<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999.
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 000-23151
----------------
USWEB CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 87-0551650
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
</TABLE>
2880 Lakeside Drive, Suite 300
Santa Clara, California 95054
(Address of principal executive offices)
(408) 987-3200
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [_] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Title of each class Outstanding at March 31, 1999
------------------- -----------------------------
Common Stock, $.001 par value 74,221,101
</TABLE>
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<PAGE>
USWEB CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Page No.
--------
<C> <S> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited).... 1
Condensed Consolidated Balance Sheet at March 31, 1999 and
December 31, 1998......................................... 1
Condensed Consolidated Statement of Operations for the
Three Months Ended March 31, 1999 and 1998................ 2
Condensed Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 1999 and 1998................ 3
Notes to Condensed Consolidated Financial Statements....... 4
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 8
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 22
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.......................................... 23
ITEM 5. Other Information.......................................... 23
ITEM 6. Exhibits................................................... 23
Signatures.......................................................... 24
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
USWEB CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................ $ 79,548 $ 64,956
Short-term investments............................... 17,135 36,230
Accounts receivable, net............................. 100,538 89,038
Other current assets................................. 10,665 9,946
Deferred tax assets.................................. 637 637
--------- ---------
Total current assets............................... 208,523 200,807
Property and equipment, net............................ 20,645 18,880
Intangible assets, net................................. 171,954 168,335
Deferred income taxes and other assets................. 15,162 15,152
--------- ---------
$ 416,284 $ 403,174
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable..................................... $ 30,258 $ 38,251
Accrued expenses..................................... 55,502 52,908
Deferred revenue..................................... 3,894 4,210
Income taxes payable................................. 2,912 3,111
Lease obligations, current........................... 2,993 3,445
--------- ---------
Total current liabilities.......................... 95,559 101,925
Lease obligations, non-current......................... 1,035 1,377
--------- ---------
96,594 103,302
--------- ---------
Stockholders' equity:
Common Stock......................................... 70 66
Additional paid-in-capital........................... 618,465 546,976
Accumulated deficit.................................. (298,845) (247,170)
--------- ---------
Total stockholders' equity......................... 319,690 299,872
--------- ---------
$ 416,284 $ 403,174
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE>
USWEB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months
ended March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues................................................... $ 84,112 $ 39,325
-------- --------
Cost of revenues:
Services................................................. 52,926 26,750
Provision for loss on contract........................... 11,215 --
Stock compensation....................................... 4,408 1,681
-------- --------
Total cost of revenues................................. 68,549 28,431
-------- --------
Gross profit............................................... 15,563 10,894
-------- --------
Operating expenses:
Marketing, sales and support............................. 8,855 5,261
General and administrative............................... 14,033 9,358
Acquired in-process technology........................... 823 4,323
Stock compensation....................................... 9,148 2,568
Amortization of intangible assets........................ 29,473 4,860
Merger and integration costs............................. 5,316 --
-------- --------
Total operating expenses............................... 67,648 26,370
-------- --------
Loss from operations....................................... (52,085) (15,476)
Interest income, net....................................... 901 925
-------- --------
Loss before income taxes................................... (51,184) (14,551)
Provision for income taxes................................. 491 704
-------- --------
Net loss................................................... $(51,675) $(15,255)
======== ========
Net loss per share:
Basic and diluted........................................ $ (0.73) $ (0.29)
======== ========
Weighted average shares outstanding...................... 70,971 52,408
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
USWEB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months
ended March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss................................................. $(51,675) $(15,255)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 31,643 6,265
Provision for doubtful accounts........................ 1,690 397
Provision for loss on contract......................... 11,215 --
Stock option and warrant costs and expenses............ 13,556 4,316
Acquired in-process technology......................... 823 4,323
Deferred income taxes.................................. -- (178)
Tax benefit from disqualifying dispositions............ -- 404
Changes in assets and liabilities:
Accounts receivable.................................... (9,154) 8,938
Other assets........................................... (551) 384
Accounts payable....................................... (8,694) (15,452)
Accrued expenses....................................... 511 (3,839)
Deferred revenue....................................... (316) 431
Income taxes payable................................... (199) 37
-------- --------
Net cash used in operating activities................ (11,151) (9,229)
-------- --------
Cash Flows From Investing Activities:
Acquisition of property and equipment.................... (3,486) (1,480)
Cash received from (used in) acquisitions................ (8,551) 333
Purchase of short-term investments....................... (3,523) (31,576)
Proceeds from maturities/sales of short-term
investments............................................. 22,618 10,671
-------- --------
Net cash provided by (used in) investing activities.. 7,058 (22,052)
-------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of Common Stock, net.............. 19,621 855
Repayment of bank borrowings............................. -- (21)
Proceeds from capital lease financing.................... -- 888
Principal payments on capital leases..................... (936) (354)
-------- --------
Net cash provided by financing activities............ 18,685 1,368
-------- --------
Increase/(decrease) in cash and cash equivalents........... 14,592 (29,913)
Cash and cash equivalents, beginning of period............. 64,956 62,368
-------- --------
Cash and cash equivalents, end of period................... $ 79,548 $ 32,455
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
USWEB CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(Unaudited)
Note 1--The Company:
USWeb Corporation (doing business as USWeb/CKS) and its subsidiaries
("USWeb/CKS" or the "Company") is a leading Internet professional services
firm that provides Internet, intranet, extranet and Web site solutions,
advertising and branding services, and related services to businesses.
USWeb/CKS has built a network of consulting offices and what it believes to be
one of the most recognized brands for Internet professional services.
USWeb/CKS offers a comprehensive range of services to deliver Internet
solutions designed to improve clients' business processes. The Company
provides Internet professional services including strategy consulting,
analysis and design, technology development, systems implementation and
integration, audience development and maintenance. The Company also provides
consulting services in the areas of strategic corporate and product
positioning, corporate identity and product branding, new media, environmental
design, packaging, collateral systems, advertising, direct marketing, consumer
and trade promotions and media placement services.
On December 17, 1998, USWeb Corporation ("USWeb") issued 23,428,341 shares
of its common stock for all of the outstanding common stock of CKS Group, Inc.
("CKS Group") based on a conversion ratio of 1.5 shares of the Company's
Common Stock for each share of CKS Group's common stock. The transaction has
been accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements have been restated for all periods prior to
the merger to include the results of operations, financial position and cash
flows of both USWeb and CKS Group.
Note 2--Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation of USWeb/CKS' financial condition as of
March 31, 1999, the results of its operations and its cash flows for the
three-month periods ended March 31, 1999 and 1998. These financial statements
should be read in conjunction with the Company's audited 1998 financial
statements, including the notes thereto, and the other information set forth
therein included in the Company's 1998 Annual Report on Form 10-K. Operating
results for the three-month period ended March 31, 1999 are not necessarily
indicative of the operating results that may be expected for the year ending
December 31, 1999. Certain prior period amounts have been reclassified to
conform to the current period presentation.
Note 3--Acquisitions:
During the quarter ended March 31, 1999, the Company acquired all of the
outstanding stock of Martha Felt Group, Inc., Internetworking Systems Group,
Inc., and BI Business Information SA in separate transactions in exchange for
a total of $5,500 in cash and 1,657,964 shares of the Company's Common Stock,
resulting in an aggregate purchase price of $28,679.
The acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed
on the basis of their fair values on the acquisition dates. Approximately
$2,686 of the aggregate purchase price was allocated to net tangible assets
consisting primarily of cash, accounts receivable, property
4
<PAGE>
USWEB CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and equipment and accounts payable. The historical carrying amounts of such
net assets approximated their fair values. Approximately $823 was allocated to
in-process technology and was immediately charged to operations because such
in-process technology had not reached the stage of technological feasibility
at the acquisition dates and had no alternative future use. Approximately
$1,650 was allocated to existing technology and is being amortized over its
estimated useful life of one year. The purchase price in excess of the fair
value of identified tangible and intangible assets and liabilities assumed in
the amount of $23,520 was allocated to workforce in place and is being
amortized over estimated useful lives ranging from 18 to 24 months.
During 1999 and 1998, the Company recognized the acquisition of 16
businesses ("Acquired Entities"). The following unaudited pro forma
consolidated amounts give effect to these acquisitions as if they had occurred
on January 1, 1999 and on January 1, 1998 by consolidating the results of
operations of the Acquired Entities with the results of USWeb/CKS for the
three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three months
ended March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues................................................ $ 84,695 $ 56,527
======== ========
Net loss................................................ $(49,053) $(74,788)
======== ========
Net loss per share:
Basic and diluted..................................... $ (0.56) $ (1.10)
======== ========
Weighted average number of shares outstanding......... 87,271 68,063
======== ========
</TABLE>
Note 4--Strategic Alliances:
In May 1998, the Company entered into a strategic alliance with NBC
Multimedia, Inc. ("NBC") to expand production capabilities for NBC's
interactive properties and services. As part of the strategic alliance, the
Company was awarded a multi-year contract where revenues earned under the
contract are expected to approximate $11,000. In connection with the strategic
alliance, the Company issued warrants to NBC allowing them to purchase
1,600,000 and 500,000 shares of the Company's Common Stock at $22.50 and
$25.43 per share, respectively. Warrants to purchase 1,050,000 shares are
exercisable at any time prior to their expiration in November 1999 (the "Fixed
Warrants"). Warrants to purchase the remaining 1,050,000 shares are subject to
cancellation or, if previously exercised, are subject to repurchase at the
original exercise price, in the event that the agreement is cancelled by NBC
prior to May 2002 (the "Variable Warrants). The warrants were initially valued
at $12,568. Of the total value ascribed to the NBC warrants, $6,286 was
attributable to the Fixed Warrants and recorded as part of stock compensation
in operating expenses. The remaining $6,282 of the initial value was
attributed to the Variable Warrants, which are included as part of the costs
of the NBC contract. The Variable Warrants are subject to revaluation at each
balance sheet date through the date the related cancellation or repurchase
rights lapse. The Variable Warrants were revalued at March 31, 1999, and the
original charge was increased by $11,215 to $21,209 based on current market
data. Because the inclusion of the value of the Variable Warrants as part of
the NBC contract results in an overall loss on the contract, this amount was
recognized as a provision for loss on contract.
5
<PAGE>
USWEB CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Supplemental Cash Flow Information:
<TABLE>
<CAPTION>
Three Months
Ended March
31,
------------
1999 1998
------ ------
<S> <C> <C>
Supplemental disclosures:
Cash paid for interest....................................... 75 46
Cash paid for income taxes................................... 207 16
Non-cash financing and investing activities:
Common Stock issued for acquisitions......................... 27,278 32,552
Assumption of liabilities in acquisition..................... -- 4,976
</TABLE>
Note 6--Balance Sheet Components:
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
1999 1998
--------- ------------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable............................... $ 86,168 $ 78,746
Unbilled revenues................................. 21,423 15,533
Less: Allowance for doubtful accounts............. (7,053) (5,241)
--------- --------
$ 100,538 $ 89,038
========= ========
Property and equipment, net:
Computer equipment................................ $ 28,290 $ 25,445
Furniture and fixtures............................ 3,943 3,483
Leasehold improvements............................ 3,937 3,491
--------- --------
36,170 32,419
Less: Accumulated depreciation and amortization... (15,525) (13,539)
--------- --------
$ 20,645 $ 18,880
========= ========
Intangible assets, net:
Goodwill, primarily workforce in place............ $ 271,211 $239,768
Purchased technology.............................. 14,707 13,058
--------- --------
285,918 252,826
Less: Accumulated amortization.................... (113,964) (84,491)
--------- --------
$ 171,954 $168,335
========= ========
Accrued expenses:
Compensation and benefits......................... $ 24,379 $ 14,331
Marketing costs................................... 2,056 3,458
Professional fees................................. 3,194 3,953
Merger and related costs.......................... 9,301 17,892
Other............................................. 16,572 13,274
--------- --------
$ 55,502 $ 52,908
========= ========
</TABLE>
6
<PAGE>
USWEB CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Recent Accounting Pronouncements:
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software
and on accounting for the proceeds of computer software originally developed
or obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use. SOP 98-1 will be effective
for the Company in 1999. USWeb/CKS does not expect the adoption of this
pronouncement to have a material impact on its financial condition or results
of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. SFAS No. 133 requires that all
derivatives be recognized in the balance sheet at their fair market value and
the corresponding derivative gains or losses be either reported in the
statement of operations or as a deferred item depending on the type of hedge
relationship that exists with respect to such derivatives. SFAS No. 133 will
be effective for the Company in 2000. USWeb/CKS does not expect the adoption
of this pronouncement to have a material impact on its financial condition or
results of operations.
7
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis of the financial condition and results
of operations of USWeb Corporation (which is also known as and referred to as
"USWeb/CKS") should be read in conjunction with the Company's consolidated
financial statements for the year ended December 31, 1998 filed with
USWeb/CKS' Annual Report on Form 10-K.
The following discussion contains forward-looking statements about matters
that involve risks and uncertainties, such as statements of the Company's
plans, objectives, expectations and intentions, as well as financial trends.
The discussion also includes cautionary statements about these matters. You
should read the cautionary statements made below as being applicable to all
related forward-looking statements wherever they appear in this document.
USWeb/CKS' actual results could differ materially from those discussed below.
Factors that could cause or contribute to such differences include those
discussed in "Risk Factors," as well as those discussed elsewhere herein.
Overview
USWeb/CKS is a leading Internet professional services firm that provides
intranet, extranet and Web site solutions, advertising and branding services,
and related services to businesses. USWeb/CKS has built a network of
consulting offices and what we believe to be one of the most recognized brands
for Internet professional services. USWeb/CKS offers a comprehensive range of
services to deliver Internet solutions designed to improve clients' business
processes. We provide Internet professional services including strategy
consulting, analysis and design, technology development, systems
implementation and integration, audience development and maintenance. We also
provide consulting services in the areas of strategic corporate and product
positioning, corporate identity and product branding, new media, environmental
design, packaging, collateral systems, advertising, direct marketing, consumer
and trade promotions and media placement services.
On December 17, 1998, USWeb Corporation completed its merger with CKS Group,
Inc. ("CKS Group") in a transaction accounted for as a pooling of interests.
Accordingly, our historical financial statements have been combined to present
the historical consolidated financial statements of USWeb Corporation and CKS
Group for all periods presented. Under terms of the merger agreement, each
outstanding share of CKS Group common stock was exchanged for 1.5 shares of
USWeb Corporation Common Stock.
