaction accounted for as a pooling of interests.
Accordingly, these supplemental consolidated financial statements are restated
for all periods prior to the merger to include CKS Group. Under terms of the
agreement, each outstanding share of CKS Group Common Stock was exchanged for
1.5 shares of USWeb Common Stock. Additionally, USWeb assumed all outstanding
options to purchase CKS Group Common Stock and assumed CKS Group's employee
stock purchase plan, adjusted for the 1.5 to 1 ratio.
Prior to the Combination, CKS Group's fiscal year ended on November 30. In
recording the business combination, CKS Group's consolidated financial
statements as of and for each of the three years in the period ended November
30, 1997 have been combined with USWeb's consolidated financial statements as
of and for each of the two years in the period ended December 31, 1997.
During the period from March 16, 1997, to September 30, 1998, USWeb completed
the acquisitions of thirty-seven Internet consulting services firms and
advertising firms in various transactions accounted for as purchases.
Collectively, the companies acquired through September 30, 1998 accounted for
as purchases are referred to herein as the "Acquired Entities." The aggregate
purchase price of the Acquired Entities was approximately $274,200.
The acquisition prices of the Acquired Entities were allocated, on an entity-
by-entity basis, to the assets acquired, including tangible and intangible
assets and liabilities assumed based upon the fair values of such assets and
liabilities on the dates of the acquisitions. Approximately $15,800 of the
aggregate purchase was allocated to identified net tangible assets consisting
primarily of cash, accounts receivable, property and equipment, and accounts
payable. The historical carrying amounts of such assets approximated their fair
values on the dates of acquisition. Approximately $35,000 of the acquisition
price was allocated to in-process technology. Because such in-process
technology had not reached the stage of technological feasibility at the
acquisition dates and had no alternative future use, these amounts were
immediately charged to operations. Approximately $11,100 of the aggregate
purchase price was allocated to existing technology and is being amortized over
its estimated useful life of six months to one year. Approximately $212,300 of
the purchase price was allocated to goodwill, primarily workforce in place, and
is being amortized over its estimated useful life of twelve to forty-two months
with respect to the USWeb Acquired Entities, and twenty years with respect to
the entities acquired by CKS Group.
Between January 31, 1997 and June 17, 1997, CKS Group acquired two entities
in the advertising industry under separate transactions that were accounted for
as poolings of interests. The aggregate consideration for these transactions
was 1,623,599 shares of CKS Group Common Stock.
The following unaudited pro forma consolidated amounts give effect to the
acquisitions of the Acquired Entities and the entities acquired by CKS Group as
if they occurred on January 1, 1996 and on January 1, 1997 (or date of
inception, if later).
F-50
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues....................... $ 64,569 $ 165,914 $ 120,357 $ 173,387
========== ========== ========== ==========
Net loss....................... $ (3,359) $ (221,476) $ (177,478) $ (104,625)
========== ========== ========== ==========
Pro forma net loss per share:
Basic and diluted............ $ (0.15) $ (5.22) $ (4.45) $ (1.60)
========== ========== ========== ==========
Weighted average shares:
Basic and diluted............ 21,803,000 42,448,000 39,891,000 65,137,000
========== ========== ========== ==========
</TABLE>
The following table sets forth revenues and net income (loss) for acquired
entities that were accounted for as poolings of interests and previously
reported separately:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------
1995 1996 1997 1997 1998
------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
CKS.......................... $34,792 $ 56,951 $ 95,024 $ 70,743 $ 82,866
USWeb........................ -- 1,820 19,278 8,676 73,086
CKS acquired entities........ 8,864 7,618 -- -- --
------- -------- -------- -------- ---------
$43,656 $ 66,389 $114,302 $ 79,419 $ 155,952
======= ======== ======== ======== =========
Net income (loss):
CKS.......................... $ 1,366 $ 5,679 $ 7,666 $ 6,451 $ 7,400
USWeb........................ -- (13,808) (58,336) (39,270) (111,532)
CKS acquired entities........ 4,436 4,770 -- -- --
------- -------- -------- -------- ---------
$ 5,809 $ (3,359) $(50,670) $(32,819) $(104,132)
======= ======== ======== ======== =========
</TABLE>
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.
Principles of consolidation
The accompanying supplemental consolidated financial statements include the
consolidated accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
F-51
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Cash, cash equivalents and short-term investments
The Company invests its excess cash in debt instruments of the U.S.
Government, its agencies and in high-quality corporate and municipality issues.
All highly-liquid instruments with an original maturity of three months or less
are considered cash equivalents, and those with original maturities greater
than three months and current maturities less than twelve months from the
balance sheet date are considered short-term investments.
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 to seven years. Amortization of leasehold improvements is computed using
the straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term.
Intangible assets
Goodwill resulting from the Companys acquisitions is estimated by management
to be primarily associated with the acquired workforce and technological know
how. Accordingly, a significant portion of the purchase price of each
acquisition is considered to relate to workforce in place. As a result of the
rapid technological changes occurring in the Internet industry and the intense
competition for qualified Internet professionals, goodwill recorded in
connection with the Companys acquisitions of Internet professional services
companies is amortized on a straight-line basis over the estimated periods of
benefit, which range from twelve to forty-two months. Goodwill recorded in
connection with the Companys acquisitions of advertising firms is amortized on
a straight-line basis over twenty 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 through September 30, 1998, the Company has not
recorded any provisions for possible impairment of intangible assets. See Note
13--Subsequent Events.
Completed technologies obtained through acquisition or merger are capitalized
and amortized on a straight-line basis over an estimated benefit period of six
to twelve 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 in which 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-52
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED 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), advertising
commissions, initial franchise fees, monthly royalties from Affiliates and
hosting service fees. 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. Deferred revenue
represents the amount of cash received in advance of services being performed.
Commissions earned from advertising placed with media are generally recorded
as services revenue at the time the advertising appears or is broadcast.
Commissions earned for production expenditures and fees derived from other
services are recognized as services revenue upon performance of the service.
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."
Revenues from web-site hosting services are included in Other Revenues, have
been insignificant to date and are recognized monthly as services are provided.
Advertising costs
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising costs for the
years ended December 31, 1996 and 1997 totaled $3,223 and $4,060, respectively,
and $2,404 (unaudited) and $1,495 (unaudited) for the nine months ended
September 30, 1997 and 1998, 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,
F-53
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.
Income taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets are
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
In 1997, the Company acquired a partnership in a transaction accounted for as
a pooling of interests. As a partnership, this entity's earnings were taxed at
the individual partner level, therefore no provision for income taxes has been
made in the accompanying supplemental consolidated financial statements for
income attributable to this entity. The accompanying supplemental consolidated
statements of income include a provision for income taxes on an unaudited pro
forma basis as if the partnership had been a C corporation fully subject to
income taxes, for all periods presented.
Net income (loss) per share
The Company computes net income (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 income (loss) per
share is computed by dividing the net income (loss) for the period by the
weighted average number of common shares outstanding during the period. The
weighted average shares used to compute basic net income (loss) per share
include outstanding shares of Common Stock from the date of issuance and shares
vested under stock bonus arrangements computed for each period by dividing
cumulative amortization of deferred compensation expense by the weighted
average price of the Company's Common Stock during the period. The computation
excluded (i) for the year ended December 31, 1997, 2,051,000 equivalent
acquisition-related shares held in escrow ("Acquisition Shares"), (ii) for the
years ended December 31, 1996 and 1997, 4,286,000 and 2,830,000, respectively,
of equivalent shares of Common Stock subject to repurchase rights ("Restricted
Shares") and (iii) for the years ended December 31, 1996 and 1997, 5,375,000
and 10,278,000, respectively, of equivalent shares of Mandatorily Redeemable
Convertible Preferred Stock ("Preferred Stock") prior to their conversion into
Common Stock on December 5, 1997. In addition, the calculation of diluted net
income (loss) per share excludes Common Stock issuable upon exercise of
employee stock options and upon exercise of outstanding warrants, as their
effect in all periods presented is antidilutive. For the year ended December
31, 1995, the calculation of diluted net income per share included the dilutive
effect of 298,000 shares issuable pursuant to employee stock options and
2,836,000 shares which were contingently issuable pursuant to prior business
combinations.
Pro forma net income (loss) gives effect to the pooling-of-interests
combination between the Company and a partnership during fiscal 1997 whereby
the partnerships' historical results of operations prior to the acquisition by
the Company, which have been included with the Company's under the pooling-of-
interests method, do not include a provision for income taxes. Pro forma net
income (loss) and net income (loss) per share data include a tax provision as
if the partnership had been a taxable "C" corporation for all periods.
F-54
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
marketable securities 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 highly diversified. The Company
has not experienced any significant credit losses to date.
Fair value of financial instruments
The carrying value of the Company's financial instruments, including accounts
receivable, approximates fair market value.
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
financial impact on its consolidated financial statements and is currently
assessing the impact of the disclosure provisions of the new pronouncements.
The Company complies with the provisions of Emerging Issues Task Force Issue
No. 96-18 ("EITF 96-18") with respect to stock options granted to non-employees
who are consultants to the Company. EITF 96-18 requires variable plan
accounting with respect to such non-employee stock options, whereby
compensation associated with such options is measured on the date such options
vest, and incorporates the current air market value of the Companys Common
Stock into the option valuation model.
Interim results (unaudited)
The accompanying supplemental consolidated interim financial statements as of
September 30, 1998 and for the nine months ended September 30, 1997 and 1998
are unaudited. In the opinion of management, the unaudited consolidated
supplemental interim financial statements have been prepared on the same basis
as the annual supplemental consolidated financial statements and reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the financial position as of September 30, 1998 and the results
of the Companys operations and its cash flows for the nine months ended
September 30, 1997 and 1998. The financial data and other information disclosed
in these notes to supplemental consolidated financial statements related to
these periods are unaudited. The results for the nine months ended September
30, 1998 are not necessarily indicative of the results to be expected for the
year ending December 31, 1998.
F-55
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 3--SUPPLEMENTAL CASH FLOW INFORMATON:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1995 1996 1997 1997 1998
--------------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures:
Cash paid for interest.......... $ 91 $ 121 $ 263 $ 183 $ 315
Income taxes.................... 647 4,488 1,386 1,121 509
Non-cash financing and investing
activities:
Common Stock issued for note
receivable..................... -- 2,000 -- -- --
Notes payable converted into
Common Stock................... -- 957 -- -- --
Equipment acquired through
capital lease.................. -- 288 578 -- --
Common Stock issued for
acquisitions................... -- 4,997 46,293 35,360 190,379
Common Stock issued for
services....................... -- -- 1,250 -- --
Assumptions of liabilities in
acquisition.................... -- -- 2,146 2,146 5,284
Issuance of warrants............ -- -- -- -- 9,156
Deferred tax asset recorded in
connection with taxable pooling
of interests transactions...... -- -- 9,346 9,346 --
</TABLE>
F-56
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable, net:
Accounts receivable.......................... $26,372 $64,807 $ 95,017
Unbilled revenues............................
Less: Allowance for doubtful accounts........ (792) (2,261) (6,631)
------- ------- --------
$25,580 $62,546 $ 88,386
======= ======= ========
Property and equipment, net:
Computer equipment........................... $ 5,452 $13,072 $ 22,689
Furniture and fixtures....................... 2,583 3,536 3,399
Leasehold improvements....................... 1,504 2,991 3,807
------- ------- --------
9,539 19,599 29,895
Less: Accumulated depreciation and
amortization................................ (3,884) (7,548) (12,404)
------- ------- --------
$ 5,655 $12,051 $ 17,491
======= ======= ========
Intangible assets, net:
Goodwill, primarily workforce in place....... $ 6,077 $56,572 $225,738
Purchased technology......................... -- 3,610 11,058
------- ------- --------
6,077 60,182 236,796
Less: Accumulated amortization............... (140) (10,935) (56,930)
------- ------- --------
$ 5,937 $49,247 $179,866
======= ======= ========
Accrued expenses:
Compensation and benefits.................... $ 4,207 $ 5,128 $ 9,813
Accrued financing costs...................... 10 1,450 --
Marketing costs.............................. 1,592 1,260 1,977
Professional fees............................ 721 1,012 4,046
Other........................................ 4,039 8,884 11,648
------- ------- --------
$10,569 $17,734 $ 27,484
======= ======= ========
</TABLE>
NOTE 5--SHORT-TERM INVESTMENTS:
At December 31, 1997, short-term investments in marketable securities were
classified as available-for-sale and consisted of debt securities of the U.S.
Government and its agencies, high-quality municipal debt instruments and
corporate debt.
At September 30, 1998, short-term investments in marketable securities were
classified as available-for-sale and consisted of 55% (unaudited) corporate
debt securities, 4% (unaudited) debt securities of the U.S. Government and its
agencies, 14% (unaudited) foreign debt securities and 27% of municipal bonds.
At December 31, 1997 and September 30, 1998, the fair value of the
investments approximated cost. Fair value is determined based upon the quoted
market prices of the securities as of the balance sheet date.
F-57
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The contractual maturities of the debt securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Due within one year............................. $11,329 $32,208
Due after one year through five years........... -- 13,893
Due after five years through ten years.......... 1,900 512
Due after ten years............................. 10,800 564
------- -------
$24,029 $47,177
======= =======
</TABLE>
NOTE 6--INCOME TAXES:
Historical income taxes
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT:
Federal.......................................... $1,201 $2,328 $1,562
State............................................ 340 942 818
Foreign.......................................... -- -- 450
------ ------ ------
Total current.................................. 1,541 3,270 2,830
------ ------ ------
DEFERRED:
Federal.......................................... (374) (937) (771)
State............................................ (102) (233) (85)
------ ------ ------
Total deferred................................. (476) (1,170) (856)
------ ------ ------
Charge in lieu of taxes attributable to employee
stock option plans................................ -- 926 3,343
------ ------ ------
$1,065 $3,026 $5,317
====== ====== ======
</TABLE>
F-58
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ -------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating losses................................... $5,200 $17,000
Accounts receivable allowances......................... 327 533
Depreciation........................................... 314 230
Federal benefit of state taxes......................... 266 --
Basis of assets for tax purposes in excess of book
for taxable pooling transactions...................... -- 10,280
Deferred compensation.................................. 657 206
Benefit and other accruals............................. 231 256
Other.................................................. 163 313
------ -------
Gross deferred tax assets............................ 7,158 28,818
Valuation allowance...................................... (5,200) (17,000)
------ -------
Net deferred tax assets.................................. 1,958 11,818
------ -------
DEFERRED TAX LIABILITIES:
Change from cash to accrual method of accounting for
income tax purposes................................... (620) (278)
------ -------
Total deferred tax liabilities....................... (620) (278)
------ -------
Net deferred tax assets.................................. $1,338 $11,540
====== =======
</TABLE>
Deferred tax assets of approximately $17,000 at December 31, 1997 consists of
federal and state net operating loss carryforwards which are subject to
separate return limitations rules. Based on this limitation and 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 $17,000 of deferred tax assets such that a
valuation allowance has been provided.
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Federal tax statutory
rate................... 34.0 % (35.0)% (35.0)%
Partnership benefit..... (22.0) (514) (0.7)
State income taxes, net
of federal benefit..... 3.5 138 1.9
Nondeductible intangible
assets................. -- -- 23
Change in valuation
allowance.............. -- 1,451 22
Other................... -- (132) 10.3
----- ----- -----
15.5 % 908 % 11.5 %
===== ===== =====
</TABLE>
At December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $42,750 and $26,350, respectively, available to
reduce future taxable income, which expire in
F-59
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 carryforward. Such a change occurred in December 1997 resulting in a
$13,000 limitation.
Unaudited pro forma income taxes
The pro forma provision for income taxes reflects the income tax expense that
would have been reported if an acquired partnership had been a C corporation
for each of the years in the three-year period ended December 31, 1997. The
components of pro forma income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT:
Federal......................................... $2,612 $4,008 $1,771
State........................................... 687 1,344 927
Foreign......................................... -- -- 450
------ ------ ------
Total current................................. 3,299 5,352 3,148
------ ------ ------
DEFERRED:
Federal......................................... (374) (937) (771)
State........................................... (102) (233) (85)
------ ------ ------
Total deferred................................ (476) (1,170) (856)
------ ------ ------
Charge in lieu of taxes attributable to employee
stock option plans............................... -- 926 3,343
------ ------ ------
Total pro forma provision for income taxes........ $2,823 $5,108 $5,635
====== ====== ======
</TABLE>
The Company's pro forma effective rate differs from statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1995 1996 1997
---- ------- -----
<S> <C> <C> <C>
Federal tax statutory rate......................... 34.0% (35.0)% (35.0)%
State income expenses, net of federal benefit...... 5.7% 259 2.0
Nondeductible intangible assets.................... -- -- 2.3
Change in valuation allowance...................... -- 1,451 22
Other.............................................. 1.4% (142) 0.5
---- ------- -----
41.1% 1,533.0 % 12.5 %
==== ======= =====
</TABLE>
On an unaudited pro forma basis, the tax effects of temporary differences
that give rise to the significant portions of the unaudited pro forma deferred
tax assets and liabilities do not differ significantly from the historical
amounts presented above as December 31, 1996 and 1997. Because the merger with
the partnership was a taxable transaction, during the first quarter of fiscal
1997, the Company recorded a deferred tax asset and an increase in
stockholders' equity of approximately $9,346,000 for the difference between the
financial statement and tax carrying amounts of the partnership's net assets
upon the closing of the transaction.
F-60
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 7--NOTES PAYABLE:
In July 1995, the Company entered into a credit agreement with a bank for
$4,600, including a $3,000 line of credit, a $1,000 equipment line of credit,
and a $600 term loan to refinance existing debt. The equipment line of credit
and term loan expired during 1997. Borrowings were secured by all assets of the
Company. As of December 31, 1997, the Company has no amounts outstanding under
this line of credit.
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.
During 1996, the Company entered into a $500 line of credit with a bank
bearing interest a the banks prime rate plus 0.25% (8.75% as of November 30,
1997). Borrowings were unsecured and the line of credit expired on January 31,
1998. As of December 31, 1997, the Company has no amounts outstanding under
this line of credit.
On October 6, 1997, the Company entered into a credit facility with a bank
that allows the Company to borrow up to maximum of $3,000 to finance various
equipment purchases. Advances accrue interest at the banks 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 banks prime rate plus 1%. On December
10, 1997, the Company repaid the outstanding amount, plus interest of $14.
F-61
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 8--COMMITMENTS AND CONTINGENCIES:
Leases
The Company and its subsidiaries lease facilities under noncancelable
operating leases which expire through 2011. The leases provide for escalating
monthly payments which are being charged to operations ratably over the lease
term. In addition to the minimum lease payments, the Company is responsible for
property taxes, insurance and certain other operating costs. The Company also
leases certain equipment under long-term lease agreements that are classified
as capital leases. These capital leases terminate at various dates through
January 2002.
Total equipment acquired under capitalized lease was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1996 1997 1998
----- ------ -------------
<S> <C> <C> <C>
Computer and equipment.......................... $ 702 $1,234 $ 64
Furniture and fixtures.......................... 108 154 --
----- ------ ----
810 1,388 64
Less: Accumulated depreciation.................. (214) (877) (54)
----- ------ ----
$ 596 $ 511 $ 10
===== ====== ====
</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 noncancelable operating and capital
leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
------------ --------- -------
<S> <C> <C>
1998..................................................... $ 6,529 $ 466
1999..................................................... 6,011 309
2000..................................................... 4,959 30
2001..................................................... 3,436 10
2002..................................................... 2,377 1
Thereafter............................................... 6,857 --
------- -----
Total minimum payments................................... $30,169 816
-------
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 $2,935 and $7,872 for the years
ended December 31, 1996 and 1997, respectively.
Litigation
As is typical for companies in USWeb's business and of USWeb's size, USWeb is
from time to time the subject of lawsuits. USWeb does not believe that the
outcome of any pending litigation is likely to be material to USWeb, but due to
the inherent uncertainties of litigation, there is a risk that the outcome of
F-62
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
pending or any future litigation could have a material adverse effect on the
USWeb business, financial condition, cash flows, or results of operations.
NOTE 9--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
At December 31, 1996, a total of 9,329,500 shares of Mandatorily Redeemable
Convertible Preferred Stock were authorized for issuance, of which 6,226,167
and 3,103,333 shares were designated as Series A and Series B, respectively. In
1996, the Company issued 6,172,833 shares of Series A and 3,103,333 shares of
Series B Mandatorily Redeemable Convertible Preferred Stock ("Series A" and
Series "B") for cash at $1.62 and $2.01 per share, respectively. In 1997, the
Company authorized an additional 3,400,000 shares of Mandatorily Redeemable
Convertible Preferred Stock designated as Series C and issued 2,818,193 shares
of Series C Mandatorily Redeemable Convertible Preferred Stock ("Series C") for
cash at $6.21 per share. 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 10--STOCKHOLDERS EQUITY:
Preferred Stock
The Company is authorized to issue 100,000,000 shares of $0.001 par value
Common Stock and 1,000,000 shares of $0.001 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 Founders 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 $0.0003 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
From January 1996 to December 31, 1996 the Company issued warrants to
purchase 104,721 shares of its Common Stock at exercise prices ranging from
$0.09 to $1.62 per share. The fair value of these warrants
F-63
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
aton their respective grant dates was not material. The warrants are
exercisable at any time, and their expiration dates range from May 2001 through
February 2006.
