<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1996
REGISTRATION NO. 333-2178
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CKS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7389 77-0385435
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
10441 BANDLEY DRIVE
CUPERTINO, CA 95014
(408) 366-5100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MARK D. KVAMME
CHIEF EXECUTIVE OFFICER
CKS GROUP, INC.
10441 BANDLEY DRIVE
CUPERTINO, CA 95014
(408) 366-5100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
ROBERT T. CLARKSON, ESQ. DONALD M. KELLER, JR., ESQ.
WILSON SONSINI GOODRICH & ROSATI VENTURE LAW GROUP
PROFESSIONAL CORPORATION A PROFESSIONAL CORPORATION
650 PAGE MILL ROAD 2800 SAND HILL ROAD
PALO ALTO, CA 94304 MENLO PARK, CA 94025
(415) 493-9300 (415) 854-4488
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as possible after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act of
1933 registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
CKS GROUP, INC.
CROSS REFERENCE SHEET
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF ITEMS REQUIRED IN FORM S-1
<TABLE>
<CAPTION>
FORM S-1 ITEM LOCATION IN PROSPECTUS
----------------------------------- --------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................. Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................ Inside Front and Outside Back Cover Pages;
Additional Information
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges............................ Prospectus Summary; The Company; Risk Factors
4. Use of Proceeds.................... Use of Proceeds
5. Determination of Offering Price.... Underwriting
6. Dilution........................... Not Applicable
7. Selling Security Holders........... Principal and Selling Stockholders
8. Plan of Distribution............... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered......................... Prospectus Summary; Capitalization; Description of
Capital Stock
10. Interests of Named Experts and
Counsel............................ Legal Matters
11. Information with Respect to the
Registrant......................... Outside Front Cover Page; Prospectus Summary; Risk
Factors; The Company; Dividend Policy; Selected
Consolidated Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management;
Certain Transactions; Principal and Selling
Stockholders; Description of Capital Stock; Shares
Eligible for Future Sale; Consolidated Financial
Statements; Experts
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.................... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 10, 1996
1,800,000 SHARES
[LOGO]
CKS GROUP, INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
---------------------
Of the 1,800,000 shares of Common Stock offered hereby 131,500 are being
sold by the Company and 1,668,500 shares are being sold by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
shares being sold by the Selling Stockholders. See "Principal and Selling
Stockholders."
The Common Stock is traded on the Nasdaq National Market under the symbol
"CKSG." On June 6, 1996, the last sale price of the Common Stock of the Company
as reported by the Nasdaq National Market was $37.75 per share. See "Price Range
of Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
<TABLE>
<CAPTION>
PROCEEDS TO
INITIAL PUBLIC UNDERWRITING PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
---------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Per Share............ $ $ $ $
Total(3)............. $ $ $ $
</TABLE>
- ---------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting estimated expenses of $525,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 270,000 shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total initial public offering price,
underwriting discount, and proceeds to Company will be $ ,
$ , and $ , respectively. See "Underwriting."
---------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York on or about
, 1996, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
DEAN WITTER REYNOLDS INC.
MERRILL LYNCH & CO.
---------------------
The date of this Prospectus is , 1996.
<PAGE> 4
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Commission. Such reports, proxy and information statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, NW, Washington, D.C. 20549,
and at the following Regional Offices of the Commission: New York Regional
Office, Seven World Trade Center, New York, New York 10048, and Chicago Regional
Office, Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois
60661. Copies of such material can be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, NW, Washington, D.C. 20549 upon payment of
the prescribed fees. The Common Stock of the Company is quoted on the National
Market of The Nasdaq Stock Market. Reports, proxy and information statements and
other information concerning the Company may be inspected at The Nasdaq Stock
Market at 1735 K Street, NW, Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the shares of Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement and
the exhibits thereto. Statements contained in this Prospectus as to the contents
of any contract or any other document referred to are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. A copy of the Registration
Statement and the exhibits thereto may be inspected without charge at the
offices of the Commission at Judiciary Plaza, 450 Fifth Street, Washington, D.C.
20549, and copies of all or any part of the Registration Statement may be
obtained from the Public Referenced Section of the Commission, Washington, D.C.
20549 upon the payment of the fees prescribed by the Commission.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ NATIONAL MARKET
IN ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE ACT. SEE "UNDERWRITING."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and notes thereto
appearing elsewhere in this Prospectus. Financial data pertaining to the period
prior to December 1994 reflect the consolidated financial data of the Company's
three predecessor entities, CKS Partners, Inc., CKS Interactive, Inc. and CKS
Pictures, Inc., which combined to form the Company in December 1994.
THE COMPANY
CKS Group, Inc. ("CKS" or the "Company") specializes in offering a wide
range of integrated marketing communication services that help companies market
their products, services and messages. The integrated marketing communication
services provided by the Company include strategic corporate and product
positioning, corporate identity and product branding, new media, packaging,
collateral systems, advertising, direct mail, consumer promotions, trade
promotions and media placement services. Depending on the scope of the
assignment, the Company's services to its clients range from execution of a
discrete marketing project, such as designing product packaging, to taking
responsibility for the overall marketing message through various methods. When
the Company assumes responsibility for the overall marketing message, the
Company works with the client to analyze the client's products or services, and
the market for those services, and to evaluate the appropriate media to reach
the desired market efficiently.
The Company is a provider of integrated marketing programs that utilize
advanced technology solutions and new media -- which the Company defines as
media that deliver content to end users in digital form, including the World
Wide Web, the Internet, proprietary online services, CD-ROMs, laptop PC
presentations and interactive kiosks. New media services represented
approximately 8%, 25% and 32% of the Company's revenues for fiscal years 1994
and 1995 and the six months ended May 31, 1996, respectively. The balance of the
Company's revenue for such periods was derived from the Company's other
integrated marketing communication services, including strategic corporate and
product positioning, corporate identity and product branding, packaging,
collateral systems, advertising, direct mail, consumer promotions, trade
promotions and media placement services.
The Company's overall mission is to consistently deliver integrated
marketing communication programs and products to its clients through the
creative use of advanced technology, breakthrough design and superior account
management. The Company's core strengths include leadership in new media
communications, an ability to provide a full range of marketing communication
services to its clients and a high level of creative expertise and technological
sophistication, which enables the Company to provide marketing communication
services and products quickly and efficiently.
The Company provides its services to a broad range of clients. The Company
believes that it has been and continues to be a leader in the application and
development of new media marketing programs. Examples of these new media
projects include (i) a point of purchase kiosk for Hewlett-Packard, (ii) the
creation of World Wide Web sites for MCI, General Motors, Citibank, Clinique,
Prudential, U.S. Robotics, and others, (iii) the creation of a CD-ROM demo for
the Apple System 8 operating system and others; and (iv) the United Connection
user interface design for United Airlines. With the exception of MCI and Apple
Computer, representing approximately 19% and 7% of the Company's revenues,
respectively, during the 1995 fiscal year, and 20% and 4% of the Company's
revenues, respectively, during the six months ended May 31, 1996, none of the
clients named in the prior sentence generated more than 4% of the Company's
revenues during either of those periods.
CKS is pursuing an acquisition program, primarily focused on providing new
and expanded market opportunities by strengthening its management and core
competencies, expanding its geographic presence and broadening the range of
marketing communication services offered to
3
<PAGE> 6
clients. On June 7, 1996, the Company agreed to acquire Schell/Mullaney, Inc., a
New York advertising and marketing firm specializing in servicing technology
companies, for initial consideration consisting of Common Stock valued at $5
million and up to $9 million of additional Common Stock if certain performance
targets are achieved. The Company is also considering several additional
acquisitions of marketing communication services providers with strong existing
management teams and attractive client portfolios.
The Company was incorporated in California in 1994 and is the successor to
three predecessor corporations, CKS Partners, Inc., CKS Pictures, Inc. and CKS
Interactive, Inc., which are now wholly owned subsidiaries of the Company. CKS
Partners, Inc. originally began business in 1987 with two employees as Cleary
Communications. CKS Pictures, Inc. and CKS Interactive, Inc. were incorporated
in 1994. The Company was reincorporated in Delaware in December 1995. The
Company's Internet address is: http://www.cks.com. Information contained in the
Company's World Wide Web site shall not be deemed part of this Prospectus.
RISK FACTORS
For a discussion of considerations relevant to an investment in the Common
Stock, see "Risk Factors."
4
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..................... 131,500 shares
Common Stock offered by the Selling Stockholders........ 1,668,500 shares
Common Stock outstanding after the offering............. 12,845,937 shares(1)
Nasdaq National Market symbol........................... CKSG
Use of proceeds by the Company.......................... The net proceeds will be used for
general corporate purposes,
including working capital.
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
NOVEMBER 30, ---------------------------
--------------------------- MAY 31, MAY 31,
1993 1994 1995 1995 1996
------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues................................. $12,038 $22,938 $34,792 $ 14,938 $ 22,895
Operating income......................... 489 518 2,455 763 2,377
Net income............................... 279 288 1,366 409 2,045
Net income per share(2).................. 0.03 0.03 0.13 0.04 0.16
Shares used in per share
computation(2)......................... 8,482 9,944 10,726 10,720 13,147
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1996
-----------------------
AS
ACTUAL ADJUSTED(3)
------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................ $38,960 $43,151
Working capital...................................................... 41,685 45,876
Total assets......................................................... 55,695 59,886
Noncurrent portion of notes payable and capital lease obligations.... 311 311
Total stockholders' equity........................................... 44,516 48,707
</TABLE>
- ---------------
(1) Excludes (i) 1,038,867 shares of Common Stock issuable upon exercise of
options outstanding as of May 31, 1996 at a weighted average exercise price
of $11.95 per share, (ii) 650,750 shares of Common Stock reserved for
issuance upon exercise of options that may be granted in the future under
the Company's 1995 Stock Plan, (iii) 100,000 shares of Common Stock reserved
for issuance upon exercise of options that have been or may be granted in
the future under the Company's 1995 Director Option Plan, and (iv) 300,000
shares of Common Stock reserved for issuance under the Company's 1995
Employee Stock Purchase Plan. See "Capitalization," "Management -- Benefit
Plans," and Note 5 of Notes to Consolidated Financial Statements.
(2) See Note 1 to Notes to Consolidated Financial Statements for an explanation
of the number of shares used in per share computations.
(3) Represents actual data as adjusted to reflect the sale of 131,500 shares of
Common Stock by the Company in this offering at an assumed initial public
offering price of $37.75 and after deducting the estimated underwriting
discount and offering expenses.
5
<PAGE> 8
RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Exchange Act. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors including those set
forth in the following risk factors and elsewhere in this Prospectus and other
risks detailed from time to time in the Company's reports filed with the
Commission. In evaluating the Company and its business, prospective investors
should carefully consider the following factors in addition to the other
information presented in this Prospectus before purchasing shares of Common
Stock offered hereby.
DEPENDENCE ON KEY ACCOUNTS
The Company's five largest clients accounted for 42% and 37% of the
Company's revenues for the fiscal year ended November 30, 1995 and the six
months ended May 31, 1996, respectively, with fluctuations in the amount of
revenue contribution from each such client from quarter to quarter. MCI
Telecommunications, Inc. ("MCI") and Apple Computer, Inc. ("Apple"), the
Company's two largest clients during the fiscal year ended November 30, 1995,
accounted for approximately 19% and 7% of the Company's revenues, respectively,
during that year and accounted for approximately 20% and 4% of the Company's
revenues, respectively, during the six months ended May 31, 1996. Since the
Company's clients generally retain the Company on a project by project basis, a
client from whom the Company generates substantial revenue in one period may not
be a substantial source of revenue in a subsequent period. For example, of the
five largest clients (in terms of revenues recognized by the Company) during the
fiscal year ended November 30, 1995, only two were in the top five for the
fiscal year ended November 30, 1994 and only two were in the top five for the
six months ended May 31, 1996. To the extent that the Company's major clients do
not remain a significant source of revenues, and the Company is unable to
replace these clients, there could be a direct and immediate material adverse
effect on the Company's business, financial condition and operating results. The
Company's typical project lasts four to six weeks. Once a project is completed
there can be no assurance that a client will engage the Company for further
services. In addition, the Company's clients may unilaterally reduce their use
of the Company's services or terminate existing projects without penalty. The
termination of the Company's business relationship with any of its significant
clients or a material reduction in the use of the Company's services by a
significant client would have a material adverse effect on the Company's
business, financial condition and operating results.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND MARGINS; SEASONALITY OF BUSINESS
The Company's operating results have fluctuated in the past and may
fluctuate in the future as a result of a variety of factors, including timing of
the completion, material reduction or cancellation of major projects or the loss
of a major client, timing of the receipt of new business, timing of the hiring
or loss of personnel, timing of the opening or closing of an office, the
relative mix of high margin creative projects as compared to lower margin
production projects, changes in the pricing strategies and business model of the
Company or its competitors, capital expenditures and other costs relating to the
expansion of operations, and other factors that are outside of the Company's
control. Operating results could also be materially adversely affected by
increased competition in the Company's markets. The Company's operating margins
may fluctuate from quarter to quarter depending on the relative mix of lower
cost full time employees versus higher cost independent contractors. The Company
experiences some seasonality in its business which results from timing of
product introductions and business cycles of the Company's clients. The
Company's revenues tend to be somewhat higher during the third and fourth
quarters of the Company's fiscal year as the Company's clients prepare marketing
campaigns for products launched in anticipation of fall trade shows and the
holiday season. The Company's revenues for the first fiscal quarter tend to be
somewhat lower because many clients have expended most of their marketing
budgets prior to the
6
<PAGE> 9
end of the calendar year and do not release funds from the next calendar year's
marketing budget until mid to late January. The Company expects this seasonality
to continue in the future. As a result of the foregoing and other factors, the
Company anticipates that it may experience material and adverse fluctuations in
future operating results on a quarterly or annual basis. Therefore, the Company
believes that period to period comparisons of its revenues and operating results
are not necessarily meaningful and that such comparisons cannot be relied upon
as indicators of future performance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
MANAGEMENT OF GROWTH; RISKS ASSOCIATED WITH EXPANSION
The Company's business has grown rapidly in recent periods. The growth of
the Company's business and expansion of its customer base have placed a
significant strain on the Company's management and operations. In the last
several years, the Company has opened offices in Portland (Oregon), New York,
Washington, D.C. and London. The Company subsequently decided to downsize the
London office. The Company's expansion has resulted, and is expected in the
future to result, in substantial growth in the number of its employees and in
increased responsibility for both existing and new management personnel and
strain on the Company's existing operational, financial and management
information systems. The Company's success depends to a significant extent on
the ability of its executive officers and other members of senior management to
operate effectively, both independently and as a group. See
"Management -- Executive Officers and Directors."
In addition, the Company plans to expand its offerings of integrated
marketing communication services and products. There can be no assurance that
the Company will be successful in identifying new services or products that will
be attractive to clients or that such services or products will ultimately
generate revenues in excess of costs to implement them. Difficulties in
recruiting and assimilating new personnel, enhancing the Company's financial and
operational controls and expanding the Company's marketing and customer support
capabilities may impede the Company's ability to pursue its growth strategy. In
general, there can be no assurance that the Company will be able to manage its
recent or any future expansions effectively, and any inability to do so would
have a material adverse effect on the Company's business, financial condition
and operating results. There also can be no assurance that the Company will be
able to sustain the rates of growth that it has experienced in the past. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEVELOPING MARKET FOR NEW MEDIA; NEW ENTRANTS; UNPROVEN ACCEPTANCE OF THE
COMPANY'S NEW MEDIA SOLUTIONS
The Company's future growth is dependent to a significant extent upon its
ability to increase the amount of revenue it derives from providing marketing
and advertising solutions to its customers through new media, which the Company
defines as media that delivers content to end users in digital form, including
the World Wide Web, the Internet, proprietary online services, CD-ROMs, laptop
PC presentations and interactive kiosks. The market for marketing and
advertising through new media has only recently begun to develop, is rapidly
evolving and is characterized by an increasing number of market entrants who
have introduced or developed products and services for communication and
commerce through new media. Demand and market acceptance for recently introduced
products and services are subject to a high level of uncertainty. There can be
no assurance that commerce and communication through new media will continue to
grow. The use of new media in marketing and advertising, particularly by those
individuals and enterprises that have historically relied upon traditional means
of marketing and advertising, generally requires the acceptance of a new way of
conducting business and exchanging information. In particular, enterprises that
have already invested substantial resources in other means of conducting com-
7
<PAGE> 10
merce and exchanging information may be particularly reluctant or slow to adopt
a new strategy that may make their existing resources and infrastructure less
useful.
In connection with the Company's new media services, the Company is
exploring new methods to derive revenue, so that a larger percentage of its
revenues is recurring. These methods include long-term service contracts,
product license fees and content development contracts for new media. The
Company has not generated significant revenues from these new methods, and no
assurance can be given that the Company will be able to negotiate such
arrangements with clients or that any such arrangements will generate revenues
sufficient to offset the costs incurred by the Company in performing such
services. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEPENDENCE ON PERSONNEL
The Company's success depends to a significant extent upon certain members
of senior management, including Mark D. Kvamme, Thomas K. Suiter, Carlton H.
Baab and other key employees. Although the Company maintains key man life
insurance policies on Messrs. Kvamme, Suiter, Baab and certain other key
personnel, there can be no assurance that such insurance policies will
adequately compensate for the loss of such individuals. The Company has no
employment agreements with any of these individuals. The loss of any senior
manager or other key employee could have a material adverse effect upon the
Company's business, financial condition and operating results. In addition, the
Company's ability to generate revenues relates directly to the Company's
personnel, both in terms of the number and expertise of the personnel the
Company has available to work on its projects as they are received and the mix
of such personnel (i.e., full time or temporary employees or contract service
providers). As a result, any failure by the Company to retain existing employees
or hire new employees when necessary could have a material adverse effect upon
the Company's business, financial condition and operating results. In addition,
if one or more of the Company's key employees resigns from the Company to join a
competitor or to form a competing company, the loss of such personnel and any
resulting loss of existing or potential clients to any such competitor could
have a material adverse effect on the Company's business, financial condition
and operating results. In the event of the loss of any such personnel there can
be no assurance that the Company would be able to prevent the unauthorized
disclosure or use of its technical knowledge, practices, procedures or client
lists. The Company believes that its future success will depend in large part
upon its ability to attract and retain additional highly skilled creative,
technical, financial and strategic marketing personnel. Competition for such
personnel, especially creative talent, is intense. There can be no assurance the
Company will be successful in attracting and retaining such personnel, and the
failure to do so could have a direct and immediate material adverse effect on
the Company's business, financial condition and operating results.
COMPETITION; LOW BARRIERS TO ENTRY
The markets for the Company's services are highly competitive, with service
providers constantly striving to reduce prices, incorporate new capabilities and
accelerate job completion schedules.
The Company faces competition from a number of sources. These sources
include national and regional advertising agencies as well as specialized and
integrated marketing communication firms. In addition, with respect to new
media, many advertising agencies have started to either internally develop or
acquire new media capabilities. New competitors that either provide integrated
or specialized services (e.g., corporate identity and packaging, advertising
services or World Wide Web site design) and are technologically proficient,
especially in the new media arena, have emerged and are competing with the
Company. Many of the Company's competitors or potential competitors have longer
operating histories, longer client relationships and significantly greater
financial, management, technology, development, sales, marketing and other
resources than the Company. In addition, the Company's ability to maintain its
existing clients and generate new clients
8
<PAGE> 11
depends to a significant degree on the quality of its services and its
reputation among its clients and potential clients, as compared with the quality
of services provided by and the reputations of the Company's competitors. The
Company also competes on the basis of price. To the extent the Company loses
clients to the Company's competitors because of dissatisfaction with the
Company's services or the Company's reputation is adversely impacted for any
other reason, the Company's business, financial condition and operating results
could be materially adversely affected.
There are relatively low barriers to entry into the Company's business. For
example, the Company has no significant proprietary technology that would
preclude or inhibit competitors from entering the integrated marketing
communication solutions market. The Company expects that it will face additional
competition from new entrants into the market in the future. There can be no
assurance that existing or future competitors will not develop or offer
marketing communication services and products that provide significant
performance, price, creative or other advantages over those offered by the
Company, which could have a material adverse effect on the Company's business,
financial condition and operating results. See "Business -- Competition."