USWeb Corporation was incorporated in December 1995. From the date of its
incorporation to March 31, 1997, our operating activities related primarily to
recruiting personnel, raising capital, and conducting business as a franchisor
of Internet professional services firms. Each such firm that entered into a
franchise agreement with us was designated an "Affiliate." In March 1997, we
entered into our last Affiliate agreement and do not expect to enter into any
additional Affiliate agreements. In the first quarter of 1997, we initiated
the second phase of our corporate development strategy and began to acquire
Internet professional services firms, starting with some of the Affiliates. To
date, USWeb/CKS has derived its revenues from a combination of service
revenues generated by its USWeb/CKS-owned offices and fees paid by Affiliates.
Revenues from USWeb/CKS-owned offices represented approximately 99% of total
USWeb/CKS revenues for the quarters ended March 31, 1999 and 1998.
CKS Group was founded in 1987 as Cleary Communications and initially
concentrated on the development and implementation of marketing plans and
programs. Over the last few years, CKS Group developed its vision as an
integrated marketing communications company utilizing both traditional
marketing disciplines, such as product branding and advertising, and advanced
technology solutions and new media, including Internet development, intranet
development, database architecture and enterprise systems integration.
The Company has only a limited operating history upon which to base an
evaluation of its business and prospects. The Company and its prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in an early stage of development, particularly
companies in new and rapidly evolving markets such as Internet professional
services. Such risks for the Company include, but are not
8
<PAGE>
limited to, an evolving business model and the management of both internal and
acquisition- based growth. To address these risks, the Company must, among
other things, continue strategic expansion of its network of consulting
offices, continue to develop the strength and quality of its operations,
maximize the value delivered to clients, enhance the Company's brands, respond
to competitive developments and continue to attract, retain and motivate
qualified employees. The Company may not be successful in meeting these
challenges and addressing such risks, and the failure to do so could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company has incurred net losses since inception, and
as of March 31, 1999 had an accumulated deficit of $299 million. Although the
Company has experienced revenue growth in recent quarters, such growth rates
may not be sustainable or indicative of future operating results. The Company
expects to continue to incur substantial operating losses through at least
1999, and may not achieve or sustain profitability. See "Risk Factors--We Have
Only a Limited Operating History . . . " and "--We Have a Large Accumulated
Deficit . . . "
Acquisitions
In 1996, we began to acquire selected Internet, marketing communications and
related technology services firms. We transitioned from a franchise-based
business model to one based on USWeb/CKS-owned operations to provide greater
economies of scale, enable the consulting offices to focus on providing
professional services and facilitate their growth by furnishing needed working
capital. USWeb/CKS typically determines the purchase price of each acquisition
candidate based on strategic fit, geographic coverage, historical revenues,
profitability, financial condition and contract backlog, and our qualitative
evaluation of the candidate's management team, operational scalability and
customer base.
USWeb/CKS typically acquires suitable candidates through mergers in exchange
for shares of its Common Stock, cash, or a combination of both. Generally,
with respect to past domestic acquisitions, at least fifty percent of the
shares to be issued are deposited into a one-year escrow (or otherwise
deferred) and the remaining shares are delivered to the acquired company's
shareholders. The acquired company is valued again, typically at each of six
and twelve months after acquisition, and additional shares are issued to the
acquired company or escrowed shares are returned to USWeb/CKS depending on
whether the valuation has increased or decreased. After all such purchase
price adjustments have been made, all shares remaining in escrow are issued to
the acquired company's shareholders. USWeb/CKS expects to continue using this
valuation and payment methodology for most of its future acquisitions;
however, in certain situations USWeb may use other methodologies as
appropriate. We may increasingly use cash to pay for acquisitions and, in
particular, intend to increase our use of cash in international acquisitions.
Of the 44 acquisitions completed by USWeb and CKS Group to date, 41 have
been accounted for as purchase business combinations and three, including the
acquisition of CKS Group, have been accounted for as poolings of interests.
For each purchase business combination to date, a portion of the purchase
price was allocated to the tangible and identifiable intangible assets
acquired and liabilities assumed based on their respective fair values on the
acquisition date. Identifiable intangible assets include:
. amounts allocated to in-process technology and immediately charged to
operations,
. amounts allocated to completed technology and amortized on a straight-
line basis over the estimated useful life of the technology--generally
from six months to one year,
. amounts allocated to workforce in place and amortized on a straight-line
basis over the estimated period of benefit, which ranges from twelve to
forty-two months, and
. amounts allocated to goodwill and amortized on a straight-line basis
over twelve months to twenty years.
For each purchase business transaction, the results of operations of an
acquired entity are consolidated with those of USWeb/CKS as of the date
USWeb/CKS acquires effective control of the entity, which may occur prior to
the formal legal closing of the transaction and the physical exchange of
acquisition consideration.
9
<PAGE>
To determine the amounts to be allocated to acquired in-process technology
we used two distinct approaches. For all acquisitions except Gray Peak
Technologies, Inc. ("Gray Peak"), we performed an internal detailed valuation.
For the acquisition of Gray Peak, which was individually significant at the
time it was acquired, we engaged a valuation consultant to perform an
independent valuation of the Gray Peak purchase price including an allocation
of such purchase price to assets acquired and liabilities assumed. Should
USWeb/CKS fail to complete acquired in-process technology, we may not be able
to recover costs invested in development of such technology or realize any
anticipated future net cash flows.
Generally, the employees of acquired companies who become employees of
USWeb/CKS are granted options to purchase shares of USWeb/CKS' Common Stock,
which typically become exercisable over a 36-month period. These options have
an exercise price per share equal to at least the fair market value of
USWeb/CKS Common Stock on the date of grant. Additional options generally are
granted at the revaluation dates if the target company's formula-based
valuation increases. In most cases, each optionee is also given the right to
receive a stock bonus at the time an option is granted. The stock bonus vests
at the same rate as the corresponding option and is equal in value to the
aggregate exercise price of this option. The stock bonus is payable at the
earlier of three years from the date of grant or, to the extent vested, upon
termination of employment. The stock bonus amount is amortized ratably over a
36-month period and recorded as compensation expense. This charge is
identified as "Stock Compensation" and allocated to either cost of revenues or
operating expenses depending on whether the optionee is acting in a service
delivery or administrative capacity.
During the year ended December 31, 1998, options for our Common Stock were
exchanged for outstanding vested options for the acquired entity's Common
Stock only with respect to the acquisitions of Gray Peak, Ikonic Interactive,
Inc. ("Ikonic"), and CKS Group. In the acquisitions of Gray Peak and Ikonic,
which were accounted for as purchase business combinations, the value of such
options was determined using the Black-Scholes option pricing model and
included in the determination of purchase price. For transactions in which
option vesting was accelerated as a result of the merger transaction, the
vested options were required to be exercised prior to acquisition and the
resultant target company shares exchanged for our Common Stock. Options
granted to new employees with exercise prices equal to the fair value of the
Company's Common Stock on the date of grant in exchange for future services
are accounted for in accordance with Accounting Principles Board Opinion No.
25, with no compensation expense recognized in our consolidated financial
statements. Options granted to consultants with non-variable terms are valued
on the date of grant using the Black-Scholes option pricing model. The
resulting compensation cost is allocated to cost of revenues or operating
expenses depending on whether the optionee is acting in a services delivery or
administrative capacity.
To capitalize on the growth opportunities for a newly acquired consulting
office, USWeb/CKS generally hires a number of additional Internet
professionals during the three-month period following the office's integration
into the USWeb/CKS network. The capacity utilization rates of these new
employees are initially not as high as those of seasoned employees because of
the time spent on training and professional development. Consequently,
USWeb/CKS expects that the cost of service revenues as a percentage of service
revenues of an integrated office will generally increase during the first
three months following such integration. We believe that this investment in
training and professional development will contribute to our ability to meet
growth targets.