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. No warrants had been exercised at December 31, 1997.
NOTE 11--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 accounts 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--pro forma.......................... $ (5,441) $ (50,988)
=========== ============
As adjusted (unaudited)......................... $ (7,650) $ (59,526)
=========== ============
Net loss per share:
Basic and diluted, as reported--pro forma....... $ (0.25) $ (1.74)
=========== ============
Basic and diluted, as adjusted (unaudited)...... $ (0.35) $ (2.03)
=========== ============
</TABLE>
Fair value estimates
For purposes of complying with the disclosure provisions of SFAS No. 123,
prior to the Company's initial public offering in December 1997, the fair value
of each option grant was determined on the date of grant using the minimum
value method. Subsequent to the offering, the fair value was determined using
the Black-Scholes option pricing model. Except for the volatility assumption,
which was only used under the Black-Scholes model, the following weighted-
average assumptions were used for grants during the years ended December 31,
1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
----------- ------------
<S> <C> <C>
Dividend yield...................................... 0.0% 0.0%
Volatility.......................................... 0.0% 60.0%
Risk-free interest rate............................. 6.1% 6.0-6.2%
Expected life....................................... 4 years 4 years
</TABLE>
F-64
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL 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 a 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 grant 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.
In 1996 Equity Plan Administrator, as defined, has the power to determine the
terms of the options of 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 form 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 purchasers 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
F-65
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
options and SPRs granted under the 1996 Equity Plan is determined by the 1996
Equity Plan Administrator, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation", the exercise price
must at least be equal to the fair market value of the Common Stock on the date
of grant. With respect to any participant who owns stock possessing more than
10% of the voting power of all classes of the Company's outstanding capital
stock, the exercise price of any incentive stock option granted must equal at
least 110% of the fair market value on the grant date and the term of such
incentive stock option must not exceed five years. The term of all other
options granted under the 1996 Equity Plan may not exceed ten years. As of
December 31, 1997, no SPRs had been granted.
1997 Acquisition Stock Option Plan
The Company's 1997 Acquisition Stock Option Plan (the "1997 Plan") provides
for the grant of incentive stock options to employees (including officers and
employee directors) and for the grant of nonstatutory stock options and SPRs to
employees, directors and consultants. A total of 10,000,000 shares of Common
Stock, plus annual increases equal to the lesser of (i) 400,000 shares, (ii) 5%
of the outstanding shares, or (iii) a lesser amount determined by the Board of
Directors, are currently reserved for issuance pursuant to the 1997 Plan.
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 purchasers 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.
CKS Group Stock Option Plans
In connection with the merger with CKS Group, which was consummated on
December 17, 1998 (See Note 1), the Company assumed all of the outstanding
stock options under CKS Group's 1995 Series B Common Stock Plan, 1995 Stock
Plan, 1995 Director Option Plan, 1996 Supplemental Stock Plan, and Site
Specific Option Plan (collectively the "CKS Group Stock Option Plans").
Outstanding options assumed from CKS Group Stock Option Plans generally vest
25% after one year from the date of grant, and then ratably over 36 months
thereafter, and are exercisable for a period of 10 years. No further grants
will be made under the CKS Group Stock Option Plans.
F-66
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL 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
EXERCISE EXERCISE
FIXED STOCK OPTIONS SHARES PRICE SHARES PRICE
------------------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.. 951,324 $ 1.53 2,529,617 $11.13
Granted........................... 3,492,050 16.600 11,866,080 25.21
Exercised......................... (405,028) 0.93 (630,197) 10.51
Canceled.......................... (1,508,730) 8.11 (878,315) 19.18
---------- ----------
Outstanding at end of year........ 2,529,617 $ 37.22 12,887,185 $22.42
---------- ----------
Options exercisable at end of
year............................. 552,730 3,097,052
---------- ----------
Weighted-average minimum and fair
values of options granted during
the year......................... $ 0.07 $ 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
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.50 - $12.56 10,012,686 9.1 years $ 7.77 2,905,234 $ 7.74
$20.00 - $29.75 2,250,489 9.0 years 14.77 178,694 13.41
$31.00 - $42.00 624,011 9.6 years 22.52 13,125 24.33
---------- ---------
22,899,871 6,002,286
========== =========
</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 Employees
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 Employees termination. The aggregate stock bonus for
awards through December 31, 1997, totaled $62,118, and will be paid in shares
of Common Stock at the fair market value of the Common Stock at the date of
issuance. Stock bonus awards are recognized as compensation expense over the
thirty-six month vesting periods and comprise stock compensation expense in the
accompanying consolidated financial statements. Stock compensation recorded
related to vested stock bonuses aggregated $9,118 and $15,073 (unaudited) for
the year ended December 31, 1997, and the nine-months ended September 30, 1998,
respectively. Of these amounts, $2,420 and $5,299, respectively, have been
recorded in cost of revenues, with the remainder recorded in stock
compensation.
F-67
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Employee Stock Purchase Plan
In September 1997, the Board of Directors approved the 1997 Employee Stock
Purchase Plan (the "Purchase Plan"). A total of 1,000,000 shares of Common
Stock have been reserved for issuance under this plan. Terms of the plan permit
eligible employees to purchase Common Stock through payroll deductions of up to
15% of the employees 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.
During the years ended December 31, 1996 and 1997, shares totalling 151,062
and 192,824, respectively, were issued under CKS Group's Employee Stock
Purchase Plan at average prices of $9.81 and $9.27 per share, respectively.
NOTE 12--RELATED PARTY TRANSACTIONS:
In 1990, an acquired partnership redeemed the equity interest of the
principal partner. Consideration provided by the redemption agreement included
a contingent amount of 50% of the partnership's adjusted income (as defined by
the redemption agreement), for the years 1991 through 1996, and 33 1/3% of such
adjusted income for the years 1997 through 2000. The redemption agreement also
provided for specific payout terms should the business be sold in years 1
through 10. As of December 31, 1996, the current portion of liabilities to
related parties included $1,804,000 related to this arrangement. This amount
was paid during the year ended December 31, 1997.
The partnership reached an agreement with the estate of a deceased partner to
redeem all of her partnership shares for $457,000. The redemption agreement
provided for an initial $100,000 payment in December 1996 with the balance
payable in quarterly installments without interest over four years. The balance
was fully paid as of December 31, 1997.
NOTE 13--SUBSEQUENT EVENTS (UNAUDITED):
Strategic Alliances
In May 1998, the Company entered into a strategic alliance with NBC
Multimedia, Inc. (NBC) to expand production capabilities for NBC's interactive
properties and services. As part of the strategic alliance the Company was
awarded a multi-year contract where revenues earned under the contract are
expected to approximate $11,000. In connection with the strategic alliance, the
Company issued warrants to NBC allowing them to purchase 1,600,000 and 500,000
shares of the Company's Common Stock at $22.50 and $25.43 per share,
respectively. Warrants to purchase 1,050,000 shares are exercisable at any time
prior to their expiration in November 1999 (the "Fixed Warrants"). Warrants to
purchase the remaining 1,050,000 shares are subject to cancellation, or if
previously exercised, are subject to repurchase by the Company at the original
purchase price, in the event that the agreement is cancelled by NBC prior to
May 2002 (the "Variable Warrants"). Of the total value ascribed to the NBC
warrants, $6,286 was attributable to the Fixed Warrants and recorded as part of
stock compensation in operating expenses in the quarter ended June 30, 1998,
and $6,282 was attributable to the Variable Warrants. Because the inclusion of
the value of the Variable Warrants as part of the NBC contract will result in
an overall loss on the contract, an accrual of $9,430 was provided in the
quarter ended June 30, 1998 to recognize this loss. The Variable Warrants are
subject to future revaluation at each balance sheet date through the date the
related cancellation or repurchase rights lapse. During the quarter ended
September 30, 1998, the Company recorded a recovery of the previously
recognized loss totaling $7,336, due to changes in the estimated fair value of
the Variable Warrants.
F-68
<PAGE>
USWEB CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Follow-on Offering
On April 7, 1998, the Company completed a follow-on offering whereby the
Company sold 1,581,216 shares of Common Stock. Net proceeds to the Company from
the follow-on offering aggregated approximately $31,151, after deducting
underwriters discounts and expenses of the offering. In addition, various
option and warrant holders who participated as selling stockholders in the
offering exercised 387,118 stock options and 56,547 shares of Common Stock. Net
proceeds to the Company from the exercise of stock options and warrants to
purchase warrants aggregated approximately $2,698.
Acquisition
In December 1998 the Company completed the acquisition of all the outstanding
stock of Sysicom, an Internet professional services firm located in Paris,
France, in exchange for 454,752 shares of the Company's Common Stock and $5,000
in cash. This acquisition will be accounted for as a purchase, and accordingly,
the recognized purchase price will be allocated to the tangible and
identifiable intangible assets and liabilities assumed on the basis of their
fair values on the acquisition date.
Impairment Charge
In August 1996, in connection with its acquisition of Schell/Mullaney, the
Company recorded goodwill totaling $4,600. In November 1997 and 1998, in
connection with additional purchase consideration resulting from earn-out
provisions, additional goodwill totaling $4,500 and $4,500, respectively, was
recorded. As of September 30, 1998, the carrying amount of Schell/Mullaney
goodwill aggregated approximately $13,100. In December 1998, in connection with
the renewal of an employment arrangement with a key employee, the Company
estimated that the future undiscounted net cash flows from this subsidiary will
be significantly less than in prior periods. Accordingly, based upon the
provisions of this employment arrangement and the expected future net
discounted cash flows, the Company determined that any impairment provision
totaling $11,000 was necessary and will recognize this amount as a charge to
general and administrative expense in the quarter ending December 31, 1998.
Stock Repurchase Program
In September 1998, the Company adopted a stock repurchase program to buy
shares of its Common Stock in the open market. The Board of Directors
authorized the repurchase of up to the lesser of 1,000,000 shares or $15,000.
The stock repurchase program will expire in 1999.
Litigation
On November 5, 1998, a putative class action lawsuit was filed in the United
States District Court for the Northern District of California against CKS Group
and three of its officers and directors. The complaint alleges that during the
period March 20, 1997 to November 7, 1997 (the "Class Period"), the defendants
violated the Securities Exchange Act and the SEC rules and regulations
thereunder by issuing false and misleading statements about CKS Group's
operations, revenues and earnings which allegedly inflated CKS Group's reported
revenues, earnings and stock price. The complaint further alleges that those
who purchased CKS Group's stock suffered damages when on November 7, 1997, the
price of CKS Group Common Stock dropped, allegedly causing losses to the
members of the class. The plaintiff seeks to recover damages in an unspecified
amount (together with interest and attorneys' fees) on behalf of all purchasers
of CKS Group Common Stock during the Class Period. The Company believes that
this lawsuit is without merit and intends to defend this action vigorously.
Certain of such legal proceedings may be covered under insurance policies or
indemnification agreements. Based upon information presently available, the
Company believes that the final outcome of such proceedings will not have a
material adverse effect upon the Company's business, results of operations or
financial condition.
Share Authorization
On December 16, 1998, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of Common Stock by 100,000,000 shares to 200,000,000 shares.
F-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<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-92
<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-93
<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-94
<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-95
<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-96
<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-97
<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-98
<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-99
<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-100
<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-101
<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-102
<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-103
<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-104
<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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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-111
<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-112
<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-113
<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-114
<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-115
<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-116
<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-117
<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-118
<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-119
<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-120
<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-121
<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-122
<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-123
<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-124
<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-125
<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-126
<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-127
<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-128
<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-129
<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-130
<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-131
<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-132
<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-133
<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-134
<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-135
<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-136
<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-137
<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-138
<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-139
<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-140
<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-141
<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-142
<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-143
<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-144
<PAGE>
USWEB MARIN
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1995 1996 1996 1997
-------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING
ACTIVITIES:
Net income.......................... $(65,000) $(169,000) $ 57,000 $(691,000)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Stock Compensation................. -- 33,000 -- 48,000
Depreciation and amortization...... -- 6,000 2,000 38,000
Provision for doubtful accounts.... -- 30,000 -- 15,000
Noncash exchange for services...... -- 22,000 -- --
Changes in assets and liabilities:
Accounts receivable............... (24,000) (411,000) (76,000) (14,000)
Costs in excess of billings....... -- -- -- (57,000)
Other current assets.............. (5,000) (9,000) (5,000) (3,000)
Other assets...................... -- -- -- (44,000)
Accounts payable.................. 12,000 28,000 20,000 127,000
Accrued expenses.................. 34,000 275,000 (8,000) 286,000
Deferred revenues................. -- 120,000 -- (120,000)
-------- --------- -------- ---------
Net cash used in operating
activities...................... (48,000) (75,000) (10,000) (415,000)
-------- --------- -------- ---------
CASH FLOWS USED IN INVESTING
ACTIVITIES FOR THE ACQUISITION OF
PROPERTY AND EQUIPMENT.............. (7,000) (48,000) (12,000) (320,000)
-------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock............ 56,000 292,000 64,000 312,000
Proceeds from short-term borrowing.. -- -- -- 350,000
Collection of note receivable from
shareholder........................ -- -- -- 25,000
-------- --------- -------- ---------
Net cash provided by financing
activities...................... 56,000 292,000 64,000 687,000
-------- --------- -------- ---------
Net increase (decrease) in cash and
cash equivalents.................... 1,000 169,000 42,000 (48,000)
Cash and cash equivalents at
beginning of period................. -- 1,000 1,000 170,000
-------- --------- -------- ---------
Cash and cash equivalents at end of
period.............................. $ 1,000 $ 170,000 43,000 122,000
======== ========= ======== =========
SUPPLEMENTAL NONCASH ACTIVITY:
Issuance of common stock for
shareholder
note receivable.................... $ -- $ 25,000 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-145
<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-146
<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-147
<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-148
<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-149
<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-150
<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-151
<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-152
<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-153
<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-154
<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-155
<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-156
<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-157
<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-158
<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-159
<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-160
<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-161
<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-162
<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-163
<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-164
<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-165
<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-166
<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-167
<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-168
<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-169
<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-170
<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-171
<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-172
<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-173
<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-174
<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-175
<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-176
<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-177
<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-178
<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-179
<PAGE>
USWEB LA CENTRAL
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES:
USWeb LA Central (the "Company"), formerly W3-design, was incorporated in
California on April 7, 1995 as a dedicated group of information architects who
build Web-based communities for major corporations in North America.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentration of Credit Risk
The Company is potentially subject to a concentration of credit risk from its
trade receivables, as a significant portion is due from two customers totaling
85% and 28% at March 31, 1996 and 1997, respectively. The Company performs
ongoing credit evaluation of its customers and generally does not require
collateral. For the period from April 7, 1995 (Inception) through March 31,
1996 and for the year ended March 31, 1997, five customers accounted for 41%
and 27% of the Company's total revenues, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
three years.
Revenue Recognition
The Company derives its revenues from consulting service agreements.
Service revenues from fixed-price development agreements are recognized under
the completed-contract method whereby income is recognized only when the
contract is substantially completed and all costs and related revenues are
deferred in the balance sheet until that time. Provisions for agreement
adjustments and losses are recorded in the period such items are identified.
Unearned revenues represents the amount of revenues received in advance of
services being performed.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets are
based on provisions of the enacted tax laws; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Fair Value of Financial Instruments
The Company's financial instruments, including accounts receivable, notes and
accounts payable, accrued expenses and billings in excess of fees and
expenditures have carrying amounts which approximate fair value due to the
relatively short maturity of these instruments.
F-180
<PAGE>
USWEB LA CENTRAL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interim Financial Information
The accompanying balance sheet as of September 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended September 30, 1996
and 1997, are unaudited. In the opinion of management, these statements have
been prepared on the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of the results of the interim periods. The financial data
and other information disclosed in these notes to financial statements related
to these periods are unaudited. The results for the six months ended September
30, 1997 are not necessarily indicative of the results to be expected for the
year ending March 31, 1998.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
MARCH 31,
----------------- SEPTEMBER 30,
1996 1997 1997
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computers and equipment..................... $47,000 $152,000 $177,000
Furniture and fixtures...................... 6,000 32,000 43,000
------- -------- --------
53,000 184,000 220,000
Less: accumulated depreciation.............. (8,000) (45,000) (70,000)
------- -------- --------
$45,000 $139,000 $150,000
======= ======== ========
</TABLE>
NOTE 3--INCOME TAXES:
The Company files separate company tax returns. The provision for income
taxes consists of the following for the years ended March 31, 1996 and 1997 and
the six months ended September 30, 1996 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED SEPTEMBER
MARCH 31, 30,
--------------- ---------------
1996 1997 1996 1997
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal.................................... $ 8,000 $46,000 $45,000 $28,000
State...................................... 1,000 8,000 8,000 5,000
------- ------- ------- -------
9,000 54,000 53,000 33,000
------- ------- ------- -------
Deferred:
Federal.................................... 64,000 35,000 -- --
State...................................... 11,000 4,000 -- --
------- ------- ------- -------
75,000 39,000 -- --
------- ------- ------- -------
Income tax provision......................... $84,000 93,000 $53,000 $33,000
======= ======= ======= =======
</TABLE>
A reconciliation of the federal income tax rate to the effective tax rate
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
MARCH 31, SEPTEMBER 30,
------------- ---------------
1996 1997 1996 1997
----- ----- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory rate............................ 34% 34% 34% 34%
State income tax, net of federal benefit.. 7% 4% 6% 6%
Nondeductable expenses and other.......... 3% -- -- --
----- ----- ------ ------
Effective income tax rate................. 44% 38% 40% 40%
===== ===== ====== ======
</TABLE>
F-181
<PAGE>
USWEB LA CENTRAL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of March 31, 1996 and 1997, the Company had total deferred tax liabilities
of $75,000 and $114,000, respectively, consisting primarily of a conversion
from the cash to accrual method of accounting.
NOTE 4--COMMITMENTS:
The Company maintains an executive office and an operating office in Culver
City, California and New York, New York, respectively, under month-to-month
operating leases. The Company is generally responsible for maintaining public
liability and property damage insurance on the leased property and is also
responsible for certain operating expenses and property taxes.
Rent expense for the period from April 7, 1995 (Inception) through March 31,
1996 and for the year ended March 31, 1997 and the six month period ended
September 30, 1997 totaled $15,000, $37,000, and $42,000, respectively.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company to
issue 10,000 shares of $1 par value Common Stock. For the period from April 7,
1995 (Inception) through March 31, 1996, the Company sold 1,000 shares of
Common Stock to the founders of the Company.
NOTE 6--SUBSEQUENT EVENTS:
On October 1, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of Common Stock, at which time the Company became
a wholly owned subsidiary of USWeb.
F-182
<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-183
<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-184
<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-185
<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-186
<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-187
<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-188
<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-189
<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-190
<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-191
<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-192
<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-193
<PAGE>
USWEB NEW YORK CENTRAL
(FORMERLY REACH NETWORKS, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED APRIL 30, JULY 31,
---------------------- -------------------
1996 1997 1996 1997
--------- ----------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net cash flows from operating
activities
Net loss........................ $(186,237) $(1,617,718) $(77,682) $(179,111)
Adjustments to reconcile net
loss to net cash provided by
operating activities
Product line discontinuance... -- 360,154 -- --
Depreciation and amortization. 254,701 288,077 70,187 29,178
Provision for doubtful
accounts..................... 81,036 193,773 -- --
Stock grant compensation...... 10,378 -- -- --
Changes in operating assets
and liabilities
Accounts receivable......... (248,731) 542,152 (224,280) 22,581
Unbilled costs and accrued
earnings................... -- (38,000) -- (73,704)
Deferred taxes.............. 68,756 (1,460) (1,460) --
Other receivables and
prepayments................ (4,075) 69,025 11,678 (20,250)
Accounts payable............ 610,082 109,775 231,233 120,496
Accrued expenses............ (210,000) 139,107 87,122 12,808
Deferred revenue............ (211,576) 26,667 -- 71,056
Income taxes................ (143,062) -- -- --
Other assets................ 861 438 -- (1,001)
--------- ----------- -------- ---------
Net cash provided by (used in)
operating activities........... 22,133 71,990 96,798 (17,947)
--------- ----------- -------- ---------
Cash flows from investing
activities
Capital expenditures............ (406,915) (109,210) (19,174) 1,692
Purchase of investment.......... (25,000) -- -- --
--------- ----------- -------- ---------
Net cash used in investing
activities..................... (431,915) (109,210) (19,174) 1,692
--------- ----------- -------- ---------
Cash flows from financing
activities
Net increase (decrease) in
borrowings from stockholders... 170,109 391 (42,165) 21,820
--------- ----------- -------- ---------
Net cash provided by (used in)
financing activities........... 170,109 391 (42,165) 21,820
--------- ----------- -------- ---------
Net increase (decrease) in cash
and cash equivalents............. (239,673) (36,829) 35,459 5,565
Cash and cash equivalents,
beginning of period.............. 279,833 40,160 40,160 3,331
--------- ----------- -------- ---------
Cash and cash equivalents, end of
period........................... $ 40,160 $ 3,331 $ 75,619 $ 8,896
========= =========== ======== =========
Cash paid during the period for:
Interest........................ $ -- $ 6,394 $ -- $ --
========= =========== ======== =========
Income taxes.................... $ 33,240 $ 267 $ 267 $ --
========= =========== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-194
<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-195
<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-196
<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-197
<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-198
<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-199
<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-200
<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-201
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Inter.logic.studios, inc.