RISKS ASSOCIATED WITH ACQUISITIONS
As part of its business strategy, the Company expects to make acquisitions
of, or significant investments in, businesses that offer complementary marketing
communication services, products and technologies. Any such future acquisitions
or investments would be accompanied by the risks commonly encountered in
acquisitions of businesses. Such risks include, among other things, the
difficulty of assimilating the operations and personnel of the acquired
businesses, the potential disruption of the Company's ongoing business, the
inability of management to maximize the financial and strategic position of the
Company through the successful incorporation of acquired personnel and clients,
the maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and clients as a result of any
integration of new management personnel. In June 1996, the Company signed an
agreement to acquire Schell/ Mullaney, Inc., a New York advertising and
marketing firm specializing in servicing technology companies, for consideration
consisting of an initial payment, in Common Stock of the Company, of $5 million
and additional future consideration of up to $9 million in Common Stock of the
Company if certain operating results are achieved in 1997 and 1998. Consummation
of the Schell/Mullaney acquisition is subject to a number of conditions,
including the issuance of a permit by the California Department of Corporations
following a hearing as to the fairness of the proposed acquisition, the absence
of a material adverse change in the business of the Company or Schell/Mullaney
and other matters. The Company is also negotiating with other potential
acquisition targets. The Company expects that future acquisitions, if any, could
provide for consideration to be paid in cash, stock or a combination of cash and
stock. There can be no assurance that the Schell/Mullaney acquisition or any
other potential acquisition will be consummated. These factors could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
UNCERTAIN ADOPTION OF THE INTERNET AS A MEDIUM OF COMMERCE AND COMMUNICATIONS;
DEPENDENCE ON THE INTERNET
The Company's ability to derive revenues from new media solutions will
depend in part upon a robust industry and the infrastructure for providing
Internet access and carrying Internet traffic. The Internet may not prove to be
a viable commercial marketplace because of inadequate development of the
necessary infrastructure, such as a reliable network backbone or timely
development of complementary products, such as high speed modems. Because global
commerce and online exchange of information on the Internet and other similar
open wide area networks are new and evolving, it is difficult to predict with
any assurance whether the Internet will prove to be and remain a viable
commercial marketplace. Moreover, critical issues concerning the commercial use
of the
9
<PAGE> 12
Internet (including security, reliability, cost, ease of use and access, and
quality of service) remain unresolved and may impact the growth of Internet use.
There can be no assurance that the Internet will become a viable commercial
marketplace. If the necessary infrastructure or complementary products are not
developed, or if the Internet does not become a viable commercial marketplace,
the Company's business, financial condition and operating results could be
materially adversely affected.
PROJECT PROFIT EXPOSURES
The Company generates the substantial majority of its revenues through
project fees on a fixed fee for service basis. The Company assumes greater
financial risk on fixed-price type contracts than on either time-and-material or
cost-reimbursable contracts. Failure to anticipate technical problems, estimate
costs accurately or control costs during performance of a fixed-price contract
may reduce the Company's profit or cause a loss. Although the majority of the
Company's projects typically last four to six weeks and therefore each
individual short-term project creates less exposure than a long-term fixed-price
contract, in the event the Company does not accurately anticipate the progress
of a number of significant revenue-generating projects it could have a material
adverse effect on the Company's business, financial condition and operating
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CONFLICTS OF INTEREST
Conflicts of interest are inherent in certain segments of the marketing
communications industry. The Company has in the past and will in the future be
unable to pursue potential advertising and other opportunities because such
opportunities will require the Company to provide services to direct competitors
of existing Company clients. In addition, the Company risks alienating or
straining relationships with existing clients each time the Company agrees to
provide services to even indirect competitors of existing Company clients.
Conflicts of interest may jeopardize the stability of revenues generated from
existing clients and preclude access to business prospects, either of which
developments could have a material adverse effect on the Company's business,
financial condition and operating results.
SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS
The Company's revenues and results of operations will be subject to
fluctuations based upon the general economic conditions of the United States. If
there were to be a general economic downturn or a recession in the United
States, then the Company expects that business enterprises, including its
clients and potential clients, would substantially and immediately reduce their
advertising and marketing budgets. In the event of such an economic downturn,
there can be no assurance that the Company's business, financial condition and
operating results would not be materially and adversely affected.
MARKET ACCEPTANCE OF THE COMPANY'S APPROACH; SERVICE DEVELOPMENT; RAPID
TECHNOLOGICAL CHANGE
The Company provides an integrated approach to meet the marketing
communications needs of its clients. This approach is markedly different from
the more typical approach whereby clients employ the services of several
specialized service providers to meet their marketing communications needs.
There can be no assurance that potential clients of the Company will be willing
to embrace the Company's integrated approach. Moreover, to compete successfully
against specialized service providers, the Company believes that its products
and services in each discipline will need to be competitive with the services
offered by the firms that specialize in each discipline. There can be no
assurance that the Company will be successful in providing competitive solutions
to clients in each of its integrated marketing communication services and
products. Failure to do so could result in the loss of existing customers or the
inability to attract and retain new customers,
10
<PAGE> 13
either of which developments could have a material adverse effect on the
Company's business, financial condition and operating results.
CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION AND DELAWARE LAW
Following completion of this offering, executive officers, directors,
holders of five percent or more of the Company's Common Stock and companies
associated with such persons will collectively own approximately 56% of the
Company's outstanding Common Stock, including approximately 19% held by The
Interpublic Group of Companies, Inc. ("IPG"). Accordingly, such persons will
have the effective power to influence significantly the outcome of matters
submitted for the vote of stockholders, including the election of members of the
Board of Directors and the approval of significant change in control
transactions. Their combined equity interest in the Company accordingly may have
the effect of making certain transactions more difficult in the absence of the
support of management of the Company and may have the effect of delaying,
deferring or preventing a change in control of the Company.
In addition, the Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of such stock
without further stockholder approval. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. Issuance of Preferred
Stock could have the effect of delaying, deferring or preventing a change in
control of the Company. Furthermore, certain provisions of the Company's
Certificate of Incorporation and of Delaware law could have the effect of
delaying, deferring or preventing a change in control of the Company. See
"Management," "Certain Transactions," "Principal and Selling Stockholders," and
"Description of Capital Stock."
VOLATILITY OF SHARE PRICE
The trading price of the Company's Common Stock has been and in the future
could be subject to wide fluctuations in response to quarterly variations in
operating results, announcements of new services or business acquisitions by the
Company or its competitors, the gain or loss of client accounts, changes in
estimates of revenues or earnings by securities analysts, changes in the mix of
revenues derived by the Company from new media projects as compared to other
projects and other events or factors. In addition, the stock market has from
time to time experienced extreme price and volume fluctuations that have
particularly affected the market price of many technology-oriented companies and
that often have been unrelated or disproportionate to the operating performance
of these companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. The trading prices of many high
technology and Internet-related companies' stocks, including the Common Stock of
the Company, are at or near their historical highs and reflect price/earning
ratios substantially above historical norms. There can be no assurance that the
trading price of the Company's Common Stock will remain at or near its current
level. See "Price Range of Common Stock." Furthermore, purchasers of the Common
Stock offered by this Prospectus will suffer an immediate and significant
dilution in the net tangible book value per share of the Common Stock from the
public offering price.
SHARES ELIGIBLE FOR FUTURE SALE; NEW ISSUANCES BY THE COMPANY
Sales of substantial numbers of shares of Common Stock into the public
market at any time or from time to time could adversely affect the prevailing
market price of the Common Stock. The 2,875,000 shares sold in the Company's
initial public offering and the 1,800,000 shares offered hereby are freely
tradeable without restriction under the Securities Act, unless held by
"affiliates" of the Company. The remaining 8,170,937 shares of Common Stock held
by existing stockholders are "restricted" shares under the Securities Act (the
"Restricted Shares"). In December 1996 and January 1997 (collectively, the
"Expiration Date") all the Restricted Shares will become eligible for
11
<PAGE> 14
sale pursuant to Rule 144 promulgated under the Securities Act ("Rule 144"). The
Restricted Shares that first become eligible for sale in the public market on
the Expiration Date will be subject to certain volume and other resale
restrictions pursuant to Rule 144. The Securities and Exchange Commission has
proposed to reduce the Rule 144 holding periods. If enacted, such reduction
would have a material effect on the timing of when Restricted Shares become
eligible for resale. The holders of 6,162,372 of the Restricted Shares are
subject to a lock up agreement (the "Lock-up Agreement") between such holders
and the Underwriters, under which such holders have agreed not to sell such
shares until 90 days after the date of this Prospectus. In addition, if the
acquisition of Schell/Mullaney is consummated, the Company will issue
approximately 132,000 shares (based on the closing price of the Company's Common
Stock on June 6, 1996 as reported by the Nasdaq National Market) to the
shareholders of Schell/Mullaney upon the closing of such acquisition, half of
which shares (approximately 66,000 shares based on the closing price of the
Company's Common Stock on June 6, 1996 as reported on the Nasdaq National
Market) will be subject to the Lock-up Agreement, and the remainder of which
will be freely tradeable.
The Company has reserved 1,000,000 shares of Common Stock for issuance upon
the exercise of options to be granted pursuant to the Company's 1995 Stock Plan.
As of May 31, 1996, options to purchase 349,250 shares of Common Stock were
outstanding under the Company's 1995 Stock Plan and options to purchase 689,617
shares of Common Stock were outstanding under the Company's 1995 Series B Common
Stock Plan (the "Series B Plan Shares"). All such Series B Plan Shares became
eligible for sale under Rule 701 on March 13, 1996. Following completion of this
offering, Options to purchase an aggregate of 160,249 shares of Common Stock
under the Company's 1995 Stock Plan and 1995 Series B Common Stock Plan are
subject to the Lock-up Agreement. In addition, the Company has reserved 300,000
shares of Common Stock for issuance pursuant to the Company's 1995 Employee
Stock Purchase Plan and 100,000 shares for issuance upon exercise of options
granted or to be granted under its 1995 Director Stock Option Plan. The Company
has filed a Registration Statement on Form S-8 to register the shares of Common
Stock issuable upon exercise of options granted under the Company's Series B
Plan, the 1995 Stock Plan, the 1995 Directors' Option Plan and the 1995 Employee
Stock Purchase Plan. Subject to the Lock-Up Agreement, to the extent applicable
shares of Common Stock issued under such plans will be available for sale in the
public market upon vesting of such shares, subject to the Rule 144 volume
limitations applicable to affiliates.
12
<PAGE> 15
THE COMPANY
The Company was incorporated in California in 1994 and is the successor to
three predecessor corporations, CKS Partners, Inc., CKS Pictures, Inc. and CKS
Interactive, Inc., which are now wholly owned subsidiaries of the Company. CKS
Partners, Inc. originally began business in 1987 with two employees as Cleary
Communications. CKS Pictures, Inc. and CKS Interactive, Inc. were incorporated
in 1994. The Company was reincorporated in Delaware in December 1995. The
Company's executive offices are located at 10441 Bandley Drive, Cupertino,
California 95014. Its telephone number at that address is (408) 366-5100. The
Company's Internet address is: http://www.cks.com. Information contained in the
Company's World Wide Web site shall not be deemed part of this Prospectus.
CKSGroup(TM), CKSInteractive(TM), CKSMedia(TM), CKSOnsite(TM),
CKSPartners(TM) and CKSPictures(TM) are trademarks of the Company. This
Prospectus also contains trademarks and trade names of other companies.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain its future earnings, if any, to
fund the development and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. The Company's
bank line of credit agreement currently restricts the payment of dividends.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 131,500 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$4,191,000 (approximately $13,874,000 if the Underwriters' over-allotment option
is exercised in full) (at an assumed initial public offering price of $37.75 and
after deducting the estimated underwriting discount and offering expenses). The
Company intends to add the net proceeds from this offering to working capital,
where such proceeds will be available to support general corporate purposes. A
portion of the proceeds may also be used to acquire or invest in businesses that
offer complementary marketing communication services, products or technologies.
Pending use of the net proceeds for the above purposes, the Company intends to
invest such funds in short-term, interest-bearing, investment grade obligations.
The Company will not receive any proceeds from the sale of Common Stock by the
Selling Stockholders.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "CKSG." The following table lists the high and low closing prices
since the Company's Common Stock began trading on the Nasdaq National Market on
December 15, 1995.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1996:
First Quarter (beginning December 15, 1995).......................... $39 $20
Second Quarter....................................................... $43 3/4 $24 1/2
Third Quarter (through June 6, 1996)................................. $38 3/4 $37 3/4
</TABLE>
On June 6, 1996, the closing price of the Company's Common Stock as
reported by the Nasdaq National Market was $37.75 per share. There were
approximately 60 holders of record of the Company's Common Stock as of May 31,
1996.
13
<PAGE> 16
CAPITALIZATION
The following table sets forth the Company's (i) actual capitalization as
of May 31, 1996, and (ii) as adjusted capitalization to give effect to the
application of the estimated net proceeds from the sale by the Company of the
131,500 shares of Common Stock offered hereby by the Company at an assumed
public offering price of $37.75 per share (after deduction of the estimated
underwriting discount and estimated expenses of the offering).
<TABLE>
<CAPTION>
MAY 31, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Noncurrent portion of notes payable and capital lease obligations.... $ 311 $ 311
------- ------
Stockholders equity(1):
Preferred Stock; $.001 par value; 5,000,000 shares authorized and
no shares outstanding and as adjusted........................... -- --
Common Stock; $.001 par value; 30,000,000 shares authorized:
actual -- 12,714,437 shares issued and outstanding; as
adjusted -- 12,845,937 shares issued and outstanding............ 13 13
Additional paid-in capital......................................... 40,253 44,444
Notes receivable from stockholders................................. (292) (292)
Retained earnings.................................................. 4,542 4,542
------- ------
Total stockholders' equity................................. 44,516 48,707
------- ------
Total capitalization....................................... $44,827 $49,018
======= ======
</TABLE>
- ---------------
(1) Excludes (i) 1,038,867 shares of Common Stock issuable upon exercise of
options outstanding as of May 31, 1996 at a weighted average exercise price
of $11.95 per share, (ii) 650,750 shares of Common Stock reserved for
issuance upon exercise of options that may be granted in the future under
the 1995 Stock Plan, (iii) 100,000 shares of Common Stock reserved for
issuance upon exercise of options granted or to be granted in the future
under the 1995 Director Option Plan, and (iv) 300,000 shares reserved for
issuance under the 1995 Employee Stock Purchase Plan. See "Capitalization,"
"Management -- Benefit Plans" and Note 5 of Notes to Consolidated Financial
Statements.
14
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements, notes
thereto and other financial information included elsewhere in this Prospectus.
The consolidated statement of operations data for fiscal years 1993, 1994 and
1995 and the consolidated balance sheet data as of November 30, 1994 and
November 30, 1995 are derived from audited consolidated financial statements of
the Company which have been reported upon by KPMG Peat Marwick LLP, independent
auditors, and are included herein. The consolidated balance sheet data as of
November 30, 1993 are derived from an audited consolidated balance sheet which
has not been included in this Prospectus. The consolidated statement of
operations data for fiscal years 1991 and 1992 and for the six months ended May
31, 1995 and May 31, 1996 and the consolidated balance sheet data as of November
30, 1991 and 1992 are derived from unaudited consolidated financial statements
and include, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the financial
data for such periods. The results for the six months ended May 31, 1996 are not
necessarily indicative of the results to be expected for the full fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------
YEAR ENDED NOVEMBER 30, MAY 31, MAY 31,
--------------------------------------------- ------- -------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................... $5,227 $6,723 $12,038 $22,938 $34,792 $14,938 $22,895
------ ------ ------- ------- ------- ------- -------
Operating expenses:
Direct salaries and related
expenses........................... 1,180 1,343 2,782 6,168 10,485 4,651 6,775
Other direct operating expenses...... 2,639 3,359 6,183 11,121 13,164 5,810 8,459
General and administrative
expenses........................... 1,163 1,773 2,584 5,131 8,688 3,714 5,284
------ ------ ------- ------- ------- ------- -------
Total operating expenses........... 4,982 6,475 11,549 22,420 32,337 14,175 20,518
------ ------ ------- ------- ------- ------- -------
Operating income....................... 245 248 489 518 2,455 763 2,377
Other income (expense)................. 2 12 (25) (38) (27) (33) 774
------ ------ ------- ------- ------- ------- -------
Income before income taxes........... 247 260 464 480 2,428 730 3,151
Income taxes........................... 98 110 185 192 1,062 321 1,106
------ ------ ------- ------- ------- ------- -------
Net income........................... $ 149 $ 150 $ 279 $ 288 $ 1,366 $ 409 $ 2,045
====== ====== ======= ======= ======= ======= =======
Net income per share................... $ 0.02 $ 0.02 $ 0.03 $ 0.03 $ 0.13 $ 0.04 $ 0.16
Shares used in per share
computation(1)....................... 7,670 8,039 8,482 9,944 10,726 10,720 13,147
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
------------------------------------------- -------
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 32 $ 28 $ 102 $ 43 $ 2,327 $38,960
Working capital.................................... 190 128 69 (336) 2,797 41,685
Total assets....................................... 1,508 1,571 3,953 8,107 13,686 55,695
Noncurrent portion of notes payable and capital
lease obligations................................ 154 -- 106 340 412 311
Total stockholders' equity......................... 383 612 895 1,023 4,595 44,516
</TABLE>
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in per share computations.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section and other parts of this Prospectus contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Risk Factors" commencing on
page 6. Prospective Investors are urged to consider the factors discussed in the
"Risk Factors" section, in evaluating an investment in the shares of Common
Stock offered hereby.
OVERVIEW
The Company was originally founded in 1987 as Cleary Communications and
initially concentrated on the development and implementation of marketing plans
and programs. Over the last several years, the Company developed its vision as
an integrated marketing communications company and hired personnel with the
appropriate skills to expand its service offerings to encompass a full range of
marketing communications, including strategic corporate and product positioning,
corporate identity and product branding, new media, packaging, collateral
systems, advertising, direct mail, consumer promotions, trade promotions and
media placement services. The Company is a provider of integrated marketing
programs that utilize advanced technology solutions and new media -- which the
Company defines as media that deliver content to the end user in digital form,
including the World Wide Web, the Internet, proprietary online services,
CD-ROMs, PC laptop presentations and interactive kiosks. New media services
represented approximately 8%, 25% and 32% of the Company's revenues for fiscal
years 1994 and 1995 and the six months ended May 31, 1996, respectively. The
balance of the Company's revenues for such period were derived from the
Company's other integrated marketing communication services, including strategic
corporate and product positioning, corporate identity and product branding,
packaging, collateral systems, advertising, direct mail, consumer promotions,
trade promotions and media placement services.
The Company generates substantially all of its revenues through project
fees on a fixed fee for service basis. When the Company prepares to bid on a new
project, the Company develops internal estimates for the number of hours
required to complete various segments of the project, based in large part on the
Company's database of similar projects archived in the Company's proprietary
project management software, the Electronic Job Jacket. The Company's policy is
to bill 50% of project fees at the commencement of the project, with the balance
billed upon completion.
The Company 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. The Company updates its estimated costs on
each project monthly. Fees and expenditures in excess of billings represent the
costs incurred and anticipated profits earned on projects in progress in excess
of amounts billed, and are recorded as an asset. Billings in excess of fees and
expenditures represent amounts billed in excess of costs incurred and estimated
profit earned, and are recorded as a liability. To the extent costs incurred and
anticipated costs to complete projects in progress exceed anticipated billings,
a loss is accrued for the excess. See "Risk Factors -- Project Profit
Exposures."
16
<PAGE> 19
The Company is currently exploring new methods to derive revenue, so that a
larger percentage of its revenues is recurring.* These methods include the
following:
- Long-term service contracts, under which the Company provides ongoing
marketing communication services;
- Product license fees, under which the Company licenses marketing
communication software programs to clients for license fees and recurring
maintenance charges; and
- Content development contracts for new media, under which the Company
prepares and refreshes the content of online communications on a daily,
weekly or monthly basis for which the Company receives either an agreed
upon flat fee or a percentage of the revenue generated from the online
site.
The Company has not generated significant revenues from these new methods,
and no assurance can be given that the Company will be able to negotiate such
arrangements with clients or that any such arrangements will generate revenues
sufficient to offset the costs incurred by the Company in performing such
services.
The Company generates higher profit margins when a greater percentage of
its services are performed by full time employees rather than independent
consultants. Accordingly, the Company 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. The Company has made a
strategic decision to incur the incremental costs of independent consultants to
staff growth in project levels rather than increase the number of full time
employees until the Company has determined that the increased revenue levels are
sustainable.
The Company has also made a strategic decision to grow through the
acquisition of businesses that offer complementary marketing communications
services, products and technologies. In June 1996, the Company signed an
agreement to acquire Schell/Mullaney for consideration consisting of an initial
payment, in Common Stock of the Company, of $5 million and additional future
consideration of up to $9 million in Common Stock of the Company if certain
operating results are achieved in 1997 and 1998. Consummation of the
Schell/Mullaney acquisition is subject to a number of conditions, including the
issuance of a permit by the California Department of Corporations following a
hearing as to the fairness of the proposed acquisition, the absence of a
material adverse change in the business of the Company or Schell/Mullaney and
other matters. The Company is also negotiating with other potential acquisition
targets. The Company expects that future acquisitions, if any, could provide for
consideration to be paid in cash, stock or a combination of cash and stock.
There can be no assurance that any of these acquisitions will be consummated.
See "Risk Factors -- Risks Associated with Acquisitions."