The successful implementation of USWeb/CKS' acquisition strategy depends on
its ability to identify suitable acquisition candidates, acquire such
companies on acceptable terms and integrate their operations successfully with
those of the Company. USWeb/CKS may not be able to do so. Moreover, in
pursuing acquisitions USWeb/CKS may compete with companies with similar
acquisition strategies, certain of which competitors may be larger and have
greater financial and other resources than USWeb/CKS. Competition for these
acquisition targets could also result in increased prices for acquisition
targets and a diminished pool of companies available for acquisition.
Acquisitions also involve a number of other risks, including adverse effects
on USWeb/CKS' reported operating results from increases in goodwill
amortization, acquired in-process technology, stock compensation expense and
increased compensation expenses resulting from newly hired employees, the
diversion of management attention, risks associated with the subsequent
integration of acquired
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businesses, potential disputes with the sellers of one or more acquired
entities and the failure to retain key acquired personnel. Client satisfaction
or performance problems with an acquired firm could also have a material
adverse impact on the reputation of USWeb/CKS as a whole, and any acquired
subsidiary could significantly under-perform relative to USWeb/CKS'
expectations. For all of these reasons, USWeb/CKS' pursuit of an overall
acquisition strategy or any individual completed, pending or future
acquisition could harm USWeb/CKS' business, results of operations and
financial condition. To the extent USWeb/CKS chooses to use cash consideration
in the future to pay for all or part of any acquisitions, USWeb/CKS may be
required to obtain additional financing. Such financing may be unavailable on
favorable terms, if at all.
Strategic Alliance
In May 1998, USWeb Corporation entered into a strategic alliance with NBC
Multimedia, Inc. ("NBC") to expand production capabilities for NBC's
interactive properties and services. As part of the strategic alliance, we
were awarded a multi-year contract where revenues earned under the contract
are expected to approximate $11.0 million. In connection with the strategic
alliance, we issued warrants to NBC allowing them to purchase 1,600,000 and
500,000 shares of our Common Stock at $22.50 and $25.43 per share,
respectively. Warrants to purchase 1,050,000 shares are exercisable at any
time prior to their expiration in November 1999 (the "Fixed Warrants"). If the
agreement is cancelled by NBC Multimedia, Inc. before May 2002, USWeb/CKS can
cancel the warrants to purchase the remaining 1,050,000 shares or, if the
warrants have been previously exercised, can repurchase the associated shares
issued (the "Variable Warrants"). The warrants were initially valued at
$12.6 million. Of the total value ascribed to the NBC warrants, $6.3 million
was attributable to the Fixed Warrants and recorded as part of stock
compensation in operating expenses. The remaining $6.3 million of the initial
value was attributed to the Variable Warrants, which are included as part of
the costs of the NBC contract. The Variable Warrants are subject to
revaluation at each balance sheet date through the date the related
cancellation or repurchase rights lapse. The Variable Warrants were revalued
at March 31, 1999, and the original charge was increased by $11.2 million to
$21.2 million based on current market data. Because the inclusion of the value
of the Variable Warrants as part of the NBC contract results in an overall
loss on the contract, this amount was recognized as a provision for loss on
contract.
As a result of the purchase accounting adjustments, the stock compensation
charges and the charges associated with the NBC warrants described above,
USWeb/CKS has incurred significant non-cash expenses. In addition to the
charge associated with NBC warrants, stock compensation expense included in
cost of revenues totaled $4.4 million, stock compensation expense included in
operating expenses totaled $9.1 million and amortization of intangible assets
totaled $29.5 million, all of which were related to the acquisition of
USWeb/CKS-owned offices. In addition, USWeb/CKS has recognized an aggregate
cost of $0.8 million for acquired in-process technology related to the
acquisitions it completed during the quarter ended March 31, 1999. USWeb/CKS
expects these acquisition-related non-cash expenses to continue on a basis
corresponding with operation of the acquisition program.
Sources of Revenues and Revenue Recognition
USWeb/CKS consolidates the financial statements of acquired entities
beginning on the date USWeb/CKS assumes effective control of those entities.
Revenues primarily consist of fees from consulting services engagements
(including both time-and-materials and fixed-price engagements). We provide
Internet professional services including strategy consulting, analysis and
design, technology development, systems implementation and integration,
audience development and maintenance. We also provide strategic corporate and
product positioning, corporate identity and product branding, new media,
environmental design, packaging, collateral systems, advertising, direct
marketing, consumer and trade promotions and media placement services.
Revenues from time-and-materials engagements are recognized as services are
provided and revenues from fixed-price engagements are recognized using the
percentage-of-completion method. Billable rates vary by the service provided
and geographical region. Although a majority of engagements are currently
performed on a time-and-materials basis, USWeb/CKS intends to increase the
percentage of its engagements that are based on a fixed price. The pricing,
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management and execution of individual engagements are the responsibility of
the consulting office that performs or coordinates the services.
Classification of Costs
Cost of revenues include direct costs, such as personnel salaries and
benefits and the cost of any third-party hardware or software included in an
Internet solution, and related overhead expenses, such as depreciation and
occupancy charges, associated with the generation of the revenues. The
technology, sales, marketing and administrative costs of each USWeb/CKS-owned
office are classified as operating expenses. Corporate expenses are primarily
classified as operating expenses. Marketing and sales expenses include product
and service research, advertising, brand name promotions and lead-generation
activities, as well as the salary and benefits costs of the personnel in these
functions. General and administrative expenses include administration,
accounting, legal and human resources costs.
Results of Operations (Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------------
% of % of
1999 Revenue 1998 Revenue
-------- ------- -------- -------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues................................ $ 84,112 100 % $ 39,325 100 %
-------- --- -------- ---
Cost of revenues:
Services.............................. 52,926 63 26,750 68
Provision for loss on contract........ 11,215 13 -- --
Stock compensation.................... 4,408 5 1,681 4
-------- --- -------- ---
Total cost of revenues.............. 68,549 81 28,431 72
-------- --- -------- ---
Gross Profit............................ 15,563 19 10,894 28
-------- --- -------- ---
Operating Expenses
Marketing, sales and support.......... 8,855 11 5,261 13
General and administrative............ 14,033 17 9,358 24
Acquired in-process technology........ 823 1 4,323 11
Stock compensation.................... 9,148 11 2,568 7
Amortization of intangible assets..... 29,473 35 4,860 12
Merger and integration costs.......... 5,316 6 -- --
-------- --- -------- ---
Total operating expenses............ 67,648 81 26,370 67
-------- --- -------- ---
Loss from operations.................... (52,085) (62) (15,476) (39)
Interest income, net.................... 901 1 925 2
-------- --- -------- ---
Loss before income taxes................ (51,184) (61) (14,551) (37)
-------- --- -------- ---
Provision for income taxes.............. 491 1 704 2
-------- --- -------- ---
Net loss................................ $(51,675) (62)% $(15,255) (39)%
======== === ======== ===
</TABLE>
Revenues. Total revenues increased $44.8 million or 114% during the three-
month period ended March 31, 1999, compared to the corresponding period ended
March 31, 1998. This increase resulted from an increase in the number and
relative size of client engagements we have undertaken as well as revenue
recognized by companies acquired subsequent to March 31, 1998. During the
three months ended March 31, 1999, revenue related to acquisitions completed
subsequent to the three-month period ended March 31, 1998 was $28.3 million.
