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As filed with the Securities and Exchange Commission on April 8, 1999
Registration No. 333-38351
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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Post-Effective Amendment No. 8
to
Form S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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USWEB CORPORATION
(Exact name of Registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
Delaware 8742 870551650
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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USWeb Corporation
2880 Lakeside Drive, Suite 300
Santa Clara, CA 95054
(408) 987-3200
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
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Carolyn V. Aver
Chief Financial Officer
USWeb Corporation
2880 Lakeside Drive, Suite 300
Santa Clara, CA 95054
(408) 987-3200
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
Mark Bonham, Esq.
Sam Zucker, Esq.
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
(650) 493-9300
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Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] __________
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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PROSPECTUS
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16,666,667 Shares
[LOGO OF USWEB(TM) CORPORATION APPEARS HERE]
Common Stock
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The common stock of USWeb Corporation trades on The Nasdaq National Market
under the symbol USWB.
The shares offered hereby involve a high degree of risk. See "Risk Factors"
commencing on page 4.
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 April 8, 1999.
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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.
USWeb/CKS
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 broad
geographic presence 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 believe
we have established 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.
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. Services related to Internet technology solutions
include:
. strategy consulting
. analysis and design
. technology development
. implementation and integration
. audience development
. maintenance
Services related to marketing communications programs include:
. strategic corporate and product positioning
. corporate identity and product branding
. new media and collateral systems
. environmental design and packaging
. advertising and media placement
. consumer and trade promotions
We deliver these services to clients through individual consulting offices,
whose regional presence enables them to develop close client relationships and
an understanding of client needs. In addition, individual consulting offices
may draw upon the assistance of other 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. Our field offices have efficient, real-time access to these
resources through USWeb/CKS Central, our secure intranet, which enables them to
leverage the capabilities of the entire USWeb/CKS operation.
As of December 31, 1998, we had acquired over 40 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 our stockholders, we may proceed with such acquisitions. We
expect most future acquisitions to include the issuance of additional shares of
common stock.
USWeb and USWeb/CKS refer to USWeb Corporation, a Delaware corporation, and
our subsidiaries. USWeb Corporation was incorporated in December 1995. Our
principal executive offices are located at 2880 Lakeside Drive, Suite 300,
Santa Clara, California 95054, our World Wide Web address is
http://www.uswebcks.com and our telephone number is (408) 987-3200.
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The Offering
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 12,400,000 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 securities 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 regarding
valuation and payment terms. 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 issuance of shares of
common stock in future acquisitions will dilute your ownership percentage of
USWeb/CKS as well as your voting power. You are encouraged to read "Risk
Factors--As We Issue Additional Stock, All Other Stockholdings Will Be Diluted"
for a better understanding of the effect future issuances of securities will
have on you.
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RISK FACTORS
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 our revenues,
increase our costs, make our financial results poorer and decrease our
financial strength. Negative events are also likely to cause our stock price to
decline.
Risks Related To USWeb/CKS's Business
We Have Only A Limited Operating History And Are In An Early Stage Of
Development.
USWeb Corporation 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 our business and prospects. We are in
an early stage of development and face extra risks, expenses and difficulties
as we grow and evolve. These risks, expenses and difficulties apply
particularly to USWeb/CKS because our markets, Internet professional services
and integrated marketing communications services, are new and rapidly evolving.
If we are unable to successfully manage our growth in these evolving markets
our business and prospects will suffer.
We Have A Large Accumulated Deficit And Expect To Continue To Incur Operating
Losses For Some Time.
USWeb Corporation has operated with a net loss since we were formed and our
expenses have always exceeded our revenues. As of December 31, 1998, we had an
accumulated deficit of $247.2 million. Although USWeb/CKS has experienced
revenue growth in recent months, we 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. Continued
operating losses will hurt our financial position and could cause our stock
price to fall.
Our Quarterly Results May Fluctuate.
USWeb/CKS is likely to experience significant fluctuations in our quarterly
operating results. Such fluctuations make it more difficult to manage the
business, plan expenditures and maintain a reputation as a successful and
growing company. When these fluctuations are negative, they can result in
decreases in our stock trading price or others' view of the stability of our
business. Even positive fluctuations that are temporary or create unreasonably
high expectations can lead to eventual declines in stock price as investors
adopt more realistic expectations. In the event of decreased expectations about
our business or downgrading of our stock by securities analysts, our stock
trading price would probably decline rapidly, and investors might sue the
company. Such a lawsuit would be expensive and may result in our having to pay
large amounts in damages or settlement fees. Some important factors that could
affect our quarterly operating results, in addition to the other factors
discussed in this section, are:
. the productivity of our consulting offices
. the relative mix of lower cost full-time employees versus higher cost
independent contractors
. loss of an important customer or contract
. the amount and timing of expenditures by our clients for Internet
professional services and integrated marketing communications
. the amount and timing of our capital expenditures and other costs
relating to the expansion of our operations
. economic conditions specific to Internet technology usage
Our quarterly results are also affected by our ability to anticipate revenues
and to budget expenses appropriately. We intend to increase expenses
significantly to expand operations and enhance USWeb/CKS's brand names. We
often must commit to these and other 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.
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If USWeb/CKS experiences a shortfall in customer demand, or if our expenses
precede or are not rapidly followed by increased revenues, our results of
operations will suffer and our stock price may drop significantly and rapidly.
In addition, in order to compete effectively in its market, USWeb/CKS may need
to take actions that will change our 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/CKS may also experience seasonality in demand for our
services.
Our Success Depends On Our Ability To Manage Our Growth.
USWeb/CKS's rapid growth has placed a significant strain on our managerial,
operational, financial and other resources. This strain is likely to continue.
As of December 31, 1998, USWeb/CKS had over 1,960 employees. We believe that we
will need to hire additional personnel to support our business. Our future
success will depend, in part, upon our ability to manage our growth
effectively.
Our Success Depends On Our Ability To Integrate Our Acquisitions.