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Investors are strongly encouraged to review the section entitled "Risk
Factors" commencing on page 6, for a discussion of factors that could affect
future performance.
17
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues of certain items
included in the Company's statements of operations for the periods indicated:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED NOVEMBER 30, -------------------
------------------------- MAY 31, MAY 31,
1993 1994 1995 1995 1996
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Direct salaries and related expenses......... 23.1 26.9 30.1 31.1 29.6
Other direct operating expenses.............. 51.3 48.5 37.8 38.9 36.9
General and administrative expenses.......... 21.5 22.3 25.0 24.9 23.1
----- ----- ----- ----- -----
Total operating expenses............. 95.9 97.7 92.9 94.9 89.6
----- ----- ----- ----- -----
Operating income............................... 4.1 2.3 7.1 5.1 10.4
Other income (expense)......................... (0.2) (0.2) (0.1) (0.2) 3.4
----- ----- ----- ----- -----
Income before taxes............................ 3.9 2.1 7.0 4.9 13.8
Income taxes................................... 1.6 0.8 3.1 2.2 4.9
----- ----- ----- ----- -----
Net income..................................... 2.3% 1.3% 3.9% 2.7% 8.9%
===== ===== ===== ===== =====
</TABLE>
FISCAL YEARS ENDED NOVEMBER 30, 1993, 1994 AND 1995
REVENUES
The Company generates substantially all of its revenues through project
fees on a fixed fee for service basis. Revenues from new media projects
represented approximately 25% of revenues in the fiscal year ended November 30,
1995. Revenues increased from $22.9 million in the fiscal year ended November
30, 1994 to $34.8 million in fiscal 1995, representing an increase of 51.7%. The
increase in revenues was due to an increase in the volume of creative and design
projects undertaken for existing clients of the Company, as well as to the
establishment of new client relationships. During the fiscal year ended November
30, 1995, the Company experienced an increase in revenues associated with its
new media business of approximately 358% over fiscal year 1994, as well as an
increase in revenues from other services of approximately 23.7%.
The Company's revenues increased from $12.0 million in fiscal 1993 to $22.9
million in fiscal 1994, representing an increase of 90.5%. This increase was
primarily attributable to substantially increased activity in virtually all
marketing communication services provided by the Company, accelerated by
geographic expansion as the Company opened an office in Cupertino to establish
and develop the Company's new media and video production services, and new
offices in Portland (Oregon) and London. During the first six months of fiscal
1996 the Company downsized the London office. During fiscal 1994, the Company
experienced an increase in revenues associated with its new media business of
approximately 352% over fiscal 1993, as well as an increase in revenues from
other services of approximately 81.0%.
DIRECT SALARIES AND RELATED EXPENSES
Direct salaries and related expenses consist primarily of wages for regular
and temporary employees, as well as profit-sharing payments and benefits for
regular employees. The Company's direct salaries and related expenses increased
70% from approximately $6.2 million in the fiscal year ended November 30, 1994
to approximately $10.5 million during fiscal 1995, representing 26.9% of
revenues for the fiscal year 1994 and 30.1% of revenues in fiscal 1995. The
Company's direct salaries and related expenses increased from approximately $2.8
million in fiscal 1993 to approximately $6.2 million in fiscal 1994,
representing 23.1% of revenues in fiscal 1993 and 26.9% of
18
<PAGE> 21
revenues in fiscal 1994. The increase from fiscal 1994 to fiscal 1995 and the
increase from fiscal 1993 to fiscal 1994 resulted principally from the Company's
hiring of additional full time employees, many of whom initially provided
services to the Company as independent consultants on a periodic basis. Fees
paid to independent consultants are included in other direct operating expenses.
OTHER DIRECT OPERATING EXPENSES
Other direct operating expenses include materials, contract freelance
talent (independent consultants), facilities and equipment expenses necessary to
provide services to the Company's clients. Other direct operating expenses
increased 18.4% from $11.1 million in the fiscal year ended November 30, 1994 to
$13.2 million for fiscal 1995, representing 48.5% of revenues in fiscal 1994 and
37.8% of revenues in fiscal 1995. Approximately 47.7% of the increase in other
direct operating expenses during this period was due to additional facilities
required to support the Company's growth. The Company's other direct operating
expenses increased 79.9% from $6.2 million in fiscal 1993 to $11.1 million in
fiscal 1994, representing 51.3% of revenues for fiscal 1993 and 48.5% of
revenues for fiscal 1994. Approximately 48% of the increase in other direct
operating expenses during this period was due to incremental costs incurred to
establish the Company's new media and video production services, with the
remainder of the increase due primarily to higher freelance talent and
production materials costs. The decrease in other direct operating expenses as a
percentage of revenues from fiscal 1994 to fiscal 1995 and the decrease from
fiscal 1993 to fiscal 1994 resulted principally from the increased amount of
higher margin creative projects, as opposed to lower margin production projects.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include headquarters expenses,
insurance, personnel costs for finance and administration, legal fees, audit
expenses, bad debt, management information systems expenses, employee profit
sharing, executive bonus payments and, for the period from January 1995 to
December 1995, a management fee payable to IPG. General and administrative
expenses increased from approximately $5.1 million in the fiscal year ended
November 30, 1994 to approximately $8.7 million in fiscal year 1995,
representing an increase of 69.3%. This increase was primarily due to an
increase of approximately $1.17 million in costs relating to finance and
administrative personnel to support the Company's expanded operations and
improve the Company's management information systems, and to a lesser extent an
increase of $784,000 in the Company's bad debt reserve during fiscal year 1995.
The Company increased provisions for doubtful accounts to accommodate the
increased number of customers served by the Company.
General and administrative expenses increased 98.6% from approximately $2.6
million in fiscal 1993 to approximately $5.1 million in fiscal 1994 and
represented 21.5% and 22.3% of revenues in fiscal 1993 and 1994, respectively.
These increases in absolute dollars were primarily due to an increase of
approximately $820,000 in costs related to finance and administrative personnel,
and to a lesser extent an increase in bad debt expense from $30,000 during
fiscal 1993 to $377,000 during fiscal 1994. The bad debt expense was
attributable to the bankruptcy filing of one of the Company's former clients and
the partial write-off of certain accounts receivable pursuant to a negotiated
settlement with another former client of the Company.
INCOME TAXES
Combined federal and state income tax rates were 39.9% in fiscal 1993,
40.0% in fiscal 1994, and 43.7% in fiscal 1995.
19
<PAGE> 22
SIX MONTHS ENDED MAY 31, 1995 AND MAY 31, 1996
REVENUES
Revenues increased from $14.9 million in the six months ended May 31, 1995
to $22.9 million in the six months ended May 31, 1996, representing an increase
of 53.3%. This increase in revenues was due to an increase in the volume of
creative and design projects undertaken for existing clients of the Company, as
well as the establishment of new client relationships. Revenues from new media
projects represented approximately 32% of revenues for the six months ended May
31, 1996.
DIRECT SALARIES AND RELATED EXPENSES
The Company's direct salaries and related expenses increased 45.7% from
approximately $4.7 million in the six months ended May 31, 1995 to approximately
$6.8 million during the six months ended May 31, 1996, representing 31.1% of
revenues for the first six months of fiscal year 1995 and 29.6% of revenues in
the first six months of fiscal 1996. This increase in absolute dollars resulted
principally from the Company's hiring of additional full time employees, many of
whom initially provided services to the Company as independent consultants on a
periodic basis. The decrease in these expenses as a percentage of revenues
reflects a more rapid increase in revenues than in direct salaries and related
expenses. Fees paid to independent consultants are included in other direct
operating expenses.
OTHER DIRECT OPERATING EXPENSES
Other direct operating expenses increased 45.6% from $5.8 million in the
six months ended May 31, 1995, to $8.5 million in the first six months of fiscal
year 1996, representing 38.9% of revenues in the first six months of 1995 and
36.9% of revenues in the first six months of 1996. The period over period
increase in absolute dollars was attributable to increases in materials costs
and free lance talent costs necessary to support the higher level of revenues.
The decrease in other direct operating expenses as a percentage of revenues
resulted principally from the increased proportion of higher margin creative
projects.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased from approximately $3.7
million in the six months ended May 31, 1995 to approximately $5.3 million in
the same period of fiscal year 1996, representing an increase of 42.3%. As a
percentage of revenues, general and administrative expenses decreased from 24.9%
of revenues in the six months ended May 31, 1995 to 23.1% in the first six
months of fiscal 1996. This period over period increase in absolute dollars in
general and administrative expenses was attributable principally to increases in
business development expense, higher legal and accounting expenses associated
with being a public company and increased lease payments associated with
additional offices, offset in part by a decrease in bad debt reserve expense due
to the collection of a previously reserved receivable. The decrease in these
expenses as a percentage of revenues reflects a more rapid increase in revenues
than in general and administrative expenses.
INTEREST AND OTHER INCOME
Interest income increased by approximately $612,000 from the six months
ended May 31, 1995 to the same period of fiscal 1996 due to higher average cash
and cash equivalents balances.
INCOME TAXES
Combined federal and state income tax rates were 44.0% in the six months
ended May 31, 1995 and 35.1% in the first six months of fiscal 1996. The
reduction in rates is primarily due to the impact of income generated by the
Company's holdings in tax advantaged investments.
20
<PAGE> 23
QUARTERLY RESULTS
The following tables present the Company's operating results for each of
the six quarters for the period ended May 31, 1996, including such amounts
expressed as a percentage of revenues. The information for each of these
quarters is unaudited, but has been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of the Company's
management, reflects all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of such information when read in
conjunction with the Company's audited consolidated financial statements and
notes thereto appearing elsewhere in this Prospectus. Operating results for any
quarter are not necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31, AUGUST 31, NOVEMBER 30, FEBRUARY 29, MAY 31,
1995 1995 1995 1995 1996 1996
------------ ------- ---------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $ 6,200 $ 8,738 $ 9,532 $ 10,322 $ 9,150 $13,745
------- ------- ------- ------- -------
Operating expenses:
Direct salaries and related
expenses..................... 2,052 2,599 2,862 2,972 2,978 3,797
Other direct operating
expenses..................... 2,252 3,558 3,512 3,842 3,227 5,232
General and administrative
expenses..................... 1,706 2,008 2,470 2,504 2,089 3,195
------- ------- ------- ------- -------
Total operating
expenses.............. 6,010 8,165 8,844 9,318 8,294 12,224
------- ------- ------- ------- -------
Operating income................. 190 573 688 1,004 856 1,521
Other income (expense)........... (36) 3 (10) 16 259 515
------- ------- ------- ------- -------
Income before income taxes....... 154 576 678 1,020 1,115 2,036
Income taxes..................... 68 253 298 443 372 734
------- ------- ------- ------- -------
Net income....................... $ 86 $ 323 $ 380 $ 577 $ 743 $ 1,302
======= ======= ======= ======= =======
Net income per share............. $ 0.01 $ 0.03 $ 0.04 $ 0.05 $ 0.06 $ 0.10
Shares used in per share
computation.................... 10,674 10,765 10,739 10,750 12,942 13,361
AS A PERCENTAGE OF REVENUES
Revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------- ------- ------- ------- -------
Operating expenses:
Direct salaries and related
expenses..................... 33.1 29.7 30.0 28.8 32.5 27.6
Other direct operating
expenses..................... 36.3 40.7 36.9 37.2 35.3 38.1
General and administrative
expenses..................... 27.5 23.0 25.9 24.3 22.8 23.2
------- ------- ------- ------- -------
Total operating
expenses.............. 96.9 93.4 92.8 90.3 90.6 88.9
------- ------- ------- ------- -------
Operating income................. 3.1 6.6 7.2 9.7 9.4 11.1
Other income (expense)........... (0.6) 0.0 (0.1) 0.2 2.8 3.7
------- ------- ------- ------- -------
Income before taxes.............. 2.5 6.6 7.1 9.9 12.2 14.8
Income taxes..................... 1.1 2.9 3.1 4.3 4.1 5.3
------- ------- ------- ------- -------
Net income....................... 1.4% 3.7% 4.0% 5.6% 8.1% 9.5%
======= ======= ======= ======= =======
</TABLE>
The Company's operating results have fluctuated in the past and may
fluctuate in the future as a result of a variety of factors, including timing of
the completion, material reduction or cancellation of major projects or the loss
of a major client, timing of the receipt of new business, timing of the hiring
or loss of personnel, timing of the opening or closing of an office, the
relative mix of high margin creative projects as compared to lower margin
production projects, changes in the pricing strategies and business model of the
Company or its competitors, capital expenditures and other costs relating to the
expansion of operations, and other factors that are outside of the Company's
control.
21
<PAGE> 24
Operating results could also be materially adversely affected by increased
competition in the Company's markets.
The Company experiences some seasonality in its business, which results
from timing of product introductions and business cycles of the Company's
clients. The Company's revenues tend to be somewhat higher during the third and
fourth quarters of the Company's fiscal year as the Company's clients prepare
marketing campaigns for products launched in anticipation of fall trade shows
and the holiday season. The Company's revenues for the first fiscal quarter tend
to be somewhat lower because many clients have expended most of their marketing
budgets prior to the end of the calendar year and do not release funds from the
next calendar year's marketing budget as compared to the fourth quarter of
fiscal 1995 until mid to late January.
The increase in direct salaries and related expenses in the third quarter
of fiscal 1995 over the second quarter of fiscal 1995 was due in part to
increased compensation expense of $122,000 recorded in connection with stock
options granted in fiscal 1995. The increase in direct salaries and related
expenses as a percentage of revenues in the first quarter of fiscal 1996 as
compared to the fourth quarter of fiscal 1995 was due to the decrease in
revenues during that quarter. The decrease in direct operating expenses as a
percentage of revenues in the first quarter of fiscal 1996 as compared to the
fourth quarter of fiscal 1995 was primarily due to decreases in materials and
freelance costs, partially offset by an increase in facilities costs as a
percentage of revenues. The increase in general and administrative expenses as a
percentage of revenues in the first quarter of fiscal 1995 was due to the
decrease in revenues during that quarter. The increase in general and
administrative expenses as a percentage of revenues in the third quarter of
fiscal 1995 was primarily due to a $289,000 increase in the provision for
doubtful accounts to accommodate the increased number of customers served by the
Company and to a lesser extent to general and administrative payroll related
expenses and legal and accounting costs. The general and administrative expenses
for the fourth quarter of fiscal 1995 remained approximately the same as the
prior quarter as the Company continued to build its bad debt reserve and
incurred recruiting fees. The Company expects that general and administrative
expenses will increase in absolute dollars in future quarters.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and investments in
property and equipment through cash generated from operations, bank borrowing,
equity financing and capital lease financing arrangements. At May 31, 1996, the
Company had no material capital commitments.
Cash and cash equivalents, consisting primarily of high-quality municipal
bonds and tax-advantaged money market instruments, totaled $39.0 million at May
31, 1996 compared to $2.3 million at November 30, 1995. The increase in cash and
cash equivalents during this period was primarily due to net proceeds of $37.8
million resulting from the sale of stock in connection with the Company's
initial public offering in December 1995. The Company's cash and cash
equivalents increased $74,000, decreased $59,000, and increased $2.3 million for
the fiscal years ended November 30, 1993, 1994 and 1995, respectively.
The changes in cash flows for the three fiscal years ended November 30,
1993, 1994 and 1995 resulted principally from positive cash flows from operating
activities of $372,000, $1.0 million and $2.1 million, respectively, and
positive cash flow from financing activities of $401,000, $546,000 and $1.4
million, respectively, offset in part by investments in property and equipment
of $699,000, $1.6 million and $1.2 million, respectively. The positive cash flow
from financing activities for the fiscal year ended November 30, 1995 resulted
principally from the sale of stock to IPG, offset by repayments on the Company's
line of credit of $674,000. The changes in cash flows for the six months ended
May 31, 1996 resulted from positive cash flows from financing activities of
$37.7 million (principally from the sale of stock in connection with the
Company's initial public offering) and from cash provided by operations of
$160,000, offset in part by cash used in investing activities of $1.3 million.
22
<PAGE> 25
The Company has a $3.0 million credit facility available under a revolving
line of credit based on 75% percent of eligible accounts receivable. The Company
also has a $1.0 million three year term loan facility available for purchases of
equipment. The credit facilities are secured by all the assets of the Company
and bear interest at prime plus 0.5% for the line of credit and 0.75% for the
term loan. At May 31, 1996, there was no indebtedness outstanding under these
credit facilities. These credit agreements, which are scheduled to expire on
July 31, 1996, require compliance with various financial covenants and
restrictions, including maintenance of minimum levels of net worth and
profitability, and restrict the Company's ability to pay dividends or to effect
mergers or acquisitions without the bank's consent.
The Company believes its current cash and cash equivalents, together with
existing credit facilities, cash flows from operations, if any, and the proceeds
of this offering will be sufficient to meet the Company's cash requirements for
at least the next twelve months, including the cost of business acquisitions, if
any.* The Company may need to raise additional funds through public or private
debt or equity financing in order to take advantage of opportunities that may
become available to the Company, including expansion of operating activities and
acquisition of businesses, products or technologies, or otherwise to respond to
competitive pressures.
There can be no assurance that the Company will be able to raise additional
capital on favorable terms or at all.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Investors are strongly encouraged to review the section entitled "Risk
Factors" commencing on page 6, for a discussion of factors that could affect
future performance.
23
<PAGE> 26
BUSINESS
This section and other parts of this Prospectus contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Risk Factors" commencing on
page 6. Prospective Investors are urged to consider the factors discussed in the
"Risk Factors" section, in evaluating an investment in the shares of Common
Stock offered hereby.
OVERVIEW
CKS Group, Inc. specializes in offering a wide range of integrated
marketing communication services that help companies market their products,
services and messages. The integrated marketing communication services provided
by the Company include strategic corporate and product positioning, corporate
identity and product branding, new media, packaging, collateral systems,
advertising, direct mail, consumer promotions, trade promotions and media
placement services. The Company is a provider of marketing programs that utilize
advanced technology solutions and new media -- which the Company defines as
media that deliver content to end users in digital form, including the World
Wide Web, the Internet, proprietary online services, CD-ROMs, laptop PC
presentations and interactive kiosks. New media services represented
approximately 8%, 25% and 32% of the Company's revenues for fiscal years 1994
and 1995 and the six months ended May 31, 1996, respectively. The balance of the
Company's revenue for such periods was derived from the Company's other
integrated marketing communication services, including strategic corporate and
product positioning, corporate identity and product branding, packaging,
collateral systems, advertising, direct mail, consumer promotions, trade
promotions and media placement services.
INDUSTRY BACKGROUND
Several recent trends within the American business community are changing
the marketing communication needs of American businesses. These trends include
the following:
Shortening of Product Life Cycles and Preparation Times for Marketing
Campaigns. Today's increasingly competitive global business environment exerts
constant pressure on businesses to reduce product development cycles, which in
turn reduces product life cycles. Although this trend has been particularly
evident with respect to companies in high technology industries, it has also
begun to affect other industries as well. As a result, the marketing activities
for many products are now typically accomplished in shorter periods of time than
before (i.e., weeks rather than months). For example, the telecommunications
industry, which is characterized by the frequent introduction of new services
and promotional campaigns, now typically requires the rapid design and
turnaround of marketing programs that are associated with the frequent
introduction of services or campaigns.
Emergence of New Media. The recent emergence of new media communication
vehicles such as the World Wide Web, the Internet, proprietary online services,
CD-ROMs, laptop PC presentations and interactive kiosks, are rapidly changing
the way businesses communicate with other businesses and consumers. Much of the
recent growth in Internet use by businesses and individuals has been driven by
the emergence of the World Wide Web. The World Wide Web is used by organizations
to offer their products and services on the Internet and to publish confidential
company information to employees inside the enterprise. There are thousands of
commercial World Wide Web sites and millions of Internet users. Most industry
observers expect this trend to continue and accelerate. As a consequence, many
businesses are concluding that they must develop an effective method of
marketing through these new media. The Company believes that successful
providers of marketing communication services in this emerging new media
environment will need to possess skill sets and marketing approaches that are
different from those required for traditional print and broadcast
communications. In particular, a higher level of technological competence will
be required.
24
<PAGE> 27
Market Segmentation. The emergence of online services, the advent of cable
television with dozens or hundreds of channels available and the substantial
increase in the number of special interest magazines and periodicals have now
made it possible for businesses to tailor their marketing messages to narrow
target groups of potential customers who may be more demographically predisposed
to buy their product or service. As a consequence, the marketing message for a
product introduction might now typically consist of a greater number of
individual components than in the past, with multiple variations of the overall
message aimed at smaller subsegments of the market.
New Tools and Technologies. The increasing availability of new and more
sophisticated tools and technologies now permit marketers to prepare and deliver
high quality marketing messages quickly and efficiently. For example, tools
facilitating the repurposing of advertising content in digital form, as well as
tools allowing the creation of sophisticated multimedia presentations, have
provided new methods for the preparation and delivery of marketing
communications. Successful providers of marketing communications services will
need to understand and utilize these and other new tools and technologies.