USWeb/CKS recognizes revenues related to fixed fee for service projects using
the percentage of completion method based on the ratio of costs incurred to
total estimated project costs. USWeb/CKS updates its estimated costs on each
project monthly. Fees and expenditures in excess of billings represents the
costs incurred and
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anticipated profits earned on projects in progress in excess of amounts
billed, and is recorded as an asset. Billings in excess of fees and
expenditures represents amounts billed in excess of costs incurred and
estimated profits earned, and is recorded as a liability. To the extent costs
incurred and anticipated costs to complete projects in progress exceed
anticipated billings, a loss is accrued for the excess.
We generally generate higher profit margins when a greater percentage of our
services are performed by full-time employees rather than independent
consultants. Accordingly, USWeb/CKS actively monitors and manages its level of
full-time and temporary employees as compared to independent consultants to
ensure that future projects are adequately staffed. In certain instances,
USWeb/CKS has made a strategic decision to incur the incremental costs of
independent consultants to staff growth in projects rather than increase the
number of full-time employees until such time as USWeb/CKS has determined that
the increased revenue levels are sustainable. We anticipate that revenues in
future periods will vary depending on our internal growth and management of
growth, and as a result of any acquisitions and the integration of acquired
firms.
Cost of Revenues. Cost of revenues increased $40.1 million or 141% during
the three-month period ended March 31, 1999 compared to the corresponding
period in 1998. This increase primarily resulted from increases in the number
and relative size of client engagements we have undertaken as well as cost of
revenues recognized by companies acquired subsequent to March 31, 1998. During
the three months ended March 31, 1999, cost of revenues related to
acquisitions completed subsequent to the three-months ended March 31, 1998 was
$19.5 million. Included in cost of revenues for the period ended March 31,
1999 is a provision for contract loss of $11.2 million related to the NBC
warrants discussed above. We anticipate that cost of revenues will increase in
absolute dollars as a result of internal growth and as a result of any
acquisitions we may complete.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased $3.6 million or 68% during the three-month period ended March 31,
1999 compared to the corresponding period ending March 31, 1998. This increase
resulted from the consolidation of additional Internet consulting businesses
acquired during the respective periods and from increases in personnel to
support the growth of our operations, and were partially offset by decreases
in marketing expenses resulting from our transition away from an affiliate
franchising program. During the three months ended March 31, 1999, sales and
marketing expenses related to acquisitions completed subsequent to the period
ended March 31, 1998 were $2.2 million. We anticipate that sales and marketing
expenses will increase in future periods in absolute dollars as we continue to
pursue an aggressive brand building strategy and continue to acquire and
consolidate the results of additional Internet consulting firms.
General and Administrative Expenses. General and administrative expenses
increased $4.7 million or 50% in the three-month period ended March 31, 1999
compared to the corresponding period in the prior year. These increases were
primarily attributable to additional costs resulting from the consolidation of
the results of operations of acquired businesses as well as increases in
personnel and overhead costs to support the internal growth of our operations.
During the three months ended March 31, 1999, general and administrative
expenses related to acquisitions completed subsequent to the period ended
March 31, 1999 were $2.6 million. USWeb/CKS believes that the absolute dollar
level of general and administrative expenses will increase in future periods
as a result of increased staffing and as a result of the acquisition of
additional Internet professional services firms.
Acquired In-Process Technology. Acquired in-process technology results from
our acquisition program. Acquired in-process technology expenses were $0.8
million in the three-month period ended March 31, 1999 a decrease of $3.5
million or 81% from $4.3 million during the corresponding period in 1998. The
acquired in-process technology had not reached the stage of technological
feasibility as of the dates of their acquisition and had no alternative future
use. Accordingly, such amounts were charged to operations in the period the
respective acquisitions were consummated. The amount of acquired in-process
technology, if any, will fluctuate in future periods based upon the nature and
timing of future acquisitions.
Stock Compensation. Stock compensation expense results primarily from stock
bonuses awarded to employees of acquired companies, as well as from stock
options granted with exercise prices below the fair
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market value of our Common Stock on the date of grant. Stock compensation
expense is classified as cost of revenue or operating expense depending upon
the classification of the respective employees. Such expenses are recognized
ratably over the related vesting period, which is generally three years. Stock
compensation expense totaled $13.6 million in the three-month period ended
March 31, 1999 an increase of $9.4 million or 219% from $4.2 million during
the corresponding period in 1998. This increase is a direct result of options
granted pursuant to the Company's acquisitions. USWeb/CKS anticipates that
such amounts will increase in the near term as recent stock awards vest
contemporaneously, and that such amounts will fluctuate in future periods
based upon the nature and timing of future acquisitions and related stock and
option awards.
Amortization of Intangible Assets. Amortization of intangible assets
consists primarily of amortization of purchased technology, workforce in place
and goodwill resulting from our various acquisitions. Amortization of
intangible assets totaled $29.5 million in the three months ended March 31,
1999 an increase of $24.6 million or 506% from $4.9 million during the
corresponding period of 1998. Amortization periods range from six months to
twenty years. Amortization of intangible assets will fluctuate in future
periods based upon the nature and timing of future acquisitions.
Merger and Integration Costs. We completed our merger with CKS Group on
December 17, 1998. Costs directly associated with the merger were $5.3 million
during the three-months ended March 31, 1999. Total merger and integration
costs, including $28.8 million recognized in the fourth quarter of 1998,
aggregated $34.1 million. Such costs included $20.9 million of professional
fees, including investment banking, legal, accounting and printing fees; $10.2
million of costs associated with lease termination, office consolidation and
employee severance and retention costs; and $3.0 million in other related
costs. As of March 31, 1999, $9.3 million of accrued merger and integration
costs, consisting primarily of lease termination and employee related costs,
remained unpaid. Such amounts are expected to be paid by September 30, 1999.
No significant merger and integration costs related to the merger with CKS
Group are expected to be incurred in future periods.
Interest Income, net. Interest income, net consists primarily of interest
earned on our holdings in cash, cash equivalents and short-term investments,
offset by interest expense incurred primarily on our capital lease facility.
The decrease in net interest income in 1999 as compared to 1998 was primarily
attributable to lower average cash, cash equivalents and marketable securities
balances.
Provision for Income Taxes. For the three months ended March 31, 1999,
provision for income taxes represents foreign and state taxes accrued for
USWeb/CKS subsidiaries. For the quarter ended March 31, 1998, provision for
income taxes represents the actual provision for income taxes of CKS Group
prior to the merger with USWeb Corporation. No provision for federal and state
income taxes was recorded by USWeb Corporation because USWeb Corporation
incurred net operating losses in that period.
Net Loss. Net losses for the three-month periods ended March 31, 1999 and
1998 were $51.7 million and $15.3 million, respectively. The increase in the
net loss was primarily attributable to increases in costs directly associated
with our acquisition program, including amortization of intangible assets,
stock compensation and merger and integration costs related to the merger with
CKS Group in 1998. In addition, the Company recorded a provision for contract
loss on warrants related to a strategic alliance.
Recent Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software
and on accounting for the proceeds of computer software originally developed
or obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use. SOP 98-1 will be effective
for USWeb/CKS' year ending December 31, 1999. USWeb/CKS does not expect the
adoption of this pronouncement to have a material impact on its financial
condition or results of operations.
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In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. SFAS 133 requires that all
derivatives be recognized in the balance sheet at their fair market value and
the corresponding derivative gains or losses be either reported in the
statement of operations or as a deferred item depending on the type of hedge
relationship that exists with respect to such derivatives. SFAS 133 will be
effective for the Company's fiscal year 2000. USWeb/CKS does not expect the
adoption of this pronouncement to have a material impact on its financial
condition or results of operations.