A key component of our growth strategy is the acquisition of Internet
professional service firms. If we are unable to identify suitable acquisition
candidates, acquire those companies on acceptable terms and integrate their
operations successfully with those of USWeb/CKS, we will fall short of our
growth objectives and our business could suffer. If we do not retain key
acquired personnel, we will likely lose a significant portion of the potential
benefits of an acquisition. The integration of acquired companies also requires
substantial management attention and can divert attention from other aspects of
the business, including aspects that could affect our results of operations.
We have completed over 40 acquisitions and are currently facing all of these
challenges. Since we are a relatively new company, our ability to meet these
challenges has not been proven.
Our Acquisitions Carry Financial and Other Liabilities.
Our acquisitions generally involve increases in goodwill amortization,
acquired in-process technology, stock compensation expense, and increased
compensation expense resulting from newly hired employees, all of which
negatively affect our operating results. Acquisitions also require 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. If an acquired company turns out to be a poor performer, we will likely
face problems related to client satisfaction, our reputation could be
diminished, and we might have a dispute with the sellers of the acquired
entity.
We Face Risks Associated With The USWeb-CKS Group Merger.
USWeb Corporation merged with CKS Group in December 1998. Because this is the
largest merger of which USWeb and CKS Group have been a part and we have no
experience with a merger of this magnitude, stockholders should expect some
difficulties. The integration process will be further complicated by the need
to integrate widely dispersed operations and distinct corporate cultures. In
addition, the integration process will require the development of new service
offerings. 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 the merger. 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 Corporation 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
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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 also depends on the ability of our 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 have new roles in the merged
company, which will add to the challenges of integration.
We Need To Maintain And Strengthen The USWeb/CKS Brands.
We believe that maintaining and strengthening our brands is essential to
attracting and retaining 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 we
fail to promote and maintain our brands, or incur excessive expenses in an
attempt to promote and maintain our brands, our operating results and prospects
will suffer.
Our Key Strategic Relationships Are Not Based On Contractual Arrangements And
May Be Terminated Easily.
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.
Our International Operations Are Difficult To Manage.
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. We also face risks
inherent in doing business on an international level. Some of the challenges
involved in managing our international operations are described on page 20.
We Could Lose Money On Projects Where We Set A Fixed Price.
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 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.
If We Do Not Perform To Our Clients' Expectations, We Face Potential Liability.
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.
We Have Limited Control Over The Operations Of Our Franchisees.
USWeb/CKS has entered into franchise agreements with affiliates that manage a
small number of its consulting offices. The operational
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autonomy granted to each affiliate through the franchise structure might
inhibit our control over our 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 us responsible for some action or
liability of an affiliate. One claim was made alleging breach of contract
against a former affiliate, although that claim has been settled.
The Infringement Or Misuse Of Intellectual Property Rights Could Hurt Our
Business.
We believe our copyrights, trademarks, and trade secrets are important to our
success. If others infringe or misappropriate our copyrights, trademarks or
similar proprietary rights, our business could be hurt. In addition, although
we do not believe that we are infringing the intellectual property rights of
others, other parties might assert infringement claims against us. 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 U.S., so as our business
expands into foreign countries, risks associated with intellectual property
will increase.
Any Problems With Year 2000 Compliance In Our Internal Systems Or Customer
Solutions Could Harm Our Business.
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 our 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 our
business. 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 reduce funds available to purchase
USWeb/CKS products and services.
We Might Need Significant Additional Capital And Might Not Be Able To Obtain
It.
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
. 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 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 our
operating flexibility. Strategic arrangements may require us to relinquish our
rights to certain of our intellectual property. If adequate funds are not
available on acceptable terms, USWeb/CKS may be unable to develop or enhance
our services and products, take advantage of future opportunities, or respond
to competitive pressures.
We Are Involved In Potentially Expensive 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
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amount to cover payments made in connection with the claim, it could hurt the
financial position of USWeb/CKS. We are also likely from time to time to be the
subject of lawsuits typically filed against companies of our size and in our
industry.
Conflicts Of Interest Between Potential Clients May Reduce Our Business
Opportunities.
Conflicts of interest are inherent in certain segments of the marketing
communications industry, particularly in advertising. CKS Group, a company that
recently merged with USWeb Corporation 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 our
operating results to suffer.
Our Charter Documents Make It Difficult For Another Company To Acquire
USWeb/CKS.
Our board of directors has the authority to issue up to 1,000,000 shares of
preferred stock and to determine the terms of those shares without any further
action by the stockholders. The rights of holders of our 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 certificate
of incorporation and bylaws and of Delaware law could delay or make difficult a
merger, tender offer or proxy contest involving USWeb/CKS.
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Risks Associated With Our Industry
The Market In Which We Operate Is Highly Competitive And Has Low Barriers To
Entry.
The market for Internet professional services and integrated marketing
communications is new, intensely competitive, rapidly evolving and subject to
rapid technological change. A few of our competitors are listed on page 23.
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.
There are low barriers to entry into USWeb/CKS's business. 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.
We Need To Recruit And Retain Skilled Professionals, Who Are In Short Supply.
USWeb/CKS's business of delivering 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.
Potential Clients May Not Widely Adopt Internet Solutions, And, If They Do, May
Not Outsource Such Projects.
The market for USWeb/CKS's services will depend upon the adoption of
intranet, extranet, Web site and Internet solutions by customers. If customers
and potential customers choose not to implement such solutions, USWeb/CKS will
address a smaller market and its revenues could be adversely affected. Some
critical unresolved issues concerning the use of Internet solutions are
security, reliability, cost, ease of deployment and administration and
bandwidth of the Internet itself. These issues may affect the use of such
technologies to solve business problems. Some entities would have to change
significantly 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.
We Must Keep Pace With Technological Change To Remain Competitive.
Technology in the Internet industry changes very rapidly, and USWeb/CKS's
products and services, as well as the skills of our employees, could become
obsolete quickly. Our success will depend, in part, on our ability to improve
our existing services, develop new services and solutions that address the
increasingly sophisticated and varied needs of our current and prospective
clients, and respond to technological advances, emerging industry standards and
practices, and competitive service offerings.
Changes In The Law Or In Government Regulation Could Hurt Our Business.