In our opinion, the accompanying balance sheet and the related statement of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Inter.logic.studios, inc. at
December 31, 1997, and the results of its operations and its cash flows for the
year in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
March 24, 1998
F-202
<PAGE>
INTER.LOGIC.STUDIOS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 87,000
Accounts receivable.............................................. 531,000
Deferred contract costs.......................................... 60,000
Prepaid expenses and other current assets........................ 13,000
Loan to employees................................................ 8,000
--------
Total current assets........................................... 699,000
Property and equipment, net........................................ 154,000
--------
$853,000
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 41,000
Deferred revenue................................................. 110,000
Notes payable, current portion................................... 36,000
Accrued expenses................................................. 2,000
--------
Total current liabilities...................................... 189,000
--------
Note payable, less current portion................................. 42,000
--------
Commitments (Note 4)
Shareholders' equity:
Common Stock, $0.01 par value, 6,000,000 shares authorized;
3,900,000 shares issued and outstanding......................... 2,000
Retained earnings................................................ 620,000
--------
Total shareholders' equity..................................... 622,000
--------
$853,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-203
<PAGE>
INTER.LOGIC.STUDIOS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Revenues........................................................... $1,712,000
Cost of revenues................................................... 808,000
----------
Gross profit..................................................... 904,000
----------
Operating expenses:
Sales, general and administrative................................ 336,000
----------
Net income from operations 568,000
Interest expense, net.............................................. (3,000)
----------
Net income......................................................... $ 565,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-204
<PAGE>
INTER.LOGIC.STUDIOS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
--------- ------ -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996........... 3,900,000 $2,000 $226,000 $228,000
Distribution to shareholders........... -- -- (171,000) (171,000)
Net income............................. -- -- 565,000 565,000
--------- ------ -------- --------
Balance at December 31, 1997........... 3,900,000 $2,000 $620,000 $622,000
========= ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-205
<PAGE>
INTER.LOGIC.STUDIOS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 565,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss on disposal of property and equipment...................... 4,000
Depreciation and amortization................................... 26,000
Changes in current assets and liabilities:
Accounts receivable............................................ (407,000)
Prepaid expenses and other current assets...................... (68,000)
Accounts payable............................................... 32,000
Deferred revenue............................................... 110,000
Accrued expenses............................................... 16,000
---------
Net cash provided by operating activities..................... 278,000
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans to employees............................................... (7,000)
Purchase of property and equipment............................... (98,000)
---------
Net cash used in investing activities......................... (105,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable...................................... 132,000
Repayment of notes payable....................................... (54,000)
Distributions to shareholders.................................... (171,000)
---------
Net cash used in financing activities......................... (93,000)
---------
Net increase in cash and cash equivalents......................... 80,000
Cash and cash equivalents at beginning of year.................... 7,000
---------
Cash and cash equivalents at end of year.......................... $ 87,000
=========
SUPPLEMENTAL DISCLOSURES:
Interest paid.................................................... $ 4,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-206
<PAGE>
INTER.LOGIC.STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Inter.logic.studios, inc., (the "Company"), was incorporated in Georgia on
September 5, 1995 and provides professional consulting services including
internet technology integration, web page and intranet design, production and
maintenance.
Use of estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue recognition
Service revenues from fixed-price development agreements are recognized under
the completed- contract method whereby income is recognized only when the
contract is substantially competed and all costs and related revenues are
deferred in the balance sheet until that time. Provisions for agreement
adjustments and losses are recorded in the period such items are identified.
Significant customers
At December 31, 1997, two customers accounted for 25% and 63% of total
accounts receivable, respectively, and 43% and 28% of revenue, respectively,
for the year ended December 31, 1997.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line basis over the estimated useful lives of the assets respective
assets, which range from five to seven years.
Income taxes
The Company has elected to be taxed as an S Corporation, pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the shareholders' personal income tax returns.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Property and equipment:
Computer equipment............................................ $181,000
Furniture and fixtures........................................ 24,000
Office equipment.............................................. 8,000
--------
213,000
Less: Accumulated depreciation and amortization............... (59,000)
--------
$154,000
========
</TABLE>
NOTE 3--NOTES PAYABLE:
During the year ended December 31, 1998, the Company borrowed $132,000 under
notes payable which bear interest at 10.5% and are secured by computer
equipment. The outstanding note payable
F-207
<PAGE>
INTER.LOGIC.STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
balance of $78,000 at December 31, 1997 is due in monthly installments of
principal and interest of $3,000 through February 2000.
Principal and interest payments under this note payable are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998.............................................................. $36,000
1999.............................................................. 36,000
2000.............................................................. 6,000
-------
$78,000
=======
</TABLE>
NOTE 4--COMMITMENTS:
Leases
The Company leases office space and equipment under noncancelable operating
leases with various expiration dates through 2003. Rent expense for the year
ended December 31, 1997 was $53,000. Future minimum lease payments under
noncancelable operating at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1998............................................................ $105,000
1999............................................................ 36,000
2000............................................................ 4,000
2001............................................................ 4,000
2002............................................................ 4,000
Thereafter...................................................... 1,000
--------
Total minimum lease payments.................................... $154,000
========
</TABLE>
NOTE 5--SUBSEQUENT EVENTS:
Equity Transactions
On January 1, 1998 the Company amended its Articles of Incorporation to
increase the number of shares of Common Stock which the Company is authorized
to issue to 6,000,000 and decrease the par value of the Company's stock to
$0.01 per share. The Company declared a 2,600-for-one Common Stock dividend to
its shareholders. The financial statements have been retroactively restated to
reflect this stock dividend.
On January 31, 1998, the Company declared a dividend in the amount of
$124,000, which was paid during February 1998 and March 1998. The financial
statements have been retroactively restated to reflect this stock dividend.
Stock Option Plan
On January 1, 1998, the Company adopted a Stock Option Plan (the "Plan"). The
Plan provides for the granting of stock options to employees and consultants of
the Company. The Company has reserved 400,000 shares of Common Stock for
issuance under the Plan.
F-208
<PAGE>
INTER.LOGIC.STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The exercise price of options granted under the Plan is determined by the
Plan Administrator, as defined. With respect to incentive stock options granted
under the Plan, the exercise price must be at least equal to the fair market
value per share of the Common Stock on the date of grant, and the exercise
price of any incentive stock option granted to a participant who owns more than
10% of the voting power of the Company's outstanding capital stock must be
equal to at least 110% of fair market value of the Common Stock on the date of
grant.
Options outstanding under the Plan have a term of ten years, except for those
issued to participants who own more than 10% of the voting power of the
Company's outstanding capital stock, which have a term of five years.
During February and March 1998, the Company granted 219,600 stock options
with exercise prices of $0.30 per share. These options automatically vested
upon completion of the Acquisition (see Acquisition below).
Note Payable
On March 19, 1998, the Company borrowed $25,000 under a bank loan which bears
interest at 10.5%. Principal and accrued interest on this loan are due on April
20, 1998.
Acquisition
On March 24, 1998, the Company was acquired by USWeb Corporation ("USWeb")
whereby all of the Company's outstanding shares of Common Stock were exchanged
for 294,495 shares of USWeb Common Stock, at which time the Company became a
wholly owned subsidiary of USWeb.
F-209
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Quest Interactive Media, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Quest Interactive Media, Inc. at
March 31, 1997 and January 31, 1998, and the results of its operations and its
cash flows for the year ended March 31, 1997 and the ten months ended January
31, 1998 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
March 27, 1998
F-210
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, JANUARY 31,
1997 1998
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 3,000 $ --
Accounts receivable, net.............................. 65,000 123,000
--------- ---------
Total current assets................................ 68,000 123,000
Property and equipment, net............................. 15,000 32,000
--------- ---------
$ 83,000 $ 155,000
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable...................................... $ 49,000 $ 70,000
Accrued liabilities................................... 189,000 283,000
Current portion of notes payable...................... 5,000 5,000
Unearned revenue...................................... -- 42,000
Other current liabilities............................. 9,000 --
--------- ---------
Total current liabilities........................... 252,000 400,000
Notes payable........................................... 20,000 15,000
--------- ---------
272,000 415,000
--------- ---------
Shareholders' deficit:
Common Stock, no par value, 10,000 shares authorized;
5,600 shares issued and outstanding.................. -- --
Accumulated deficit................................... (189,000) (260,000)
--------- ---------
Total shareholders' deficit......................... (189,000) (260,000)
--------- ---------
$ 83,000 $ 155,000
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-211
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED JANUARY 31,
MARCH 31, ------------------
1997 1997 1998
---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues.................................... $286,000 $198,000 $481,000
Cost of net revenues............................ 154,000 112,000 236,000
-------- -------- --------
Gross profit.................................. 132,000 86,000 245,000
-------- -------- --------
Operating expenses:
General and administrative.................... 163,000 135,000 264,000
Marketing, sales and support.................. 17,000 15,000 51,000
-------- -------- --------
Total operating expenses.................... 180,000 150,000 315,000
-------- -------- --------
Loss from operations............................ (48,000) (64,000) (70,000)
Interest expense................................ 2,000 1,000 1,000
-------- -------- --------
Net loss........................................ $(50,000) $(65,000) $(71,000)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-212
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance at March 31, 1996............... 5,600 $-- $(139,000) $(139,000)
Net loss................................ -- -- (50,000) (50,000)
----- --- --------- ---------
Balance at March 31, 1997............... 5,600 -- (189,000) (189,000)
Net loss................................ -- (71,000) (71,000)
----- --- --------- ---------
Balance at January 31, 1998............. 5,600 $-- $(260,000) $(260,000)
===== === ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-213
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED JANUARY 31,
MARCH 31, ------------------
1997 1997 1998
---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $(50,000) $(65,000) $(71,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................. 5,000 5,000 8,000
Changes in current assets and liabilities:
Accounts receivable, net..................... (36,000) 8,000 (58,000)
Accounts payable............................. 30,000 20,000 21,000
Accrued liabilities.......................... 65,000 44,000 94,000
Unearned revenue............................. -- -- 42,000
Other current liabilities.................... -- -- (9,000)
-------- -------- --------
Net cash provided by operating activities... 14,000 12,000 27,000
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. (18,000) (20,000) (25,000)
-------- -------- --------
Net cash used in investing activities....... (18,000) (20,000) (25,000)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) note payable...... 7,000 10,000 (5,000)
-------- -------- --------
Net cash provided by (used in) financing
activities................................. 7,000 10,000 (5,000)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 3,000 2,000 (3,000)
Cash and cash equivalents at beginning of
period......................................... -- -- 3,000
-------- -------- --------
Cash and cash equivalents at end of period...... $ 3,000 $ 2,000 $ --
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMA-
TION:
Interest paid.................................. $ 2,000 $ 1,000 $ 1,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-214
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Quest Interactive Media, Inc., (the "Company") provides web site design and
maintenance, database design and management and software customization services
to clients in the United States, primarily in the Southeast. The Company was
incorporated in Tennessee on March 27, 1995.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue recognition
Service revenues are recognized over the period of each engagement using
primarily the percentage-of-completion method using labor hours incurred as the
measure of progress towards completion. Provisions for contract adjustments and
losses are recorded in the period such items are identified. Unearned revenues
represent the amount of cash received in advance of services being performed.
Interim financial information
The accompanying interim financial statements for the ten months ended
January 31, 1997 are unaudited. In the opinion of management, the unaudited
interim financial statements have been prepared on the same basis as the annual
financial statements, and reflect all adjustments which, include only normal
recurring adjustments, necessary to present fairly the results of the Company's
operations and its cash flows for the ten months ended January 31, 1997. The
financial data and other information disclosed in these notes to financial
statements related to this period are unaudited.
Concentration of credit risk
Financial instruments that potentially subject the Company to a concentration
of credit risk consist principally of cash and accounts receivable. The Company
places its cash in a checking account with a high quality financial
institution. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
The Company maintains an allowance for doubtful accounts receivable based upon
the expected collectibility of accounts receivable.
The following table summarizes the revenues from customers in excess of 10%
of the total revenues:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED
YEAR ENDED JANUARY 31,
MARCH 31, -------------
1997 1997 1998
---------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
Customer A........................................ 28% 26% 38%
Customer B........................................ 26% 28% --
Customer C........................................ 10% 14% --
Customer D........................................ 11% -- --
</TABLE>
F-215
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the receivable balances as a percentage of
total accounts receivable for the customers presented above:
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED JANUARY 31,
MARCH 31, ------------------
1997 1997 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Customer A.................................. 44% -- 5%
Customer D.................................. 14% -- --
</TABLE>
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally 4
to 8 years.
Advertising
Advertising costs are expensed as incurred, in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising expense was
$43,000, $3,000 (unaudited) and $3,000 for the ten months ended January 31,
1998 and 1997, and the year ended March 31, 1997, respectively.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
MARCH 31, JANUARY 31,
1997 1998
--------- -----------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable................................. $ 67,000 $130,000
Less: Allowance for doubtful accounts............... (2,000) (7,000)
-------- --------
$ 65,000 $123,000
======== ========
Property and equipment, net:
Office equipment.................................... $ 25,000 $ 50,000
Less: Accumulated depreciation...................... (10,000) (18,000)
-------- --------
$ 15,000 $ 32,000
======== ========
Accrued liabilities:
Payroll and related expenses........................ $179,000 $273,000
Taxes payable....................................... 10,000 10,000
-------- --------
$189,000 $283,000
======== ========
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
On May 1, 1995, the Company entered into a loan agreement with a related
party shareholder to raise capital in the amount of $25,000. The principal
amount plus accrued interest is due in five annual installments of $5,000 each,
commencing April 30, 1997, with the final payment due on April 30, 2001.
Interest accrues at a rate of 6% per annum. The note is secured by 5,600 shares
of the Company's Common Stock.
NOTE 4--INCOME TAXES:
No provision for income taxes has been recognized for the ten months ended
January 31, 1998 and 1997 (unaudited) or the year ended March 31, 1997, as the
Company incurred net operating losses for income tax purposes and has no
carryback ability. Deferred income taxes were not significant at January 31,
1998 or March 31, 1997.
F-216
<PAGE>
QUEST INTERACTIVE MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5--BORROWINGS:
Notes payable consists of amounts payable to a related party shareholder
which are secured by 5,000 shares of Common Stock as follows:
<TABLE>
<CAPTION>
MARCH 31, JANUARY 31,
1997 1998
--------- -----------
<S> <C> <C>
6% note; principal and interest payable annually;
matures April 30, 2001.............................. $25,000 $20,000
Less: current portion................................ 5,000 5,000
------- -------
$20,000 $15,000
======= =======
</TABLE>
Principal payments under notes payable are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
-----------
<S> <C>
1998.............................................................. $ 5,000
1999.............................................................. 5,000
2000.............................................................. 5,000
2001.............................................................. 5,000
-------
Total........................................................... $20,000
=======
</TABLE>
NOTE 6--COMMITMENTS:
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through April 30, 2000. Rent
expense for the ten months ended January 31, 1998 and 1997, and March 31, 1997
was $18,000, $9,000 (unaudited) and $10,000, respectively. The terms of the
facility lease provide for rental payments on a graduated scale. The Company
recognizes rent expense on a straight-line basis over the lease period, and has
accrued for rent expense incurred but not paid.
Future minimum lease payments under noncancelable operating leases as of
January 31, 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
MARCH 31, LEASES
---------- ---------
<S> <C>
1998............................................................ $ 7,000
1999............................................................ 42,000
2000............................................................ 41,000
2001............................................................ 10,000
--------
Total minimum lease payments.................................. $100,000
========
</TABLE>
NOTE 7--COMMON STOCK:
The Company's Articles of Incorporation authorize the Company to issue 10,000
shares of no par value Common Stock. At January 31, 1998 and March 31, 1997,
5,600 shares were outstanding. All outstanding shares are held by an officer of
the Company.
NOTE 8--SUBSEQUENT EVENTS:
On March 27, 1998 the Company was acquired by USWeb Corporation ("USWeb")
whereby all of the Company's outstanding shares of Common Stock were exchanged
for 73,624 shares of USWeb Common Stock, at which time the Company became a
wholly owned subsidiary of USWeb.
F-217
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Ensemble Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Ensemble Corporation at December
31, 1997, and the results of its operations and its cash flows for the year in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
March 27, 1998
F-218
<PAGE>
ENSEMBLE CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 536,000
Accounts receivable, net......................................... 1,291,000
Inventory........................................................ 17,000
Shareholder loan................................................. 58,000
Prepaid expenses and other current assets........................ 9,000
----------
Total current assets........................................... 1,911,000
Property and equipment, net........................................ 549,000
Other assets....................................................... 20,000
----------
$2,480,000
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable..................................................... $ 10,000
Accounts payable................................................. 133,000
Accrued liabilities and taxes payable............................ 245,000
Unearned revenues................................................ 73,000
Capital lease obligations, current portion....................... 171,000
----------
Total current liabilities...................................... 632,000
Long-term liabilities:
Deferred taxes liabilities....................................... 332,000
Capital lease obligation, non-current............................ 223,000
----------
Total liabilities.............................................. 1,187,000
----------
Shareholders' equity:
Common Stock: $.001 par value, 10,000,000 shares authorized,
2,625,000 shares issued and outstanding at December 31, 1997 3,000
Additional paid-in-capital....................................... 72,000
Retained earnings................................................ 1,218,000
----------
Total shareholders' equity..................................... 1,293,000
----------
$2,480,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-219
<PAGE>
ENSEMBLE CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Net revenues....................................................... $6,745,000
Cost of net revenues............................................... 4,408,000
----------
Gross profit..................................................... 2,337,000
----------
Operating expenses:
Marketing, sales and support..................................... 590,000
General and administrative....................................... 951,000
----------
Total operating expenses....................................... 1,541,000
----------
Income from operations............................................. 796,000
Interest income.................................................... 12,000
Interest expense................................................... (28,000)
----------
Income before income taxes......................................... 780,000
Provision for income taxes......................................... (298,000)
----------
Net income......................................................... $ 482,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-220
<PAGE>
ENSEMBLE CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996..................... 2,625,000 $3,000 $72,000 $ 736,000 $ 811,000
Net income................ 482,000 482,000
--------- ------ ------- ---------- ----------
Balance at December 31,
1997..................... 2,625,000 $3,000 $72,000 $1,218,000 $1,293,000
========= ====== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-221
<PAGE>
ENSEMBLE CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 482,000
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization................................... 204,000
Changes in assets and liabilities:
Accounts receivable............................................ (714,000)
Inventory...................................................... (9,000)
Prepaid expenses and other current assets...................... 78,000
Other assets................................................... (2,000)
Accounts payable............................................... (32,000)
Accrued liabilities and other payables......................... (53,000)
Unearned revenues.............................................. 73,000
Deferred tax liabilities....................................... 215,000
---------
Net cash provided by operating activities..................... 242,000
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................... (128,000)
---------
Net cash used in investing activities......................... (128,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable........................................ (11,000)
Repayment of shareholder......................................... 2,000
Principal payment on capital lease obligation.................... (134,000)
---------
Net cash used in financing activities......................... (143,000)
---------
Net decrease in cash and cash equivalents......................... (29,000)
Cash and cash equivalents at beginning of year.................... 564,000
---------
Cash and cash equivalents at end of year.......................... $ 535,000
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................... $ 24,000
=========
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING ACTIVITIES:
Acquisition of equipment under capitalized leases................ $ 246,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-222
<PAGE>
ENSEMBLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Ensemble Corporation (the "Company") was incorporated in 1991 in Texas. The
Company provides technology services in the South Central United States in the
areas of client/server applications, Internet/Intranet design and
implementations, back-office network and infrastructure implementations and
business technology planning.
The Company also recognizes revenues from Internet access, third-parties
software and hardware purchased and resold to clients. However, revenues from
such activities have been immaterial to date.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue recognition
The Company derives most of its revenues from consulting agreements. Service
revenues from fixed-price agreements are recognized over the period of each
engagement under the percentage-of-completion method using labor hours incurred
as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Revenues from time-and-materials agreements are recognized and billed as the
services are provided. Unearned revenues represent the amount of revenues
received in advance of services being performed.
Cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
deposits cash and cash equivalents with high credit quality financial
institutions.