Liquidity and Capital Resources
The Company invests predominantly in instruments that are highly liquid,
investment grade, and have maturities of less than one year, with the intent
to make such funds readily available for operating purposes. At March 31,
1999, the Company had approximately $96.7 million in cash, cash equivalents
and short-term investments compared to $101.2 million at December 31, 1998.
Cash used in operating activities was $11.2 million for the three months
ended March 31, 1999 and resulted primarily from the net loss of $51.7
million, increases in accounts receivable of $9.2 million and decreases in
accounts payable of $8.7 million, partially offset by non-cash charges of
$58.9 million (which includes primarily provision for contract loss, stock
compensation, acquired in-process technology, amortization of intangible
assets and depreciation and amortization of fixed assets and leasehold
improvements). Cash used in operating activities was $9.2 million for the
three months ended March 31, 1998, and was primarily due to the net loss from
operations of $15.3 million, offset by non-cash charges of $15.5 million.
Cash provided by investing activities was $7.1 million for the three months
ended March 31, 1999. Sales and maturities (net of purchases) of investments
in marketable securities during the period were $19.1 million and capital
expenditures totaled $3.5 million. Capital expenditures have generally been
comprised of purchases of computer hardware and software as well as leasehold
improvements related to leased facilities and are expected to increase in
future periods. Cash used in investing activities was $22.1 million for the
three months ended March 31, 1998, and was primarily due to purchase of short-
term investments (net of sales and maturities) of $20.9 million.
Cash provided by financing activities was $18.7 million for the three months
ended March 31, 1999. During the period, various stock option, employee stock
purchase and common stock warrant holders exercised or purchased their stock
options, employee shares and common stock warrants, resulting in net proceeds
to the Company of $19.6 million. Cash provided by financing activities was
$1.4 million for the three months ended March 31, 1998, and was primarily due
to sale of Common Stock through the Company's employee stock purchase plan and
upon exercise of options, resulting in net proceeds of $0.9 million.
We currently have no material commitments other than those under operating
lease agreements and costs incurred in connection with the recently completed
merger with CKS Group, which include investment banking fees, professional
fees and severance and retention payments. We have experienced a substantial
increase in capital expenditures and operating lease arrangements since
inception, which is consistent with increased staffing, and anticipate that
this will continue in the future. Additionally, USWeb/CKS will continue to
evaluate possible acquisitions of or investments in businesses, products, and
technologies that are complementary to those of USWeb/CKS, which may require
the use of cash. USWeb/CKS believes that existing cash, investments, and
borrowings available under its credit facilities will be sufficient to fund
its requirements for working capital and capital expenditures for at least the
next 12 months. However, USWeb/CKS may sell additional equity or debt
securities or seek additional credit facilities if it believes such actions
would be a better way to fund acquisition-related or other costs. Sales of
additional equity or convertible debt securities would result in additional
dilution to our stockholders. We may need to raise additional funds sooner in
order to support more rapid expansion, develop new or enhanced services and
products, respond to competitive pressures, acquire complementary businesses
or technologies or take advantage of unanticipated opportunities. USWeb/CKS'
future liquidity and capital requirements will depend upon numerous factors,
including the success of our existing and new service
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offerings and competing technological and market developments. See "Risk
Factors--We Might Need Significant Additional Capital and Might Not Be Able
Obtain It."
Year 2000
Many computer systems and software and electronic products are coded to
accept only two-digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. In addition, certain systems and products do not correctly
process "leap year" dates. As a result, computer systems and software ("IT
Systems") and other property and equipment not directly associated with
information systems ("Non-IT Systems"), such as elevators, phones, other
office equipment used by many companies, including USWeb/CKS, may need to be
upgraded, repaired or replaced to comply with such "Year 2000" requirements
and "leap year" requirements.
USWeb/CKS has conducted an internal review of its principal internal
corporate headquarters IT Systems, including finance, human resources,
Intranet applications and payroll systems. We have contacted the vendors of
the principal IT Systems in our internal corporate headquarters to determine
potential exposure to Year 2000 issues. Those systems not certified as Year
2000 compliant by their vendors will be replaced by systems that are certified
as Year 2000 compliant. Although the principal internal corporate headquarters
IT Systems are Year 2000 compliant, some of our minor internal systems,
including our Windows NT operating system and internal networking systems are
not Year 2000 compliant or have not been evaluated. These systems will be
replaced or upgraded to Year 2000 compliance. USWeb/CKS has completed an
assessment of the status of the IT Systems at our subsidiaries and has a plan
in place to replace or upgrade these systems to Year 2000 Compliance.
USWeb/CKS has not yet completed an assessment of the Non-IT Systems for the
corporate headquarters and our subsidiaries.
USWeb/CKS has appointed a task force (the "Task Force") to oversee Year 2000
and leap year issues. The task force is expected to review all IT Systems and
Non-IT Systems that have not been determined to be Year 2000 and leap year
compliant and will attempt to identify and implement solutions to ensure such
compliance. USWeb/CKS expects to evaluate its systems for Year 2000 and leap
year compliance in accordance with the DISC PD2000-1 Year 2000 compliance
standards established by the British Standards Institute. To date, USWeb/CKS
has spent an immaterial amount to remediate its Year 2000 issues. USWeb/CKS
presently estimates that the total cost of addressing its Year 2000 and leap
year issues will be immaterial. These estimates were derived utilizing
numerous assumptions, including the assumption that we have already identified
our most significant Year 2000 and leap year issues and that the plans of our
third-party suppliers will be fulfilled in a timely manner without cost to us.
However, these assumptions may not be accurate, and actual results could
differ materially from those anticipated.
USWeb/CKS has been informed by most of its suppliers that they will be Year
2000 compliant by the Year 2000. Any failure of these third parties systems to
timely achieve Year 2000 compliance could significantly harm our business,
financial condition, results of operations and prospects.
USWeb/CKS has not determined the state of compliance of certain third-party
suppliers of services such as phone companies, long distance carriers,
financial institutions and electric companies. The failure of any one of these
services could severely disrupt our ability to carry on its business as well
as disrupt the business of our customers.
Failure to provide Year 2000 and leap year compliant business solutions to
their customers or to receive such business solutions from their suppliers
could result in liability to the Company or otherwise significantly harm our
business, results of operations, financial condition and prospects.
Furthermore, USWeb/CKS believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or patch their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase products and services such as those offered by USWeb/CKS, which
could significantly harm our business, results of operations and financial
condition. USWeb/CKS could be affected through disruptions in the operation of
the enterprises with which USWeb/CKS interacts or from general widespread
problems or an economic crisis resulting from noncompliant
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Year 2000 systems. Despite our efforts to address the Year 2000 effect on its
internal systems and business operations, such effect could result in a severe
disruption of its business or could significantly harm our business, financial
condition or results of operations. USWeb/CKS has not developed a complete
contingency plan to respond to any of the foregoing consequences of internal
and external failures to be Year 2000 and leap year compliant, but expects the
Task Force to develop such a plan.
Other Information
During the period from April 1 to May 15, 1999, the Company recognized the
acquisitions of all the outstanding stock of two entities in separate
transactions in exchange for a total of 956,407 shares of the Company's Common
Stock and $1.0 million in cash for an aggregate purchase price of $48.0
million, excluding acquisition expenses. The acquisitions will be accounted
for using the purchase method of accounting and, accordingly, the purchase
price of each acquisition will be allocated to net tangible assets and
identifiable intangible assets acquired and liabilities assumed on the basis
of their fair values.