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 our
services or increase the cost of doing business or in some other manner harm
our business.
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Risks Related To The Stock Offered By This Prospectus
As We Issue Additional Stock, All Other Stockholdings Will Be Diluted.
USWeb/CKS has a large number of stock options and warrants outstanding 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. Dilution occurs whenever more shares of the common stock are
issued. The effect of dilution is that any earnings of the company will have to
be divided among more shares. As a result, unless the issuance of the shares
involves an increase in the company's value or earnings, each outstanding share
will be worth a lesser amount. Because voting power is shared among all
outstanding shares, the issuance of more shares also reduces the voting power
of each previously outstanding share.
We expect to continue our acquisition program during the coming year and to
issue additional stock, options and warrants in the future to pay for other
acquisitions. USWeb/CKS may also be required by acquisition agreements 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, our acquisition program will result in further
substantial dilution to investors. This dilution is in addition to dilution
that occurs from employee stock option and purchase programs and financing
activities.
Our Stock Price Is Very Volatile And You Could Suffer A Decline In Value.
The market price of our Common Stock has been and is likely to continue to be
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 our competitors, changes in financial estimates by
securities analysts, overall equity market conditions or other events or
factors. Because our stock is more volatile than the market as a whole, our
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 our business.
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FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" as defined under
securities laws. These 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.
These forward-looking statements may be found in the "Prospectus Summary,"
"Risk Factors," "Business," and other sections of this prospectus. Our 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. You should carefully consider that information before you make an
investment decision.
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.
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 our 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 our subsidiaries in the proposed acquisitions.
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BUSINESS
Overview
USWeb Corporation, which is also known as and referred to as "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 consulting offices throughout the
United States and in several countries outside the United States. We provide a
comprehensive range of intranet, extranet and Web site solutions and services,
as well as marketing communications programs that use advanced technology and
new media.
By combining our expertise with industry-specific knowledge, we provide an
integrated service offering to help clients build their business in innovative
ways. Our services are focused on helping clients to:
. Differentiate their products and services.
. Improve business efficiency.
. Enhance customer relationships.
. Leverage human capital.
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.
Industry Background
Intranets, extranets and Web sites 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. On the consumer side, Web sites support the full cycle of
customer interaction with a brand. Web sites 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. Intranets, extranets and Web sites are collectively referred to as
"Internet Solutions" in this prospectus.
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 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 with 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
design 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 be able to
develop and execute marketing strategies rapidly, because shortening product
life cycles reduce lead times for marketing campaigns. New media, including
Internet-related services as well as CDROMs and interactive kiosks, have
emerged as an integral component of marketing and communications strategy.
These new media
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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 functions in-house, a company would have to make
substantial commitments of time, money and technical personnel to keep current
with rapidly evolving technologies, content presentation techniques and
competitors' offerings. Professionals with the requisite strategic, technical
and creative skills are often in short supply and many organizations are
reluctant to expand their internal information systems or marketing departments
for particular engagements at a time when they are attempting to minimize fixed
costs to increase returns on investment. At the same time, external economic
factors encourage organizations to focus on their core competencies and 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. A
number of small Internet professional services firms have emerged to address
the significant and rapidly growing market for Internet solutions. However, the
small size and capital constraints of most of these firms restrict their
ability to supply clients with the necessary depth and integration of
strategic, technical and creative skills. Furthermore, many of these providers
tend to develop expertise in a limited number of vertical markets because of
the need to leverage the information and experiences gained from the relatively
small number of Internet solution engagements they have completed.
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 presence and
information sharing capabilities of a large organization could capitalize on
this opportunity to help companies build their businesses in innovative ways.
The USWeb/CKS Solution
Our mission is to provide clients with the vision, expertise and resources
required to help build their businesses using Internet solutions and integrated
marketing communications. To capitalize on the opportunity presented by the
rapid growth in demand for such services, we have built and are continuing to
expand a professional services firm with offices across the United States and
important markets worldwide. We are an integrated international firm, with
local offices that can develop close client relationships and gain an in-depth
understanding of client needs. Each office benefits from the resources of our
overall organization. For example, individual offices may draw as needed upon
the assistance of one or more additional offices with specialized creative or
technical expertise. Each 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.
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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, 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 of Services 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 try our services with minimal long-term risk. In many instances, 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.
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.
Continue to Expand Geographic Presence.
We are continuing to expand our geographic presence 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 31, 1998, USWeb/CKS
had offices in major markets across the United States, as well as in Austria,
Canada, France, Germany, Switzerland, and the United Kingdom.
Foster 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, and Telly
Awards, as well as a One Show Interactive Award 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.
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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 co-
marketing programs, joint research and development on leading implementations
of Internet solutions, technical education, client feedback channels and
hardware and software distribution rights. We also maintain relationships with
a number of venture capital firms for early access to leading-edge solutions.
Leverage Operational Economies of Scale.
We provide certain operational and administrative services centrally,
allowing the field 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. Through our "E-Services" division, we intend to offer
comprehensive outsourced management of Internet-based, entry- and enterprise-
level applications on a subscription basis. These services are intended to give
corporate business professionals and resource-constrained IT organizations
cost-effective, accelerated access to the latest technologies to enhance
existing business systems while enabling them to focus on core competencies. We
are leveraging our relationships with leading technology companies to offer our
clients a variety of Internet application modules, which we will customize to
the needs of each client. We further 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 help clients build their
businesses innovative ways. 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 a
majority of our engagements on a time and materials basis, although we also
deliver solutions on a fixed-price basis and seek 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 its
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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 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.
. E-Services. To address the Application Service Provider market, we have
established an "E-Services" division, which intends to offer outsourced
application solutions designed to maximize a company's return on IT
investments. We are assembling a portfolio of offerings in four
categories: e-commerce, communications and knowledge management, customer
relationship management, and back office functions. We intend to combine
best-of-breed packaged applications with customized application
development to help IT organizations implement strategic Internet-based
business solutions quickly and cost-effectively.