Concentration of credit risk
Financial instruments that potentially subject the Company to a concentration
of credit risk consist of cash, cash equivalents and accounts receivable. The
Company limits its exposure to credit loss by depositing its cash and cash
equivalents with high credit quality financial institutions. The Company's
accounts receivable are derived from revenue earned from customers located in
the U.S. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral. The Company
maintains an allowance for doubtful accounts receivable based upon their
expected collectibility. The following customers accounted for more than 10% of
total accounts receivable at December 31, 1997:
<TABLE>
<S> <C>
Company A................................................................ 19%
Company B................................................................ 13%
Company C................................................................ 11%
</TABLE>
Customer D accounted for 17% of total net revenues for the year ended
December 31, 1997.
The Company has also established a number of strategic relationships with
leading software companies including Microsoft and Borland. The loss of any of
these strategic relationships would deprive the Company of the opportunity to
gain early access to leading-edge technology and to cross-sell additional
services.
F-223
<PAGE>
ENSEMBLE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventory
Inventory includes hardware and software to be resold and is stated at the
lower of cost or market, cost being determined using the first-in, first-out
(FIFO) method. A reserve for excess or obsolete inventory is recorded when
quantities on hand exceed customer's requirements.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with
the disclosure provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation ("SFAS No. 123").
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
three years.
Income taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets is
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rate are not anticipated. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Fair value of financial instruments
The Company's financial instruments, including accounts receivable,
shareholder loan, notes and accounts payable, and capital lease obligations
have carrying amounts which approximate fair value due to the relatively short
maturity of these instruments.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
PROPERTY AND EQUIPMENT, NET:
Computer equipment............................................ $ 157,000
Furniture and fixtures........................................ 177,000
Property and equipment acquired under capital leases.......... 607,000
Leasehold improvements........................................ 38,000
---------
979,000
Less: Accumulated depreciation and amortization............... (430,000)
---------
$ 549,000
=========
</TABLE>
F-224
<PAGE>
ENSEMBLE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--RELATED PARTY TRANSACTIONS:
The Company internally developed certain computer game software beginning in
1994 through April 1996. In February 1996, a license agreement was executed
between the Company and Ensemble Studios Corporation, an affiliate of the
Company, for the exclusive use of the subject software by Ensemble Studios
Corporation. The entire fee of $265,000 received under this agreement was
recorded as revenue in 1996. In addition, during the year ended December 31,
1997, there were employees of Ensemble Studios Corporation who were on the
Company's payroll. The related expenses for these employees were reimbursed by
Ensemble Studios Corporation. Effective September 1997, these employees were
transferred to the payroll of Ensemble Studios Corporation.
In August 1996, the Company issued loans to two shareholders for $29,000
each. Interest is charged on the outstanding balance at 8% per annum and total
accrued interest for the year ended December 31, 1997 was $3,000. The maturity
date for these loans is August 1998. Under the Stock Purchase Agreement, dated
August 1996, both shareholders were issued 162,500 shares of Common Stock in
lieu of cash.
NOTE 4--INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Current tax expense:
Federal....................................................... $ 73,000
State......................................................... 10,000
--------
83,000
--------
Deferred tax expense:
Federal....................................................... 189,000
State......................................................... 26,000
--------
215,000
--------
$298,000
========
</TABLE>
Deferred tax liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Depreciation.................................................... $ 3,000
Reserves and accruals........................................... 299,000
--------
$302,000
========
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory income tax rate to pre-tax
income as follows:
<TABLE>
<S> <C>
Federal statutory rate................................................. 34.0%
State tax, net of federal impact....................................... 3.0%
Other.................................................................. 1.2%
-----
38.2%
=====
</TABLE>
F-225
<PAGE>
ENSEMBLE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5--BORROWINGS:
Line of credit
In January 1997, the Company entered into a line-of-credit agreement with a
bank, under which the bank committed to loan the Company up to $500,000.
Borrowings under the line bear interest at 1.5% over the bank's prime rate, and
are secured by eligible accounts receivable, as defined in the agreement. The
line of credit expired on January 6, 1998. As of December 31, 1997, there is no
balance outstanding under the line of credit.
Note payable
At December 31, 1997, the Company has a note payable to a bank which is
secured by computer equipment. The note bears interest at 2.0% over the bank's
prime rate and matures on January 2, 1999.
NOTE 6--COMMITMENTS:
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through 2005. Rent expense for
the year ended December 31, 1997 was $325,000. The terms of the facility lease
provide for rental payments on a graduated scale. The Company recognizes rent
expense on a straight-line basis over the lease period, and has accrued for
rent expense incurred but not paid.
Future minimum lease payments under noncancelable operating and capital
leases, including lease commitments entered into subsequent to December 31,
1997, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ -------- ----------
<S> <C> <C>
1998.................................................... $239,000 $ 331,000
1999.................................................... 150,000 458,000
2000.................................................... 59,000 532,000
2001.................................................... 23,000 578,000
2002.................................................... 7,000 605,000
Thereafter.............................................. -- 1,419,000
-------- ----------
Total minimum lease payments............................ 478,000 $3,923,000
==========
Less amount representing interest....................... (84,000)
--------
Present value of capitalized lease obligations.......... 394,000
Less current portion.................................... (171,000)
--------
Long term portion of capitalized lease obligations...... $223,000
========
</TABLE>
NOTE 7--STOCK OPTIONS:
In 1996, the Company adopted the Ensemble Corporation, Inc. Stock Option Plan
(the "Plan"). The Plan provides for the granting of stock options to employees
and consultants of the Company. Options granted under the Plan are nonqualified
stock options.
The plan is administered by the Board of Directors of the Company. Options
are granted at the discretion of the Board of Directors at option prices not
less than fair market value, as determined by the Board of Directors, at the
date of grant.
F-226
<PAGE>
ENSEMBLE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-
Based Compensation." The information set forth below represents pro forma net
income as if the Company had accounted for its employee stock options under the
fair value method as prescribed by SFAS No. 123.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997: no dividend yield, expected volatility of
0%, a risk-free interest rate of 6% and an expected life of five years for each
nonqualified stock option.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The pro
forma information for the Company is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Net income:
As reported................................................... $482,149
========
Pro forma..................................................... $463,319
========
</TABLE>
Stock options activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Outstanding at December 31, 1996............................ -- --
Granted................................................... 185,446 $1.56
Exercised................................................. -- --
Canceled.................................................. -- --
-------
Outstanding at December 31, 1997............................ 185,446 $1.56
=======
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable under the Plan as of December 31, 1997.
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------- -----------
<S> <C> <C>
Number of options................................... 185,446 46,362
Exercise price...................................... $ 1.56 $ 1.56
Weighted average continuing contractual life in
years.............................................. 4 4
Weighted average exercise price..................... $ 1.56 $ 1.56
</TABLE>
NOTE 8--EMPLOYEE BENEFIT PLANS:
The Company sponsors a 401(k) defined contribution plan covering all
employees. Contributions made by the Company are determined annually by the
Board of Directors. No employer contributions were made under this plan as of
December 31, 1997.
NOTE 9--SUBSEQUENT EVENTS:
The Company has renegotiated its lease agreements for office space effective
March 31, 1998. The future minimum lease payments under these agreements are
included in Note 6.
On March 27, 1998, the Company was acquired by USWeb Corporation ("USWeb")
whereby all of the Company's outstanding shares of Common Stock were exchanged
for 543,678 shares of USWeb Common Stock, at which time the Company became a
wholly owned subsidiary of USWeb.
F-227
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ikonic Interactive, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Ikonic Interactive, Inc. at
October 31, 1997 and January 31, 1998 and the results of their operations and
their cash flows for the year ended October 31, 1997 and the three months ended
January 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
April 15, 1998
F-228
<PAGE>
IKONIC INTERACTIVE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 454,000 $ 97,000
Accounts receivable................................ 521,000 1,078,000
Costs in excess of billings........................ 168,000 267,000
Other current assets............................... 12,000 19,000
----------- -----------
Total current assets............................. 1,155,000 1,461,000
Property and equipment, net.......................... 829,000 736,000
Other assets......................................... 94,000 94,000
----------- -----------
$ 2,078,000 $ 2,291,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................... $ 273,000 $ 195,000
Accrued expenses................................... 385,000 256,000
Deferred revenue................................... 96,000 521,000
Capital lease obligations, current portion......... 273,000 269,000
Loans payable...................................... 575,000 575,000
----------- -----------
Total current liabilities........................ 1,602,000 1,816,000
Capital lease obligations, long-term portion......... 206,000 148,000
Other liabilities.................................... 88,000 88,000
----------- -----------
1,896,000 2,052,000
----------- -----------
Commitments (Note 5)
Mandatorily Redeemable Convertible Preferred Stock... 3,517,000 3,587,000
----------- -----------
Shareholders' deficit:
Common stock, no par value; 50,000,000 shares au-
thorized; 10,917,800 and 10,922,800 shares issued
and outstanding................................... 257,000 258,000
Accretion of Preferred Stock to redemption value... (528,000) (598,000)
Accumulated deficit................................ (3,064,000) (3,008,000)
----------- -----------
Total shareholders' deficit...................... (3,335,000) (3,348,000)
----------- -----------
$ 2,078,000 $ 2,291,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-229
<PAGE>
IKONIC INTERACTIVE, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JANUARY 31,
OCTOBER 31, ----------------------
1997 1997 1998
----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues................................... $10,236,000 $2,283,000 $1,942,000
Cost of revenues........................... 5,915,000 1,257,000 942,000
----------- ---------- ----------
Gross profit............................. 4,321,000 1,026,000 1,000,000
----------- ---------- ----------
Operating expenses:
General and administrative............... 2,588,000 538,000 507,000
Marketing, sales and support............. 1,989,000 400,000 359,000
Research and development................. 149,000 21,000 45,000
----------- ---------- ----------
Total operating expenses............... 4,726,000 959,000 911,000
----------- ---------- ----------
Net income (loss) from operations.......... (405,000) 67,000 89,000
Interest expense, net...................... 132,000 34,000 33,000
----------- ---------- ----------
Net income (loss).......................... $ (537,000) $ 33,000 $ 56,000
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-230
<PAGE>
IKONIC INTERACTIVE, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ACCRETION OF
PREFERRED
COMMON STOCK STOCK TO TOTAL
------------------- REDEMPTION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT VALUE DEFICIT DEFICIT
---------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at October 31,
1996................... 10,908,250 $254,000 $(267,000) $(2,527,000) $(2,540,000)
Accretion of Preferred
Stock to redemption
value.................. -- -- (261,000) -- (261,000)
Issuance of Common
Stock.................. 9,550 3,000 -- -- 3,000
Net loss................ -- -- -- (537,000) (537,000)
---------- -------- --------- ----------- -----------
Balance at October 31,
1997................... 10,917,800 257,000 (528,000) (3,064,000) (3,335,000)
Accretion of Preferred
Stock to redemption
value.................. -- -- (70,000) -- (70,000)
Issuance of Common
Stock.................. 5,000 1,000 -- -- 1,000
Net income.............. -- -- -- 56,000 56,000
---------- -------- --------- ----------- -----------
Balance at January 31,
1998................... 10,922,800 $258,000 $(598,000) $(3,008,000) $(3,348,000)
========== ======== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-231
<PAGE>
IKONIC INTERACTIVE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JANUARY 31,
OCTOBER 31, ---------------------
1997 1997 1998
----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $(537,000) $ 33,000 $ 56,000
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operat-
ing activities:
Depreciation.............................. 476,000 123,000 112,000
Changes in assets and liabilities:
Accounts receivable...................... 608,000 310,000 (557,000)
Costs in excess of billings.............. 63,000 122,000 (99,000)
Other current assets..................... 32,000 (70,000) (7,000)
Accounts payable......................... (319,000) (255,000) (78,000)
Accrued expenses......................... 342,000 (52,000) (129,000)
Deferred revenue......................... (198,000) 168,000 425,000
Other assets............................. (15,000) (33,000) --
Other liabilities........................ 32,000 -- --
--------- --------- ---------
Net cash provided by (used in) operating
activities............................. 484,000 346,000 (277,000)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment...... (203,000) (6,000) (19,000)
--------- --------- ---------
Net cash used in investing activities... (203,000) (6,000) (19,000)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obliga-
tions..................................... (178,000) (60,000) (62,000)
Borrowings under line of credit............ 309,000 14,000 --
Proceeds from issuance of Common Stock..... 3,000 -- 1,000
--------- --------- ---------
Net cash provided by (used in) financing
activities............................. 134,000 (46,000) (61,000)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................ 415,000 294,000 (357,000)
Cash and cash equivalents, beginning of pe-
riod....................................... 39,000 39,000 454,000
--------- --------- ---------
Cash and cash equivalents, end of period.... $ 454,000 $ 333,000 $ 97,000
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFOR-
MATION:
Interest paid.............................. $ 142,000 $ 37,000 $ 35,000
========= ========= =========
Accretion of Preferred Stock to redemption
value..................................... $ 261,000 $ 65,000 $ 70,000
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-232
<PAGE>
IKONIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Ikonic Interactive, Inc. (the "Company"), was incorporated in California as
Destinations Video, Inc. in September 1985 and was renamed Ikonic Interactive,
Inc. in May 1994. The Company provides Internet development services. The
Company's activities to date have consisted of user interface design, content
creation, software development and business/technical consulting to customers
located in North America.
Use of estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as revenues and expenses reported for the periods presented. The Company
regularly evaluates these estimates, and while actual results may differ,
management believes that these estimates are reasonable.
Revenue recognition
Revenue on long-term fixed-price contracts is generally recorded using the
percentage-of-completion method. Under the percentage-of-completion method,
revenue on contracts is recognized based on labor hours incurred as the measure
towards completion. Earned but unbilled revenues are classified under current
assets as costs in excess of billings. Billings in excess of revenues
recognized are classified under current liabilities as deferred revenue.
Provisions for losses are recognized on uncompleted contracts when they become
known. Revisions in costs and profit estimates are reflected in the accounting
period in which the facts which require the revisions become known. Under the
time-and-materials contracts, revenue is recognized based on agreed-upon
individual hourly rates for time incurred on the project during the period plus
any materials used and charged against the project. Sales of other services are
recorded as revenue when such services are rendered.
Cash and cash equivalents
Cash and cash equivalents consist of cash and investments in a money market
fund maintained at one financial institution. The Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
Fair value of financial instruments
The carrying amounts for cash, accounts receivable, accounts payable, accrued
liabilities and loans payable approximate their respective fair values because
of the short term maturity of these items. The carrying value of the Company's
notes payable approximates fair market value.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and trade accounts receivable. The Company places its cash primarily in
checking and money market accounts with high quality financial institutions.
F-233
<PAGE>
IKONIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company performs ongoing credit evaluations of its customers' financial
condition. The Company has not experienced significant credit losses to date.
The following customers accounted for 10% or more of the Company's total
revenues or accounts receivable for the period indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JANUARY 31,
OCTOBER 31, ---------------
1997 1997 1998
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Customer A.................................... 17% 17% --
Customer B.................................... 10% 13% --
Customer C.................................... 10% -- --
Customer D.................................... -- 16% --
Customer E.................................... -- 15% --
Customer F.................................... -- 12% --
Customer G.................................... -- 11% --
Customer H.................................... -- -- 11%
Customer I.................................... -- -- 10%
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
Accounts receivable:
Customer C......................................... 11% --
Customer E......................................... 13% 16%
Customer I......................................... -- 19%
</TABLE>
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed on the
straight-line basis over the estimated useful lives of the respective assets
which range from three to seven years.
Income taxes
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred income tax assets and
liabilities are determined based on the differences between the financial
reporting and tax bases of assets and liabilities, and are measured using the
currently enacted tax rates and laws, as well as the expected future tax
benefit to be derived from tax loss and tax credit carryforwards. Valuation
allowances are established for deferred tax assets when it is considered more
likely than not that some portion or all of the deferred tax assets will not be
realized.
Stock compensation
The Company accounts for its stock-based compensation plans in accordance
with provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and complies with the disclosure provisions of
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation," ("FAS 123"). If the accounting recognition provisions of FAS 123
had been adopted, the effect on the Company's reported net income (loss) would
have been immaterial.
Interim financial information
The accompanying interim financial statements for the three months ended
January 31, 1997 are unaudited. In the opinion of management, the unaudited
interim financial statements have been prepared
F-234
<PAGE>
IKONIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
on the same basis as the annual financial statements, and reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the results of the Company's operations and its cash flows for
the three months ended January 31, 1997. The financial data and other
information disclosed in these notes to financial statements related to this
period are unaudited.
NOTE 2--PROPERTY AND EQUIPMENT:
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
Computer hardware and software..................... $1,287,000 $1,299,000
Furniture and fixtures............................. 222,000 222,000
Equipment.......................................... 260,000 267,000
---------- ----------
1,769,000 1,788,000
Less: Accumulated depreciation..................... (940,000) (1,052,000)
---------- ----------
$ 829,000 $ 736,000
========== ==========
</TABLE>
NOTE 3--INCOME TAXES:
No provision (benefit) for income taxes has been recognized for the year
ended October 31, 1997 and three months ended January 31, 1997 (unaudited) and
1998, as the Company incurred net losses for income tax purposes and has no
carryback potential.
Deferred tax assets of approximately $858,000 at January 31, 1998, consist
primarily of federal and state net operating loss carryforwards. Based on a
number of factors, including the lack of a history of profits and the fact that
the Company competes in a developing market that is characterized by rapidly
changing technology, management believes that there is sufficient uncertainty
regarding the realization of deferred tax assets such that a full valuation
allowance has been provided.
At January 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $774,000 and $84,000, respectively, available to
reduce future taxable income, which expire in varying amounts through 2013. The
Company's ability to utilizes net operating loss carryforwards and tax credits
are subject to limitations as set forth in applicable federal and state tax
laws. As specified in the Internal Revenue Code, an ownership change of more
than 50% by a combination of the Company's significant stockholders during any
three-year period would result in certain limitations on the Company's ability
to utilize its net operating loss and credit carryforwards.
NOTE 4--LINE OF CREDIT
During 1996, the Company secured a credit agreement with a commercial lending
institution. The agreement allows the Company to borrow up to the lesser of
$750,000 or 75% of the Company's domestic accounts receivable plus 50% of
foreign accounts receivable at the bank's prime lending rate plus 1%. At
January 31, 1998, the prime rate was 10%. The credit agreement is secured by
the assets of the Company. This agreements requires that the Company comply
with certain financial covenants including minimum tangible net worth and
minimum quick ratio.
As of January 31, 1998, the Company had drawn $575,000 on this credit
agreement. The outstanding balance under this line of credit was repaid by
USWeb Corporation ("USWeb") upon completion of its acquisition of the Company
(Note 9).
F-235
<PAGE>
IKONIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5--LEASES AND COMMITMENTS:
Capital lease obligations
The Company is obligated under various non-cancelable operating and capital
leases for office space and certain property and equipment which expire in
2001. Future minimum lease payments under these leases at January 31, 1998 are
as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- --------
<S> <C> <C>
Year ending October 31,
1998.................................................. $ 320,000 $251,000
1999.................................................. 397,000 186,000
2000.................................................. 467,000 40,000
2001.................................................. 311,000 --
---------- --------
Total minimum payments................................ $1,495,000 477,000
==========
Less amount representing interest..................... (60,000)
--------
Present value of minimum lease obligations............ 417,000
Less current portion.................................. 269,000
--------
Lease obligation, long-term........................... $148,000
========
</TABLE>
Rent expense totaled $353,000, $88,000 and $103,000 for the year ended
October 31, 1997 and for three months ended January 31, 1997 (unaudited) and
1998, respectively. At October 31, 1997 and January 31, 1998, fixed assets
recorded by the Company under capital leases totaled $909,000 and $916,000,
respectively.
NOTE 6--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company has authorized 15,000,000 shares of Mandatorily Redeemable
Convertible Preferred Stock ("Preferred Stock"); 5,000,000 shares are
designated Series A Preferred Stock and 5,000,000 shares are designated Series
B Preferred Stock. As of January 31, 1998, there were 2,694,295 shares of
Series A Preferred Stock and 3,665,960 shares of Series B Preferred Stock
issued and outstanding.
Unless the consent of a majority of the holders of the outstanding shares of
Preferred Stock is obtained, the Company may not pay or declare a cash
dividend, nor may any other distribution be made on any equity security of the
Company.
Holders of Preferred Stock receive one vote for each common share into which
such shares of Preferred Stock are convertible. Each share of Series A and
Series B Preferred Stock has a liquidation preference equal to its original
issue price plus an amount equal to 8% of the original issue price for such
share of Preferred Stock compounded per annum from the date of issue plus any
declared but unpaid dividends. Thereafter, the holders of the Common Stock of
the Company receive all remaining assets of the Company. On April 15, 1998, the
Company reached an agreement to be acquired (Note 9). At that time, the
Company's Mandatorily Redeemable Convertible Preferred Stock was converted into
6,360,255 shares of Common Stock.