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, which may result in expensive litigation.
Risks Related To USWeb/CKS' 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. Accordingly, 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 also 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
March 31, 1999, we had an accumulated deficit of $299 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 the
rest of 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
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. 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' 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.
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' rapid
growth has placed a significant strain on our managerial, operational,
financial and other resources. This strain is likely to continue. Our employee
base has grown dramatically in the past year. 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 selected 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.
18
<PAGE>
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 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. These risks include unexpected changes in regulatory
requirements, regional economic downturns, changes in currency exchange rates,
difficulties in staffing and managing foreign operations, difficulties in
using equity incentives for employees, differences in business customs, longer
payment cycles, and political instability.
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' 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.
19
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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 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' 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' 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' 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 amount to
cover payments made in connection with the claim, it could hurt the financial
position of USWeb/CKS. We are also a party to other lawsuits and will likely
from
20
<PAGE>
time to time to be the subject of additional 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' certificate of incorporation and bylaws and of Delaware law could
delay or make difficult a merger, tender offer or proxy contest involving
USWeb/CKS.
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. Our competitors include Internet integrators and
web presence providers such as iXL, Organic Online, Modem Media.Poppe Tyson,
and Proxicom; advertising and media agencies such as Foote, Cone & Belding and
Ogilvy & Mather; large information technology consulting service providers
such as Andersen Consulting, Cambridge Technology Partners and EDS; and
computer hardware, software and service vendors such as IBM, Compaq, Hewlett-
Packard, Microsoft, Novell and Oracle. 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' 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' business of delivering professional services is labor
intensive. Accordingly, USWeb/CKS' 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' 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' 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
21
<PAGE>
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' 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.
Risks Related To Our Common Stock
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' 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.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks
The Company's market risk exposures are set forth in its Annual Report on
Form 10-K for the year ended December 31, 1998, and have not changed
significantly.
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PART II
Item 1. Legal Proceedings.
On November 5, 1998, a putative class action lawsuit captioned Wilson v. CKS
Group, Inc., et al., was filed in the United States District Court for the
Northern District of California against CKS Group and three of its former
officers and directors. The complaint alleges that during the period March 20,
1997 to November 7, 1997 (the "Class Period"), the defendants violated the
Securities Exchange Act and the SEC rules and regulations thereunder by
issuing false and misleading statements about CKS Group's operations, revenues
and earnings which allegedly inflated CKS Group's reported revenues, earnings
and stock price. The complaint further alleges that those who purchased CKS
Group's stock did so at artificially inflated prices. The plaintiff seeks to
recover damages in an unspecified amount (together with interest and
attorneys' fees) on behalf of all purchasers of CKS Group Common Stock during
the Class Period. Discovery in the case has not yet begun. USWeb/CKS believes
that this lawsuit is without merit and intends to defend this action
vigorously. We do not believe that the outcome of the stockholder class action
described above is likely to be material to us.
On September 15, 1998, U S WEST filed a complaint against USWeb/CKS and one
of our 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 (the "Nebraska
Action"). U S WEST seeks to enjoin all use by the Company of "USWeb." On March
3, 1999, the Company filed a complaint against U S WEST in the United States
District Court for the Northern District of California, seeking a declaration
that the Company's use of "USWeb" does not infringe upon, dilute, or otherwise
violate any valid rights of U S WEST (the "California Action"). Discovery has
not yet begun in the Nebraska Action or the California Action. USWeb/CKS
believes that the Nebraska Action is without merit and intends 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.
Item 5. Other Information.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Other Information."
Item 6. Exhibits
Exhibit 3.1 Amended and Restated Bylaws of the Registrant.
Exhibit 11.1 Statement of calculation of basic and diluted net loss and pro
forma net loss per share.
Exhibit 27.1 Financial Data Schedule
23
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
USWEB CORPORATION
Registrant
By:/s/ Carolyn V. Aver
_____________________________________
Carolyn V. Aver
Executive Vice President and Chief
Financial Officer
(on behalf of the Registrant and
as principal financial officer)
Dated: May 14, 1999
24
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED BYLAWS
OF
USWEB CORPORATION
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I - CORPORATE OFFICES 1
1.1 REGISTERED OFFICE..................................... 1
1.2 OTHER OFFICES......................................... 1
ARTICLE II - MEETINGS OF STOCKHOLDERS............................... 1
2.1 PLACE OF MEETINGS..................................... 1
2.2 ANNUAL MEETING........................................ 1
2.3 SPECIAL MEETING....................................... 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS...................... 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.......... 2
2.6 QUORUM................................................ 2
2.7 ADJOURNED MEETING; NOTICE............................. 3
2.8 VOTING................................................ 3
2.9 WAIVER OF NOTICE...................................... 3
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT
WITHOUT A MEETING..................................... 4
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING;
GIVING CONSENTS....................................... 4
2.12 PROXIES............................................... 5
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE................. 5
ARTICLE III - DIRECTORS............................................. 6
3.1 POWERS................................................. 6
3.2 NUMBER OF DIRECTORS.................................... 6
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF
DIRECTORS.............................................. 6
3.4 RESIGNATION AND VACANCIES.............................. 6
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE............... 7
3.6 FIRST MEETINGS......................................... 8
3.7 REGULAR MEETINGS....................................... 8
3.8 SPECIAL MEETINGS; NOTICE............................... 8
3.9 QUORUM................................................. 8
3.10 WAIVER OF NOTICE....................................... 8
3.11 ADJOURNED MEETING; NOTICE.............................. 9
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING...... 9
3.13 FEES AND COMPENSATION OF DIRECTORS..................... 9
3.14 APPROVAL OF LOANS TO OFFICERS.......................... 9
3.15 REMOVAL OF DIRECTORS................................... 9
ARTICLE IV - COMMITTEES............................................. 10
4.1 COMMITTEES OF DIRECTORS................................ 10
4.2 COMMITTEE MINUTES...................................... 10
4.3 MEETINGS AND ACTION OF COMMITTEES...................... 11
ARTICLE V - OFFICERS................................................ 11
5.1 OFFICERS............................................... 11
5.2 ELECTION OF OFFICERS................................... 11
5.3 SUBORDINATE OFFICERS................................... 11
5.4 REMOVAL AND RESIGNATION OF OFFICERS.................... 12
5.5 VACANCIES IN OFFICES................................... 12
5.6 CHAIRMAN OF THE BOARD.................................. 12
5.7 PRESIDENT.............................................. 12
5.8 VICE PRESIDENT......................................... 12
5.9 SECRETARY.............................................. 13
5.10 TREASURER.............................................. 13
5.11 ASSISTANT SECRETARY.................................... 14
5.12 ASSISTANT TREASURER.................................... 14
5.13 AUTHORITY AND DUTIES OF OFFICERS....................... 14
ARTICLE VI - INDEMNITY.............................................. 14
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.............. 14
6.2 INDEMNIFICATION OF OTHERS.............................. 15
6.3 INSURANCE.............................................. 15
ARTICLE VII - RECORDS AND REPORTS................................... 15
7.1 MAINTENANCE AND INSPECTION OF RECORDS.................. 15
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<PAGE>
TABLE OF CONTENTS
(continued)
7.2 INSPECTION BY DIRECTORS................................ 16
7.3 ANNUAL STATEMENT TO STOCKHOLDERS....................... 16
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS......... 16
ARTICLE VIII - GENERAL MATTERS...................................... 17
8.1 CHECKS................................................. 17
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS....... 17
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES................. 17
8.4 SPECIAL DESIGNATION ON CERTIFICATES.................... 18
8.5 LOST CERTIFICATES...................................... 18
8.6 CONSTRUCTION; DEFINITIONS.............................. 18
8.7 DIVIDENDS.............................................. 19
8.8 FISCAL YEAR............................................ 19
8.9 SEAL................................................... 19
8.10 TRANSFER OF STOCK...................................... 19
8.11 STOCK TRANSFER AGREEMENTS.............................. 19
8.12 REGISTERED STOCKHOLDERS................................ 19
ARTICLE IX - AMENDMENTS............................................. 20
ARTICLE X - DISSOLUTION............................................. 20
ARTICLE XI - CUSTODIAN.............................................. 21
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES........... 21
11.2 DUTIES OF CUSTODIAN................................... 21
-iii-
<PAGE>
AMENDED AND RESTATED BYLAWS
---------------------------
OF
--
USWEB CORPORATION
-----------------
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of Newcastle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the third
Wednesday of September in each year at 10:00 a.m. However, if such day falls on
a legal holiday, then the meeting shall be held at the same time and place on
the next succeeding full business day. At the meeting, directors shall be
elected and any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more stockholders holding shares in the aggregate entitled to cast not
less than ten percent (10%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the stockholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then the stockholders entitled to vote thereat, present in person
or represented by
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<PAGE>
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the certificate of incorporation, each stockholder shall
be entitled to one vote for each share of capital stock held by such
stockholder.