. Audience Development. We can work with the client to develop a strategy
for achieving its online marketing objectives by increasing Web site
traffic, strengthening brand awareness and generating sales leads. 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.
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. 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, which can be executed around the development of both on-line and
off-line programs, 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.
. Internet Design and New Media. We develop media and technology solutions
to help clients deliver a consistent and effective marketing message
through digital channels, including the World Wide Web, the Internet,
proprietary online services, CD-ROMs, and interactive kiosks.
. Advertising and Media Placement. We design cross-media advertising,
including 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.
. Collateral Systems; Packaging. We develop and implement the design and
content of collateral literature systems. We also provide creative
design, development, and production of individual retail packages or
integrated retail packaging systems.
. Environmental Design. 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.
. 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 Development
We have established and are continuing to expand our broad geographic
presence, with consulting offices across the United States and in certain
other countries. We promote internal growth through rigorous management of
business fundamentals. We are also continuing to pursue a selective
acquisition program, focused on strategic and international opportunities.
For acquisitions, 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 who continue their employment with USWeb/CKS 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
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percentage of those candidates. We stress to each desired candidate the
advantages of merging with us, including the depth and breadth of services
required by many potential clients; the client recognition and acceptance of
the USWeb/CKS brands; additional funding required to pursue large and
profitable 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/CKS 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.
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As of December 31, 1998, USWeb/CKS had acquired a number of companies, which
are listed in the table below. 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.
<TABLE>
<CAPTION>
Month of
Name Office Locations Consolidation
- ---- --------------------------------- -------------
<S> <C> <C>
Schell/Mullaney.............. New York, NY Aug-96
Donovan & Green.............. New York, NY Jan-97
McKinney & Silver............ Raleigh, NC Jan-97
Xcom Corporation............. San Francisco, CA and San Diego, Mar-97
CA
CKS Group Holding Mar-97
(Deutschland)............... Munich and Hamburg, Germany
Gormley & Partners........... Greenwich, CN Mar-97
Cosmix Corporation........... Seattle, WA Apr-97
Fetch Interactive, Inc....... Milwaukee, WI Apr-97
NewLink Corporation.......... Los Angeles, CA Apr-97
NetWORKERS Corporation....... Santa Clara, CA May-97
InterNetOffice, LLC.......... Atlanta, GA and Austin, TX May-97
Infopreneurs Inc............. Washington, D.C. Jun-97
Netphaz Corporation.......... Phoenix, AZ Jun-97
SiteSpecific................. New York, NY Jun-97
Electronic Images, Inc....... Pittsburgh, PA Jul-97
Multimedia Marketing & Design Jul-97
Inc......................... Chicago, IL
DreamMedia, Inc.............. Hollywood, CA Aug-97
KandH, Inc. ................. Hollywood, CA Aug-97
Internet Cybernautics, Inc... Sausalito, CA Sep-97
Synergetix Systems Sep-97
Integration, Inc............ Long Island, NY
Online Marketing Company..... Detroit, MI Sep-97
Zendatta, Inc................ San Mateo, CA Sep-97
USWeb--Apex, Inc............. Houston, TX Nov-97
W3-design.................... Culver City, CA Nov-97
Reach Networks, Inc.......... New York, NY Nov-97
InnoMate Online Marketing Feb-98
GmbH........................ Dusseldorf, Germany
Utopia, Inc.................. Boston, MA Mar-98
Inter.logic.studios, inc. ... Atlanta, GA Mar-98
Quest Interactive Media, Mar-98
Inc. ....................... Memphis, TN
Ensemble Corporation......... Dallas, TX Mar-98
Ikonic Interactive, Inc...... San Francisco, CA and New York, Mar-98
NY
Xplora Limited............... Windsor, United Kingdom Apr-98
Kallista, Inc................ Chicago, IL May-98
Nutley Systems, Inc. (nSET).. Seattle, WA May-98
Advanced Video Communications May-98
(AVC)....................... Boston, MA
USWeb San Jose............... San Jose, CA May-98
Gray Peak Technologies, Jun-98
Inc......................... New York, NY
Boston, MA
Reston, VA
Iselin, NJ
Wanchoi, Hong Kong
Tucker Network Technologies.. So. Norwalk, CT Jul-98
Metrix Communications, Inc... St. Paul, MN and Irvine, CA Aug-98
Sysicom...................... Paris, France Dec-98
CKS Group, Inc............... Cupertino, CA Dec-98
</TABLE>
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We believe that there are numerous potential acquisition candidates that
satisfy our acquisition criteria. 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, 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.
We also face a number of challenges that pose risks or could hurt our
business as we build up our international operations, such as:
. unexpected changes in regulatory requirements that could raise the cost
of doing business, prevent doing business, or restrict USWeb/CKS's
ability to remove funds 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 or significantly decrease the profitability of
operations where payment is in local currency
. 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
. political instability and the risk of military conflict
In addition to our company-owned offices, as of December 31, 1998, we had
four franchisees, which we refer to as Affiliates, that collectively managed an
aggregate of seven 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 (1) a minimum monthly payment or (2) 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, 1998, fees from Affiliates represented less than 1% of our
total revenues.
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.
Clients
We market our services primarily to medium-sized and large companies, which
we define as those with over 500 employees or $50 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, 1998.
For Internet solutions, clients typically begin by establishing a basic Web
site and then
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implement 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. We target clients whose Internet
technology and marketing communications consulting needs will result in
projects which will generate $250,000 to $5,000,000 in revenues.
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.
Develop Marketing and Sales Tools for Consulting Offices. We have developed a
toolkit of marketing and sales materials to be used by
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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 offices throughout the United States and in several
countries outside the United States. Each consulting office is responsible for
providing professional services to its clients, either alone or in conjunction
with one or more other offices. Client sales, engagement pricing, and staffing
decisions for each office are generally made by the managers of the office,
although our executive officers take an active role in directing the activities
of all consulting offices.
Our headquarters, in the San Francisco Bay Area, provides consulting offices
with operational support in financial management and reporting, human
resources, office administration, and management performance improvement tools.