NOTE 7--STOCK OPTION PLAN:
In 1993, the Company adopted the 1993 Equity Incentive Plan (the "Plan"). The
Plan provides for the issuance of stock options to purchase 3,166,095 shares of
the Company's Common Stock to employees, directors of and consultants to the
Company. The Plan authorizes the grant of incentive stock options,
F-236
<PAGE>
IKONIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
nonstatutory stock options, stock bonuses, and sales of restricted stock. The
exercise price of incentive stock options may not be less than the fair value
of the stock at the date of the grant, as determined by the Board of Directors.
The exercise price for nonstatutory stock options, stock bonuses, and sale of
restricted stock may not be less than 85% of the fair market value of the stock
at the date of the grant, as determined by the Board of Directors. The vesting
provisions of individual options may vary, but at a minimum provide for vesting
at the rate of 20% per year over five years from the date the stock option is
granted. The term of the Plan is for ten years unless terminated sooner by the
Board of Directors as provided for in the Plan agreement.
The following table summarizes the option activity for the year ended October
31, 1997 and the three months ended January 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
OCTOBER 31, 1997 JANUARY 31, 1998
--------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of the period.......... 2,149,245 $0.23 2,494,800 $0.25
Granted................. 1,499,500 $0.30 29,500 $0.50
Exercised............... (9,550) $0.30 (5,000) $0.30
Canceled................ (1,144,395) $0.28 (407,250) $0.28
----------- ----------
Outstanding at end of
period................. 2,494,800 $0.25 2,112,050 $0.25
----------- ----------
Weighted-average minimum
value of options grant-
ed..................... $ 0.06 $ 0.11
=========== ==========
</TABLE>
The weighted average remaining contractual life of options outstanding at
January 31, 1998 was 8.8 years. At January 31, 1998, 898,508 options were
exercisable at exercise prices ranging from $0.20-0.30.
NOTE 8--SAVINGS PLAN:
In 1994, the Company began sponsoring a defined contribution 401(k) plan (the
"401(k) Plan") which covers substantially all of its employees after they have
completed six months of service. Under the 401(k) Plan, the Company makes
discretionary matching contributions equal to a percentage of the salary
reduction elected by the employee. The percentage matching contribution is
determined each year by the Company, not to exceed the permissible legal
maximum. During 1997, the Company made no contributions to the 401(k) Plan.
NOTE 9--SUBSEQUENT EVENTS
On April 15, 1998, the Company reached an agreement with USWeb whereby USWeb
will acquire all of the Company's outstanding Common Stock in exchange for
498,457 shares of Common Stock of USWeb.
F-237
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of USWeb San Jose
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholder's equity and of cash flows present fairly, in all
material respects, the financial position of USWeb San Jose at December 31,
1997, and the results of its operations and its cash flows for the year in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, at December
31, 1997 the Company has negative working capital and cash and available credit
may not be sufficient to fund the company's operations for next year, which
raises substantial doubt about its ability to continue as a going concern.
Management's plans regarding this matter are also described in Note 1. These
financial statements do not include any adjustments that might result from this
uncertainty.
PRICE WATERHOUSE LLP
San Jose, California
March 26, 1998
F-238
<PAGE>
USWEB SAN JOSE
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 19,000 $ 2,000
Accounts receivable (net of allowance of
$29,000)........................................ 146,000 118,000
Account receivable--related parties.............. 81,000 80,000
Other current assets............................. 2,000 --
-------- --------
Total current assets........................... 248,000 200,000
Property and equipment, net........................ 119,000 114,000
-------- --------
$367,000 $314,000
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................. $110,000 $ 80,000
Accounts payable--related parties................ 181,000 250,000
Accrued expenses................................. 23,000 24,000
-------- --------
Total current liabilities...................... 314,000 354,000
-------- --------
Commitments (Note 5)
Shareholder's equity:
Common Stock, no par value, 10,000,000 shares au-
thorized;
500,000 shares issued and outstanding........... 50,000 50,000
Retained earnings................................ 3,000 (90,000)
-------- --------
Total shareholder's equity (deficit)........... 53,000 (40,000)
-------- --------
$367,000 $314,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-239
<PAGE>
USWEB SAN JOSE
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1997 1997 1998
------------ ------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Third parties............................... $394,000 $ 61,000 $178,000
Related parties............................. 417,000 15,000 58,000
-------- -------- ---------
Total revenues............................ 811,000 76,000 236,000
-------- -------- ---------
Cost of revenues:
Third parties............................... 198,000 38,000 173,000
Related parties............................. 209,000 9,000 57,000
-------- -------- ---------
Total cost of sales....................... 407,000 47,000 230,000
-------- -------- ---------
Gross profit.............................. 404,000 29,000 6,000
Operating expenses:
Selling, general and administrative......... 395,000 24,000 99,000
-------- -------- ---------
Net income (loss)............................. $ 9,000 $ 5,000 $ (93,000)
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-240
<PAGE>
USWEB SAN JOSE
STATEMENT OF SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- RETAINED SHAREHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------- ------- -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996............ -- $ -- $ (6,000) $ (6,000)
Issuance of Common Stock................ 500,000 50,000 -- 50,000
Net income.............................. -- -- 9,000 9,000
------- ------- -------- --------
Balance at December 31, 1997............ 500,000 50,000 3,000 53,000
Net loss (unaudited).................... -- -- (93,000) (93,000)
------- ------- -------- --------
Balance at March 31, 1998 (unaudited)... 500,000 $50,000 $(90,000) $(40,000)
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-241
<PAGE>
USWEB SAN JOSE
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1997 1997 1998
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ 9,000 $ 5,000 $ (93,000)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............. 10,000 3,000 5,000
Changes in assets and liabilities:
Accounts receivable...................... (146,000) (50,000) 28,000
Accounts receivable--related parties..... (81,000) -- 1,000
Other current assets..................... (2,000) (2,000) 2,000
Accounts payable......................... 95,000 5,000 (30,000)
Accounts payable--related parties........ 198,000 43,000 69,000
Accrued expenses......................... 16,000 1,000 1,000
--------- -------- ---------
Net cash provided by operating activi-
ties................................... 99,000 5,000 (17,000)
--------- -------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE ACQUISITION OF PROPERTY AND EQUIPMENT... (104,000) (29,000) --
--------- -------- ---------
Net decrease in cash and cash equivalents.... (5,000) (24,000) (17,000)
Cash and cash equivalents, beginning at peri-
od.......................................... 24,000 24,000 19,000
--------- -------- ---------
Cash and cash equivalents, end of period..... $ 19,000 $ -- $ 2,000
========= ======== =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSAC-
TIONS:
Issuance of Common Stock in exchange for net
assets (Note 6)............................ $ 50,000 $ -- $ --
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-242
<PAGE>
USWEB SAN JOSE
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb San Jose (the "Company") operated as a division of Virtual Valley, Inc.
("Virtual Valley"), which is a wholly-owned subsidiary of Metro Publishing,
Inc. (the "Parent"), until July 16, 1997, at which date the Company was
incorporated as a separate legal entity in California. The Company specializes
in electronic marketing on the Internet and is a full-service developer of
Internet and intranet sites, offering services in four areas: website design,
hosting, promotion and training.
During June 1996, the Company entered into a franchise agreement with USWeb
Corporation ("USWeb") to be a part of USWeb's Affiliate network. The
relationship with USWeb provided for increased marketing presence, technical
support and centralized hosting facilities.
Use of estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage-of-completion method using labor hours
incurred as the measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Unearned revenues represent the amount of revenues invoiced in advance of
services being performed. Revenues from time-and-materials agreements and
hosting services are recognized and billed as the services are provided.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
Significant customers
During the year ended December 31, 1997, sales to one customer accounted for
43% of third party revenues. At December 31, 1997, approximately 65%, 17% and
10% of third party accounts receivable were due from three customers,
respectively.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
five years.
Advertising Costs
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising costs for the year
ended December 31, 1997 totaled $136,000.
F-243
<PAGE>
USWEB SAN JOSE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets is
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Fair value of financial instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable and accrued expenses, have carrying amounts which
approximate fair value due to the relatively short maturity of these
instruments.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment, net:
Computers and equipment........................... $ 97,000 $ 97,000
Furniture and fixtures............................ 35,000 35,000
-------- --------
132,000 132,000
Less: Accumulated depreciation.................... (13,000) (18,000)
-------- --------
$119,000 $114,000
======== ========
</TABLE>
NOTE 3--TRANSACTIONS WITH RELATED PARTIES:
During the year ended December 31, 1997, the Company recorded $417,000 in
revenues from related parties and $209,000 in cost of revenues for services
performed for the Parent and its subsidiaries, of which $81,000 is included in
related party accounts receivable at December 31, 1997. The terms of these
transactions are consistent with those of third parties.
During the year ended December 31, 1997, the Parent charged the Company
$66,000 for its pro rata share of insurance premiums, rent and administrative
costs, such as accounting and legal services. Management believes that the
methodologies used to allocate these charges are reasonable. In addition, the
Parent charged the Company $129,000 in advertisement fees for the year ended
December 31, 1997.
As of December 31, 1997, the Company had $181,000 in accounts payable to
related parties. This amount consists of $139,000 due to Virtual Valley for
payroll related expenses paid by Virtual Valley on the Company's behalf and
$42,000 due to the Parent for costs and services charged to the Company as
described above.
NOTE 4--INCOME TAXES:
Income tax expense for the year ended December 31, 1997 was not material. The
Company had no significant deferred tax assets or liabilities at December 31,
1997.
F-244
<PAGE>
USWEB SAN JOSE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5--COMMITMENTS AND CONTINGENCIES:
Royalties
Under the terms of its franchise agreement with USWeb, the Company is
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties for the year ended December 31,
1997 totaled $60,000 and are included in cost of revenues.
Operating leases
The Company leases office space under a noncancelable operating lease which
expires in 1999. Rent expense for the year ended December 31, 1997 totaled
$16,000.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDED DECEMBER 31, LEASES
----------------------- ---------
<S> <C>
1998.............................................................. $38,000
1999.............................................................. 19,000
-------
Total minimum lease payments.................................... $57,000
=======
</TABLE>
NOTE 6--COMMON STOCK:
The Company's Articles of Incorporation authorize the Company to issue
10,000,000 shares of Common Stock. On July 16, 1997, the Company issued 500,000
shares of Common Stock to Virtual Valley, Inc. in exchange for the net assets
of its USWeb San Jose division, which had a net book value of $50,000 on that
date.
F-245
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Gray Peak Technologies, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Gray Peak
Technologies, Inc. (the "Company") at December 31, 1997 and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Stamford, Connecticut
April 17, 1998
F-246
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 7,715 $ 5,355
Accounts receivable, net of allowance for doubtful
accounts of $29................................... 1,346 1,717
Prepaid expenses and other assets.................. 136 173
------- -------
Total current assets............................. 9,197 7,245
Fixed assets, net (Note 3)........................... 715 1,200
Officer loans........................................ 36 70
------- -------
$ 9,948 $ 8,515
======= =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................... $ 633 $ 540
Accrued expenses................................... 527 572
Deferred revenue................................... -- 136
Income taxes payable............................... 20 --
Current portion of capital leases payable.......... 11 11
------- -------
Total current liabilities........................ 1,191 1,259
Capital leases payable............................... 26 24
------- -------
1,217 1,283
------- -------
Commitments (Note 10)
Mandatorily Redeemable Series B Convertible Preferred
Stock ($0.01 par value; 4,500,000 shares authorized;
4,117,500 shares issued and outstanding;
recorded at liquidation preference) ................ 8,235 8,235
Stockholders' equity:
Series A Convertible Preferred Stock ($0.01 par
value; 2,525,000 shares authorized, issued and
outstanding; liquidation preference of $2,525).... 25 25
Common Stock ($0.01 par value; 16,000,000 shares
authorized,
2,000,000 shares issued and outstanding).......... 20 20
Additional paid-in capital......................... 2,393 2,385
Accumulated deficit................................ (1,942) (3,433)
------- -------
Total stockholders' equity (deficit)............. 496 (1,003)
------- -------
$ 9,948 $ 8,515
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-247
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------
1997 1997 1998
------------ ---- -------
(UNAUDITED)
<S> <C> <C> <C>
Revenues, net........................................ $ 2,532 $138 $ 1,816
Operating expenses:
Professional personnel............................. 1,880 58 1,384
Sales and marketing................................ 559 8 571
General and administrative......................... 1,253 29 803
Other costs........................................ 848 -- 622
------- ---- -------
Total operating costs............................ 4,540 95 3,380
------- ---- -------
(Loss) income from operations........................ (2,008) 43 (1,564)
Interest income and other, net....................... 86 -- 73
------- ---- -------
(Loss) income before income taxes.................... (1,922) 43 (1,491)
Provision for income taxes........................... 20 -- --
------- ---- -------
Net (loss) income.................................... $(1,942) $ 43 $(1,491)
======= ==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-248
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
---------------- ---------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------ --------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... -- -- -- -- -- -- --
Issuance of Common
Stock.................. -- -- 2,000,000 $ 20 $ 30 -- $ 50
Issuance of Series A
Convertible Preferred
Stock and warrants, net
of issuance costs...... 2,525,000 $ 25 -- -- 2,448 -- 2,473
Expenses related to
issuance of Series B
Convertible Preferred
Stock.................. -- -- -- -- (85) -- (85)
Net loss................ -- -- -- -- -- $(1,942) (1,942)
--------- ---- --------- ---- ------ ------- -------
Balance at December 31,
1997................... 2,525,000 25 2,000,000 20 2,393 (1,942) 496
Expenses related to
issuance of Series B
Convertible Preferred
Stock (Unaudited)...... -- -- -- -- (8) -- (8)
Net loss (Unaudited).... -- -- -- -- -- (1,491) (1,491)
--------- ---- --------- ---- ------ ------- -------
Balance at March 31,
1998 (Unaudited)....... 2,525,000 $ 25 2,000,000 $ 20 $2,385 $(3,433) $(1,003)
========= ==== ========= ==== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-249
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -------------------
1997 1997 1998
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................... $(1,942) $ 43 $ (1,491)
Adjustments to reconcile net loss to net
cash
(used in) provided by operating activities:
Depreciation and amortization............. 90 -- 96
Changes in assets and liabilities:
Accounts receivable...................... (1,346) (109) (371)
Prepaid expenses and other current as-
sets.................................... (111) (1) (62)
Accounts payable......................... 633 36 (93)
Accrued expenses......................... 527 52 47
Deferred revenue......................... -- -- 136
Income taxes payable..................... 20 -- (22)
------- -------- ---------
Net cash (used in) provided by operating
activities............................. (2,129) 21 (1,760)
------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of capital equipment.............. (768) (21) (583)
------- -------- ---------
Net cash used for investing activities.. (768) (21) (583)
------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Officer loans............................... (36) (33) (34)
Net proceeds from issuance of convertible
preferred stock............................ 10,598 2,473 17
Net proceeds from issuance of common stock.. 50 50 --
------- -------- ---------
Net cash provided by (used for) financ-
ing activities......................... 10,612 2,490 (17)
------- -------- ---------
Net increase (decrease) in cash.............. 7,715 2,490 (2,360)
Cash and cash equivalents at beginning of pe-
riod........................................ -- -- 7,715
------- -------- ---------
Cash and cash equivalents at end of period... $ 7,715 $2,490 $ 5,355
======= ======== =========
Supplemental information:
Cash paid for interest...................... $ 2 $ -- $ --
======= ======== =========
Cash paid for income taxes.................. $ 2 $ -- $ 20
======= ======== =========
Noncash investing activity:
Capital lease obligations related to pur-
chase of fixed assets...................... $ 37 $ -- $ --
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-250
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. THE COMPANY
Gray Peak Technologies, Inc. (the "Company") was incorporated in December
1996 under the laws of the State of Delaware and effectively began operations
in January 1997. The Company is a provider of network integration services for
complex data, voice and video networks. The Company provides services for the
full life cycle of a network, including business assessment, design and
architecture, implementation, integration, operations and optimization and
maintains expertise in the most complex network technologies and multivendor
environments. In addition, the Company develops proprietary technologies which
are used in the deployment of its services. The Company operates in one
industry segment. To date, the Company has provided limited professional
services to certain of its United States based clients in foreign locations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments, with
original maturities of less than three months when purchased and are stated at
cost. Interest is accrued as earned.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed on a straight-line
basis over the estimated useful lives of the respective assets, generally
ranging form three to five years.
Revenue Recognition
The Company's revenues are derived from network integration professional
services. Services are provided on a "time and expense" basis and through
fixed-price contracts. Revenues under "time and expense" contracts are
recognized as services are performed. Under fixed-priced contracts, revenues
are recognized using the percentage-of-completion method of accounting
requiring milestone achievements prior to invoicing. Payments received in
advance of services performed are recorded as deferred revenue.
Included in accounts receivable at December 31, 1997 are unbilled costs of
approximately $68, and consist primarily of services performed which were not
billed as of that date due to specific contractual terms established with
certain clients.
Income Taxes
The Company provides for income taxes using an asset and liability approach
that recognizes deferred tax assets and liabilities for expected future tax
consequences of temporary differences between the book and tax bases of assets
and liabilities. A valuation allowance is provided if it is more likely than
not that some or all of the deferred tax asset will not be realized.
Interim Financial Data
The unaudited financial data for the three months ended March 31, 1997 and
1998 have been prepared by management and include all adjustments, consisting
only of normal recurring adjustments, necessary to
F-251
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
present fairly the results of operations and cash flows. The results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of the operating results to be expected for the year ending December
31, 1998.
Fair Value of Financial Instruments
The carrying value of accounts receivable, accounts payable and accrued
expenses approximates their value due to the relatively short maturities of
these instruments.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"), which requires the presentation of the components of comprehensive
income in a company's financial statements for reporting periods beginning
subsequent to December 15, 1997. Comprehensive income is defined as the change
in a company's equity during a financial reporting period from transactions and
other circumstances from nonowner sources (including cumulative translation
adjustments, minimum pension liabilities and unrealized gains/losses on
available-for-sale securities). During the quarter ended March 31, 1998, such
amounts were not significant, and the Company's comprehensive loss approximated
its net loss.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"), which establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company has not yet determined the
impact, if any, of adopting this new standard. The disclosures prescribed by
FAS 131 are effective for fiscal years beginning after December 15, 1997.
3. FIXED ASSETS
Fixed assets are comprised of the following at December 31, 1997 and March
31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
<S> <C> <C>
Computer equipment.................................... $747 $1,197
Furniture and fixtures................................ 23 36
Leasehold improvements................................ 35 153
---- ------
805 1,386
Less: accumulated depreciation and amortization....... (90) (186)
---- ------
$715 $1,200
==== ======
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses are comprised of the following at December 31, 1997 and
March 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
<S> <C> <C>
Salaries and wages.................................... $340 $226
Legal expenses........................................ 60 50
Bonus................................................. -- 150
Other................................................. 127 146
---- ----
$527 $572
==== ====
</TABLE>
F-252
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
5. SECURED LINE OF CREDIT
In August 1997, the Company obtained a secured line of credit with a bank for
$750 which expires on August 18, 1998. Borrowings under the line are secured by
substantially all of the assets of the Company and are limited to the maximum
committed line, less outstanding obligations of the Company owed to the bank,
including outstanding letters of credit. The payment of cash dividends is
prohibited under the secured line of credit. At December 31, 1997, there were
no borrowings outstanding under this secured line of credit. Interest is
payable monthly at an annual rate equal at the bank's prime lending rate (9.50%
at December 31, 1997) plus one and one half percent.
At December 31, 1997, an irrevocable letter of credit of $68 was issued under
this agreement which is being maintained as security for performance under a
long-term property lease agreement.
At December 31, 1997, amounts available under the secured line of credit were
$682.
6. COMMON STOCK AND CONVERTIBLE PREFERRED STOCK
Common Stock
Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of the Company's common stockholders. Common stockholders
are entitled to receive dividends, if any, as may be declared by the Board of
Directors, subject to any preferential dividend rights of the preferred
stockholders. The Company has reserved a total of 16,000,000 shares of common
stock for the issuance under the Company's stock option plan and for conversion
of preferred stock and the exercise of the stock purchase warrants.
Series A Convertible Preferred Stock
In March 1997, the Company issued 2,525,000 shares of Series A Convertible
Preferred Stock ("Series A Preferred") and warrants at $1.00 per share
providing gross proceeds of $2,525 and net proceeds, after deducting expenses,
of $2,473.
The holders of Series A Preferred have the right to convert such shares into
common stock on a one-for-one basis at an initial conversion price of $1.00 per
share, which is subject to adjustment for any security issuances at a per share
price less than $1.00. The Series A Preferred will automatically convert into
common stock upon sale of the Company or the consummation of a public offering
of the Company's common stock with a per share price and gross proceeds of
qualifying amounts.