At a stockholders' meeting at which directors are to be elected, or at
elections held under special circumstances, a stockholder shall be entitled to
cumulate votes (i.e., cast for any candidate a number of votes greater than the
number of votes which such stockholder normally is entitled to cast). Each
holder of stock, or of any class or classes or of a series or series thereof,
who elects to cumulate votes shall be entitled to as many votes as equals the
number of votes which (absent this provision as to cumulative voting) he would
be entitled to cast for the election of directors with respect to his shares of
stock multiplied by the number of directors to be elected by him, and he may
cast all of such votes for a single director or may distribute them among the
number to be voted for, or for any two or more of them, as he may see fit.
2.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the
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beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders need be
specified in any written waiver of notice unless so required by the certificate
of incorporation or these bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is expressed.
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(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.12 PROXIES
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be
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managed and all corporate powers shall be exercised by or under the direction of
the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The authorized number of directors shall be eleven (11). This number may
be changed by a duly adopted amendment to the certificate of incorporation or by
an amendment to this bylaw adopted by the vote or written consent of the holders
of a majority of the stock issued and outstanding and entitled to vote or by
resolution of a majority of the board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stock holders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his successor is elected and qualified
or until his earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign at any time upon written notice to the corporation.
When one or more directors so resigns and the resignation is effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become effec
tive, and each director so chosen shall hold office as provided in this section
in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors
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elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
--------------
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.7 REGULAR MEETINGS
----------------
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Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board may be called by the president on three (3)
days' notice to each director, either personally or by mail, telegram, telex,
facsimile or telephone; special meetings shall be called by the president or
secretary in like manner and on like notice on the written request of two (2)
directors unless the board consists of only one (1) director, in which case
special meetings shall be called by the president or secretary in like manner
and on like notice on the written request of the sole director.
3.9 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.11 ADJOURNED MEETING; NOTICE
-------------------------
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
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Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.15 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corpo ration. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
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disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution, or (v) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
Section 3.12 (action without a meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
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ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, one or more vice
presidents, a secretary, and a treasurer or chief financial officer. The
corporation may also have, at the discretion of the board of directors, a
chairman of the board, one or more assistant vice presidents, assistant
secretaries, assistant treasurers, and any such other officers as may be
appointed in accordance with the provisions of Section 5.3 of these bylaws. Any
number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be chosen by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
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Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENT
--------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all
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stockholders and their addresses, the number and classes of shares held by each,
the number and date of certificates evidencing such shares, and the number and
date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 TREASURER
---------
The treasurer or chief financial officer shall keep and maintain, or cause
to be kept and maintained, adequate and correct books and records of accounts of
the properties and business transactions of the corporation, including accounts
of its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The treasurer shall deposit all money and other valuables in the name and
to the credit of the corporation with such depositaries as may be designated by
the board of directors. He shall disburse the funds of the corporation as may
be ordered by the board of directors, shall render to the president and
directors, whenever they request it, an account of all of his transactions as
treasurer and of the financial condition of the corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or these bylaws.
5.11 ASSISTANT SECRETARY
-------------------
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.12 ASSISTANT TREASURER
-------------------
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the treasurer
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.13 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
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In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
---------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the
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power to indemnify him against such liability under the provisions of the
General Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
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<PAGE>
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VII
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
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<PAGE>
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
-----------------
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<PAGE>
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal represen tative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
8.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained in
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
----
The corporation may adopt a corporate seal to be used at the discretion of
the officers.
8.10 TRANSFER OF STOCK
-----------------
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
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<PAGE>
8.11 STOCK TRANSFER AGREEMENTS
-------------------------
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.1 REGISTERED STOCKHOLDERS
-----------------------
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
----------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
ARTICLE X
DISSOLUTION
-----------
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
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<PAGE>
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall
have attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
ARTICLE XI
CUSTODIAN
---------
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
-------------------------------------------
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the stockholders
are so divided that they have failed to elect successors to directors whose
terms have expired or would have expired upon qualification of their successors;
or
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the stockholders are unable to
terminate this division; or
(iii) the corporation has abandoned its business and has failed within
a reasonable time to take steps to dissolve, liquidate or distribute its assets.
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<PAGE>
11.2 DUTIES OF CUSTODIAN
-------------------
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
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<PAGE>
EXHIBIT 11.1
USWEB CORPORATION
CALCULATION OF NET LOSS PER SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months
ended March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss.................................................. $(51,675) $(15,255)
======== ========
Weighted average common shares outstanding................ 69,572 51,705
Shares deemed outstanding under stock bonus arrangements
for employees of acquired companies...................... 1,399 703
-------- --------
Total weighted average common shares outstanding.......... 70,971 52,408
======== ========
Basic and diluted net loss per share...................... $ (0.73) $ (0.29)
======== ========
</TABLE>
Net loss per share is computed in accordance with SFAS No. 128, "Earnings
Per Share," and SEC Staff Accounting Bulletin No. 98 for all periods
presented. The computation excludes: (i) acquisition-related shares held in
escrow, and (ii) Common Stock subject to repurchase rights. The computation of
net loss and diluted supplemental net loss per share excludes Common Stock
issuable upon exercise of certain employee stock options and upon exercise of
certain outstanding warrants, as their effect is antidilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 79,548
<SECURITIES> 17,135
<RECEIVABLES> 100,538
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 208,523
<PP&E> 20,645
<DEPRECIATION> 0
<TOTAL-ASSETS> 416,284
<CURRENT-LIABILITIES> 95,559
<BONDS> 0
0
0
<COMMON> 70
<OTHER-SE> 319,620
<TOTAL-LIABILITY-AND-EQUITY> 416,284
<SALES> 84,112
<TOTAL-REVENUES> 84,112
<CGS> 52,926
<TOTAL-COSTS> 68,549
<OTHER-EXPENSES> 67,648
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (51,184)
<INCOME-TAX> 491
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,675)
<EPS-PRIMARY> (0.73)
<EPS-DILUTED> (0.73)
</TABLE>