Our headquarters manages our marketing campaigns, the strategic relationships
with partner companies, and the acquisition program. Finally, our headquarters
maintains USWeb/CKS Central, our intranet and the company's primary channel for
enterprise-wide interaction and communication. We developed and maintain
USWeb/CKS Central in-house. USWeb/CKS Central provides consulting offices with
rapid, secure and efficient online access to each other and to all of our
centrally managed resources, such as the project registry, sales and marketing
tools, vendor information and operational assistance. We believe that USWeb/CKS
Central is both scalable and critical to our strategy of strengthening our
position as a leading Internet professional services firm because USWeb/CKS
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.
22
<PAGE>
Our competitors can be divided into several groups such as those listed in
the table below:
<TABLE>
<CAPTION>
Market Segment Sample Competitors
-------------- ------------------
<S> <C>
Internet Integrators
and Web Presence Providers.. IXL
Organic Online
Modem Media.Poppe
Tyson
Proxicom
Advertising and Media
Agencies............. Foote Cone & Belding
Ogilvy & Mather
Large Information
Technology Consulting
Service Providers.... Andersen Consulting
Cambridge Technology
Partners
EDS
Computer Hardware,
Software and Service
Vendors.............. IBM
Compaq
Hewlett-Packard
Microsoft
Novell
Oracle
</TABLE>
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, for example, 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. Existing or future
competitors could 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 31, 1998 we had 1,960 employees, of which 140 were located in
our corporate facilities in Cupertino, San Francisco, and Santa Clara,
California, and 1,820 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 future success will depend in part
on our
23
<PAGE>
continued ability to attract, hire or acquire and retain qualified employees.
Executive Officers of USWeb/CKS
The executive officers of USWeb/CKS, and their ages as of December 31, 1998,
are as follows.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Mark Kvamme.... 38 Chairman of the Board
Robert Shaw.... 50 Chief Executive Officer
Tobin Corey.... 38 President
Carolyn Aver... 39 Executive Vice President, Chief Financial Officer,
Secretary
Sheldon Laube.. 48 Executive Vice President and Chief Technology Officer
</TABLE>
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 USWeb Corporation in December 1995 and has served
as its President since June 1996 and as a Director since April 1998. Prior to
June 1996, Mr. Corey served as its Executive Vice President, Marketing. From
1994 to December 1995, Mr. Corey served as Vice President of Marketing for the
NetWare Products Division of Novell. From 1991 through 1994, Mr. Corey served
as Director of Marketing for the Desktop Division of Novell.
Ms. Carolyn Aver joined USWeb/CKS 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
Technologies, Ms. Aver served as Vice President and Chief Financial Officer of
ParcPlace-Digitalk from March 1993 to May 1997. Ms. Aver was also employed by
AutoDesk, Inc. from October 1984 to March 1993 where she served in various
capacities including Controller, Chief Financial Officer and Vice President,
Finance.
Mr. Sheldon Laube co-founded USWeb Corporation 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.
Properties
Our principal headquarters facility occupies approximately 27,100 square
feet under lease in Santa Clara, California. We have recently entered into a
lease for a 75,000 square foot building in San Francisco, a portion of which
we intend to use for our core executive staff beginning in mid-1999. All
company-owned offices also lease their facilities. We believe our facilities
currently under lease, together with space available for lease, are adequate
to meet our current needs. 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,
24
<PAGE>
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.
The complaint alleges that during the class period, which is the period from
March 20, 1997 to November 7, 1997, 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 did so at
artificially inflated prices. The plaintiff seeks to recover damages in an
unspecified amount, as well as 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.
On September 15, 1998, U S WEST filed a complaint against USWeb/CKS and one
of its licensees in the United States District Court for the District of
Nebraska, alleging claims under federal and state law for trademark
infringement, trademark dilution, and unfair competition. U S West filed an
Amended Complaint on October 5, 1998. U S West seeks to enjoin all use by us of
"USWeb." On March 4, 1999, we filed a motion to dismiss U S West's Amended
Complaint. On March 3, 1999, we filed a separate complaint against U S West in
the United States District Court for the Northern District of California,
seeking a declaration that our use of "USWeb" does not infringe upon, dilute,
or otherwise violate any valid rights of U S West. Discovery has not yet begun
in either of these lawsuits. USWeb/CKS believes that the lawsuit against us is
without merit and we intend to defend this action vigorously.
As is typical for companies in our business and of our size, we are from time
to time the subject of lawsuits. In addition to the lawsuits described above, a
number of legal proceedings are presently pending. Certain of such proceedings
may be covered under insurance policies or indemnification agreements. Based
upon information presently available, we believe that the final outcome of
pending proceedings should not materially harm 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 materially harm our business, financial condition or results
of operations.
25
<PAGE>
PLAN OF DISTRIBUTION
USWeb/CKS will issue the common stock from time to time in connection with
acquisitions 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 (1) 1% of the shares of common stock of USWeb/CKS
outstanding and (2) 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.
EXPERTS
The financial statements incorporated in this prospectus by reference to the
annual report on Form 10-K of USWeb Corporation for the year ended December 31,
1998 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
26
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
USWeb/CKS files annual, quarterly, and special reports, proxy statements, and
other information with the Securities and Exchange Commission. We have also
filed with the SEC a registration statement on Form S-4 (File No. 333-38351)
under the Securities Act of 1933 and the SEC's related rules and regulations.
This prospectus, which is a part of a larger registration statement, does not
contain all of the information in the registration statement and the exhibits
and schedules to the registration statement. You may read and copy any
information that USWeb/CKS files with the SEC at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Also, the SEC 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 like us 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.
The SEC allows us to "incorporate by reference" some of the information we
file with the SEC, which means that we can disclose important information to
you by referring you to other documents we file with the SEC. We have included
some information in this document by incorporating it from other documents. We
previously filed the following documents with the SEC, and we incorporate them
by reference in this prospectus:
1. Our annual report on Form 10-K for the fiscal year ended December 31,
1998.
2. The description of our capital stock contained in our registration
statement on Form 8-A filed September 30, 1997.
In addition, we incorporate by reference all documents filed by us pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
after the date of this prospectus and before the termination of the offering.