Corporate Downsizing. The drive for greater productivity within the
American business community has led many corporations to substantially reduce
their internal marketing departments. In the past, these internal marketing
departments would oversee and control the overall direction of an entity's
marketing messages. These departments retained specialist firms such as
advertising agencies, corporate identity firms, product packaging designers,
direct mail firms and others, for the various components of the overall
marketing function. As a result of these substantial reductions in the number of
internal marketing personnel, it has become increasingly difficult for many
corporations to internally coordinate the work of a large number of specialized
advertising firms and ensure the production of uniform and consistent marketing
messages.
These trends have created a demand for an integrated approach to marketing
communication services that can produce high quality, creative results more
quickly and efficiently than before and can deliver these messages through both
new and traditional media. This new approach will require, and clients will
expect, that firms providing marketing communication services will make use of
the latest tools, techniques and technologies available to deliver high quality
results quickly and efficiently.
CKS CORE STRENGTHS
The Company's overall mission is to consistently deliver integrated
marketing communication services and products to its clients through the
creative use of advanced technology, breakthrough design and superior account
management. The Company believes that certain core strengths have been, and will
continue to be, key to the Company's success. These core strengths include the
following:
New Media Communications. The Company develops and implements new media
marketing programs. The Company created its first interactive marketing program
for Apple in 1988 using Apple's Hypercard technology. Since that time, the
Company has continued to build on its new media capabilities. The Company
believes that its fundamental understanding of the tools and technologies used
to develop and distribute new forms of interactive communication will provide it
with a substantial advantage over its competitors in the emerging new media
area.*
Integrated Marketing. The Company currently offers a full range of
marketing communication services to its clients, including strategic corporate
and product positioning, corporate identity and product branding, new media,
packaging, collateral systems, advertising, direct mail, consumer promotions,
trade promotions and media placement services. The Company provides both tradi-
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Investors are strongly encouraged to review the section entitled "Risk
Factors" commencing on page 6, for a discussion of factors that could affect
future performance.
25
<PAGE> 28
tional and new media solutions in these areas. While some of the Company's
employees specialize in only one or two of these disciplines, many are
generalists skilled at providing high quality marketing services in several of
these areas.
Creative Excellence. The Company attempts to provide creative solutions in
all areas of marketing communications that meet or exceed the highest standards
of service within each individual discipline. Although the Company was founded
with an initial core of expertise in the packaging and corporate identity
disciplines, the Company has since expanded into other areas of marketing
communications. In order to maintain high levels of creativity and quality, the
Company places great importance on recruiting and retaining talented employees.
The Company's investments in tools and technologies have served as a competitive
advantage in recruiting and retaining many talented employees who are attracted
to the Company's technology-driven culture. In addition, the Company's
integrated approach to marketing communication services attracts and retains
many highly qualified employees who are interested in applying their skills to
more than one marketing discipline. The Company has received numerous honors and
awards, including Addy Awards, Marget Larsen Awards for Design, Murphy Awards,
Telly Awards and a Communication Arts Design Annual award.
Technological Proficiency. The Company's founders all worked at Apple
Computer during the 1980's where they saw the benefit of applying technology to
enhance integrated marketing communications. As a result, one of the Company's
primary objectives has been to capitalize on the fundamental changes in the
marketing communication services marketplace by becoming the premier supplier of
integrated marketing communications through the use of advanced technology. To
help meet this objective, the Company equips its creative and production staff
with computer workstations which the Company leases and upgrades frequently to
maintain the latest technologies. The Company's programming staff is skilled in
C/C++, Perl, Visual Basic and other programming languages, and multimedia tools
such as Director, JavaScript and QuickTime VR. The Company has developed
innovative server-side Web applications, and generally continues to develop
tools and applications to provide leading edge marketing communication services
and products quickly and efficiently. The Company has acquired licenses to
certain third-party software products and tools prior to the time such products
are generally available by acting as a beta site for pre-release versions of
these products and tools. The Company believes that its technological
sophistication has enabled it to provide marketing communication services and
products quickly and efficiently.
CKS STRATEGY
The Company intends to expand upon its core strengths in order to further
enhance its ability to provide high quality marketing solutions that must be
developed quickly and efficiently.* The Company's strategy also includes the
following key elements:
Use Integration as a Tool for Building Client Relationships. The Company
has been able to utilize its integrated approach to marketing communication
services as an effective tool in forming its present client relationships, and
the Company believes that such integration will continue to serve this function
in the future.* The Company's client relationships have typically begun with a
single assignment that might encompass corporate identity or packaging, a
brochure or a World Wide Web site. Such single project relationships have
allowed clients to "test" the Company's services with minimal long-term risk. In
many instances, for example MCI, Widmer Brothers Brewing Company and Yes!
Entertainment, the Company has been successful in expanding the relationship
beyond the single-project assignment to include additional projects in other
marketing disciplines.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Investors are strongly encouraged to review the section entitled "Risk
Factors" commencing on page 6, for a discussion of factors that could affect
future performance.
26
<PAGE> 29
Expand Scope of Services and Geographic Locations. The Company seeks to
expand both the breadth and depth of its integrated marketing communication
services. The Company believes, however, that its business can be conducted most
efficiently through offices with fifty or fewer employees, in part because a
smaller office is better able to retain the Company's distinctive culture and
operate more efficiently than a larger office. The Company seeks to achieve
these objectives both by continuing to expand the scope of the marketing
communications services that it currently offers and adding new offices in
cities where clients have recognized the need for the Company's services.* The
Company recently opened an office in Washington, D.C., and plans to open other
offices in the future.* This strategy entails the risk that business at a new
office will not develop as well as the Company anticipates. See "Risk
Factors -- Management of Growth, Risk Associated with Expansion."
Capitalize on Leadership Position and Market Opportunities in New
Media. The Company has been and continues to be a leader in the application and
development of new media marketing communication services and products. The
Company believes that the proliferation of the Internet and other new media will
continue to provide substantial opportunities to the Company.* These trends have
enabled companies to focus their marketing messages and may ultimately result in
one-on-one marketing to specific individuals. The Company believes that it
possesses the necessary creative and technical skills to capitalize on these
market opportunities. In addition, the Company believes that its management
systems, including its Electronic Job Jacket software, provide the Company with
a competitive advantage in delivering these new media marketing communication
services and products in a timely and cost-effective manner.
Leverage Relationship with IPG. In January 1995, the Company entered into
a financial and strategic relationship with IPG, the third largest advertising
and communications corporation in the world. The relationship was based on IPG's
desire to accelerate the integration of advanced technology into its own
advertising agency services, as well as the Company's interest in gaining access
to IPG resources and substantial existing client base. Although IPG is under no
contractual obligation to introduce its clients to the Company, the Company
believes that its relationship with IPG provides CKS access to certain of IPG's
large accounts that need marketing communication with a substantial technology
or new media orientation.* At the same time, this relationship enables IPG to
provide additional new media communications expertise to its clients. See
"Certain Transactions -- Relationship with The Interpublic Group of Companies,
Inc."
Grow Through Acquisitions of Complementary Businesses. The Company seeks
to acquire businesses that offer complementary marketing communication services,
products and technologies.* The Company evaluates potential acquisitions for
their ability to add to the Company's new media capabilities, technological
proficiency, creative excellence and integrated marketing services skills. In
addition, the Company seeks to leverage acquisitions to expand the breadth of
the Company's management*. Other factors that the Company evaluates in
considering potential acquisitions include a reputation for superb creative work
in both specialities where the Company is particularly strong and in specialties
that have not been the Company's historic strengths, accessible proprietary
technology and new media expertise, potential for geographic expansion,
relationships with certain companies and clients and the degree to which the
potential acquisition candidate shares the Company's vision of combining
integrated marketing communications services with an understanding of
technology. The Company has signed an agreement to acquire Schell/Mullaney and
is currently in discussions with other potential acquisition candidates. There
can be no assurance that the acquisition agreement already signed will be
consummated, that the Company will enter into definitive agreements with any
such candidates or, if so, that any of such acquisitions
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Investors are strongly encouraged to review the section entitled "Risk
Factors" commencing on page 6, for a discussion of factors that could affect
future performance.
27
<PAGE> 30
will be consummated. See "Risk Factors -- Risks Associated with Acquisitions"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CKS CLIENTS AND SERVICES
The Company provides a broad range of marketing communication services.
Depending on the scope of the assignment, the Company's services to its clients
range from execution of a discrete marketing project, such as designing product
packaging, to taking responsibility for the overall marketing message through
various methods. When the Company assumes responsibility for the overall
marketing message, the Company works with the client to analyze the client's
products or services and the market for those services and to evaluate the
appropriate media to reach the desired market efficiently. The Company then
creates and distributes various versions of the message through the chosen
media. The Company's services include the following:
- Strategic Corporate and Product Positioning -- Development of a unique
selling proposition for either a company or product that differentiates
it from the competition.
- Corporate Identity and Product Branding -- Development of a creative look
and feel that establishes a corporate or brand personality to
differentiate it from the competition.
- New Media -- Development of media to be delivered to end users in digital
form, including the World Wide Web, the Internet, proprietary online
services, CD-ROMs, laptop PC presentations and interactive kiosks.
- Packaging -- Creative development, design and production of an individual
retail package or integrated retail packaging systems.
- Collateral Systems -- Development and implementation of a literature
system including, for example, individual brochures, flyers and data
sheets.
- Advertising -- Broadcast and/or print advertising designed to generate
awareness of a company, product, or service over an extended period of
time.
- Direct Mail -- Development of mail programs designed to generate demand
among a specific target audience within a limited time frame.
- Consumer Promotions -- Marketing communications campaign and
merchandising materials designed to increase sales among consumers.
- Trade Promotions -- Marketing communications campaign designed to provide
information and incentives to specific industry trade during a limited
time.
- Media Placement Services -- Strategic planning, negotiation and purchase
of both traditional and new media.
The Company's five largest clients accounted for 42% and 37% of the
Company's revenues for the fiscal year ended November 30, 1995 and the six
months ended May 31, 1996, respectively, with fluctuations in the amount of
revenue contribution from each such client from quarter to quarter. MCI and
Apple, the Company's two largest clients during fiscal 1995, accounted for
approximately 19% and 7% of the Company's revenues, respectively, during that
year, and accounted for approximately 20% and 4% of the Company's revenues,
respectively, during the six months ended May 31, 1996. Since the Company's
clients generally retain the Company on a project by project basis, a client
from whom the Company generates substantial revenue in one period may not be a
substantial source of revenue in a subsequent period. For example, of the five
largest clients (in terms of revenues recognized by the Company) during the
fiscal year ended November 30, 1995 only two were in the top five for the fiscal
year ended November 30, 1994 and only two were in the top five for the six
months ended May 31, 1996.
CKS generally performs services for its clients on a project by project
basis. In certain circumstances the Company enters into agreements with its
clients to establish the terms upon which the Company deals with such clients
when the Company is engaged to perform services. Such agreements are terminable
at will by either party and without penalty.
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<PAGE> 31
The Company targets and services a wide variety of clients, ranging from
small, privately-held technology companies, such as Starwave Corporation, to
Fortune 150 companies such as McDonald's Corporation ("McDonald's") and General
Motors Corporation ("GM"). Other representative clients of the Company include
Apple, Citibank, Clinique, Prudential Insurance Company, Sears, Roebuck & Co.,
U.S. Robotics Corp., and Williams-Sonoma Inc. These client relationships
generally began with a limited assignment and have since grown to a relationship
involving a variety of marketing communications services. The chart below
demonstrates the breadth of marketing communication services that the Company
has provided to various clients. With the exception of MCI, Apple and McDonald's
representing approximately 19%, 7% and 7% of the Company's revenues,
respectively, during the fiscal year ended November 30, 1995, and 20%, 4% and 2%
of the Company's revenues, respectively, during the six months ended May 31,
1996, none of the clients named in the chart below generated more than 5% of the
Company's revenues during either of those periods.
LOGO
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<PAGE> 32
CUSTOMER CASE STUDIES
The following customer case studies further illustrate the Company's
integrated marketing communication solutions for certain of the Company's
customers, in each case indicating such customer's principal reasons for
selecting CKS, the manner in which CKS' services have been implemented and the
value CKS has provided.
MCI
The Company began working with the Business Markets division of MCI in
November 1994. The Company's initial assignment was to develop the strategy and
implementation plan for MCI's new online service, internetMCI
(http://www.internetMCI.com). MCI then asked the Company to assist with the
conception, execution, development and maintenance of the online service.
In February 1996, MCI asked the Company to assist in the introduction of
MCI One, a fully integrated communication service. MCI One provides consumers
with long distance, paging, cellular, personal (800), calling card and Internet
services for one flat fee per month. With the passage of the Telecommunications
Act of 1996, MCI felt it was critical to launch this service by May 1, 1996,
giving MCI and the Company ten weeks to complete the project. CKS was successful
in meeting MCI's target launch date. MCI One was thereby the first fully
integrated communication service available to consumers following the passage of
the Telecommunications Act of 1996.
CKS developed the MCI One marketing communication materials, including
product packaging and collateral, a World Wide Web site, a direct mail campaign
and after-market support, such as a customer invoice. CKS is working with MCI to
develop additional marketing communication support materials for MCI One,
including a CD-ROM and instructional video.
The Company also created MCI's corporate site (http://www.mci.com) which
includes over 500 World Wide Web pages with approximately 6,000 connecting links
within the site and the World Wide Web ("hot links"). The Company continues to
work with MCI on branding, direct response programs, Internet strategy and
implementation, marketing brochures and interactive sales tools. For the fiscal
year ended November 30, 1995, and the six months ended May 31, 1996, MCI was the
Company's largest client in terms of revenues.
Widmer Brothers Brewing
Widmer Brothers Brewing Company ("Widmer") in Portland, Oregon is the
largest draught craft brewer in the Northwest based on sales volume, supplying
pubs, restaurants and retailers in 17 states, including California, Oregon and
Washington. Widmer's products include Widmer Hefeweizen, a German-style
unfiltered wheat beer that is the largest selling draught craft beer in the
Northwest.
To promote its entry into the bottled beer market in early 1996, Widmer
considered 12 advertising agencies, including the Company, to devise a
comprehensive launch program. The Company won Widmer's business in part by
organizing a 14-person team which interviewed beer distributors, bartenders,
waitpersons and customers at approximately 20 establishments in Portland, San
Francisco, San Jose and San Diego, and then produced a video presentation
supporting the Company's strategic and creative recommendations to Widmer.
CKS recommended the product positioning and brand strategy that are the
foundation of Widmer's retail marketing efforts. The Company first developed a
channel marketing plan to promote Widmer's brands to distributors. Subsequently,
the Company designed Widmer's product packaging, created print and outdoor
advertising and produced radio advertising spots to support Widmer's launch of
its bottled products. The Company also created Widmer's point-of-sale displays,
planned and executed media placements, designed and hosted Widmer's World Wide
Web site and created graphics for Widmer's delivery trucks.
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<PAGE> 33
Widmer launched its bottled products in the Northwest in May 1996. Based on
initial sales and demand in the Northwest, Widmer is currently considering
introducing its bottled products in other markets.
YES! Entertainment Corporation
YES! Entertainment Corporation ("YES!") develops, manufactures and markets
toys and other children's products, including a variety of educational and
interactive products. YES! engaged the Company in July 1994 to help position a
new audio concept that allows children to record and instantly playback whatever
they record.
Since it was critical for YES! to launch the product for the Christmas
selling season, the Company was asked to complete its assignment in a very rapid
fashion. In four weeks, the Company developed the product name Yak Bak(TM),
along with packaging, merchandising, trade communications and advertising
concepts.
YES! continues to capitalize on Yak Bak's success with brand extensions and
new product launches. The Company worked with YES! in extending the brand and
developing marketing communication support materials for a number of other
interactive toys for children, including the Yak Bak II,(TM) Yak Bak sfx,(TM)
MegaMouth,(TM) Pull Me Pals,(TM) and Power Penz(TM) products. CKS has also
created five advertising campaigns for YES! to market these new products. CKS
filmed and produced the broadcast advertisements at its digital video production
facilities. The Company continues to work with YES! on strategic product
positioning, advertising campaigns, packaging, product branding and collateral
systems.
DEVELOPMENT OF NEW CLIENT RELATIONSHIPS
The Company attracts new clients through a number of different methods. To
date, the Company has relied heavily on referrals from existing clients to
attract new clients. In addition, certain clients have been referred to the
Company as a result of its relationship with IPG. The Company is currently in
the process of instituting a new business development program. The Company's
executive officers have historically engaged in numerous speaking tours and
other presentations aimed at attracting new clients. These speaking tours have
led directly to the formation of new client relationships by the Company as well
as substantial press and other media coverage of the Company, which has
indirectly assisted the Company in forming new client relationships. The Company
also advertises its integrated marketing communication services in certain
business magazines. In March 1996, the Company opened an office in Washington,
D.C. in order to enhance the Company's ability to rapidly meet the needs of MCI,
the Company's largest client in terms of fiscal 1995 revenues. The Company may
establish additional offices in the future in order to further relationships
with existing clients or in order to facilitate acquiring new clients in diverse
geographic markets.*
USE OF TECHNOLOGY
The prior experience in technology companies of the Company's founders and
many of its employees, along with the location of the Company's headquarters in
Silicon Valley, have helped the Company to utilize technology as a major
competitive advantage. The Company employs technology to maximize its ability to
provide high quality, integrated marketing communication services to its clients
in a timely and cost-effective manner. The Company also emphasizes the use of
technology in managing its business, as demonstrated by its development of the
Electronic Job Jacket.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Investors are strongly encouraged to review the section entitled "Risk
Factors" commencing on page 6, for a discussion of factors that could affect
future performance.
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<PAGE> 34
Digital Content
The Company has made a substantial investment in technology which allows
all of its employees to share and utilize digital content as well as other
Company and client information in an easy and efficient manner. All work
performed by the Company for its clients is maintained by the Company in digital
form on CD-ROMs. The Company has created an electronic network among its
offices, which facilitates the sharing of information and allows each office to
benefit from the experience and know-how of the other offices. The Company
believes that its use of digital technology for the production and shipping of
audio and video content, frequent updating of content for whatever medium is
being used for its distribution, packaging and design assignment, virtual sets,
internal communication, and cost control enable the Company to provide superior
solutions to its clients at lower costs than traditional marketing
communications services companies.
Electronic Job Jacket Software
The Company began development of its Electronic Job Jacket software in 1990
and put it into service later that year. The Electronic Job Jacket is a software
system that the Company uses for internal purposes only that tracks financial
and other information relating to completed and open projects being worked on by
the Company. The Company uses the Electronic Job Jacket in project bids to help
estimate, based upon historical information from prior projects, the various
resources that will be needed to complete the project. When a project commences,
each person working on the project records, on a daily or weekly basis, the time
spent on the project. This allows the account manager, each individual working
on the account, the Company's executive officers and finance personnel, and each
employee of the Company to compare, at any time, the Company's performance
against the estimates that formed the basis for the Company's project quote.
This allows the Company to determine early in the process if its costs of
performing the services are likely to exceed the revenue received, or result in
lower margins than anticipated. By closely monitoring the information contained
in the Electronic Job Jacket, the Company is better able to manage its projects.
The Company can also obtain data on the costs of performing certain services,
thereby improving its ability to prepare appropriate bids on future projects.
The Electronic Job Jacket is linked with the Company's accounting system,
allowing the Company to obtain accurate information as to the extent of project
completion for the purpose of recognizing revenues.
Access to New Technologies
The Company's reputation as a technological innovator frequently allows it
access to advanced media and communications technologies before such
technologies are available to the general public or to the Company's
competitors. In addition, the Company is frequently involved in alpha and beta
test programs for pre-release versions of new information technologies. Early
access to emerging technologies allows the Company to provide innovative media
and marketing solutions to its customers before the Company's competitors, and
to more rapidly explore and exploit the benefits of such new technologies. As a
result of these relationships, the Company's engineers and creative staff
regularly interact with the persons who design and develop the new media tools
the Company uses. The Company believes it enjoys an advantage over rival
marketing communication providers in effectively utilizing advanced multimedia
and communications technologies to deliver its clients' marketing messages.
FUTURE DEVELOPMENT PROJECTS
Building upon its existing integrated marketing communications services and
products, the Company has several development projects underway that are
intended to extend the use of its services to address potential new market
opportunities. For instance, the Company recently created a reusable
object-oriented C++ engine for interactive multimedia applications. The Windows-
compatible engine allows the use of video, sound, animation, picture display and
hyper-linking, as well as the ability to register multiple users, track and
print test results, and keep track of where a
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user left off. Each component of the software engine can be leveraged for use in
other applications that require similar functionality. There can be no assurance
that any of the Company's development projects will result in commercial
products or services.