In connection with this transaction, the Company also issued warrants to the
holders of Series A Preferred for the purchase of 2,525,000 shares of the
Company's common stock, at an initial exercise price of $1.00 per share. Using
the Black-Scholes pricing model, the Company has valued these warrants at $682,
which is included in the carrying value of the Series A Preferred. The holders
of the warrants have the right to purchase shares of the Company's common stock
at any time following the third anniversary of the date of issuance but prior
to the fifth anniversary. In addition, the warrants will automatically convert
into shares of the Company's common stock upon (i) a sale of or consolidation
of the Company with, or merger of the Company into another corporation or (ii)
the consummation of a public offering of the Company's common stock with a per
share price and gross proceeds of specified amounts.
F-253
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Series B Convertible Preferred Stock
In September 1997, the Company issued 4,117,500 shares of Series B
Convertible Preferred Stock ("Series B Preferred") at $2.00 per share providing
gross proceeds of $8,235 and net proceeds, after deducting expenses, of $8,150.
The holders of the Series B Preferred have the right to convert such shares
into shares of the Company's common stock on a one-for-one basis at an initial
conversion value of $2.00 per share, subject to anti-dilution protection (as
defined). In addition to the anti-dilution provisions, the conversion value for
the Series B Preferred shall be adjusted based upon an assumed Company value
determined from the Company's achieving certain revenue and earnings before
interest and taxes ("EBIT") targets during the Company's year ending December
31, 1998 (as defined). The EBIT targets shall not apply, however, in the event
a public offering of the Company's common stock or sale of the Company is
completed prior to December 31, 1998 with a per share value to the holders of
Series B Preferred of at least $5.00. In addition, in any such event, if the
per share value to the holders of Series B Preferred is at least $6.50, then
the conversion value shall be increased to $2.50 per share.
In addition, (i) such shares will automatically convert into common stock
upon the consummation of a public offering of the Company's common stock or
sale transaction of qualifying size (ii) any time after the fifth anniversary
of the date of issuance of the Series B Preferred, a holder at its option may
sell such shares to the Company at a redemption amount, and (iii) in the event
of a liquidation of the Company the holders of Series B Preferred stock are
entitled to a liquidation preference (each as defined).
No dividends shall be paid on the Series B Preferred, provided that no
dividends or other distributions shall be made on any other class of the
Company's capital stock unless a pro-rata dividend or distribution is made on
the Series B Preferred shares outstanding. The holders of Series B Preferred
shall be entitled to vote on matters which holders of common stock have the
right to vote.
7. EMPLOYEE BENEFIT PLANS
Stock Option Plan
In March 1997, the Company's Board of Directors adopted the 1997 Stock Option
Plan (the "1997 Plan"), whereby incentive and nonqualified options to purchase
up to 2,000,000 shares of the Company's common stock may be granted to key
employees, directors and consultants. The exercise and vesting periods and the
exercise price of the options granted under the 1997 Plan are determined by a
Committee of the Board of Directors. The 1997 Plan stipulates that no options
may be exercisable after ten years from the date of grant. The fair market
value of the Company's common stock is determined by the Board of Directors.
Options granted under the 1997 Plan generally vest in equal installments over a
period of four years commencing after the first year of the date of grant, with
the exception of 1,005,000 options granted to certain key employees which have
the additional vesting conditions that the Company meets certain revenue
targets.
F-254
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table summarizes stock options activity under the Plan for the
year ended December 31, 1997, all of which were granted to employees:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at beginning of year......................... -- --
Granted.................................................. 1,730,000 $1.38
Forfeited................................................ (100,000) 1.20
--------- -----
Outstanding at end of year............................... 1,630,000 $1.39
========= =====
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------
AVERAGE
REMAINING
CONTRACTUAL AVERAGE
SHARES LIFE EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) PRICE
--------------- ----------- ----------- --------
<S> <C> <C> <C>
$1.00..................................... 999,500 4.4 $1.00
$2.00..................................... 630,500 4.8 2.00
--------- --- -----
1,630,000 4.5 $1.39
========= === =====
</TABLE>
There were no exercisable options outstanding at December 31, 1997.
The Company has elected to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its Plan. Accordingly, no compensation cost has been recognized
for options granted to employees under the Plan for the year ended December 31,
1997.
Had compensation cost for options granted to employees been determined based
upon the fair value at the date of grant for awards under the Plan consistent
with the methodology prescribed under Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation," the Company's net loss for the year
ended December 31, 1997 and the three months ended March 31, 1998 would have
increased by $48 and $37, respectively.
The fair values of the Company's stock-based awards to employees during the
year ended December 31, 1997 was estimated using the Black-Scholes option-
pricing model based on the following weighted average assumptions:
<TABLE>
<S> <C>
Dividend yield....................................................... None
Weighted average risk free interest rate on the date of grant........ 6.26%
Forfeitures.......................................................... None
Expected life........................................................ 5 years
Volatility........................................................... 0%
</TABLE>
F-255
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Defined Contribution Plan
The Company has a defined contribution plan (the "Plan"), which qualifies
under Section 401(k) of the Internal Revenue Code, for employees meeting
certain services requirements. Participants may contribute up to 15% of their
gross wages not to exceed, in any given year, a limitation set by Internal
Revenue Service regulations. The Plan provides for discretionary contributions
to be made by the Company as determined by the Board of Directors. The Company
has not made any contributions to the Plan during 1997.
8. INCOME TAXES
The Company has incurred a loss during 1997, which has generated a net
operating loss carryforward of approximately $1,700 at December 31, 1997, for
federal and state income tax purposes. This carryforward is available to future
taxable income and expires in 2012 for federal income tax purposes. This loss
is subject to limitation on future years utilization should certain ownership
changes occur.
The net operating loss carryforward and temporary differences between
carrying amounts of assets and liabilities for financial reporting and income
tax purposes result in a net deferred tax benefit of $783 at December 31, 1997.
The Company's operating plans anticipate taxable income in future periods:
however, such plans make significant assumptions which cannot be reasonably
assured including continued market acceptance of the Company's services by
customers. Therefore, in consideration of the Company's current year loss and
the uncertainty of its ability to utilize this deferred tax benefit in the
future, the Company has recorded a valuation allowance in the amount of $783 at
December 31, 1997 to offset the deferred tax benefit amount.
Significant components of the noncurrent deferred tax assets at December 31,
1997 are as follows:
<TABLE>
<S> <C>
Deferred tax assets
Accounts receivable reserves........................................ $ 12
Net operating loss.................................................. 697
Accruals............................................................ 77
-----
Total deferred tax assets......................................... 786
Deferred tax liabilities
Depreciation........................................................ 3
-----
Total deferred tax liabilities.................................... 3
-----
Net deferred tax asset................................................ 783
Less: valuation allowance............................................. (783)
-----
Deferred tax asset, net............................................... $ --
=====
</TABLE>
The components of the provision for income taxes at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
Current taxes
Federal................................................................ --
State and city......................................................... $20
---
Provision for income taxes........................................... $20
===
</TABLE>
F-256
<PAGE>
GRAY PEAK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
9. CONCENTRATION OF RISK AND CUSTOMER INFORMATION
Financial instruments which potentially subject the Company to concentrations
of credit risk are primarily cash, accounts receivable, officer loans and
accounts payable. The Company generally does not require collateral and the
majority of its trade receivables are unsecured. Management of the Company does
not believe that significant credit risk exists at December 31, 1997.
For the year ended December 31, 1997, customers A, B, C and D accounted for
24.9%, 12.5%, 12.1% and 10.3%, respectively, of net revenues. No other
customers accounted for more than 10% of net revenues for the year ended
December 31, 1997.
10. COMMITMENTS
The Company operates in leased facilities. Management believes that leases
currently in effect will be renewed or replaced by other leases of a similar
nature and term. Rent expense under operating leases amounted to $136 for the
year ended December 31, 1997.
During 1997, the Company entered into capital leases for certain computer
equipment totaling $37 of capitalized costs.
The future minimum lease payments under capital leases (including present
value of net minimum lease payments) and operating leases as of December 31,
1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998...................................................... $14 $332
1999...................................................... 14 341
2000...................................................... 14 113
2001...................................................... -- --
2002...................................................... -- --
Thereafter................................................ -- --
--- ----
Total minimum lease payments.............................. 42 $786
====
Less amount representing interest......................... (5)
---
Present value of net minimum lease payments including cur-
rent maturities of $11 with interest rate of 9.4%........ $37
===
</TABLE>
F-257
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CKS Group, Inc.:
We have audited the accompanying consolidated balance sheets of CKS Group,
Inc. and subsidiaries (the Company) as of November 30, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended November 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of McKinney & Silver (M&S), which statements reflect total assets
constituting 23% as of November 30, 1996, and total revenues constituting 40%
and 33%, and income before income taxes constituting 65% and 38% in each of the
years in the two-year period ended November 30, 1996, respectively, of the
related consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates
to amounts included for M&S, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of CKS Group, Inc. and subsidiaries
as of November 30, 1997 and 1996, and the results of their operations and their
cash flows for each of the years in the three-year period ended November 30,
1997, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
San Jose, California
December 15, 1997
F-258
<PAGE>
INDEPENDENT AUDITORS' REPORT
Partners
McKinney & Silver
We have audited the balance sheets of McKinney & Silver (a Partnership) as of
December 31, 1996 and 1995, and the related statements of income, partners'
capital, and cash flows for the three years then ended (not presented
separately herein). These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require than we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of McKinney & Silver (a
Partnership) at December 31, 1996 and 1995, and the results of its operations
and its cash flows for the three years then ended in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
January 31, 1997
F-259
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------- AUGUST 30,
1997 1996 1998
-------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 18,223 $19,385 $ 29,817
Marketable securities......................... 24,041 37,895 17,323
Accounts receivable, net of allowance of
$1,442, $792 and $2,233 in 1997, 1996, and
1998, respectively........................... 50,049 22,651 42,385
Fees and expenditures in excess of billings... 4,594 2,792 11,640
Prepaid expenses and other current assets..... 1,949 907 2,802
Deferred income taxes......................... 1,400 1,038 1,736
-------- ------- --------
Total current assets........................ 100,256 84,668 105,703
Property and equipment, net..................... 5,849 4,571 5,867
Deferred income taxes........................... 10,140 300 6,472
Goodwill and other assets....................... 30,228 5,937 34,925
-------- ------- --------
Total assets................................ $146,473 $95,476 $152,967
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 38,161 $21,392 $ 36,052
Accrued expenses.............................. 7,515 6,430 5,926
Billings in excess of fees and expenditures... 2,417 3,257 3,485
Current portion of liabilities to related
parties...................................... 2,284 1,955 623
Current portion of notes payable and capital
lease obligations............................ 765 433 161
Income taxes payable.......................... -- 426 1,218
-------- ------- --------
Total current liabilities................... 51,142 33,893 47,465
Liabilities to related parties, less current
portion........................................ -- 223 --
Notes payable and capital lease obligations,
less current portion........................... 739 502 766
-------- ------- --------
Total liabilities........................... 51,881 34,618 48,231
-------- ------- --------
Stockholders' equity:
Preferred stock; $0.001 par value; 5,000,000
shares authorized; none issued and outstand-
ing ......................................... -- -- --
Common stock; $0.001 par value; 30,000,000
shares authorized; 14,865,000, 14,229,000 and
15,450,000 shares issued and
outstanding in 1997, 1996, and 1998, respec-
tively....................................... 15 14 15
Additional paid-in capital.................... 80,103 51,715 82,798
Unrealized gain (loss) on marketable
securities................................... 12 (65) (12)
Notes receivable from stockholders............ (198) (292) (198)
Cumulative translation adjustment............. (62) (6) 11
Retained earnings............................. 14,722 9,492 22,122
-------- ------- --------
Total stockholders' equity.................. 94,592 60,858 104,736
-------- ------- --------
Total liabilities and stockholders' equity.. $146,473 $95,476 $152,967
======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-260
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30, NINE MONTHS ENDED
------------------------ ---------------------
AUGUST 30, AUGUST 31,
1997 1996 1995 1998 1997
-------- ------- ------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ $133,602 $88,248 $58,383 $118,633 $99,980
-------- ------- ------- -------- -------
Operating expenses:
Direct salaries and related ex-
penses........................ 34,714 22,962 15,440 29,689 24,325
Other direct operating ex-
penses........................ 53,952 35,415 24,219 52,575 40,238
General and administrative ex-
penses........................ 27,954 17,014 11,146 21,932 20,749
Depreciation and amortization.. 3,096 1,496 1,000 2,985 2,226
Merger costs................... 2,452 -- -- -- 2,452
-------- ------- ------- -------- -------
Total operating expenses...... 122,168 76,887 51,805 107,181 89,990
-------- ------- ------- -------- -------
Operating income................ 11,434 11,361 6,578 11,452 9,990
Other income, net............... 1,549 2,114 296 1,158 988
-------- ------- ------- -------- -------
Income before income taxes...... 12,983 13,475 6,874 12,610 10,978
Income taxes.................... 5,317 3,026 1,065 5,210 4,527
-------- ------- ------- -------- -------
Net income...................... $ 7,666 $10,449 $ 5,809 $7,400 $ 6,451
======== ======= ======= ======== =======
UNAUDITED PRO FORMA NET INCOME
AND PER SHARE
DATA:
Income before income taxes, as
reported....................... $ 12,983 $13,475 $ 6,874 $10,978
Pro forma income taxes........ 5,635 5,108 2,823 4,845
-------- ------- ------- -------
Pro forma net income............ $ 7,348 $ 8,367 $ 4,051 $ 6,133
======== ======= ======= =======
Basic net income per share...... $ 0.48
========
Pro forma basic net income per
share.......................... $ 0.50 $ 0.61 $ 0.44 $ 0.42
======== ======= ======= =======
Shares used in basic per share
computation.................... 14,633 13,646 9,176 15,345 14,543
======== ======= ======= ======== =======
Diluted net income per share.... $ 0.45
========
Pro forma diluted net income per
share.......................... $ 0.47 $ 0.58 $ 0.36 $ 0.39
======== ======= ======= =======
Shares used in diluted per share
computation.................... 15,590 14,435 11,265 16,335 15,705
======== ======= ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-261
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------
UNREALIZED NOTES
ADDITIONAL GAIN (LOSS) ON RECEIVABLE CUMULATIVE TOTAL
PAID-IN MARKETABLE FROM TRANSLATION RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SECURITIES STOCKHOLDERS ADJUSTMENT EARNINGS EQUITY
------ ------ ---------- -------------- ------------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, NOVEMBER 30,
1994................... 10,545 $10 $ 948 $ -- $(371) $ -- $ 2,192 $ 2,779
Issuance of Series A
common stock........... 739 1 1,923 -- -- -- -- 1,924
Repurchase of common
stock.................. (31) -- (23) -- 8 -- -- (15)
Issuance of common
stock.................. 68 -- 103 -- -- -- -- 103
Compensation related to
stock option........... -- -- 156 -- -- -- -- 156
Collections on stock-
holder notes
receivable............. -- -- -- -- 71 -- -- 71
Distributions to stock-
holders................ -- -- -- -- -- -- (4,477) (4,477)
Net income.............. -- -- -- -- -- -- 5,809 5,809
------ --- ------- ----- ----- ----- ------- --------
BALANCES, NOVEMBER 30,
1995................... 11,321 11 3,107 -- (292) -- 3,524 6,350
Issuance of common stock
warrants............... -- -- 100 -- -- -- -- 100
Issuance of common
stock.................. 2,991 3 48,060 -- -- -- -- 48,063
Compensation related to
stock options.......... -- -- 130 -- -- -- -- 130
Tax benefit from
disqualifying
dispositions........... -- -- 926 -- -- -- -- 926
Unrealized loss on mar-
ketable securities..... -- -- -- (65) -- -- -- (65)
Distributions to stock-
holders................ -- -- (499) -- -- -- (4,481) (4,980)
Repurchase of common
stock.................. (83) -- (109) -- -- -- -- (109)
Translation adjustment.. -- -- -- -- -- (6) -- (6)
Net income.............. -- -- -- -- -- -- 10,449 10,449
------ --- ------- ----- ----- ----- ------- --------
BALANCES, NOVEMBER 30,
1996................... 14,229 14 51,715 (65) (292) (6) 9,492 60,858
Issuance of common
stock.................. 474 1 5,208 -- -- -- -- 5,209
Compensation related to
stock options.......... -- -- 265 -- -- -- -- 265
Tax benefit from
disqualifying
dispositions........... -- -- 3,343 -- -- -- -- 3,343
Unrealized gain on mar-
ketable
securities ............ -- -- -- 77 -- -- -- 77
Distribution to stock-
holders................ -- -- -- -- -- -- (2,172) (2,172)
Deferred issuance of
common stock related to
business acquisitions.. -- -- 5,582 -- -- -- -- 5,582
Common stock issued for
business acquisitions.. 168 -- 4,738 -- -- -- -- 4,738
Deferred tax asset
recorded in connection
with taxable pooling of
interests.............. -- -- 9,346 -- -- -- -- 9,346
Repurchase of common
stock and cancellation
of note receivable from
stockholder............ (6) -- (94) -- 94 -- -- --
Change in subsidiaries'
fiscal year-ends....... -- -- -- -- -- -- (264) (264)
Translation adjustment.. -- -- -- -- -- (56) -- (56)
Net income.............. -- -- -- -- -- -- 7,666 7,666
------ --- ------- ----- ----- ----- ------- --------
BALANCES, NOVEMBER 30,
1997................... 14,865 15 80,103 12 (198) (62) 14,722 94,592
Issuance of common stock
(unaudited)............ 287 -- 2,633 -- -- -- -- 2,633
Compensation related to
stock options
(unaudited)............ -- -- 87 -- -- -- -- 87
Tax benefit from
disqualifying
dispositions
(unaudited)............ -- -- 111 -- -- -- -- 111
Unrealized loss on
marketable securities
(unaudited)............ -- -- -- (24) -- -- -- (24)
Common stock issued for
business acquisition
(unaudited)............ 298 -- 200 -- -- -- -- 200
Adjustment to original
purchase agreement
related to business
combination
(unaudited)............ -- -- (336) -- -- -- -- (336)
Translation adjustment
(unaudited)............ -- -- -- -- -- 73 -- 73
Net income (unaudited).. -- -- -- -- -- -- 7,400 7,400
------ --- ------- ----- ----- ----- ------- --------
BALANCES, AUGUST 30,
1998 (UNAUDITED)....... 15,450 $15 $82,798 $ (12) $(198) $ 11 $22,122 $104,736
====== === ======= ===== ===== ===== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-262
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30, NINE MONTHS ENDED
--------------------------- ---------------------
AUGUST 30, AUGUST 31,
1997 1996 1995 1998 1997
-------- -------- ------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING AC-
TIVITIES:
Net income................... $ 7,666 $ 10,449 $ 5,809 $ 7,400 $ 6,451
Adjustments to reconcile net
income to net cash (used in)
provided by operating activ-
ities:
Deferred income taxes...... (856) (1,097) (476) 3,332 (859)
Compensation related to
stock options............. 265 130 156 88 91
Tax benefit from disquali-
fying dispositions........ 3,343 926 -- 110 2,502
Depreciation and amortiza-
tion...................... 3,096 1,496 1,000 2,985 2,226
Loss on disposition of
property due to acquisi-
tion...................... 227 -- -- -- 227
Other non-cash items....... 235 (315) -- -- (154)
Changes in operating assets
and liabilities:
Accounts receivable........ (19,103) (8,148) (1,392) 7,737 (519)
Fees and expenditures in
excess of billings........ (323) (1,647) 354 (7,046) (3,744)
Prepaid expenses and other
current assets............ (447) 38 (943) (853) (52)
Accounts payable........... 12,833 12,195 (1,783) (2,109) (5,452)
Accrued expenses........... (516) 3,556 1,553 (1,589) (2,194)
Billings in excess of fees
and expenditures.......... 47 246 (240) 1,068 (702)
Income taxes payable....... (847) (1,253) 1,125 1,218 366
-------- -------- ------- -------- --------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES. 5,620 16,576 5,163 12,341 (1,813)
-------- -------- ------- -------- --------
CASH FLOWS FROM INVESTING AC-
TIVITIES:
Purchases of property and
equipment.................. (1,995) (2,011) (1,574) (1,471) (1,244)
Purchases of marketable se-
curities................... (21,175) (39,710) -- (26,403) (17,259)
Sales of marketable securi-
ties....................... 34,934 1,750 -- 33,110 32,620
Business acquired, net of
cash received.............. (13,740) 55 -- (6,485) (13,740)
Other assets................ 70 (586) (6) 303 148
-------- -------- ------- -------- --------
NET CASH (USED IN)
PROVIDED BY INVESTING
ACTIVITIES............... (1,906) (40,502) (1,580) (946) 525
-------- -------- ------- -------- --------
CASH FLOWS FROM FINANCING AC-
TIVITIES:
Net repayments on line of
credit and note payable.... (1,414) (382) (676) (577) (1,659)
Collection (repayment) of
stockholder notes receiv-
able....................... -- (37) 71 -- --
Proceeds from sale of common
stock and warrants......... 5,208 43,154 1,994 2,632 3,637
Repurchase of common stock.. -- (109) (15) -- --
Distributions to stockhold-
ers........................ (2,398) (4,635) (4,444) -- (2,405)
Liabilities to related par-
ties....................... (2,013) 503 (10) (1,856) (1,736)
-------- -------- ------- -------- --------
NET CASH (USED IN)
PROVIDED BY FINANCING
ACTIVITIES............... (617) 38,494 (3,080) 199 (2,163)
-------- -------- ------- -------- --------
Net increase (decrease) in
cash and cash equivalents... 3,097 14,568 503 11,594 (3,451)
Change in subsidiaries' fis-
cal year-ends............... (4,259) -- -- -- (4,259)
Cash and cash equivalents,
beginning of period......... 19,385 4,817 4,314 18,223 19,385
-------- -------- ------- -------- --------
Cash and cash equivalents,
end of period............... $ 18,223 $ 19,385 $ 4,817 $ 29,817 $ 11,675
======== ======== ======= ======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid:
Interest................... $ 187 $ 63 $ 91 $ 72 $ 131
======== ======== ======= ======== ========
Income taxes............... $ 1,386 $ 4,488 $ 647 $ 509 $ 1,121
======== ======== ======= ======== ========
Noncash investing and fi-
nancing activities:
Issuance of common stock in
business acquisition...... $ 6,030 $ 4,997 $ -- $ 200 $ 6,030
======== ======== ======= ======== ========
Exchange of note payable
for common stock.......... $ -- $ 457 $ -- $ -- $ --
======== ======== ======= ======== ========
Businesses acquired for li-
abilities to related par-
ties...................... $ 2,146 $ -- $ -- $ 308 $ 2,146
======== ======== ======= ======== ========
Deferred tax asset recorded
in connection with taxable
pooling of interests...... $ 9,346 $ -- $ -- $ -- $ 9,346
======== ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-263
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Principles of Combination
CKS Group, Inc. (CKS or the Company) is an international integrated marketing
services and technology company specializing in offering a wide range of
integrated marketing communication services and technology solutions that help
companies market their products, services, and messages. The Company's services
include strategic corporate and product positioning, corporate identity and
product branding, new media, systems integration, environmental design,
packaging, collateral systems, advertising, direct marketing, consumer
promotions, trade promotions, and media placement services.