All of the documents we incorporate by reference shall be considered a part of
this prospectus on the date the documents are filed.
The documents that we incorporate by reference are not presented in or
delivered with this prospectus. These documents contain important business and
financial information about USWeb/CKS. These documents 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 five days before making an investment decision.
27
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Overview.................................................................. F-2
Unaudited pro forma combined statement of operations--year ended December
31, 1998................................................................. F-3
Notes to unaudited pro forma combined financial information............... F-4
INTER.LOGIC.STUDIOS, INC.
Report of Independent Accountants......................................... F-6
Balance Sheet............................................................. F-7
Statement of Operations................................................... F-8
Statement of Shareholders' Equity......................................... F-9
Statement of Cash Flows................................................... F-10
Notes to Financial Statements............................................. F-11
QUEST INTERACTIVE MEDIA, INC.
Report of Independent Accountants......................................... F-14
Balance Sheet............................................................. F-15
Statement of Operations................................................... F-16
Statement of Shareholders' Deficit........................................ F-17
Statement of Cash Flows................................................... F-18
Notes to Financial Statements............................................. F-19
ENSEMBLE CORPORATION
Report of Independent Accountants......................................... F-22
Balance Sheet............................................................. F-23
Statement of Operations................................................... F-24
Statement of Shareholders' Equity......................................... F-25
Statement of Cash Flows................................................... F-26
Notes to Financial Statements............................................. F-27
IKONIC INTERACTIVE, INC.
Report of Independent Accountants......................................... F-32
Balance Sheet............................................................. F-33
Statement of Operations................................................... F-34
Statement of Shareholders' Deficit........................................ F-35
Statement of Cash Flows................................................... F-36
Notes to Financial Statements............................................. F-37
USWEB SAN JOSE
Report of Independent Accountants......................................... F-42
Balance Sheet............................................................. F-43
Statement of Operations................................................... F-44
Statement of Shareholder's Equity (Deficit)............................... F-45
Statement of Cash Flows................................................... F-46
Notes to Financial Statements............................................. F-47
GRAY PEAK TECHNOLOGIES, INC.
Report of Independent Accountants......................................... F-50
Balance Sheet............................................................. F-51
Statement of Operations................................................... F-52
Statement of Changes in Stockholders' Equity (Deficit).................... F-53
Statement of Cash Flows................................................... F-54
Notes to Financial Statements............................................. F-55
</TABLE>
F-1
<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.
Accordingly, the historical financial statements of the Company have been
restated to combine the historical consolidated financial statements of USWeb
and CKS Group for all periods presented. The combined company is referred to as
"the Company" or "USWeb/CKS." 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 February 1, 1998 to December 31, 1998, USWeb/CKS
completed the acquisitions of fifteen Internet consulting services firms in
various transactions accounted for as purchases. Collectively, the companies
acquired through December 31, 1998, are referred to herein as the "Acquired
Entities." The aggregate purchase price of the Acquired Entities was
approximately $223 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 $4.8 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 $25.5 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 $9.5 million of the aggregate
purchase price was allocated to existing technology and is being amortized over
the estimated useful life of six to twelve months. Approximately $183.2 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.
The accompanying unaudited pro forma combined statement of operations
presents the results of operations of USWeb/CKS for the year ended December 31,
1998, combined with the statements of operations of the Acquired Entities as if
such entities had been acquired on January 1, 1998.
The operating results of USWeb/CKS for any period are not necessarily
indicative of the results for any subsequent period.
F-2
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
(A)
Acquired Pro Forma
Historical Entities Adjustments Combined
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues.......................... $ 228,600 $17,878 $ -- $ 246,478
--------- ------- -------- ---------
Cost of revenues:
Services......................... 146,251 12,387 -- 158,638
Provision for loss on contract... 9,994 -- -- 9,994
Stock compensation............... 13,037 -- 15,744 (B) 28,781
--------- ------- -------- ---------
Total cost of revenues......... 169,282 12,387 15,744 197,413
--------- ------- -------- ---------
Gross profit...................... 59,318 5,491 (15,744) 49,065
--------- ------- -------- ---------
Operating expenses:
Marketing, sales and support..... 27,761 4,069 -- 31,830
General and administrative....... 44,694 3,536 -- 48,230
Acquired in-process technology... 25,508 -- (25,508) --
Stock compensation............... 31,760 -- 35,227 (B) 66,987
Amortization of intangible
assets.......................... 74,538 -- 50,779 (B) 125,317
Merger and integration costs..... 28,822 -- -- 28,822
Impairment of goodwill........... 11,079 -- -- 11,079
--------- ------- -------- ---------
Total operating expenses....... 244,162 7,605 60,498 312,265
--------- ------- -------- ---------
Loss from operations.............. (184,844) (2,114) (76,242) (263,200)
Interest income, net.............. 4,302 -- -- 4,302
--------- ------- -------- ---------
Loss before income taxes.......... (180,542) (2,114) (76,242) (258,898)
Provision for income taxes........ 7,739 -- -- 7,739
--------- ------- -------- ---------
Net loss.......................... $(188,281) $(2,114) $(76,242) $(266,637)
========= ======= ======== =========
Net loss per share:
Basic............................ $ (3.07) $ (4.35)
========= =========
Diluted.......................... $ (3.07) $ (4.35)
========= =========
Weighted average shares:
Basic............................ 61,329 61,329
========= =========
Diluted.......................... 61,329 61,329
========= =========
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information
F-3
<PAGE>
USWEB CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Note 1--Periods Presented
The accompanying unaudited pro forma combined statement of operations
information gives effect to the acquisition by USWeb/CKS of fifteen Internet
consulting business, acquired between February 1, 1998 and December 31, 1998,
as if such acquisitions occurred on January 1, 1998.
Note 2. --The following adjustments were applied to the historical financial
statements of USWeb/ CKS and the Acquired Entities to arrive at the
unaudited pro forma combined financial information.
(A) To include items of income and expense related to the Acquired Entities
for the respective periods in 1998 prior to the acquisition by USWeb/CKS.