IPG RELATIONSHIP
In January 1995, the Company entered into a relationship with IPG pursuant
to which IPG acquired a 29% ownership interest in the Company, on a fully
diluted basis, through the purchase of capital stock from the Company and
certain stockholders of the Company. IPG purchased additional capital stock of
the Company from certain stockholders of the Company in October 1995, thereby
increasing its ownership position to approximately 35% on a fully diluted basis
prior to the Company's initial public offering. Following the Company's initial
public offering in December 1995, IPG's ownership was reduced to approximately
28%, and following the sale of the shares offered hereby IPG's ownership will be
approximately 19%. See "Certain Transactions -- Relationship with The
Interpublic Group of Companies, Inc." In connection with the purchase, Barry R.
Linsky, a Senior Vice President of IPG, joined the Board of Directors of the
Company. IPG is a holding company for multiple advertising agencies and other
marketing communications companies, including McCann-Erickson, Ammirati &
Puris/Lintas, Lowe Group and others.
The relationship between IPG and the Company was based on IPG's desire to
accelerate the integration of advanced technology into its own advertising
agency services, as well as the Company's interest in gaining access to IPG
resources and substantial existing client base. Although IPG is under no
contractual obligation to introduce the Company to IPG's clients, the Company
believes that its relationship with IPG provides CKS access to certain of IPG's
large accounts that need marketing communications with a significant emphasis on
new media technology. At the same time, this relationship enables IPG to provide
additional new media communications expertise to its clients.
The Company has also derived certain other benefits, including management
advice and consulting services, from its relationship with IPG, although IPG's
contractual obligation to provide advice and services to the Company terminated
upon closing of the Company's initial public offering in December 1995. For
example, IPG has provided the Company with access to additional research
capabilities and a worldwide network of agencies that the Company might not
otherwise have. IPG also has provided the Company with knowledge and experience
with respect to the integration of multiple marketing communication firms and
disciplines into a unified group. IPG, which has acquired over 250 marketing
communications companies, has also advised the Company in connection with
identifying, valuing and integrating potential acquisitions. See "Certain
Transactions -- Relationship with The Interpublic Group of Companies, Inc."
COMPETITION
The markets for the Company's services are highly competitive and are
characterized by pressures to reduce prices, incorporate new capabilities and
accelerate job completion schedules.
The Company faces competition from a number of sources. These sources
include national and regional advertising agencies as well as specialized and
integrated marketing communication firms. In addition, with respect to new
media, many advertising agencies have started to either internally develop or
acquire new media capabilities. New competitors that either provide integrated
or specialized services (e.g., corporate identity and packaging, advertising
services or World Wide Web site design) and are technologically proficient,
especially in the new media arena, have emerged and are competing with the
Company. Many of the Company's competitors or potential competitors have longer
operating histories, longer client relationships and significantly greater
financial, management, technology, development, sales, marketing and other
resources than the Company. In addition, the Company's ability to maintain its
existing clients and generate new clients depends to a significant degree on the
quality of its services and its reputation among its clients and
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<PAGE> 36
potential clients, as compared with the quality of services provided by and the
reputations of the Company's competitors. The Company also competes on the basis
of price. To the extent the Company loses clients to the Company's competitors
because of dissatisfaction with the Company's services or the Company's
reputation is adversely impacted for any other reason, the Company's business,
financial condition and operating results could be materially adversely
affected.
There are relatively low barriers to entry into the Company's business. For
example, the Company has no significant proprietary technology that would
preclude or inhibit competitors from entering the integrated marketing
communication solutions market. The Company expects that it will face additional
competition from new entrants into the market in the future. There can be no
assurance that existing or future competitors will not develop or offer
marketing communication services and products that provide significant
performance, price, creative or other advantages over those offered by the
Company, which could have a material adverse effect on the Company's business,
financial condition and operating results.
The principal factors on which the Company competes are service, creative
quality, price, technological and new media sophistication and intangible
factors such as the interpersonal skills of the individuals managing the client
account. The Company believes that it competes favorably with respect to each of
these factors.*
EMPLOYEES
As of May 31, 1996, the Company had a total of 230 employees, 191 of which
were full-time regular employees.
The Company's success depends to a significant extent upon certain members
of senior management, including Mark D. Kvamme, Thomas K. Suiter, Carlton H.
Baab and other key employees. Although the Company maintains key man life
insurance policies on Messrs. Kvamme, Suiter and Baab and certain other key
personnel, there can be no assurance that such insurance policies will
adequately compensate for the loss of such individuals. The Company has no
employment agreements with any of these individuals. The loss of any senior
manager or other key employee could have a material adverse effect upon the
Company's business, financial condition and operating results. In addition, the
Company's ability to generate revenues relates directly to the Company's
personnel, both in terms of the number and expertise of the personnel the
Company has available to work on its projects as they are received and the mix
of such personnel (i.e., full time or temporary employees or contract service
providers). As a result, any failure by the Company to retain existing employees
or hire new employees when necessary could have a material adverse effect upon
the Company's business, financial condition and operating results. In addition,
if one or more of the Company's key employees resigns from the Company to join a
competitor or to form a competing company, the loss of such personnel and any
resulting loss of existing or potential clients to any such competitor could
have a material adverse effect upon the Company's business, financial condition
and operating results. Further, in the event of the loss of any such personnel
there can be no assurance that the Company would be able to prevent the
unauthorized disclosure or use of its technical knowledge, practices, procedures
or client lists. The Company believes that its future success will depend in
large part upon its ability to attract and retain additional highly skilled
creative, technical, financial and strategic marketing personnel. Competition
for such personnel, especially creative talent, is intense. There can be no
assurance the Company will be successful in attracting and retaining such
personnel, and the failure to do so could have a direct and immediate
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Investors are strongly encouraged to review the section entitled "Risk
Factors" commencing on page 6, for a discussion of factors that could affect
future performance.
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<PAGE> 37
material adverse effect on the Company's business, financial condition and
operating results. See "Management."
FACILITIES
The Company's primary facility consists of approximately 63,000 square feet
in Cupertino, California including a 22,000 square foot digital video production
facility. The Company's other facilities include the following:
Campbell -- approximately 10,000 square feet; New York -- approximately 6,500
square feet of space; Portland (Oregon) -- approximately 8,500 square feet; San
Francisco -- approximately 7,400 square feet; and Washington,
D.C., -- approximately 10,900 square feet. The Company is currently negotiating
a lease for 30,000 additional square feet in Cupertino, California. The Company
leases all of its facilities.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The current executive officers and directors of the Company and their ages
as of June 1, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- -------------------------------------------------
<S> <C> <C>
Mark D. Kvamme.............. 35 Chairman of the Board and Chief Executive Officer
Thomas K. Suiter............ 41 President, CKS Partners and Director
Carlton H. Baab............. 38 Chief Financial Officer, Executive Vice President
and Secretary
Alexandre Balkanski(1)...... 35 Director
Pierre R. Lamond(1)(2)...... 65 Director
Barry R. Linsky(1)(2)....... 54 Director
Michael B. Slade............ 38 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mark D. Kvamme joined the Company in 1989 as a Partner and since 1991 has
served as the Chairman of the Company's Board of Directors and Chief Executive
Officer. Prior to joining the Company, Mr. Kvamme served as Vice President of
Marketing of Pillar Corporation. From September 1986 to January 1989, Mr. Kvamme
was International Marketing Manager for Wyse Technology, Inc., a terminal and
personal computer manufacturer, from 1986 to 1989. Before joining Wyse, Mr.
Kvamme founded and served as President and Chief Executive Officer of
International Solutions, Inc., a global distributor of hardware and software
products, from 1984 to 1986. While at Apple between 1980 and 1984, Mr. Kvamme
held various management positions in international sales and marketing and in
product development, as well as being one of the initial managers of Apple
France. Mr. Kvamme holds a B.A. in French Economics and Literature from the
University of California at Berkeley.
Thomas K. Suiter assumed the position of President, CKS Partners in May
1996. Mr. Suiter joined CKS in 1991 as Chief Creative Officer, and has served as
a member of the Company's Board of Directors since that time. Before joining the
Company, Mr. Suiter was World Wide Creative Director of Landor Associates from
1985 to 1991. Prior to joining Landor, Mr. Suiter was Director of Creative
Services at Apple from 1984 to 1985 and Creative Director from 1982-1984 where
he and his group were responsible for Apple's corporate identity and the
marketing communication materials for the MacIntosh and Apple II product lines.
Mr. Suiter attended San Diego State University and the Art Center College of
Design, Pasadena, California.
Carlton H. Baab has served as the Company's Chief Financial Officer and
Vice President of Finance and Administration since joining the Company in
February 1994. Mr. Baab was promoted to Executive Vice President, Chief
Operating Officer and Secretary in August 1995. Mr. Baab's duties were
consolidated under the titles of Chief Financial Officer, Executive Vice
President and Secretary in May 1996. Prior to joining the Company, Mr. Baab
co-founded and served as President and Chief Executive Officer of MobileSoft
Corporation, a software application developer for the Apple Newton. Mr. Baab was
the Vice President & General Manager of the Contract Division at the Levolor
Corporation from August 1989 to August 1993. At Levolor, Mr. Baab was also Vice
President of Information Technology and Re-Engineering and a member of the
executive turnaround team. Mr. Baab holds a B.S. in Electrical Engineering from
the University of Southern California and an M.B.A. from the Harvard Graduate
School of Business Administration.
Alexandre Balkanski has been a member of the Company's Board of Directors
since March 1995. Dr. Balkanski is the President and CEO of C-Cube Microsystems,
Inc. ("C-Cube"), a publicly-
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held company specializing in digital video compression solutions, which he
co-founded in July 1988. Dr. Balkanski was named Senior Vice President of C-Cube
in August 1989, served as its Vice President of Worldwide Sales and Marketing
from February 1994 to June 1995, and served as its Executive Vice President and
Chief Operating Officer from February 1994 to June 1995. Dr. Balkanski currently
serves on the board of directors of both C-Cube and Sierra Semiconductor
Corporation. Dr. Balkanski holds graduate degrees from Harvard University in
Physics, Economics and Business, as well as a B.A. in Physics from Harvard
College.
Pierre R. Lamond has been a member of the Company's Board of Directors
since 1990. Mr. Lamond has been a general partner of Sequoia Capital, a venture
capital firm, since 1981. Prior to joining Sequoia, Mr. Lamond was Vice
President and Technical Director of National Semiconductor, a company he
co-founded in 1967. Mr. Lamond currently serves as the Chairman of the Board of
Directors of Cypress Semiconductor Corporation and Vitesse Semiconductor
Corporation, and is a director of VidaMed, Inc., a medical device manufacturer,
and a number of privately held companies. He holds a B.S.C. in Electrical
Engineering and an M.S.C. in Physics from the University of Toulouse, France, as
well as an M.S.C. in Electrical Engineering from Northeastern University.
Barry R. Linsky has been a member of the Company's Board of Directors since
January 1995. Mr. Linsky has served as Senior Vice President, Planning and
Business Development of IPG since December 1990. Prior to joining IPG at the
parent company level, Mr. Linsky was Executive Vice President, Account Service,
of Lowe & Partners (formerly The Marschalk Company, a subsidiary of IPG), from
1980 until 1990. From 1972 to 1980, Mr. Linsky held various positions at The
Marschalk Company, including Senior Vice President and Director of the agency's
New Products Group and positions in account management. Previously, Mr. Linsky
had worked in consumer marketing for Lever Brothers Co., Bristol-Myers Company
and Squibb Beech-Nut, Inc. He holds degrees from Dartmouth College and the Amos
Tuck School of Business.
Michael B. Slade has been a member of the Company's Board of Directors
since June 1996. Mr. Slade has served as President and Chief Executive Officer
of Starwave Corp., a developer of multimedia information services for the
Internet, since February 1993. Prior to joining Starwave, Mr. Slade was Vice
President of Special Projects at Asymetrix, a multimedia software developer,
from October 1992 to February 1993. From May 1991 to October 1992, Mr. Slade
served as Vice President of Marketing at NeXT Computer, Inc., a developer of
object-oriented software. Mr. Slade holds a B.A. in Economics from Colorado
College and an M.B.A. from Stanford University.
DIRECTORS' COMPENSATION; DIRECTORS' OPTION PLAN
Directors who are not employees of the Company receive compensation for
their services as directors at a rate of $1,000 per year and $2,500 per Board
meeting attended. Nonemployee directors are also eligible to participate in the
1995 Directors' Option Plan.
The Company's 1995 Directors' Option Plan (the "Directors' Option Plan")
was adopted by the Board of Directors in October 1995 was approved by the
stockholders of the Company in November 1995. A total of 100,000 shares of
Common Stock has been reserved for issuance under the Directors' Option Plan.
The Directors' Option Plan provides for the grant of nonstatutory stock options
to nonemployee directors of the Company. The Directors' Option Plan is designed
to work automatically, without administration; however, to the extent
administration is necessary, it will be provided by the Board of Directors.
The Directors' Option Plan provides that each nonemployee director shall be
granted an option to purchase 20,000 shares of Common Stock (the "First Option")
on the date on which the optionee first becomes a director of the Company.
Thereafter each nonemployee director will be granted an option to purchase 5,000
shares of Common Stock (a "Subsequent Option") on the first day of each year
after adoption of the Directors' Option Plan.
The Directors' Option Plan sets neither a maximum nor a minimum number of
shares subject to options that may be granted to any one nonemployee director,
but does stipulate the number of
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shares that may be included in any grant and the method of making a grant. No
option granted under the Directors' Option Plan is transferable by the optionee
other than by will or the laws of descent and distribution, and each option is
exercisable, during the lifetime of the optionee, only by such optionee. The
Directors' Option Plan provides that each Option will become exercisable as to
25% of the shares subject to such Option on each anniversary of the date of
grant of such Option. The exercise price of all Options granted under the
Directors' Option Plan will be equal to the fair market value of a share of the
Company's Common Stock on the date of grant of the Option. Options granted under
the Directors' Option Plan have a term of 10 years.
In the event of a merger of the Company with or into another corporation or
a sale of substantially all of the Company's assets, each option would be
assumed or an equivalent option substituted by the successor corporation. The
Directors' Option Plan will terminate in October 2005. The Board of Directors
may amend or terminate the Directors' Option Plan, provided, however, that no
such action may adversely affect any outstanding option and provided further
that the provisions affecting the grant and terms of options may not be amended
more than once during any six-month period. As of the date of this Prospectus,
35,000 options have been granted under the Directors' Option Plan. Executive
officers of the Company are not eligible to participate in the Directors' Option
Plan.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth information concerning the compensation
received for services rendered to the Company during fiscal 1995 by the Chief
Executive Officer of the Company and each person who was an executive officer of
the Company during fiscal 1995 and whose total compensation in fiscal 1995
equaled or exceeded $100,000 ("Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY BONUS COMPENSATION COMPENSATION
- --------------------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Mark D. Kvamme......................... $165,000 $116,370 $3,236(1) $1,268(5)
Chief Executive Officer
Thomas K. Suiter....................... 165,000 74,517 2,668(2) --
President, CKS Partners
William T. Cleary...................... 165,000 54,390 3,216(3) 1,777(5)
Founder
Carlton H. Baab........................ 137,600 75,774 7,464(4) 2,665(5)
Chief Financial Officer, Executive
Vice President and Secretary
</TABLE>
- ---------------
(1) Consisted of $2,750 in automobile allowance and $486 in life insurance
premiums paid by the Company.
(2) Consisted of $1,750 in automobile allowance and $918 in life insurance
premiums paid by the Company.
(3) Consisted of $1,650 in automobile allowance and $1,566 in life insurance
premiums paid by the Company.
(4) Consisted of $7,200 in automobile allowance and $264 in life insurance
premiums paid by the Company.
(5) Consisted of forgiveness of interest due on loans payable to the Company.
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OPTION GRANTS IN FISCAL 1995
The following table sets forth information as to the option granted to
Carlton H. Baab for the year ended November 30, 1995. No other options were
granted in 1995 to any Named Executive Officer.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
% OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATE
SECURITIES OPTIONS OF STOCK
UNDERLYING GRANTED TO EXERCISE APPRECIATION
OPTIONS EMPLOYEES PRICE PER FOR OPTION TERM(3)
GRANTED IN FISCAL SHARE EXPIRATION -------------------
NAME (#)(1) YEAR (2) DATE 5% 10%
- ----------------------------- ----------- ----------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Carlton H. Baab.............. 40,000 6.17% $1.00 07/28/05 $25,156 $63,750
</TABLE>
- ---------------
(1) These options to purchase shares of Series B Common Stock were granted under
the 1995 Series B Common Stock Plan and provide for vesting as to 25% of the
underlying Common Stock one year after the date of grant then ratably over
36 months thereafter. The Company's Series B Common Stock converted into
Common Stock in connection with the Company's initial public offering in
December 1995.
(2) Options were granted at an exercise price equal to 100% of the fair market
value of the Company's Series B Common Stock on the date of grant, as
determined by the Board of Directors.
(3) This column shows the hypothetical gains or option spreads of the option
granted based on assumed annual compound stock appreciation rates of 5% and
10% over the full ten-year term of the option. The assumed rates of
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
future Common Stock prices.
AGGREGATE STOCK OPTION EXERCISES IN FISCAL 1994 AND FISCAL YEAR-END VALUES
No options were exercised during fiscal 1995 by the Named Executive
Officers. The following table sets forth the number and value of exercisable and
unexercisable options held at November 30, 1995 by Carlton H. Baab, the only
Named Executive Officer who held options to purchase shares of the Company's
capital stock as of such date.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
NOVEMBER 30, 1995 AT NOVEMBER 30, 1995(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Carlton H. Baab....................... 0 40,000 $ 0 $ 640,000
</TABLE>
- ---------------
(1) Calculated by determining the difference between the deemed fair market
value of the securities on November 30, 1995 underlying the options (based
on the initial public offering price of $17.00 per share) and the exercise
price.
BENEFIT PLANS
1995 STOCK PLAN
The 1995 Stock Plan of the Company (the "Stock Plan") provides for the
grant of stock options and stock purchase rights to employees, officers and
consultants of the Company and its subsidiaries. Under the Stock Plan, the
Company may grant options that are intended to qualify as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended
39
<PAGE> 42
(the "Code"), options not intended to qualify as incentive stock options and
rights to purchase restricted stock. Incentive stock options may only be granted
to employees of the Company and its subsidiaries. All incentive stock options
granted under the Stock Plan must be granted by September 2005. As of May 31,
1996, options to purchase 349,250 shares of Common Stock were outstanding under
to the Stock Plan and options to purchase 650,750 shares of Common Stock were
available for future grant under the Stock Plan. The Stock Plan was approved by
the Board of Directors in October 1995 and approved by the stockholders of
Company in November 1995.
The Stock Plan is administered by the Board of Directors or a committee
thereof. Subject to the provisions of the Stock Plan, the Board or committee has
the authority to select the persons to whom awards are granted and determine the
terms of each award, including (i) the number of shares of Common Stock covered
by the award, (ii) when the award becomes exercisable, (iii) the exercise price
of the award and (iv) the duration of the option (which may not exceed 10
years). Generally options vest over four years and must be exercised within 10
years. All options are non-transferable other than by will or the laws of
descent and distribution.
The Stock Plan provides that, in the event of a merger of the Company with
or into another corporation, the sale of more than 50% of the Company's voting
stock, a sale of substantially all of the Company's assets or a liquidation or
dissolution of the Company ("Transfer of Control"), the acquiring or successor
corporation may assume or substitute substantially equivalent awards for the
awards outstanding. To the extent awards are not assumed or substituted for,
they will vest in full prior to the Transfer of Control. To the extent options
are not assumed, substituted for or exercised prior to the Transfer of Control,
they will terminate.
1995 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan")
provides for the purchase by eligible employees of shares of the Company's
Common Stock. The Purchase Plan was adopted by the Board of Directors in October
1995 and approved by the stockholders in November 1995. A total of 300,000
shares of Common Stock have been reserved for issuance under the Purchase Plan.
The Purchase Plan, which is intended to qualify under Section 423 of the Code,
is administered by the Board of Directors or by a committee appointed by the
Board. Employees (including officers and employee directors) of the Company or
any subsidiary of the Company designated by the Board for participation in the
Purchase Plan are eligible to participate in the Purchase Plan if they are
customarily employed for more than 20 hours per week and more than five months
per year. The Purchase Plan is implemented during concurrent 24 month offering
periods each of which is divided into four consecutive six month purchase
periods, subject to change by the Board of Directors. Offering periods generally
begin on January 1 and July 1 of each year. The initial offering period
commenced at the time of the Company's initial public offering and will end on
November 30, 1997. The Purchase Plan permits eligible employees to purchase
Common Stock through payroll deductions, which may not exceed 15% of an
employee's compensation. Shares are purchased on the last day of each purchase
period. The price at which stock may be purchased under the Purchase Plan is
equal to 85% of the lower of the fair market value of the Company's Common Stock
on the first day of the offering period or the last day of the purchase period.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination of
employment with the Company. In addition, participants generally may not
purchase stock having a value (measured at the beginning of the offering period)
greater than $12,500 in any purchase period, except the first offering period,
during which an employee may purchase stock having a value of up to $25,000.