The Company was formed in January 1995 in a merger of three entities that
were under common control: CKS Partners, Inc.; CKS Interactive, Inc.; and CKS
Pictures, Inc. (collectively, the Former Affiliates). The accompanying
consolidated financial statements have been prepared on the basis that these
entities were combined at the beginning of their existence for financial
reporting purposes. The combined entities have been under common control since
inception and have been included in the consolidated financial statements at
historical cost, in a manner similar to a pooling of interests, since their
respective dates of inception. All transactions and accounts between the
combined entities have been eliminated in the accompanying consolidated
financial statements.
In accordance with the merger of the Former Affiliates, each entity's capital
stock was converted, using a predetermined conversion factor, to give effect to
the merger. All share and per share information has been retroactively restated
to give effect to the merger.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
accompanying consolidated financial statements have been restated to reflect
the effect of the mergers accounted for as poolings of interests with McKinney
& Silver (M&S) and SiteSpecific, Inc. (SiteSpecific) discussed in Note 3.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments purchased with a
remaining maturity of 90 days or less to be cash equivalents.
The Company classifies its investments in certain debt and equity securities
as "available-for-sale." Such investments are recorded at fair value, with
unrealized gains and losses, net of taxes, reported as a separate component of
stockholders' equity. The cost of securities sold is based upon the specific
identification method.
Fair Value of Financial Instruments and Concentrations of Credit Risk
The carrying value of the Company's financial instruments, including accounts
receivable, approximates fair market value.
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist principally of marketable securities and
accounts receivable. The Company's services are provided to clients in a
variety of industries. The Company performs ongoing credit evaluations of its
clients, generally does not require collateral, and records allowances for
potential credit losses.
F-264
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over estimated useful lives of three to seven years. Leasehold
improvements are amortized over the lesser of their useful lives or the
remaining term of the related lease.
Goodwill
Goodwill is amortized on a straight-line basis over 20 years. Accumulated
amortization amounted to $1,105,000 as of November 30, 1997.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
On December 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires long-lived
assets to be evaluated for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of property and equipment is measured by comparison of its
carrying amount to future net cash flows the property and equipment are
expected to generate. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the property and equipment exceeds its fair value. To date, the
Company has made no adjustments to the carrying value of its long-lived assets.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Revenue Recognition
Revenues generally are derived from fixed fee arrangements and are recognized
on the percentage-of-completion method based on the ratio of costs incurred to
total estimated costs. Fees and expenditures in excess of billings represent
the costs incurred and anticipated profits earned on projects in progress in
excess of amounts billed and are recorded as an asset. Billings in excess of
fees and expenditures represent amounts billed in excess of costs incurred and
estimated profit earned and are recorded as a liability. Such billings
generally are at the beginning of contract periods and are in accordance with
contract provisions. To the extent costs incurred and anticipated costs to
complete projects in progress exceed anticipated billings, a loss is accrued
for the excess.
Commissions earned from advertising placed with media generally are recorded
at the time the advertising appears or is broadcast. Commissions earned for
production expenditures and fees derived from other services are recognized
upon performance of the services.
F-265
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
As a partnership, M&S's earnings were taxed at the individual partner level,
therefore no provision for income taxes has been made in the accompanying
consolidated financial statements for income attributable to M&S. The
accompanying consolidated statements of income include a provision for income
taxes on an unaudited pro forma basis as if M&S had been a C corporation fully
subject to income taxes, for all periods presented.
Net Income Per Share
On December 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share. In accordance with SFAS No.
128, basic net income per share is computed using the weighted average number
of common shares outstanding during the period. Diluted net income per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using the treasury stock
method for options and warrants after giving effect to contingently issuable
shares under acquisition agreements. The Company has restated net income per
share for all periods presented in accordance with SFAS No. 128.
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method.
Foreign Currency Translation
The functional currency for the Company's foreign subsidiary is the local
currency. Financial statements for the foreign subsidiary are translated using
the current exchange rate for the balance sheet and the average exchange rate
during the year for the statement of income. Translation adjustments are
included as a separate component of stockholders' equity.
Unaudited Interim Financial Statements
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim consolidated financial information. In the opinion of management, the
accompanying unaudited consolidated financial statements have been prepared on
the same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the Company's financial position as of August 30, 1998, and the
results of its operations and its cash flows for the nine month periods ended
August 30, 1998 and August 31, 1997.
F-266
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
NOTE 2--UNAUDITED PRO FORMA NET INCOME AND PRO FORMA NET INCOME PER SHARE
Pro forma net income gives effect to the pooling-of-interests combination
between the Company and M&S during fiscal 1997. M&S was a general partnership
and, as a result, M&S's historical results of operations prior to the
acquisition by the Company, which have been included with the Company's under
the pooling-of-interests method, do not include a provision for income taxes.
Pro forma net income and net income per share data include a tax provision as
if M&S had been a taxable "C" corporation for all periods.
Reconciliation of basic and diluted net income per share and pro forma net
income per share (in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-----------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
NET INCOME SHARES EPS NET INCOME SHARES EPS NET INCOME SHARES EPS
---------- ------ --------- ---------- ------ --------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic net income per
share.................. $7,348 14,633 $0.50 $8,367 13,646 $0.61 $4,051 9,176 $0.44
Effect of dilutive
common equivalent
shares:
Options............... -- 875 -- 577 -- 198
Contingent shares..... -- 82 -- 212 -- 1,891
------ ------ ------ ------ ------ ------
Diluted net income per
share.................. $7,348 15,590 $0.47 $8,367 14,435 $0.58 $4,051 11,265 $0.36
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------------------
AUGUST 30, 1998 AUGUST 31, 1997
----------------------- ---------------------------
PRO FORMA PRO FORMA
NET INCOME SHARES EPS NET INCOME SHARES EPS
---------- ------ ----- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic net income per
share.................... $7,400 15,345 $0.48 $6,133 14,543 $0.42
Effect of dilutive common
equivalent shares:
Options................. -- 602 -- 812
Contingent shares....... -- 388 -- 350
------ ------ ------ ------
Diluted net income per
share.................... $7,400 16,335 $0.45 $6,133 15,705 $0.39
====== ====== ====== ======
</TABLE>
Diluted net income per share for the year ended November 30, 1997, does not
include the effect of 416,000 shares issuable under stock options, as the
effect of their inclusion would be antidilutive.
F-267
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
NOTE 3--BUSINESS COMBINATIONS
Schell/Mullaney, Inc.
On August 1, 1996, the Company acquired Schell/Mullaney, Inc. (SMI), and its
results of operations have been included in the Company's consolidated
financial statements from that date. Upon the closing of the merger, the shares
of common stock of SMI that were issued and outstanding immediately prior to
the closing were converted into 183,066 shares of the Company's common stock
valued at $5,000,000. Due to the attainment of certain financial performance
goals by SMI during 1997, the Company will issue approximately $4,500,000 in
common stock to the former stockholders of SMI. The former stockholders also
have the right to receive up to an additional $4,500,000 in common stock of the
Company in 1998 upon the attainment of certain financial performance goals. The
number of additional shares to be issued to the former stockholders of SMI will
be determined based on the price of the Company's common stock during a period
prior to the issuance dates of such shares. In the event additional shares are
issued to the former stockholders of SMI, they will be recorded as additional
purchase price. The acquisition was recorded as a purchase, and, as a result,
the Company initially recorded goodwill of $4,577,000.
The following summary, prepared on an unaudited pro forma basis, combines the
Company's consolidated results of operations for the years ended November 30,
1996 and 1995, with SMI's results of operations for the years ended November
30, 1996, and December 31, 1995, respectively, as if SMI had been acquired as
of the beginning of the periods presented (in thousands, except per share
data):
<TABLE>
<CAPTION>
YEARS ENDED
NOVEMBER 30,
---------------
1996 1995
------- -------
<S> <C> <C>
Revenues..................................................... $92,536 $63,429
Pro forma net income......................................... 8,440 5,010
Pro forma basic net income per share......................... $ 0.61 $ 0.54
Shares used in pro forma basic per share computation......... 13,768 9,298
Pro forma diluted net income per share....................... $ 0.58 $ 0.44
Shares used in pro forma diluted per share computation....... 14,557 11,387
</TABLE>
The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect any synergies that might be achieved from combined operations.
Donovan & Green, Inc.
On January 3, 1997, the Company acquired the assets and assumed substantially
all the liabilities of Donovan & Green, Inc. (D&G), and its results of
operations have been included in the Company's consolidated financial
statements from that date. The Purchase Agreement provided for initial payments
to D&G of $5,146,000. The Company made guaranteed payments to D&G consisting of
$2,219,000 in cash and 41,259 shares of the Company's common stock on April 18,
1997 and $1,003,000 in cash and Common Stock of CKS Group on April 15, 1998. In
addition, D&G will be entitled to receive an additional number of shares of
common stock of the Company with a value of $497,000 over the next fiscal year.
D&G also has the right to receive additional payments if the subsidiary attains
certain earnings goals during the 1998, 1999, and 2000 fiscal years. D&G may
receive $889,000 in cash and shares of the Company's common stock with a value
of $444,000 in each of 1998 and 1999 if the subsidiary meets its earnings goals
for the 1997 and 1998 fiscal years. To the extent that the subsidiary exceeds
its earnings goals for the 1998, 1999, and 2000 fiscal
F-268
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
years by more than 10%, D&G will be entitled to receive cash and common stock
of the Company with a combined value of up to $1,000,000 per year for each of
these three years. D&G did not meet its earnings goals for the year ended
November 30, 1997. The acquisition was recorded as a purchase, and, as a
result, the Company initially recorded goodwill of $8,333,000. In the event
additional contingent consideration is issued to the former stockholders of
D&G, it will be recorded as additional purchase price.
The following summary, prepared on an unaudited pro forma basis, combines the
Company's consolidated results of operations for the year ended November 30,
1996, with D&G's results of operations for the year ended December 31, 1996, as
if D&G had been acquired as of the beginning of the period presented (in
thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, 1996
-----------------
<S> <C>
Revenue................................................... $93,158
Pro forma net income...................................... $ 7,705
Pro forma basic net income per share...................... $ 0.56
Shares used basic in pro forma basic per share
computation.............................................. 13,724
Pro forma diluted net income per share.................... $ 0.53
Shares used in pro forma diluted per share computation.... 14,513
</TABLE>
The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect any synergies that might be achieved from combined operations.
CKS Holding Deutschland GmbH
On March 10, 1997, the Company acquired all of the capital stock of CKS
Holding (Deutschland) GmbH (formerly Elektronische Publikationen GmbH), a
German corporation (CKS GmbH), and its results of operations have been included
in the Company's consolidated financial statements from that date. In
consideration for the sale of their shares in CKS GmbH, the former shareholders
of CKS GmbH received $2,925,000 in cash and 86,603 shares of CKS common stock.
The acquisition of the capital stock of CKS GmbH was treated as a purchase and,
as a result, the Company initially recorded goodwill of approximately
$5,592,000. Also, under the original purchase agreement, the Company was
required to make a guaranteed payment of $672,000 in cash and Common Stock of
CKS Group in fiscal 1998. In addition, the former shareholders of CKS GmbH had
the right to receive up to an additional $10,000,000 in cash and additional
shares of Common Stock of CKS Group during fiscal 1998, 1999, and 2000 upon
attainment of certain earnings goals by CKS GmbH. On April 27, 1998, the
Company and the former shareholders of CKS GmbH terminated the original
purchase agreement with respect to the right of the former shareholders of CKS
GmbH to receive additional cash and Common Stock of CKS Group in future years
and negotiated the terms of a new purchase agreement. Under the new purchase
agreement, the Company paid to the former shareholders of CKS GmbH $6,241,000
in cash in April 1998 and granted the former shareholders of CKS GmbH the right
to receive an additional cash payment on September 20, 1998 of up to
approximately $308,000 if the subsidiary attains a certain earnings goal during
the six month period ending August 31, 1998. In the event additional contingent
consideration is paid to the former shareholders of CKS GmbH, it will be
recorded as additional purchase price. Pro forma financial information giving
effect to the acquisition of the capital stock of CKS GmbH has not been
presented because such pro forma results would not have differed materially
from the Company's actual results.
F-269
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
Gormley & Partners, Inc.
On March 12, 1997, the Company acquired certain assets of Gormley & Partners,
Inc. (Gormley), a Connecticut corporation, and its results of operations have
been included in the Company's consolidated financial statements from that
date. The Purchase Agreement provided for an initial payment of $3,150,000 in
cash and 40,206 shares of CKS common stock to Gormley and a guaranteed payment
to Gormley consisting of $1,500,000 in cash and Common Stock of CKS Group on
April 15, 1998. In addition, Gormley will be entitled to receive additional
payments upon the attainment of certain performance goals over the next three
fiscal years. The acquisition was accounted for as a purchase, and, as a
result, the Company initially recorded goodwill of $5,793,000. In the event
additional consideration is paid to Gormley, it will be recorded as additional
purchase price. Pro forma financial information giving effect to the
acquisition of certain assets of Gormley has not been presented because pro
forma results would not have differed materially from the Company's
consolidated results of operations.
McKinney & Silver
On January 31, 1997, the Company issued 841,291 shares of its common stock
for all of the partnership units and residual partnership interests of M&S. The
merger has been accounted for as a pooling of interests, and, accordingly, the
Company's consolidated financial statements have been restated for all periods
prior to the merger to include the results of operations, financial position,
and cash flows of M&S. In M&S's historical financial statements, certain direct
operating expenses were offset against revenues. Such amounts have been
reclassified in the accompanying consolidated financial statements to conform
to CKS's presentation. The effect of the reclassification was to increase both
revenues and other direct operating expenses by $13,614,000 and $9,593,000
during 1996 and 1995, respectively.
Prior to the combination, M&S's fiscal year ended on December 31. In
recording the business combination, M&S's financial statements as of and for
each of the years in the two-year period ended December 31, 1996, have been
combined with the Company's consolidated financial statements as of and for
each of the years in the two-year period ended November 30, 1996.
In 1997, M&S changed its fiscal year-end to the Sunday nearest November 30 to
conform to CKS's fiscal year-end. M&S's unaudited results of operations for the
month ended December 31, 1996, included revenues of $2,230,000 and net income
of $248,000. An adjustment has been made to stockholders' equity as of November
30, 1997, to eliminate the effect of including M&S's unaudited results of
operations for the month ended December 31, 1996, in both the years ended
November 30, 1997 and 1996.
In connection with the merger with M&S, the Company recorded a nonrecurring
charge for transaction related costs of $1,593,000 in the first quarter of
fiscal 1997, consisting primarily of fees for attorneys, accountants, financial
printing, and other related costs. In addition, because the merger is a taxable
transaction, in the first quarter of fiscal 1997, CKS recorded a deferred tax
asset and an increase to stockholders' equity of approximately $9,346,000 for
the difference between the financial statement and tax carrying amounts of
M&S's net assets upon the closing of the transaction.
F-270
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
SiteSpecific, Inc.
On June 17, 1997, the Company issued 241,108 shares of its common stock for
all of the outstanding capital stock of SiteSpecific, and assumed options to
purchase 18,884 shares of common stock under an option plan. The merger has
been accounted for as a pooling of interests, and, accordingly, the Company's
consolidated financial statements have been restated for all periods prior to
the merger to include the results of operations, financial position, and cash
flows of SiteSpecific.
Prior to the combination, SiteSpecific's fiscal year ended on December 31. In
recording the business combination, SiteSpecific's financial statements as of
December 31, 1996, and for the year ended December 31, 1996, and from inception
to December 31, 1995, have been combined with the Company's consolidated
financial statements as of and for each of the years in the two-year period
ended November 30, 1996.
In 1997, SiteSpecific changed its fiscal year-end to the Sunday nearest
November 30 to conform to CKS's fiscal year-end. SiteSpecific's unaudited
results of operations for the month ended December 31, 1996, included revenues
of $302,000 and net income of $16,000. An adjustment has been made to
stockholders' equity as of November 30, 1997, to eliminate the effect of
including SiteSpecific's unaudited results of operations for the month ended
December 31, 1996, in both the years ended November 30, 1997 and 1996.
In connection with the merger with SiteSpecific, the Company recorded a
nonrecurring charge for transaction related costs of approximately $859,000 in
the third quarter of fiscal 1997, consisting primarily of fees for attorneys,
accountants, financial printing, and other related costs.
Revenues and net income for the individual entities as previously reported
were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
NOVEMBER 30,
----------------
1996 1995
------- -------
<S> <C> <C>
Revenues:
CKS....................................................... $56,951 $34,792
M&S....................................................... 29,448 23,326
SiteSpecific.............................................. 1,849 265
------- -------
$88,248 $58,383
======= =======
Net income (loss):
CKS....................................................... $ 5,679 $ 1,366
M&S....................................................... 5,079 4,436
SiteSpecific.............................................. (309) 7
------- -------
$10,449 $ 5,809
======= =======
</TABLE>
F-271
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
NOTE 4--MARKETABLE SECURITIES
Marketable securities consisted of the following as of November 30, 1997 (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Municipal obligations.................. $24,029 $12 -- $24,041
======= === === =======
</TABLE>
Marketable securities consisted of the following as of November 30, 1996 (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Municipal obligations................. $37,771 $ -- $ -- $37,771
Marketable equity security............ 189 -- 65 124
------- ----- ----- -------
$37,960 $ -- $ 65 $37,895
======= ===== ===== =======
</TABLE>
The contractual maturities of available-for-sale debt securities, regardless
of their balance sheet classification as of November 30, 1997, were as follows
(in thousands):
<TABLE>
<CAPTION>
FAIR
COST VALUE
------- -------
<S> <C> <C>
Due within one year......................................... $11,329 $11,333
Due after one year through five years....................... -- --
Due after five years through ten years...................... 1,900 1,908
Due after ten years......................................... 10,800 10,800
------- -------
$24,029 $24,041
======= =======
</TABLE>
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------
1997 1996
------- -------
<S> <C> <C>
Computer equipment and software............................ $ 5,628 $ 3,375
Furniture and fixtures..................................... 2,702 2,459
Video production equipment................................. 954 928
Leasehold improvements..................................... 2,386 1,430
------- -------
11,670 8,192
Less accumulated depreciation and amortization............. (5,821) (3,621)
------- -------
$ 5,849 $ 4,571
======= =======
</TABLE>
F-272
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
NOTE 6--NOTES PAYABLE
During 1996, the Company entered into a $500,000 line of credit with a bank
bearing interest at the bank's prime rate plus 0.25% (8.75% as of November 30,
1997). Borrowings are unsecured and the line of credit expires on January 31,
1998. As of November 30, 1997, the Company has no amounts outstanding under the
line of credit.
In July 1995, the Company entered into a credit agreement with a bank for
$4,600,000, including a $3,000,000 line of credit, a $1,000,000 equipment line
of credit, and a $600,000 term loan to refinance existing debt. The equipment
line of credit and term loan expired during 1997. The $3,000,000 line of
credit, bearing interest at the bank's prime rate (8.5% as of November 30,
1997), expires on March 31, 1998. Borrowings are secured by all assets of the
Company. As of November 30, 1997, the Company has no amounts outstanding under
the line of credit.