(B) 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 had occurred on
January 1, 1998.
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, 1998.
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, 1998. Acquired
technology is amortized over its estimated useful life of six to twelve
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, 1998.
Stock compensation is allocated between costs of revenues and operating
expenses based upon the related classification of the employees entitled to
receive such bonuses.
(C) The following table combines, for the year ended December 31, 1998 the
historical results of operations of USWeb/CKS with 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/CKS and the results of
operations of the Acquired Entities as if each acquisition had occurred on
January 1, 1998, or the date of inception, if later.
F-4
<PAGE>
USWEB CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS INFORMATION
Year Ended December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Cost of Revenues
-----------------------------------
Provision
for Loss Stock
on Compen- Gross
Revenues Services Contract sation Total Profit
-------- -------- --------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
USWeb Historical. $228,600 $146,251 $9,994 $13,037 $169,282 $59,318
-------- -------- ------ ------- -------- -------
Acquired Entities:
Inter.logic.studios
inc............. 614 305 -- -- 305 309
Quest Interactive
Media, Inc. .... 257 133 -- -- 133 124
Ensemble Corp... 1,983 1,215 -- -- 1,215 768
Ikonic Interactive,
Inc............. 2,242 1,160 -- -- 1,160 1,082
USWeb San Jose.. 333 304 -- -- 304 29
Gray Peak
Technologies,
Inc. ........... 3,564 3,939 -- -- 3,939 (375)
Utopia, Inc..... 254 41 -- -- 41 213
Xplora Ltd...... 982 499 -- -- 499 483
Kallista, Inc... 598 281 -- -- 281 317
Tucker Network
Technologies,
Inc............. 3,159 1,948 -- -- 1,948 1,211
Metrix
Communications,
Inc............. 2,864 1,773 -- -- 1,773 1,091
Other entities.. 1,028 789 -- -- 789 239
-------- -------- ------ ------- -------- -------
Subtotal
Acquired
Entities........ 17,878 12,387 -- -- 12,387 5,491
-------- -------- ------ ------- -------- -------
Pro forma
amounts before
adjustments..... $246,478 $158,638 $9,994 $13,037 $182,119 $64,809
======== ======== ====== ======= ======== =======
<CAPTION>
Operating Expenses
------------------------------------------------------------------------------
General Acquired Amortiza- Income
Marketing, and In-process Stock tion of (Loss)
Sales and Admini- Techno- Compen- Intangible Merger Impairment from
Support strative logy sation Assets Costs of Goodwill Total Operations
---------- -------- ---------- ------- ---------- ------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
USWeb Historical. $27,761 $44,694 $25,508 $31,760 $74,538 $28,822 $11,079 $244,162 $(184,844)
---------- -------- ---------- ------- ---------- ------- ----------- -------- -----------
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..... $31,830 $48,230 $25,508 $31,760 $74,538 $28,822 $11,079 $251,767 $ 186,958
========== ======== ========== ======= ========== ======= =========== ======== ===========
</TABLE>
F-5
<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-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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.
PricewaterhouseCoopers LLP
San Jose, California
March 27, 1998
F-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 4
Forward-Looking Statements................................................. 12
Use of Proceeds............................................................ 12
Business................................................................... 13
Plan of Distribution....................................................... 27
Restrictions on Resale..................................................... 27
Legal Matters.............................................................. 27
Experts.................................................................... 27
Where You Can Find More Information........................................ 27
</TABLE>
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
16,666,667 Shares
[LOGO OF USWEB(TM)]
Common Stock
----------------
PROSPECTUS
----------------
April 8, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933.
Reference also is made to the Certificate of Incorporation of the Registrant
filed as Exhibit 3.1; the Bylaws of the Registrant, filed as Exhibit 3.2; and
the form of indemnification agreement filed as Exhibit 10.1 which, among other
things, and subject to certain conditions, authorize the Registrant to
indemnify, or indemnify by their terms, as the case may be, the directors and
officers of the Registrant against certain liabilities and expenses incurred by
such persons in connection with claims made by reason of their being such a
director or officer.
The Registrant has obtained directors and officers insurance providing
indemnification for certain of the Registrant's directors, officers,
affiliates, partners or employees for certain liabilities.
The indemnification provisions in the Bylaws, and the indemnification
agreements entered into between the Registrant and its directors and executive
officers, may be sufficiently broad to permit indemnification of the
Registrant's officers and directors for liabilities arising under the 1933 Act.
The Reorganization Agreement provides that commencing with the effectiveness
of the CKS Merger, the Registrant will indemnify the current officers and
directors of CKS Group for any action or inaction by such person prior to the
CKS Merger.
Reference is made to the following documents listed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit
Document Number
-------- -------
<S> <C>
Amended and Restated Certificate of Incorporation..................... 3.1
Bylaws of Registrant (Delaware)....................................... 3.2
Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers......................... 10.1
</TABLE>
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
3.1(B) Amended and Restated Certificate of Incorporation of the Registrant.
3.2(A) Bylaws of the Registrant.
4.1(A) Form of Registrant's Common Stock Certificate.
4.2(A) Amended and Restated Investors' Rights Agreement dated May 2, 1997
among the Registrant and the other parties named therein.
4.3(A) Form of Registrant's Series A Preferred Stock Purchase Warrant.
4.4(A) Form of Registrant's Series C Preferred Stock Purchase Warrant.
4.5(A) Form of Registrant's Common Stock Purchase Warrant.
4.6(A) Form of Registrant's Signing Warrant.
4.7(A) Form of Registrant's AGR Warrant.
4.8(A) Form of Amended and Restated Investor Rights Agreement dated November
7, 1997 among the Registrant and the other parties named therein.
4.9(B) Form of Agreement and Plan of Reorganization dated May 13, 1998 among
the Registrant, USWeb Acquisition Corporation 121, Gray Peak
Technologies, Inc. and other individuals and entities named therein.
4.10(D) Agreement and Plan of Reorganization dated September 1, 1998 among
the Registrant, USWeb Acquisition Corporation No. 134 and CKS Group,
Inc.