EXECUTIVE BONUS PROGRAM
Certain officers and employees of the Company are eligible to receive
quarterly bonus compensation under an Executive Bonus Program maintained by the
Company. Bonus compensation payments under the Executive Bonus Program are based
on attainment of sales revenue and
40
<PAGE> 43
profitability targets during the fiscal year to date, and are keyed to each
eligible employee's base salary. For most eligible employees, bonus payments are
based on performance of both the Company as a whole and the individual
employee's operating division. Bonus payments under the Executive Bonus Program
totaled approximately $396,000 in the fiscal year ended November 30, 1995 and
approximately $137,000 was accrued by the Company under the Executive Bonus
Program for the first six months of fiscal 1996. Payments under the Executive
Bonus Program are nondiscretionary, although the Board may approve additional
discretionary bonuses under such Program. The Board of Directors approved a
total of $152,050 in discretionary bonuses in fiscal 1995. The financial
performance targets on which bonus payments are based are set on an annual basis
by the Company's Chief Executive Officer and approved by the Compensation
Committee of the Board of Directors.
EMPLOYEE BONUS PROGRAM
The Company's Board of Directors regularly awards bonus compensation
payments to full-time employees of the Company under an informal Employee Bonus
Program. Such bonus payments have been awarded from time to time since inception
of the Employee Bonus Program in 1993. Any bonus payments under the Employee
Bonus Program are made at the sole discretion of the Board of Directors, which
may discontinue the Program at any time. Total payments under the Employee Bonus
Program equaled approximately 15% of the Company's pretax operating income
during the 1994 and 1995 fiscal years.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of CKS consists of
Messrs. Lamond and Linsky. Mr. Lamond is the father-in-law of Mark D. Kvamme,
the Company's Chairman and Chief Executive Officer. Mr. Linsky is a Senior Vice
President of IPG.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, the Company has
included in its Certificate of Incorporation a provision to eliminate the
personal liability of its directors for monetary damages for breach or alleged
breach of their fiduciary duties as directors, subject to certain exceptions. In
addition, the Bylaws of the Company provide that the Company is required to
indemnify its officers and directors under certain circumstances, including
those circumstances in which indemnification would otherwise be discretionary,
and the Company is required to advance expenses to its officers and directors as
incurred in connection with proceedings against them for which they may be
indemnified. The Company has entered into indemnification agreements with its
officers and directors containing provisions that are in some respects broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements require the Company, among other
things, to indemnify such officers and directors against certain liabilities
that may arise by reason of their status or service as directors or officers
(other than liabilities arising from willful misconduct of a culpable nature),
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms. At present, the Company is not aware
of any pending or threatened litigation or proceeding involving a director,
officer, employee or agent of the Company in which indemnification would be
required or permitted. The Company believes that its charter provisions and
indemnification agreements are necessary to attract and retain qualified persons
as directors and officers.
41
<PAGE> 44
CERTAIN TRANSACTIONS
RELATIONSHIP WITH THE INTERPUBLIC GROUP OF COMPANIES, INC.
On January 13, 1995, CKS, certain stockholders of CKS (the "Participating
Stockholders") and The Interpublic Group of Companies, Inc. ("IPG") entered into
a Purchase Agreement (the "Purchase Agreement"), pursuant to which IPG purchased
739,437 shares of CKS Series A Common Stock from the Company and 2,375,000
shares of CKS Common Stock from the Participating Stockholders (which shares of
Common Stock were subsequently converted into CKS Series A Common Stock). Barry
R. Linsky, a Senior Vice President of IPG, serves on the Board of Directors of
the Company. The Participating Stockholders included Mark D. Kvamme, Chairman
and Chief Executive Officer of the Company, Thomas K. Suiter, President, CKS
Partners and a director of the Company, and William T. Cleary, who was then an
executive officer and a director of the Company, each of whom respectively sold
703,199, 703,198 and 703,198 shares of Common Stock to IPG. The Purchase
Agreement was amended and restated in October 1995.
After completion of the stock sales provided for under the Purchase
Agreement, IPG owned approximately 29% of the Company's outstanding capital
stock (taking into account a pool of 500,000 shares then reserved for issuance
of options). In consideration for the shares purchased under the Purchase
Agreement, IPG paid $2.0 million to the Company and $4.0 million in total to the
Participating Stockholders. Messrs. Cleary, Kvamme and Suiter received
$1,184,333.47, $1,184,335.16 and $1,184,333.47, respectively, for the sale of
shares held by them to IPG. IPG further agreed to pay the Participating
Stockholders an aggregate of up to $1.5 million at the end of each of the 1995
and 1996 fiscal years, conditioned upon the attainment of certain gross margin
benchmarks. In particular, the Purchase Agreement provides that if the Company's
financial statements for the 1995 fiscal year reflect a gross margin of at least
$21,400,000 IPG shall make additional payments totaling $1,500,000 to the
Participating Stockholders. If the Company's gross margin for the 1995 fiscal
year is less than $21,400,000 the additional payments payable by IPG under the
Purchase Agreement are reduced by $0.25 for each dollar by which such gross
margin is less than $21,400,000. In accordance with this provision, IPG in
February 1996 made a payment of $1,500,000 to the Participating Stockholders.
The Purchase Agreement provides for an additional $1,500,000 payment by IPG (the
"1996 Payment") to the Participating Stockholders in the event the Company's
financial statements for the 1996 fiscal year reflect a gross margin of at least
$32,100,000. Such additional payment is reduced by $0.25 for each dollar by
which such gross margin is less than $32,100,000. In February 1996, IPG made an
additional payment of $1,500,000 to the Participating Stockholders, in full
satisfaction of its 1996 Payment obligation under the Purchase Agreement. For
purposes of the Purchase Agreement, the term "gross margin" refers to revenues
net of external expenses, such as printing services, production services,
freelance labor, and temporary labor.
Pursuant to the Purchase Agreement, IPG received a right to purchase,
immediately prior to the Company's initial public offering, such amount of
additional shares of CKS Series A Common Stock as would bring its total
percentage ownership of CKS to 37%, at a purchase price per share equal to 66.7%
of the estimated offering price to the public, as measured by the midpoint price
of a valuation range supplied by the managing underwriter of the Company's
initial public offering. CKS further agreed, for so long as IPG's ownership in
the Company remains at 20% or higher, not to accept any new broadcast, print or
interactive media advertising business that is competitive with the core
businesses of certain major clients of IPG. This restriction will terminate upon
the closing of this offering. IPG was also granted certain other protective
rights, all of which terminated upon consummation of the the Company's initial
public offering ("IPO").
In August 1995, the Company sold an additional 31,018 shares of Common
Stock to IPG at a price of $2.25 per share to enable IPG to maintain its
approximate percentage ownership of the Company following an increase in the
number of shares of Series B Common Stock reserved for
42
<PAGE> 45
issuance under the Company's 1995 Series B Common Stock Option Plan beyond the
500,000 shares that had been negotiated in the Purchase Agreement.
In October 1995, IPG notified the Company and the Participating
Stockholders of its intent to exercise its right to purchase additional shares
of the Company's Series A Common Stock in connection with the initial public
offering of Common Stock by the Company. In order to limit the amount of
dilution experienced by all stockholders, IPG and certain stockholders of the
Company agreed that, rather than IPG purchasing additional shares of Series A
Common Stock from the Company, such stockholders would sell shares of Common
Stock directly to IPG. In October 1995, such stockholders sold an aggregate of
481,060 shares of Common Stock to IPG at a price of $7.34 per share. Among the
persons selling such additional shares of Common Stock to IPG, Thomas K. Suiter
sold 276,654 shares of Common Stock for aggregate consideration of $2,030,640;
and William T. Cleary sold 201,406 shares of Common Stock for aggregate
consideration of $1,478,320. All outstanding shares of Series A Common Stock
were converted into an equal number of shares of Common Stock of the Company
effective upon the reincorporation into Delaware immediately prior to the
commencement of the Company's initial public offering, and at such time all
outstanding options to purchase shares of Series B Common Stock were converted
into options to purchase an equal number of shares of Common Stock at the same
exercise price per share.
On January 27, 1995, CKS, IPG and the Participating Stockholders entered
into several additional agreements in connection with the Purchase Agreement,
including a Shareholder Rights Agreement pursuant to which CKS agreed to grant
IPG and all other CKS stockholders certain registration rights with respect to
the CKS stock held by them (see "Description of Capital Stock -- Registration
Rights"), and to grant IPG a right of first refusal to purchase a pro rata
portion of certain new issuances of stock by the Company (which terminated upon
the IPO), and IPG agreed to limit its ownership of CKS capital stock to no more
than 37% of all outstanding voting shares of CKS, and to vote its shares for
election of the slate of nominees for the Board of Directors of the Company
selected by the Company, provided that such slate include a nominee selected by
IPG.
On January 27, 1995, the Company and IPG also entered into a Management
Service Agreement, pursuant which IPG agreed to provide the Company with the
following services: (i) assistance, advice and counsel regarding the methods and
techniques of conducting and exploiting the Company's business and related
systems, procedures and techniques; (ii) provision of existing or secondary
source data relating to industries and businesses which are of interest to the
Company in connection with the growth of its business; (iii) advice and
consultation in connection with the development and preparation of campaigns and
programs in the fields of advertising, marketing, sales promotion, research and
related fields; (iv) consultation and advice in connection with personnel
recruitment, and assistance in developing and effectuating a training program in
advertising and related fields; and (v) assistance and advice in such other
areas as the Company may request. In consideration for the services to be
provided by IPG under the Management Service Agreement, the Company agreed to
pay IPG a fee equal to 1% of the Company's annual gross margin, up to a maximum
of $500,000 per year, payable on a quarterly basis. In addition, the Company
agreed to reimburse IPG for all out-of-pocket expenses incurred by IPG in
connection with services performed under the Management Service Agreement. CKS
incurred $204,524 in IPG management services fees between January and December,
1995. The Company's obligation to pay IPG a fee pursuant to the Management
Services Agreement terminated upon the closing of the Company's IPO in December
1995.
CERTAIN PROFESSIONAL SERVICES ACCOUNTS
Since January 1995, the Company has provided certain creative design and
production services to the McCann-Erickson Worldwide advertising agency
("McCann"). As of May 31, 1996, the Company had invoiced McCann a total of
$441,662 for such services. McCann is a subsidiary of IPG.
43
<PAGE> 46
The Company has performed certain advertising and marketing services on
behalf of C-Cube Microsystems. The Company billed C-Cube a total of $47,290
during the 1994 fiscal year, a total of $78,661 during the 1995 fiscal year, and
a total of $87,153 during the six months ended May 31, 1996. Alexandre Balkanski
is a member of the Company's Board of Directors and President, Chief Executive
Officer and a member of the Board of Directors of C-Cube.
The Company believes that the compensation received for services performed
on behalf of McCann and C-Cube was no less favorable than would be obtained for
similar services provided to unrelated third parties. Any future transactions
between the Company and its executive officers directors and their affiliates
will be on terms no less favorable to the Company than can be obtained from
unaffiliated third parties, and any material transactions with such persons will
be approved by a majority of the disinterested members of the Company's Board of
Directors.
MOBILESOFT INVESTMENT
In August 1994, certain officers and directors of the Company and certain
affiliates thereof (collectively, the "Investors") purchased shares of capital
stock of MobileSoft Corporation ("MobileSoft") with an aggregate value of
$114,282. The Investors included CKS Partners II, a partnership whose general
partners include Mark D. Kvamme, Thomas K. Suiter, William T. Cleary, and Pierre
R. Lamond. CKS Partners II purchased MobileSoft Common Stock with an aggregate
value of $14,282. Mr. Lamond individually purchased MobileSoft Series A
Preferred Stock with a value of $90,000. Carlton H. Baab, Chief Financial
Officer and Executive Vice President of the Company, and Wade T. Snell, a
Vice-President of the Company, each invested $5,000 in shares of MobileSoft
Common Stock. MobileSoft was formed to develop and market software for the Apple
Computer Newton PDA. Since sales of Newton have not been substantial, MobileSoft
has substantially curtailed its operations, although it continues to exist as a
legal entity. Mr. Baab and Mr. Snell served as Chief Executive Officer and a
Vice President of MobileSoft, respectively. Mr. Kvamme is a member of the Board
of Directors of MobileSoft.
In connection with such transactions, CKS Partners, Inc. ("CKS Partners
I"), a subsidiary of the Company, agreed to provide to MobileSoft a minimum of
$500,000 of professional services at a 50% discount off the Company's standard
customer rates up to a maximum of $500,000. Services with a value of
approximately $240,642 have been provided to MobileSoft in exchange for payments
by MobileSoft in the amount of $120,321.
LOANS TO OFFICERS AND EMPLOYEES
The Company and its subsidiaries have made loans to certain officers and
employees of the Company primarily in connection with purchases by such officers
and employees of shares of Common Stock of the Company or its subsidiaries. A
total of $648,667 in loans have been made to 12 employees and one director since
December 1989. The Company has agreed to forgive all accrued interest due on
such loans. Among the persons receiving such loans from the Company are Mark D.
Kvamme, William T. Cleary (who was at the time an executive officer and director
of the Company) and Carlton H. Baab, who received loans in the amounts of
$123,750, $110,000 and $41,450, respectively, at annual interest rates of 8.2%,
7.0% and 6.4%, respectively. The maximum amounts payable by Messrs. Kvamme,
Cleary and Baab pursuant to such loans were $135,898, $117,700 and $44,115,
respectively. Messrs. Kvamme and Cleary have fully repaid the principal amount
of the loans they received.
STOCK OPTION GRANT TO DIRECTOR
In June 1995, shortly after joining the Company's Board of Directors,
Alexandre Balkanski was granted an option to purchase 20,000 shares of Series B
Common Stock of the Company under the Company's 1995 Series B Common Stock Plan.
The exercise price of such option is $0.50 per share, which the Board determined
to be the fair market value per share of Series B Common Stock
44
<PAGE> 47
on the date of grant. The option granted to Dr. Balkanski vests over a period of
four years, starting on the date of grant, and has a term of 10 years.
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnification agreements with each of its
directors and executive officers. Such agreements require the Company to
indemnify such individuals to the fullest extent permitted by law. See
"Management -- Limitation of Liability and Indemnification Matters."
45
<PAGE> 48
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of Common Stock of
the Company as of May 31, 1996 and as adjusted to reflect the sale of the shares
offered by this Prospectus, of (i) each person known by the Company to
beneficially own more than 5% of the Company's Common Stock, (ii) each director,
(iii) each of the Named Executive Officers, and (iv) all directors and executive
officers as a group:
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK SHARES BENEFICIALLY
BENEFICIALLY OWNED ASSUMING
OWNED(1) SALE OF SHARES
---------------------- SHARES OFFERED HEREBY
PERCENT OFFERED ---------------------
NAME OF BENEFICIAL OWNER NUMBER OF TOTAL HEREBY NUMBER PERCENT
- ----------------------------------- --------- -------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
The Interpublic Group of Companies, % %
Inc.(2).......................... 3,631,515 28.6 1,160,000 2,471,515 19.2
1271 Avenue of the Americas
New York, NY 10020
Mark D. Kvamme(3).................. 1,948,293 15.3% 100,000 1,848,293 14.4%
10441 Bandley Drive
Cupertino, CA 95014
Thomas K. Suiter(4)................ 1,568,503 12.3% 100,000 1,468,503 11.4%
10441 Bandley Drive
Cupertino, CA 95014
William T. Cleary.................. 1,106,161 8.7% 100,000 1,006,161 7.8%
10441 Bandley Drive
Cupertino, CA 95014
Carlton H. Baab(5)................. 92,729 * 32,000 60,729 *
Pierre R. Lamond(6)................ 275,478 2.2% -- 275,478 2.1%
Alexandre Balkanski(7)............. 5,417 * -- 5,417 *
Barry R. Linsky(8)................. 2,500 * -- 2,500 *
Michael B. Slade................... -- * -- -- *
All Executive Officers and
Directors as a Group (7
persons)(5)(7)................... 3,892,920 30.6% 232,000 3,660,920 28.5%
Other Selling Stockholders as a
Group (11 persons)(9)............ 901,195 7.1% 176,500 724,701 5.6%
</TABLE>
- ---------------
* Less than 1%.
(1) Except pursuant to applicable community property laws or as indicated in the
footnotes to this table, to the Company's knowledge, each stockholder
identified in the table possesses sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
stockholder.
(2) Includes 500,000 shares held by each of Ammirati & Puris/Lintas, Inc.
("Ammirati") and Scali, McCabe, Stores, Inc. ("Scali"), of which 100,000
shares are offered hereby. Ammirati and Scali are wholly-owned subsidiaries
of IPG. Also includes 2,500 shares held by each of Mr. Barry R. Linsky, who
is a director of the Company and an officer of IPG, and Mr. Richard
Villante, who is an officer of IPG.
(3) Includes 158,888 shares held by trusts for the benefit of Mr. Kvamme's
children.
(4) Includes 200,000 shares held by trusts for the benefit of Mr. Suiter's
children.
(5) Includes options to purchase 10,000 shares exercisable within 60 days of May
31, 1996.
(6) Includes 275,478 shares held by the Pierre R. and Christine E. Lamond Trust
dated 11/22/85.
(7) Represents options to purchase 5,417 shares exercisable within 60 days of
May 31, 1996.
46
<PAGE> 49
(8) Does not include 3,626,515 shares held by IPG prior to this offering, of
which Mr. Linsky is Senior Vice President, Planning and Business
Development.
(9) Such Selling Stockholders are all individuals and none is an officer or
director of the Company. David Siskin is offering 50,000 shares hereby and
following completion of this offering will own 249,065 shares, which will
constitute 2.0% of all shares of Common Stock outstanding. Robert J. Gemmel
is offering 30,000 shares hereby and following completion of this offering
will own 250,872 shares, which will constitute 2.0% of all shares of Common
Stock outstanding. Bernard Schroeder is offering 20,000 shares hereby and
following completion of this offering will own 48,631 shares, which will
constitute less than 1% of all shares of Common Stock outstanding. Wade H.
Snell III is offering 12,500 shares hereby and following completion of this
offering will own 50,381 shares, which will constitute less than 1% of all
shares of Common Stock outstanding. Jay R. Tannenbaum is offering 10,000
shares hereby and following completion of this offering will own 34,391
shares which will constitute less than 1% of all shares of Common Stock
outstanding. Jill K. Savini is offering 20,000 shares hereby and following
completion of this offering will own 20,870 shares, which will constitute
less than 1% of all shares of Common Stock outstanding. Brian K. Fortune is
offering 5,000 shares hereby and following completion of this offering will
own 25,664 shares, which will constitute less than 1% of all shares of
Common Stock outstanding. Phillip Battat is offering 5,000 shares hereby and
following completion of this offering will own 15,316 shares (including
options to purchase 11,666 shares exercisable within 60 days of May 31,
1996), which will constitute less than 1% of all shares of Common Stock
outstanding. Mark Loncar is offering 5,000 shares hereby and following
completion of this offering will own 20,539 shares (including options to
purchase 16,693 shares exercisable within 60 days of May 31, 1996), which
will constitute less than 1% of all shares of Common Stock outstanding.
Kimberly Johnson is offering 10,000 shares hereby and following completion
of this offering will own 4,966 shares (representing options to purchase
shares exercisable within 60 days of May 31, 1996), which will constitute
less than 1% of all shares of Common Stock outstanding. Suzan Packee is
offering 9,000 shares hereby and following completion of this offering will
own 4,006 shares (representing options to purchase shares exercisable within
60 days of May 31, 1996), which will constitute less than 1% of all shares
of Common Stock outstanding.
47
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
As of the date of this Prospectus, the authorized capital stock of the
Company consisted of 30,000,000 shares of Common Stock, $.001 par value, and
5,000,000 shares of Preferred Stock, $.001 par value.
COMMON STOCK
As of May 31, 1996, there were 12,714,437 shares of Common Stock
outstanding held by approximately 60 stockholders of record. The holders of
Common Stock are entitled to one vote per share on all matters to be voted upon
by the stockholders. Subject to preferences that may be applicable to any
outstanding shares of Preferred Stock, the holders of Common Stock are entitled
to receive ratably such dividends, if any, as may be declared from time to time
by the Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of liquidation, dissolution or winding up of CKS, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior liquidation rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions available to the Common Stock. All outstanding shares of
Common Stock are fully paid and nonassessable, and the shares of Common Stock to
be outstanding upon completion of this offering will be fully paid and
nonassessable.