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------
1997 1996
------ -----
(IN
THOUSANDS)
<S> <C> <C>
$600,000 bank line of credit; prime rate plus 1.0% (9.5% as
of November 30, 1997); due March 1998....................... $ 500 $ --
Borrowings under term loan; prime rate plus 1.0% (9.5% as of
November 30, 1997); due March 2002.......................... 260 --
Borrowings under term loan; prime rate plus 1.5%; due Decem-
ber 2000.................................................... -- 163
Borrowings under term loan; prime rate plus 0.75%; due July
1997........................................................ -- 89
Purchase contracts, with interest at 5.7% to 14.0%; expiring
at various dates through December 1, 2000................... 240 190
Other........................................................ 504 493
------ -----
1,504 935
Less current maturities...................................... (765) (433)
------ -----
$ 739 $ 502
====== =====
</TABLE>
Future maturities of notes payable are as follows: $765,000 in fiscal 1998;
$211,000 in fiscal 1999; $178,000 in fiscal 2000; $125,000 in fiscal 2001;
$104,000 in fiscal 2002; and $121,000 thereafter.
As of August 30, 1998, the Company and its subsidiaries had $3,760,000 in
credit facilities available under revolving lines of credit. The credit
facilities were secured by all the assets of the Company and bear interest at
rates of prime to prime plus 1%. At August 30, 1998, there was $221,500 of
indebtedness outstanding under these credit facilities. These credit agreements
are scheduled to expire between October 30, 1998 and November 30, 1998.
NOTE 7--RELATED PARTY TRANSACTIONS
In 1990, M&S redeemed the equity interest of the principal partner.
Consideration provided by the redemption agreement included a contingent amount
of 50% of the M&S adjusted income (as defined by the redemption agreement), for
the years 1991 through 1996, and 33 1/3% of such adjusted income for the years
1997 through 2000. The redemption agreement also provided for specific payout
terms should the business be sold in years 1 through 10. As of November 30,
1996, the current portion of liabilities to related parties included $1,804,000
related to this arrangement. This amount was paid during the year ended
November 30, 1997.
F-273
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
M&S reached an agreement with the estate of a deceased partner to redeem all
of her partnership shares for $457,000. The redemption agreement provided for
an initial $100,000 payment in December 1996 with the balance payable in
quarterly installments without interest over four years. The balance was fully
paid as of November 30, 1997.
NOTE 8--OPERATING LEASES
As of November 30, 1997, the Company maintains an executive office and two
operating offices in Northern California as well as operating offices in
Oregon, New York, Washington D.C., Georgia, North Carolina, Connecticut,
Germany, Austria, Switzerland, France and the United Kingdom. The Company
generally is responsible for maintaining public liability and property damage
insurance on the leased property and also is responsible for certain operating
expenses and property taxes. The facilities' leases begin to expire in 1998,
but contain renewal options to extend lease terms for up to six years. The
Company also leases office equipment under various operating leases, which
begin to expire in 1998.
Total rent expense for facilities and office equipment was approximately
$6,443,000, $4,427,000, and $2,935,000 for the years ended November 30, 1997,
1996, and 1995, respectively.
Future minimum operating lease payments for facilities and equipment are as
follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING NOVEMBER 30,
-------------------------------
<S> <C>
1998.............................................................. $ 3,973
1999.............................................................. 3,506
2000.............................................................. 2,662
2001.............................................................. 1,356
2002.............................................................. 602
-------
$12,099
=======
</TABLE>
NOTE 9--STOCKHOLDERS' EQUITY
Stock Option Plans
As of November 30, 1997, the Company had five stock option plans, which are
described below:
1995 Series B Common Stock Plan
On April 28, 1995, the Company's Board of Directors approved the 1995 Series
B Common Stock Plan (the Plan). Under the Plan, 750,000 shares of Series B
common stock have been reserved for issuance. Options granted under the Plan
may be either incentive stock options or nonstatutory stock options, as
designated by the Company's Board of Directors. The Plan expires 10 years after
adoption.
Series B common stock possessed the same rights and privileges as common
stock except that each share was entitled to one-tenth the dividend, if
declared, on common stock and one-tenth the voting privilege and liquidation
preference as a share of common stock. Series B common stock converted
automatically on a one-for-one basis into common stock upon the closing of the
Company's IPO.
F-274
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
The Plan provides that (i) the exercise price per share of an incentive stock
option will be no less than the fair market value of the Company's common stock
at the date of grant; (ii) the option exercise price per share for a
nonstatutory stock option will be no less than 85% of the fair market value;
and (iii) the exercise price of an incentive stock option for an optionee who
possesses more than 10% of the total combined voting power of all classes of
stock shall be no less than 110% of the fair market value; all as determined by
the Company's Board of Directors. Options generally vest 25% after one year and
then ratably over 36 months thereafter.
1995 Stock Plan
In October 1995, the Company's Board of Directors approved the 1995 Stock
Plan. Under the 1995 Stock Plan, options to purchase common stock and rights to
purchase common stock may be granted to eligible employees, officers, and
consultants of the Company. The Company's Board of Directors, or a committee
thereof, has the authority to select the persons to whom awards are granted and
determine the terms of each award. The total number of shares reserved for
issuance under the 1995 Stock Plan is 2,600,000. Options granted under the 1995
Stock Plan generally vest 25% after one year and ratably over 36 months
thereafter and are exercisable for 10 years.
1995 Director Option Plan
Under the 1995 Directors' Option Plan (the Directors' Option Plan), a total
of 100,000 shares are reserved for issuance. The Directors' Option Plan
provides that each nonemployee director will be granted an option to purchase
20,000 shares of common stock on the date on which the optionee first becomes a
director of the Company. Thereafter each nonemployee director will be granted
an option to purchase 5,000 shares of common stock on the first day of each
year after adoption of the Directors' Option Plan. Each option becomes
exercisable as to 25% of the shares subject to such option on each anniversary
of its date of grant and are exercisable for 10 years. The exercise price of
all options granted under the Directors' Option Plan will be equal to the fair
market value of the Company's common stock on the date of grant.
1996 Supplemental Stock Plan
In April 1997, the Company's Board of Directors approved the 1996
Supplemental Stock Plan (the 1996 Stock Plan). Under the 1996 Stock Plan,
options to purchase common stock may be granted to eligible employees and
consultants of the Company. The total number of shares reserved for issuance
under the 1996 Stock Plan is 1,000,000. Options granted under the 1996 Stock
Plan generally vest 25% after one year and then ratably over 36 months
thereafter and are exercisable for 10 years.
SiteSpecific Option Plan
In connection with the SiteSpecific merger discussed in Note 3, options
granted pursuant to the SiteSpecific Option Plan were assumed by the Company,
thereby allowing participants to purchase CKS stock in amounts and at prices
adjusted to reflect the exchange ratio of the merger.
1995 Employee Stock Purchase Plan
The Company's 1995 Employee Stock Purchase Plan (the Purchase Plan) was
approved by the Company's Board of Directors in October 1995 and provides for
the purchase of shares of the Company's
F-275
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
common stock by eligible employees. A total of 300,000 shares of common stock
have been reserved for issuance under the Purchase Plan. Eligible employees may
purchase common stock through payroll deductions, which may not exceed 15% of
an employee's compensation. Shares are purchased on the last day of each
purchase period. The price at which stock may be purchased under the Purchase
Plan is equal to 85% of the lower of the fair market value of the Company's
common stock at the beginning of a rolling two-year offering period or the last
day of each semiannual purchase period. During fiscal 1997 and 1996, shares
totaling 128,549 and 100,708, respectively, were issued under the Purchase Plan
at average prices of $13.90 and $14.72 per share, respectively.
Repricings
In November 1996, the Company's Board of Directors authorized the repricing
of outstanding options to purchase the Company's common stock with exercise
prices in excess of $20.00 per share to reduce their exercise price to $20.00
per share.
In December 1997, the Company's Board of Directors authorized the repricing
of outstanding options to purchase the Company's common stock with exercise
prices in excess of $13.5625 per share to reduce their exercise price to
$13.5625 per share.
Fair Value Disclosures
The Company uses the intrinsic value method in accounting for its plans.
Accordingly, no compensation cost has been recognized for its fixed stock
options. Had compensation cost for the Company's stock option plans been
determined consistent with SFAS No. 123, the Company's pro forma net income and
pro forma net income per share would have been reduced to the "as adjusted"
amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------
1997 1996
------ ------
<S> <C> <C>
Net income (loss):
As reported--pro forma..................................... $7,348 $8,367
As adjusted................................................ (245) 6,165
Net income (loss) per share:
As reported--pro forma basic............................... 0.50 0.61
As adjusted--basic......................................... (0.02) 0.45
As reported--pro forma diluted............................. 0.47 0.58
As adjusted--diluted....................................... (0.02) 0.43
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: 1997 -- zero dividend yield, expected volatility
of 80%, risk-free interest rate of 6.18%, and weighted-average expected life of
3.5 years; 1996 -- zero dividend yield, expected volatility of 80%, risk-free
interest rate of 6.00%, and weighted-average expected life of 3.5 years.
The fair value of purchase rights granted under the Purchase Plan is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions for grants: 1997 -- zero
dividend yield, expected volatility of 80%, risk-free interest rate of 6.77%,
and weighted-
F-276
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
average expected life of 1.15 years; 1996 -- zero dividend yield, expected
volatility of 80%, risk-free interest rate of 5.33%, and weighted-average
expected life of 1.16 years. The weighted-average fair value of purchase rights
granted under the Purchase Plan during 1997 and 1996 was $17.31 and $8.45 per
share, respectively.
The effects of applying SFAS No. 123 in this pro form disclosure is not
indicative of the effects on reported results for future years. SFAS No. 123
has not been applied to awards prior to 1996 and additional awards in future
years are anticipated.
Stock Option Plan Activity
Activity related to the Company's fixed stock option plans is as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,529,856 $13.94 634,216 $ 2.30 -- $ --
Granted................. 1,537,556 25.65 1,949,700 23.65 648,022 2.29
Exercised............... (351,412) 8.49 (82,685) 1.24 -- --
Forfeited............... (452,812) 19.45 (971,375) 26.91 (13,806) 1.62
--------- --------- -------
Outstanding at end of
year................... 2,263,188 21.58 1,529,856 13.94 634,216 2.30
========= ========= =======
Exercisable at year-end. 265,628 11.77 211,931 1.65 125,998 0.50
========= ========= =======
Weighted-average fair
value of options
granted during the
year................... 15.22 10.32
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of November 30, 1997:
<TABLE>
<CAPTION>
UNEXERCISED EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF SHARES CONTRACTUAL LIFE EXERCISE PRICE OF SHARES EXERCISE PRICE
--------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.50--$12.56 346,855 7.83 years $ 4.48 137,749 $ 2.97
20.00-- 29.75 1,500,326 9.02 22.15 119,129 20.12
31.00-- 42.00 416,007 9.61 33.78 8,750 36.50
--------- -------
$0.50--$42.00 2,263,188 8.95 21.58 265,628 11.77
========= =======
</TABLE>
F-277
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
NOTE 10--INCOME TAXES
Historical Income Taxes
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $ 1,562 $ 2,328 $ 1,201
State.......................................... 818 942 340
Foreign........................................ 450 -- --
------- -------- -------
Total Current: 2,830 3,270 1,541
------- -------- -------
Deferred:
Federal........................................ (771) (937) (374)
State.......................................... (85) (233) (102)
------- -------- -------
Total Deferred: (856) (1,170) (476)
------- -------- -------
Charge in lieu of taxes attributable to em-
ployee stock option plans..................... 3,343 926 --
------- -------- -------
$5,317 $ 3,026 $ 1,065
======= ======== =======
</TABLE>
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below (in
thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------
1997 1996
------- ------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowances............................ $ 533 $ 327
Depreciation.............................................. 230 314
Federal benefit of state taxes............................ -- 266
Basis of assets for tax purposes in excess of book for
taxable pooling.......................................... 10,280 --
Deferred compensation..................................... 206 657
Benefit and other accruals................................ 256 231
Other..................................................... 313 163
------- ------
Total deferred tax assets................................ 11,818 1,958
------- ------
Deferred tax liabilities:
Change from cash to accrual method of accounting for in-
come tax purposes........................................ (278) (620)
------- ------
Total deferred tax liabilities........................... (278) (620)
------- ------
Total deferred tax assets................................ $11,540 $1,338
======= ======
</TABLE>
F-278
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal tax statutory rate...................... 35.0% 35.0% 34.0%
Partnership benefit............................. (2.4) (12.7) (22.0)
State income taxes, net of federal benefit...... 6.6 3.8 3.5
Tax exempt income............................... (3.1) (3.6) --
Merger costs.................................... 2.3 -- --
Other........................................... 2.7 -- --
------- -------- --------
41.1% 22.5% 15.5%
======= ======== ========
</TABLE>
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $750,000, which expire beginning in 2010 through
2012.
Unaudited Pro Forma Income Taxes
The pro forma provision for income taxes reflects the income tax expense that
would have been reported if M&S (a partnership for income tax reporting
purposes) had been a C corporation for each of the years in the three-year
period ended November 30, 1997. The components of pro forma income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal....................................... $ 1,771 $ 4,008 $ 2,612
State......................................... 927 1,344 687
Foreign....................................... 450 -- --
------- -------- -------
Total current............................... 3,148 5,352 3,299
------- -------- -------
Deferred:
Federal....................................... (771) (937) (374)
State......................................... (85) (233) (102)
------- -------- -------
Total deferred.............................. (856) (1,170) (476)
------- -------- -------
Charge in lieu of taxes attributable to employee
stock option plans............................. 3,343 926 --
------- -------- -------
Total pro forma provision for income taxes.. $ 5,635 $ 5,108 $ 2,823
======= ======== =======
</TABLE>
The Company's pro forma effective rate differs from statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal tax statutory rate..................... 35.0% 35.0% 34.0%
State tax expenses, net of federal benefit..... 7.1 6.4 5.7
Tax exempt income.............................. (3.1) (3.6) --
Merger costs................................... 2.3 -- --
Other.......................................... 2.1 0.1 1.4
-------- -------- --------
Pro forma income tax expense................... 43.4% 37.9% 41.1%
======== ======== ========
</TABLE>
F-279
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
On an unaudited pro forma basis, the tax effects of temporary differences
that give rise to the significant portions of the unaudited pro forma deferred
tax assets and liabilities do not differ significantly from the historical
amounts presented above as of November 30, 1997 and 1996. Because the merger
with M&S was a taxable transaction, during the first quarter of fiscal 1997,
CKS recorded a deferred tax asset and an increase in stockholders' equity of
approximately $9,346,000 for the difference between the financial statement and
tax carrying amounts of M&S's net assets upon the closing of the transaction.
NOTE 11--SIGNIFICANT CUSTOMERS
During the years ended November 30, 1997 and 1996, professional fees from an
automotive manufacturer amounted to approximately $19,442,000 and $12,429,000,
respectively, representing approximately 15% and 14%, respectively, of total
revenues. During the year ended November 30, 1995, professional fees from a
cruise ship operator, the automotive manufacturer, and a major
telecommunications company amounted to approximately $7,608,000, $8,222,000,
and $6,730,000, respectively, representing approximately 13%, 14%, and 12%,
respectively, of total revenues.
The cruise ship operator owed the Company a total of approximately $6,036,000
and $6,741,000 as of November 30, 1997 and 1996, respectively. The automotive
manufacturer owed the Company approximately $15,344,000 as of November 30,
1997.
NOTE 12--MERGER WITH USWEB--UNAUDITED
On September 1, 1998, the Company entered into an Agreement and Plan of
Reorganization with USWeb Corporation (USWeb) pursuant to which each of the
outstanding shares of the Company's common stock will be exchanged for 1.5
shares of USWeb common stock and all of the outstanding options to purchase the
Company's common stock will be assumed and converted into options to acquire
shares of USWeb common stock at a ratio of 1.5 shares of USWeb common stock to
one shares of the Company's common stock. The merger is intended to be
accounted for as a pooling of interests.
F-280
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
NOTE 13--SUMMARY OF QUARTERLY RESULTS OF OPERATIONS--UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
MARCH 2, JUNE 1, AUG. 31, NOV. 30,
1997 1997 1997 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues.................................... $24,319 $35,911 $39,750 $33,622
------- ------- ------- -------
Operating expenses:
Direct salaries and related expenses....... 7,110 8,345 8,870 10,389
Other direct operating expenses............ 8,858 14,560 16,820 13,714
General and administrative expenses........ 5,355 7,514 7,880 7,205
Depreciation and amortization.............. 563 851 812 870
Merger costs............................... 1,593 -- 859 --
------- ------- ------- -------
Total operating expenses.................. 23,479 31,270 35,241 32,178
------- ------- ------- -------
Operating income............................ 840 4,641 4,509 1,444
Other income, net........................... 523 267 198 561
------- ------- ------- -------
Income before taxes....................... 1,363 4,908 4,707 2,005
Income taxes................................ 174 2,026 2,327 790
------- ------- ------- -------
Net income................................ $ 1,189 $ 2,882 $ 2,380 $ 1,215
======= ======= ======= =======
Pro forma net income and per share data:
Income before income taxes, as reported..... $ 1,363
Pro forma income taxes...................... 492
-------
Pro forma net income........................ $ 871
=======
Basic net income per share.................. $ 0.20 $ 0.16 $ 0.08
======= ======= =======
Pro forma basic net income per share ....... $ 0.06
=======
Shares used in basic per share computation.. 14,112 14,511 14,732 15,202
======= ======= ======= =======
Diluted net income per share................ $ 0.18 $ 0.15 $ 0.07
======= ======= =======
Pro forma diluted net income per share...... $ 0.06
=======
Shares used in diluted per share computa-
tion....................................... 15,215 15,620 16,072 16,442
======= ======= ======= =======
</TABLE>
F-281
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 30, 1997, 1996, AND 1995
(INFORMATION AS OF AUGUST 30, 1998 AND FOR THE NINE MONTHS ENDED AUGUST 30,
1998 AND AUGUST 31, 1997 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
FEBRUARY 29, MAY 31, AUGUST 31, NOVEMBER 30,
1996 1996 1996 1996
------------ ------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues.......................... $14,086 $23,244 $24,682 $26,236
------- ------- ------- -------
Operating expenses:
Direct salaries and related ex-
penses.......................... 4,400 5,349 6,009 7,204
Other direct operating expenses.. 5,207 10,302 10,667 9,239
General and administrative ex-
penses.......................... 2,951 4,035 4,461 5,567
Depreciation and amortization.... 285 335 399 477
Merger costs..................... -- -- -- --
------- ------- ------- -------
Total operating expenses........ 12,843 20,021 21,536 22,487
------- ------- ------- -------
Operating income.................. 1,243 3,223 3,146 3,749
Other income, net................. 338 582 445 749
------- ------- ------- -------
Income before income taxes...... 1,581 3,805 3,591 4,498
Income taxes...................... 349 886 819 972
------- ------- ------- -------
Net income...................... $ 1,232 $ 2,919 $ 2,772 $ 3,526
======= ======= ======= =======
Pro forma net income and per share
data:
Income before income taxes, as
reported........................ $ 1,581 $ 3,805 $ 3,591 $ 4,498
Pro forma income taxes........... 595 1,451 1,366 1,696
------- ------- ------- -------
Pro forma net income............. $ 986 $ 2,354 $ 2,225 $ 2,802
======= ======= ======= =======
Pro forma basic net income per
share........................... $ 0.07 $ 0.17 $ 0.16 $ 0.20
======= ======= ======= =======
Shares used in basic per share
computation..................... 13,378 13,794 14,030 14,224
======= ======= ======= =======
Pro forma diluted net income per
share........................... $ 0.07 $ 0.16 $ 0.15 $ 0.19
======= ======= ======= =======
Shares used in diluted per share
computation..................... 14,015 14,434 14,592 14,738
======= ======= ======= =======
</TABLE>
F-282
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information or
to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 3
Prospectus Summary....................................................... 4
Risk Factors............................................................. 6
Forward Looking Statements............................................... 13
Use of Proceeds.......................................................... 13
Market Information....................................................... 13
Dividend Policy.......................................................... 14
Capitalization........................................................... 14
Selected Consolidated Financial Data..................................... 15
Management's Discussion and Analysis of Financial
Condition and Results of Operations (As Restated)....................... 18
Business................................................................. 29
Management............................................................... 42
Certain Transactions..................................................... 54
Principal Stockholders................................................... 56
Description of Capital Stock............................................. 58
Plan of Distribution..................................................... 61
Restrictions on Resale................................................... 61
Legal Matters............................................................ 61
Experts.................................................................. 62
Index to Consolidated Financial Statements and Pro Forma Consolidated Fi-
nancial Information..................................................... F-1
</TABLE>
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
16,666,667 SHARES
[LOGO OF USWEB]
COMMON STOCK
----------------
PROSPECTUS
----------------
DECEMBER 23, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