4.11(D) Form of USWeb Corporation Holder Agreement among Registrant, CKS
Group, Inc. and certain stockholders of Registrant dated September 1,
1998 (included in Exhibit 10.19).
5.1(B) Opinion of Wilson Sonsini Goodrich & Rosati regarding legality of
securities.
10.1(A) Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.
10.2(A) 1996 Stock Option Plan and related agreements.
10.3(C) 1996 Equity Compensation Plan and related agreements.
10.4(C) 1997 Acquisition Stock Option Plan and related agreements.
10.5(C) 1997 Employee Stock Purchase Plan.
10.6(C) Form of Restricted Stock Purchase Agreement between the Registrant
and certain executive officers.
10.8(A) Management Continuity Agreement between the Registrant and Tobin
Corey.
10.9(A) Management Continuity Agreement between the Registrant and Sheldon
Laube.
10.12(A) Loan and Security Agreement dated September 29, 1997 between the
Registrant and Silicon Valley Bank.
10.13(A) Amendment, dated November 5, 1997 to Loan and Security Agreement
dated September 29, 1997 between the Registrant and Silicon Valley
Bank.
10.14(A) Intel-USWeb Relationship Agreement dated as of November 7, 1997
between the Registrant and Microsoft Corporation.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.15(B) Lease Agreement dated December 16, 1996 by and between the Company
and LAKESIDE DRIVE, INC. for 2880 Lakeside Drive, Santa Clara, CA
95054.
10.16(B) First Amendment to Lease Agreement dated July 23, 1997 by and between
the Company and LAKESIDE DRIVE, INC. for 2880 Lakeside Drive, Santa
Clara, CA 95054.
10.17(D) Form of CKS Voting Agreement between Registrant and certain
stockholders of CKS Group, Inc. dated September 1, 1998.
10.18(D) Form of CKS Group, Inc. Holder Agreement among Registrant, CKS Group,
Inc. and certain stockholders of CKS Group, Inc. dated September 1,
1998.
10.19(D) Form of USWeb Corporation Holder Agreement among Registrant, CKS
Group, Inc. and certain stockholders of Registrant dated September 1,
1998.
10.20(E) Lease Agreement dated March 5, 1999 between the Company and Rosenberg
SOMA Investments II, LLC for 410 Townsend Street, San Francisco, CA.
11.1(E) Statement of computation of pro forma net loss per share.
21.1(E) Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants. (see page II-6)
24.1 Power of Attorney.
</TABLE>
- ---------------------
(A) Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 333-36827).
(B) Previously filed with this registration statement.
(C) Incorporated by reference from the Company's Registration Statement on Form
S-8 filed on June 3, 1998 (No. 333-55893).
(D) Incorporated by reference from the Company's Registration Statement on Form
S-4 (No. 333-63323).
(E) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(b) Financial Statement Schedules
None.
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 22. Undertakings
The undersigned Registrant undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent,
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information in the
Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment shall be deemed a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof;
II-3
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the application
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(5) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
(8) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to
be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 20 of this
Registration Statement or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form S-4 and has duly caused this Post-Effective
Amendment to the Registration Statement on Form S-4, to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Santa Clara,
State of California, on this 8th day of April, 1999.
USWEB CORPORATION
By: /s/ Carolyn V. Aver
----------------------------------
Carolyn V. Aver
Executive Vice President And Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities indicated on this 8th day of April, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<C> <S>
* Chairman of the Board and Director
____________________________________
Mark D. Kvamme
* Chief Executive Officer (Principal Executive
____________________________________ Officer) and Director
Robert W. Shaw
/s/ Carolyn V. Aver Executive Vice President, Chief
____________________________________ Financial Officer and Secretary
Carolyn V. Aver (Principal Financial Officer)
* President, Chief Operating Officer and
____________________________________ Director
Tobin Corey
* Director
____________________________________
Robert Hoff
* Director
____________________________________
Joseph Marengi
*
____________________________________
Gary Rieschel Director
*
____________________________________
Klaus Schwab Director
Power of Attorney
</TABLE>
/s/ Carolyn V. Aver
*By: _____________________
Carolyn V. Aver, Attorney-
in-Fact
II-5
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of USWeb
Corporation of our report dated January 25, 1999 appearing on page 39 of USWeb
Corporation's Annual Report on Form 10-K for the year ended December 31, 1998.
We also consent to the use in this Prospectus constituting part of this
Registration Statement on Form S-4 of our reports dated March 24, 1998 related
to the financial statements of Inter.logic.studios, inc., March 27, 1998
related to the financial statements of Quest Interactive Media, Inc., March 27,
1998 related to the financial statements of Ensemble Corporation, April 15,
1998 related to the financial statements of Ikonic Interactive, Inc., March 26,
1998 related to the financial statements of USWeb San Jose, and April 17, 1998
related to the financial statements of Gray Peak Technologies, Inc. which
appear in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
San Jose, California
April 7, 1999
II-6
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Robert W. Shaw and Carolyn V. Aver, and each of
them individually, his attorney-in-fact, for him in any and all capacities, to
sign any and all amendments to this Registration Statement, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact, or his substitute, may do or cause to be done or by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Post
Effective Amendment No. 7 to the Registration Statement has been signed by the
following persons on this 29th day of March, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<C> <S>
/s/ Mark D. Kvamme Chairman of the Board and Director
____________________________________
Mark D. Kvamme
/s/ Robert W. Shaw Chief Executive Officer and Director
____________________________________ (Principal Executive Officer)
Robert W. Shaw
/s/ Carolyn V. Aver Executive Vice President and Chief
____________________________________ Financial Officer (Principal
Carolyn V. Aver Financial Officer)
/s/ Tobin Corey President, Chief Operating Officer and
____________________________________
Tobin Corey Director
/s/ Robert Hoff Director
____________________________________
Robert Hoff
/s/ Joseph Marengi Director
____________________________________
Joseph Marengi
/s/ Gary Reischel
____________________________________
Gary Rieschel Director
/s/ Klaus Schwab
____________________________________
Klaus Schwab Director
</TABLE>