PREFERRED STOCK
As of May 31, 1996, 5,000,000 shares of Preferred Stock, $.001 par value,
were authorized and no shares were outstanding. The Board of Directors has the
authority, without further action by the stockholders, to issue the Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences and the number of shares
constituting any series or the designation of such series. Preferred Stock could
thus be issued quickly with terms calculated to delay or prevent a change of
control of the Company or to serve as an entrenchment device for incumbent
management. Additionally, the issuance of Preferred Stock may have the effect of
decreasing the market price of the Common Stock, and may adversely affect the
voting and other rights of the holders of Common Stock. At present, CKS has no
plans to issue any of the Preferred Stock.
REGISTRATION RIGHTS
The holders of all shares of Common Stock outstanding prior to the
Company's initial public stock offering (the "Holders") are entitled to certain
rights with respect to the registration of such shares under the Securities Act.
Under the terms of agreements between the Company and the Holders, if CKS
proposes to register any of its securities under the Securities Act, either for
its own account or the account of other security holders exercising registration
rights, the Holders are entitled to notice of such registration and are entitled
to include at the Company's expense shares of such Common Stock therein;
provided, among other conditions, that the underwriters of any offering have the
right to limit the number of such shares included in such registration. In
addition, the Holders may require the Company, on not more than two occasions,
to file a registration statement under the Securities Act at the Company's
expense with respect to such shares, and CKS is required to use its best efforts
to effect such registration, subject to certain conditions and limitations.
Further, Holders may require the Company to register all or a portion of their
shares with registration rights on Form S-3, when CKS is eligible to use such
form, subject to certain conditions and limitations.
48
<PAGE> 51
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First Interstate
Bank of California.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law (the "Delaware Law"), an anti-takeover law. In general, Section 203 of the
Delaware Law prevents a person owning 15% or more of a corporation's outstanding
voting stock ("Interested Stockholder") from engaging in a "business
combination" (as defined in the Delaware Law) with a Delaware corporation for
three years following the date such person became an Interested Stockholder,
subject to certain exceptions such as the approval of the board of directors and
of the holders of at least two-thirds of the outstanding shares of voting stock
not owned by the interested stockholder. The existence of this provision would
be expected to have the effect of discouraging takeover attempts, including
attempts that might result in a premium over the market price for the shares of
Common Stock held by stockholders.
The Company's Certificate of Incorporation provides that any action
required or permitted to be taken by the stockholders of the Company may be
taken only at a duly called annual or special meeting of the stockholders and
does not provide for cumulative voting in the election of directors. The
Certificate of Incorporation and Bylaws also restrict the right of stockholders
to change the size of the Board of Directors and to fill vacancies on the Board
of Directors. The Bylaws also establish procedures, including advance notice
procedures, with regard to the nomination, other than by or at the direction of
the Board of Directors, of candidates for election as directors or for
stockholder proposals to be submitted at stockholder meetings. In addition, the
Company's Certificate of Incorporation provides for a Board of Directors divided
into three classes of directors with each class serving a staggered three-year
term. A classified board may maintain the incumbency of the Board of Directors,
as it generally makes it more difficult for stockholders to replace a majority
of the directors. The amendment of any of these provisions would require
approval by holders of 66.67% or more of the outstanding Common Stock.
These and other provisions could have the effect of making it more
difficult for a third party to effect a change in the control of the Board of
Directors and therefore may discourage another person or entity from making a
tender offer for the Company's Common Stock, including offers at a premium over
the market price of the Common Stock, and might result in a delay in changes in
control of management. In addition, these provisions could have the effect of
making it more difficult for proposals favored by the stockholders to be
presented for stockholder consideration.
The Company has also included in its Certificate of Incorporation
provisions to eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by the Delaware Law and to indemnify its directors and officers to the fullest
extent permitted by Section 145 of the Delaware Law.
SHARES ELIGIBLE FOR FUTURE SALE
As of May 31, 1996, the Company had outstanding 12,714,437 shares of Common
Stock. The 2,875,000 shares sold in the Company's initial public offering and
the 1,800,000 shares offered hereby are freely tradeable without restriction
under the Securities Act, unless held by "affiliates" of the Company. The
remaining 8,170,937 shares of Common Stock held by existing stockholders are
"restricted" shares under the Securities Act (the "Restricted Shares").
6,162,372 of such Restricted Shares are subject to a Lock-Up Agreement which
expires 90 days after the date of this Prospectus. In December 1996 and January
1997 (collectively, the "Expiration Date") all the Restricted Shares will become
eligible for sale pursuant to Rule 144 promulgated under the Securities Act
("Rule 144"). The Restricted Shares that first become eligible for sale in the
public
49
<PAGE> 52
market on the Expiration Date will be subject to certain volume and other resale
restrictions pursuant to Rule 144. In addition, if the acquisition of
Schell/Mullaney is consummated, the Company will issue approximately 132,000
shares (based on the closing price of the Company's Common Stock on June 6, 1996
as reported by the Nasdaq National Market) to the shareholders of
Schell/Mullaney upon the closing of such acquisition, half of which shares
(approximately 66,000 shares based on the closing price of the Company's Common
Stock on June 6, 1996 as reported on the Nasdaq National Market) will be subject
to the Lock-up Agreement, and the remainder of which will be freely tradeable.
In general, under Rule 144 as currently in effect, beginning on the
Expiration Date, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least two years (and, with respect
to non-affiliates of the Company, a person who has beneficially owned Restricted
Securities less than three years), will be entitled to sell in any three-month
period a number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the Company's Common Stock (approximately 127,144 shares
as of May 31, 1996) or (ii) the average weekly trading volume of the Company's
Common Stock in The Nasdaq Stock Market during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Such sales pursuant to Rule 144 are subject
to certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or persons whose shares
are aggregated) who is not deemed to have been an affiliate of the Company at
any time during the 90 days immediately preceding the sale and who has
beneficially owned Restricted Shares for at least three years is entitled to
sell such shares pursuant to Rule 144(k) without regard to the limitations
described above. The Securities and Exchange Commission has recently proposed to
reduce the Rule 144 holding periods. If enacted, such modification will have a
material effect on the timing of when shares of the Company's Common Stock
become eligible for resale.
The Company has reserved 1,000,000 shares of Common Stock for issuance upon
the exercise of options to be granted pursuant to the Company's 1995 Stock Plan.
As of May 31, 1996, options to purchase 349,250 shares of Common Stock were
outstanding under the Company's 1995 Stock Plan and options to purchase 689,617
shares of Common Stock were outstanding under the Company's 1995 Series B Common
Stock Plan (the "Series B Plan"). Following completion of this offering Options
to purchase an aggregate of 160,249 shares of Common Stock under the Company's
1995 Stock Plan and 1995 Series B Common Stock Plan are subject to the Lock-Up
Agreement. In addition, the Company has reserved 300,000 shares of Common Stock
for issuance pursuant to the Company's 1995 Employee Stock Purchase Plan (the
"Purchase Plan") and 100,000 shares for issuance upon exercise of options to be
granted under its 1995 Director Stock Option Plan (the "Directors' Plan"). The
Company has filed a Registration Statement on Form S-8 to register the shares of
Common Stock issuable upon exercise of options granted under the Series B Plan,
the Stock Plan, the Directors' Plan and the Purchase Plan. Shares of Common
Stock issued under the Series B Plan, the Stock Plan, the Directors' Plan and
the Purchase Plan will be available for sale in the public market upon vesting
of such shares, subject to the Rule 144 volume limitations applicable to
affiliates.
Prior to December 14, 1995 there was no public market for the Common Stock
and there is no assurance a significant public market for the Common Stock will
be sustained. Sales of substantial amounts of Common Stock in the public market
could adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through the sale of its equity
securities.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation ("WSGR"),
Palo Alto, California. An
50
<PAGE> 53
investment partnership of WSGR, and Robert T. Clarkson, a member of WSGR, own
6,000 shares of Common Stock of the Company. Certain legal matters relating to
this offering will be passed upon for the underwriters by Venture Law Group, A
Professional Corporation, Menlo Park, California.
EXPERTS
The consolidated financial statements and schedule of the Company as of
November 30, 1994 and November 30, 1995 and for each of the years in the
three-year period ended November 30, 1995, have been included herein and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent auditors, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing. The financial statements of
Schell/Mullaney, Inc. as of December 31, 1994 and 1995 and for each of the years
in the three-year period ended December 31, 1995, have been included herein and
in the Registration Statement in reliance upon the report of KPMG Peat Marwick
LLP, independent auditors, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended, with respect to the Common Stock offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and such Common Stock, reference is made to the
Registration Statement and the exhibits and schedules filed as part thereof.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and, in each instance,
if such contract or document is filed as an exhibit, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each statement being qualified in all respects by such reference to
such exhibit. The Registration Statement, including exhibits and schedules
thereto, may be inspected without charge at the Commission's principal office in
Washington D.C., and copies of all or any part thereof may be obtained from such
office after payment of fees prescribed by the Commission.
51
<PAGE> 54
CKS GROUP, INC.
------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CKS Group, Inc. and Subsidiaries:
Independent Auditors' Report....................................................... F-2
Consolidated Balance Sheets........................................................ F-3
Consolidated Statements of Income.................................................. F-4
Consolidated Statements of Stockholders' Equity.................................... F-5
Consolidated Statements of Cash Flows.............................................. F-6
Notes to Consolidated Financial Statements......................................... F-7
Schell/Mullaney, Inc.:
Independent Auditors' Report....................................................... F-14
Balance Sheets..................................................................... F-15
Statements of Income and Retained Earnings......................................... F-16
Statements of Cash Flows........................................................... F-17
Notes to Financial Statements...................................................... F-18
Unaudited Pro Forma Consolidated Financial Information............................... F-22
</TABLE>
F-1
<PAGE> 55
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CKS Group, Inc.
We have audited the consolidated financial statements of CKS Group, Inc.
and subsidiaries as of November 30, 1994 and 1995, and the related consolidated
statements of income, stockholders equity, and cash flows for each of the years
in the three-year period ended November 30, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CKS Group,
Inc. and subsidiaries as of November 30, 1994 and 1995, and the results of their
operations and cash flows for each of the years in the three-year period ended
November 30, 1995 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Jose, California
December 15, 1995, except as to
Note 5 which is as of
December 20, 1995
F-2
<PAGE> 56
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------ MAY 31,
1994 1995 1996
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 43 $ 2,327 $38,960
Accounts receivable, net of allowances of $84, $868 and
$1,040 in 1994, 1995 and 1996, respectively............. 5,653 7,203 10,744
Fees and expenditures in excess of billings................ 179 471 1,669
Prepaid expenses and other current assets.................. 143 1,095 924
------ ------- -------
Total current assets............................... 6,018 11,096 52,297
------ ------- -------
Property and equipment, net.................................. 2,089 2,590 3,398
------ ------- -------
Total assets....................................... $8,107 $13,686 $55,695
====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $3,346 $ 3,681 $ 4,652
Accrued expenses........................................... 806 2,371 3,373
Billings in excess of fees and expenditures................ 822 959 1,879
Current portion of notes payable and capital lease
obligations............................................. 1,062 316 327
Income taxes payable....................................... 318 972 381
------ ------- -------
Total current liabilities.......................... 6,354 8,299 10,612
Notes payable and capital lease obligations, less current
portion.................................................... 340 412 311
Deferred income taxes........................................ 390 380 256
------ ------- -------
Total liabilities.................................. 7,084 9,091 11,179
------ ------- -------
Commitments
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares
authorized; none issued and outstanding................. -- -- --
Common stock; $.001 par value; 30,000,000 shares
authorized:
Series A common stock; none and 3,114,437 shares issued
and outstanding in 1994 and 1995, respectively; none
issued and outstanding as of May 31, 1996............. -- 3 --
Common stock; 9,463,070, 7,125,000 issued and outstanding
in 1994 and 1995, respectively; 12,714,437 shares issued
and outstanding as of May 31, 1996...................... 9 7 13
Additional paid-in capital................................. 254 2,380 40,253
Notes receivable from stockholders......................... (371) (292) (292)
Retained earnings.......................................... 1,131 2,497 4,542
------ ------- -------
Total stockholders' equity......................... 1,023 4,595 44,516
------ ------- -------
Total liabilities and stockholders' equity......... $8,107 $13,686 $55,695
====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 57
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
NOVEMBER 30, ENDED MAY 31,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................. $12,038 $22,938 $34,792 $14,938 $22,895
------- ------- ------- ------- -------
Operating expenses:
Direct salaries and related expenses... 2,782 6,168 10,485 4,651 6,775
Other direct operating expenses........ 6,183 11,121 13,164 5,810 8,459
General and administrative expenses.... 2,584 5,131 8,688 3,714 5,284
------- ------- ------- ------- -------
Total operating expenses....... 11,549 22,420 32,337 14,175 20,518
------- ------- ------- ------- -------
Operating income............... 489 518 2,455 763 2,377
Other income (expense) net............... (25) (38) (27) (33) 774
------- ------- ------- ------- -------
Income before income taxes..... 464 480 2,428 730 3,151
Income taxes............................. 185 192 1,062 321 1,106
------- ------- ------- ------- -------
Net income..................... $ 279 $ 288 $ 1,366 $ 409 $ 2,045
======= ======= ======= ======= =======
Net income per share..................... $ 0.03 $ 0.03 $ 0.13 $ 0.04 $ 0.16
------- ------- ------- ------- -------
Shares used in per share computation..... 8,482 9,944 10,726 10,720 13,147
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 58
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A NOTES
COMMON STOCK COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
--------------- --------------- PAID-IN FROM RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS EARNINGS EQUITY
------ ------ ------ ------ ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, November 30, 1992........ -- $-- 6,892 $ 7 $ 121 $ (80) $ 564 $ 612
Issuance of common stock........... -- -- 948 1 242 (239) -- 4
Net income......................... -- -- -- -- -- -- 279 279
--
----- ------ --- ------ ----- ------ ------
Balances, November 30, 1993........ -- -- 7,840 8 363 (319) 843 895
Issuance of common stock........... -- -- 2,273 2 204 (146) -- 60
Repurchase of common stock......... -- -- (650) (1) (313) 94 -- (220)
Net income......................... -- -- -- -- -- -- 288 288
--
----- ------ --- ------ ----- ------ ------
Balances, November 30, 1994........ -- -- 9,463 9 254 (371) 1,131 1,023
Issuance of Series A common
stock............................ 739 1 -- -- 1,923 -- -- 1,924
Conversion of common stock to
Series A common stock............ 2,375 2 (2,375) (2) -- -- -- --
Repurchase of common stock......... -- -- (31) -- (23) 8 -- (15)
Issuance of common stock........... -- -- 68 -- 70 -- -- 70
Compensation related to stock
options.......................... -- -- -- -- 156 -- -- 156
Collections on stockholder notes
receivable....................... -- -- -- -- -- 71 -- 71
Net income......................... -- -- -- -- -- -- 1,366 1,366
--
----- ------ --- ------ ----- ------ ------
Balances, November 30, 1995........ 3,114 3 7,125 7 2,380 (292) 2,497 4,595
Conversion of Series A common stock
to common stock (unaudited)...... (3,114) (3) 3,114 3 -- -- -- --
Issuance of common stock
(unaudited)...................... -- -- 2,475 3 37,820 -- -- 37,823
Compensation related to stock
options (unaudited).............. -- -- -- -- 53 -- -- 53
Net income (unaudited)............. -- -- -- -- -- -- 2,045 2,045
--
----- ------ --- ------ ----- ------ ------
Balances, May 31, 1996
(unaudited)...................... -- $-- 12,714 $ 13 $ 40,253 $ (292) $4,542 $44,516
===== == ====== === ====== ===== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 59
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED NOVEMBER 30, ENDED MAY 31,
----------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 279 $ 288 $ 1,366 $ 409 $ 2,045
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred taxes............................................... 209 (127) (10) (239) (125)
Compensation related to stock options........................ -- -- 156 -- 53
Depreciation and amortization................................ 220 514 738 353 453
Changes in operating assets and liabilities:
Accounts receivable........................................ (1,743) (2,914) (1,550) 564 (3,541)
Fees and expenditures in excess of billings................ (113) (24) (292) (424) (1,198)
Prepaid expenses and other current assets.................. 25 (140) (952) 1 171
Accounts payable........................................... 1,152 2,154 335 (658) 971
Accrued expenses........................................... 398 384 1,565 301 1,002
Billings in excess of fees and expenditures................ (16) 616 137 132 920
Income taxes payable....................................... (39) 293 654 (141) (591)
------- ------- ------- ------- -------
Net cash provided by operating activities................ 372 1,044 2,147 298 160
------- ------- ------- ------- -------
Cash flows from investing activities -- purchases of property and
equipment...................................................... (699) (1,649) (1,239) (367) (1,260)
------- ------- ------- ------- -------
Cash flows from financing activities:
Net borrowings (repayments) on line of credit and
notes payable................................................ 397 706 (674) (685) (90)
Collections on stockholder notes receivable.................... -- -- 71 70 --
Proceeds from sale of common stock............................. 4 60 1,994 1,925 37,823
Repurchase of common stock..................................... -- (220) (15) -- --
------- ------- ------- ------- -------
Net cash provided by financing activities................ 401 546 1,376 1,310 37,733
------- ------- ------- ------- -------
Change in cash and cash equivalents.............................. 74 (59) 2,284 1,241 36,633
Cash and cash equivalents, beginning of period................... 28 102 43 43 2,327
------- ------- ------- ------- -------
Cash and cash equivalents, end of period......................... $ 102 $ 43 $ 2,327 $1,284 $38,960
======= ======= ======= ======= =======
Supplementary disclosure of cash paid:
Interest....................................................... $ 14 $ 60 $ 91 $ 39 $ 30
======= ======= ======= ======= =======
Income taxes................................................... $ -- $ 30 $ 647 $ 460 $ 2,237
======= ======= ======= ======= =======
Supplementary disclosures of noncash investing and financing
activities:
Sale of common stock in exchange for stockholder notes
receivable................................................... $ 243 $ 146
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 60
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED MAY 31, 1995 AND 1996 IS
UNAUDITED)
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Principles of Combination
CKS Group, Inc. (the "Company") is an integrated marketing communications
company providing corporate identity, advertising, sales promotions, product
packaging, general merchandising, and multimedia services.
The accompanying consolidated financial statements have been prepared on
the basis that the entities that now comprise the Company were combined at the
beginning of their existence for financial reporting purposes. The combined
entities have been under common control since inception and have been included
in the consolidated financial statements at historical cost, since their
respective dates of inception. The combination occurred in January 1995 as part
of a merger and it has been accounted for in a manner similar to a pooling of
interests. The entities consisted of CKS Partners, Inc., CKS Interactive, Inc.,
and CKS Pictures, Inc. (collectively, the "Former Affiliates"). In December
1994, the Boards of Directors and stockholders of the Company and the Former
Affiliates unanimously agreed to merge the Former Affiliates with and into the
Company. All transactions and accounts between the combined entities have been
eliminated in the accompanying consolidated financial statements.
In accordance with the merger of the Former Affiliates, each entity's
capital stock was converted, using a predetermined conversion factor, to give
effect to the merger. All share and per share information has been retroactively
restated to give the effect to the merger.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company's services are provided to clients in a variety of industries. The
Company performs ongoing credit evaluation of its clients and generally does not
require collateral, and records allowances for potential credit losses.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over estimated useful lives of three to seven years. Leasehold
improvements are amortized over the lesser of their useful lives or the
remaining term of the related lease.
Revenue Recognition
Revenues are derived from fixed fee arrangements and are recognized on the
percentage-of-completion method based on the ratio of costs incurred to total
estimated costs. Fees and expenditures in excess of billings represent the costs
incurred and anticipated profits earned on projects in progress in excess of
amounts billed, and are recorded as an asset. Billings in excess of fees and
expenditures represent amounts billed in excess of costs incurred and estimated
profit earned, and are recorded as a liability. Such billings are generally at
the beginning of contract periods, and are in accordance with contract
provisions. To the extent costs incurred and
F-7
<PAGE> 61
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
anticipated costs to complete projects in progress exceed anticipated billings,
a loss is accrued for the excess.
Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is the U.S.
dollar. Accordingly, monetary assets and liabilities are remeasured at year-end
exchange rates while nonmonetary items are remeasured at historical rates.
Income and expense accounts are remeasured at the average rates in effect during
the year, except for depreciation and cost of revenue which are remeasured at
historical rates. Gains and losses resulting from remeasurement are included in
income.
Net Income Per Share
Net income per share is computed using the weighted average number of
shares outstanding of common stock and dilutive common equivalent shares from
stock options using the treasury stock method. In accordance with certain
Securities and Exchange Commission (SEC) Staff Accounting Bulletins, such
computations include all common and common equivalent shares issued within 12
months of the offering date as if they were outstanding for all prior periods
presented using the treasury stock method and the initial public offering
("IPO") price.
Interim Financial Information
The consolidated financial statements for the six month periods ended May
31, 1995 and 1996 are unaudited, but include all adjustments (consisting solely
of normal recurring adjustments), which are, in the opinion of management,
necessary for a fair presentation.
(2) PROPERTY AND EQUIPMENT
Property and equipment include the following (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------
1994 1995
------ ------
<S> <C> <C>
Computer equipment and software.................................. $1,427 $2,304
Furniture and fixtures........................................... 659 718
Video production equipment....................................... 719 750
Vehicles......................................................... 80 27
Leasehold improvements........................................... 257 558
------ ------
3,142 4,357
Less accumulated depreciation and amortization................... 1,053 1,767
------ ------
$2,089 $2,590
====== ======
</TABLE>
F-8
<PAGE> 62
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) NOTES PAYABLE
In July 1995, the Company entered into a credit agreement with a bank for
$4,600,000 including a $3,000,000 line of credit, a $1,000,000 equipment line of
credit, and a $600,000 term loan to refinance existing debt. The Company may
borrow funds against the line of credit based on 75% of eligible trade
receivables, limited to $3,000,000. Advances under the $1,000,000 equipment loan
facility are limited to 80% of the equipment purchase price. Borrowings bear
interest at the bank's prime rate plus 0.5% for the $3,000,000 facility, and
prime rate plus 0.75% for the $1,000,000 facility and the $600,000 term loan.
Borrowings are secured by all assets of the Company. The agreement requires
certain financial ratios, minimum tangible net worth and profitability be
maintained and restricts the Company's ability to pay dividends or to effect
mergers or acquisitions. Notes payable consisted of the following (in
thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------
1994 1995
------ ----
<S> <C> <C>
Borrowings on lines of credit and term loans with interest at prime
plus 1.25%....................................................... $1,304 $ --
Borrowings under term loan with interest at 9.5%................... -- 408
Purchase contracts, with interest at 9% and 12%.................... 98 116
Other.............................................................. -- 204
------ ----
1,402 728
Less current maturities............................................ 1,062 316
------ ----
$ 340 $412
====== ====
</TABLE>
Future maturities of the long-term portion of notes payable are as follows:
$220,000 in fiscal 1997; $74,000 in fiscal 1998; $69,000 in fiscal 1999; and
$49,000 in fiscal 2000.
(4) LEASES
The Company maintains an executive office and two operating offices in
Northern California as well as operating offices in Oregon, New York and London.
The Company is generally responsible for maintaining public liability and
property damage insurance on the leased property and is also responsible for
certain operating expenses and property taxes. The facilities leases begin to
expire in 1996 but contain renewal options to extend lease terms for up to six
years. The Company also leases office equipment under various operating leases.
The leases begin to expire in 1996.
Total rent expense for facilities and office equipment was approximately
$300,000, $1,128,000, and $2,183,000 for the years ended November 30, 1993, 1994
and 1995, respectively.
Future minimum operating lease payments for facilities and equipment are as
follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending November 30,
------------------------------------------------------------
<S> <C>
1996........................................................ $1,765
1997........................................................ 1,466
1998........................................................ 908
1999........................................................ 679
2000........................................................ 642
Thereafter.................................................. 1,441
</TABLE>
F-9
<PAGE> 63
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) STOCKHOLDERS' EQUITY
Reincorporation
On December 7, 1995, the Company was reincorporated in Delaware. The
certificate of incorporation provides 5,000,000 authorized shares of preferred
stock with a $.001 par value per share and 30,000,000 authorized shares of
common stock with a $.001 par value per share. The consolidated financial
statements have been retroactively restated to give effect to the
reincorporation. In conjunction with the reincorporation, all outstanding shares
of Series A common stock were converted into an equal number of shares of common
stock of the Company and all outstanding options to purchase shares of Series B
common stock of the Company were converted into options to purchase an equal
number of shares of common stock of the Company.
Common Stock Repurchases
In 1994 and 1995, the Company repurchased approximately 650,000 and 31,000
shares of common stock, respectively. These shares were repurchased from
employees who had terminated employment with the Company. In accordance with the
terms of the respective employee's Stock Purchase Agreement, the Company
exercised its right of repurchase and repurchased the vested portion of shares
at the then fair market value of the common stock, with the unvested shares
being repurchased at the employee's original purchase price.
Series A Common Stock
As of November 30, 1995, the Company had authorized 5,000,000 shares of
Series A common stock. Holders of the Series A stock shall be entitled to
dividends when and as declared by the Board of Directors equal to the dividends
paid on the shares of common stock outstanding. After December 31, 1996, holders
of Series A common stock are entitled to dividends at a rate equal to 10% of the
Series A total purchase price. Each share of Series A common stock is
convertible into one share of common stock at the option of the holder. The
Series A common stock automatically converted upon the closing of the Company's
initial public offering on December 20, 1995.
On January 27, 1995, the Company and certain stockholders of the Company
entered into a stock purchase agreement with The Interpublic Group of Companies,
Inc. ("IPG") pursuant to which IPG purchased 739,437 shares of Series A common
stock from the Company and 2,375,000 shares of common stock from the
participating stockholders for $2,000,000 and $4,000,000, respectively. As part
of the transaction, the 2,375,000 shares of common stock were immediately
converted into Series A common stock. In addition, the Company entered into a
Management Services Agreement with IPG, pursuant to which IPG provides the
Company with certain management advice and consulting services for a fee based
on the Company's revenues. This agreement terminated according to its terms upon
the closing of the IPO. General and administrative expenses include $205,000
related to this agreement in the year ended November 30, 1995.
In October 1995, IPG purchased an additional 481,060 shares of common stock
from certain stockholders.
1995 Series B Common Stock Plan
On April 28, 1995, the Company's Board of Directors approved the 1995
Series B common stock plan (the "Plan"). Under the Plan, 750,000 shares of
Series B common stock have been reserved for issuance. Options granted under the
Plan may be either incentive stock options or
F-10
<PAGE> 64
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
nonstatutory stock options, as designated by the Board of Directors. The Plan
expires 10 years after adoption.
Series B common stock possesses the same rights and privileges as common
stock except that each share is entitled to one-tenth the dividend, if declared,
on common stock and one-tenth the voting privilege and liquidation preference as
a share of common stock. Series B common stock converted automatically on a
one-for-one basis into common stock upon the closing of the IPO.
The Plan provides (i) the exercise price of an incentive stock option will
be no less than the fair market value of the Company's common stock at the date
of grant, (ii) the option exercise price per share for a nonstatutory stock
option will not be less than 85% of the fair market value, and (iii) the
exercise price of an incentive stock option for an optionee who possesses more
than 10% of the total combined voting power of all classes of stock shall not be
less than 110% of the fair market value; all as determined by the Board of
Directors. Options generally vest 25% after one year and then ratably over 36
months thereafter.
Plan activity is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
AVAILABLE ----------------------------
FOR NUMBER OF PRICE
GRANT SHARES PER SHARE
-------- --------- --------------
<S> <C> <C> <C>
Options available for grant under plan....... 750,000 -- $ --
Options granted............................ (648,022) 648,022 0.50 - 9.00
Options canceled........................... 13,806 (13,806) 0.50 - 9.00
-------- -------
Balance, November 30, 1995................... 115,784 634,216 0.50 - 9.00
======== =======
</TABLE>
As of November 30, 1995, options to purchase 155,492 shares were vested.
1995 Stock Plan
In October 1995, the Board of Directors approved the 1995 Stock Plan (the
"Stock Plan"). Under the Stock Plan, options to purchase common stock and rights
to purchase common stock may be granted to employees, officers and consultants
of the Company. As of November 30, 1995, no options or rights have been granted
pursuant to the Stock Plan and 1,000,000 shares were available for future grant
under the Stock Plan. The Board or a committee thereof has the authority to
select the persons to whom awards are granted and determine the terms of each
award.
1995 Employee Stock Purchase Plan
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan") was
approved by the Board of Directors in October 1995 and provides for the purchase
by eligible employees of shares of the Company's common stock. A total of
300,000 shares of common stock have been reserved for issuance under the
Purchase Plan. Eligible employees may purchase common stock through payroll
deductions, which may not exceed 15% of an employee's compensation. Shares are
purchased on the last day of each purchase period. The price at which stock may
be purchased under the Purchase Plan is equal to 85% of the lower of the fair
market value of the Company's common stock on the first day of the offering
period or the last day of the purchase period.
1995 Directors' Option Plan
Under the 1995 Directors' Option Plan (the "Directors' Option Plan"), a
total of 100,000 shares are reserved for issuance. The Directors' Option Plan
provides that each nonemployee director will be granted an option to purchase
20,000 shares of common stock on the date on which the optionee
F-11
<PAGE> 65
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
first becomes a director of the Company. Thereafter each nonemployee director
will be granted an option to purchase 5,000 shares of common stock on the first
day of each year after adoption of the Directors' Option Plan. Each option
becomes exercisable as to 25% of the shares subject to such option on each
anniversary of its date of grant. The exercise price of all options granted
under the Directors' Option Plan will be equal to the fair market value of the
Company's common stock on the date of grant. No options have been granted under
the Directors' Option Plan.
Initial Public Offering
In December 1995, the Company completed the IPO and issued 2,475,000 shares
of its common stock at a per share price of $17.00. The Company received
proceeds of approximately $37.8 million in cash, net of underwriting discounts,
commissions and other costs.
Secondary Public Offering (Unaudited)
The Board of Directors of the Company approved an underwritten secondary
offering of 131,500 shares of the Company's common stock, expected to be
completed in June 1996.
(6) INCOME TAXES
Income taxes for fiscal years 1993, 1994 and 1995 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------
1993 1994 1995
---- ----- ------
<S> <C> <C> <C>
Current:
Federal........................................................... $ 28 $ 260 $1,201
State............................................................. 11 70 340
United Kingdom.................................................... -- 3 --
---- ----- ------
39 333 1,541
---- ----- ------
Deferred:
Federal........................................................... 104 (106) (377)
State............................................................. 42 (35) (102)
---- ----- ------
146 (141) (479)
---- ----- ------
$185 $ 192 $1,062
==== ===== ======
</TABLE>
At November 30, 1994 and 1995 the deferred tax assets and (liabilities)
consist of the following items (in thousands):
<TABLE>
<CAPTION>
1994 1995
----- ------------
<S> <C> <C>
Change from cash to accrual method of accounting for income tax
purposes..................................................... $(371) $ (322)
Accounts receivable allowances................................. 28 297
Depreciation................................................... (19) (58)
Deferred state taxes........................................... 23 125
Benefit and other accruals..................................... 31 129
----- -----
$(308) $ 171
===== =====
</TABLE>
Management believes that the deferred tax assets are fully realizable.
F-12
<PAGE> 66
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------
1994 1995
---- ----
<S> <C> <C>
Federal tax statutory rate............................................ 34.0% 34.0%
State income taxes, net of federal benefit............................ 6.0 6.0
Other................................................................. -- 3.7
---- ----
40.0% 43.7%
==== ====
</TABLE>
(7) SIGNIFICANT CUSTOMERS AND RELATED PARTY TRANSACTIONS
In the year ended November 30, 1995, professional fees from a major
telecommunications company amounted to approximately $6,730,000, representing
approximately 19% of total professional fees. This customer owed the Company a
total of approximately $1,212,000 as of November 30, 1995. During 1993 and 1994,
professional fees from a computer hardware company amounted to approximately
$3,194,000 and $3,652,000 representing approximately 14% and 30% of total
professional fees for 1993 and 1994 respectively. This customer owed the Company
a total of approximately $288,000 as of November 30, 1994. Additionally,
professional fees from another computer hardware company amounted to
approximately $1,406,000 in 1993, representing approximately 12% of total
professional fees for the year.
The Company provided professional and administrative services to MobileSoft
Corporation ("MobileSoft"), a software development company. Principal
stockholders and officers of the Company own a minority interest in the common
stock of MobileSoft. For the years ended November 30, 1993 and 1994, the Company
provided advertising services to MobileSoft amounting to approximately $70,000
and $49,000, respectively, at a 50% discount from its standard rates.
F-13
<PAGE> 67
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CKS Group, Inc.:
We have audited the accompanying balance sheets of Schell/Mullaney, Inc. as
of December 31, 1994 and 1995, and the related statements of income and retained
earnings, and cash flows for each of the years in the three-year period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Schell/Mullaney, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
June 6, 1996
F-14
<PAGE> 68
SCHELL/MULLANEY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ -- $ 283
Accounts receivable....................................... 1,937 1,876 2,121
Prepaid expenses and other current assets................. 30 35 30
------ ------- -------
Total current assets.............................. 1,967 1,911 2,434
Property and equipment, net................................. 319 449 428
Note receivable from officer................................ 500 500 500
Deposits.................................................... 16 69 71
------ ------- -------
Total assets...................................... $2,802 $2,929 $ 3,433
====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 303 $ 209 $ 264
Accrued expenses.......................................... 15 112 258
Billings in excess of expenditures........................ 783 383 666
Current portion of notes payable.......................... 500 540 40
Deferred income taxes..................................... 16 36 36
------ ------- -------
Total current liabilities......................... 1,617 1,280 1,264
Notes payable, less current portion......................... -- 160 150
Deferred rent............................................... 340 354 356
------ ------- -------
Total liabilities................................. 1,957 1,794 1,770
------ ------- -------
Commitments and contingencies
Shareholders' equity:
Common stock; $1.00 par value; 20,000 shares authorized;
100 shares issued and outstanding...................... -- -- --
Retained earnings......................................... 845 1,135 1,663
------ ------- -------
Total shareholders' equity........................ 845 1,135 1,663
------ ------- -------
Total liabilities and shareholders' equity........ $2,802 $2,929 $ 3,433
====== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE> 69
SCHELL/MULLANEY, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------------- -----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $4,173 $4,624 $5,046 $1,207 $ 1,512
Operating expenses:
Direct salaries and related expenses........ 3,071 3,039 3,492 965 788
Other direct operating expenses............. 343 342 408 75 92
General and administrative expenses......... 693 603 602 125 97
------ ------ ------ ------ ------
Total operating expenses............ 4,107 3,984 4,502 1,165 977
------ ------ ------ ------ ------
Operating income.................... 66 640 544 42 535
Other income (expense), net................... 36 36 (101) (5) (7)
------ ------ ------ ------ ------
Income before income taxes.......... 102 676 443 37 528
Income taxes.................................. 54 61 75 -- --
------ ------ ------ ------ ------
Net income.......................... 48 615 368 37 528
Retained earnings at beginning of period...... 357 230 845 845 1,135
Dividend to shareholders...................... (175) -- (78) -- --
------ ------ ------ ------ ------
Retained earnings at end of
period............................ $ 230 $ 845 $1,135 $ 882 $ 1,663
====== ====== ====== ====== ======
Pro forma net income data (unaudited):
Income before income taxes, as reported..... $ 443 $ 528
Pro forma income taxes...................... 177 211
------ ------
Pro forma net income................ $ 266 $ 317
====== ======
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE> 70
SCHELL/MULLANEY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- ----------------
1993 1994 1995 1995 1996
----- ------- ----- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 48 $ 615 $ 368 $ 37 $ 528
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred taxes............................ (2) 12 20 -- --
Depreciation and amortization............. 101 100 142 44 43
Loss on disposal of property and
equipment............................... -- -- 125 -- --
Changes in operating assets and
liabilities:
Accounts receivable..................... (100) 2,859 61 982 (245)
Prepaid expenses and other assets....... 14 (14) (58) (74) 3
Accounts payable........................ 255 (3,844) (94) 25 55
Other current liabilities............... (29) 518 (289) (162) 431
----- ------ ----- ------ ------
Net cash provided by operating
activities......................... 287 246 275 852 815
----- ------ ----- ------ ------
Cash flows from investing activities:
Purchases of property and equipment.......... (78) (122) (397) (19) (22)
Loan to officer.............................. -- (500) -- -- --
----- ------ ----- ------ ------
Net cash used in investing
activities......................... (78) (622) (397) (19) (22)
----- ------ ----- ------ ------
Cash flows from financing activities:
Net borrowings (repayments) on line of credit
and notes payable......................... (75) 375 200 (500) (510)
Dividends paid............................... (175) -- (78) -- --
----- ------ ----- ------ ------
Net cash provided (used) by financing
activities.............................. (250) 375 122 (500) (510)
----- ------ ----- ------ ------
Change in cash and cash equivalents............ (41) (1) -- 333 283
Cash and cash equivalents, beginning of
period....................................... 42 1 -- -- --
----- ------ ----- ------ ------
Cash and cash equivalents, end of period....... $ 1 -- -- 333 283
===== ====== ===== ====== ======
Cash paid:
Interest..................................... $ -- -- 9 9 3
===== ====== ===== ====== ======
Income taxes................................. $ 140 58 28 11 26
===== ====== ===== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE> 71
SCHELL/MULLANEY, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Schell/Mullaney, Inc. (the Company) is a New York advertising and marketing
firm specializing in servicing technology companies.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, including
accounts receivable, approximate fair value.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable.
Accounts receivable from one client in the computer software industry was
$1,637,000 as of December 31, 1995.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated using the five to seven
year MACRS method which is not materially different from the methods required by
generally accepted accounting principles. Leasehold improvements are amortized
over the lesser of their useful lives or the remaining term of the related
lease.
Revenue Recognition
Commissions, agency bonuses, and fees represent the principal sources of
revenue derived from the placement of various forms of media and production.
Fixed fee income is recognized on a straight line basis during the contract
period. Commissions are generally recognized when media placements appear and
when production is completed. Agency bonuses are awarded to the Company at the
discretion of the client and amounted to $-0-, $625,000 and $1,538,000 in 1993,
1994 and 1995, respectively. Billings in excess of expenditures represent
amounts billed in excess of costs incurred and estimated profit to be earned and
are recorded as a liability.
Fees earned from one client in the computer software industry approximated
90%, 75% and 86% of revenues in 1993, 1994 and 1995, respectively. The contract
with this client expired in March 1996 and was renegotiated, extending the
contract to April 1999. The client has the right to terminate the agreement with
90 days notice.
Income Taxes
The Company is an S corporation, as defined by the Internal Revenue
Service. No provision for federal income taxes has been made in the accompanying
financial statements since any liability for such income taxes is that of the
shareholders and not of the Company. Certain assets and liabilities have bases
for income tax purposes that differ from the carrying value for financial
reporting
F-18
<PAGE> 72
SCHELL/MULLANEY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
purposes, primarily due to the Company utilizing the cash basis of accounting
for tax purposes. The Company is, however, subject to certain state and local
alternative income taxes. The accompanying statement of income and retained
earnings for the year ended December 31, 1995 includes a provision for income
taxes on an unaudited pro forma basis as if the Company had been a C corporation
fully subject to federal and state income taxes (see note 6).
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Interim Financial Information
The financial statements for the three months ended March 31, 1995 and 1996
are unaudited but include all adjustments (consisting of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair
presentation.
(2) PROPERTY AND EQUIPMENT
Property and equipment included the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
<S> <C> <C>
Furniture and fixtures........................................... $ 181 $ 238
Equipment........................................................ 278 284
Leasehold improvements........................................... 169 232
---- ----
628 754
Less accumulated depreciation and amortization................... 309 305
---- ----
$ 319 $ 449
==== ====
</TABLE>
In conjunction with vacating its former facilities, the Company recorded a
$125,000 loss in 1995 from the abandonment of certain property and equipment.
This loss has been included in other income (expense), net in the accompanying
statement of income and retained earnings.
(3) NOTE RECEIVABLE FROM OFFICER
The Chairman of the Company was indebted to the Company as of December 31,
1995 under a note totaling $500,000 due January 26, 1997, plus accrued interest
of $20,000. The note bears interest at 3.98% per annum. Interest income of
$19,000 and $20,000 was recognized for the years ended December 31, 1994 and
1995, respectively. Accrued interest is included with prepaid and other current
assets in the accompanying balance sheets. The loan is expected to be repaid
prior to the closing of the merger with CKS Group, Inc. (see note 8).
F-19
<PAGE> 73
SCHELL/MULLANEY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Unsecured note payable to bank, due January 12, 1995, interest at
prime plus 2%.................................................. $ 500 $ --
Unsecured notes payable to bank, due January 31, 1996, interest
and prime plus 2%.............................................. -- 500
Installment loan payable, due in equal monthly payments of
$3,000, interest at prime plus 1.5%, secured by the Company's
furniture and fixtures, and personally guaranteed by the
shareholders................................................... -- 200
---- ----
500 700
Less current maturities.......................................... 500 540
---- ----
$ -- $ 160
==== ====
</TABLE>
The $500,000 due January 1996 was repaid. The Company's debt agreements
contain financial covenants, including but not limited to, debt service and debt
to worth ratios. The average interest rate for 1994 and 1995 approximated 10.5%
and 10.7%, respectively.
The Company has obtained a letter of credit for the purchase of supplies in
the amount of $81,000. The Company has also obtained a letter of credit as
security on its existing lease, issued by Chemical Bank in the amount of
$50,000.
(5) LEASES
Total rent expense was approximately $242,000, $242,000, and $267,000 for
the years ended December 31, 1993, 1994, and 1995, respectively.
Future minimum operating lease payments for facilities and equipment are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING LEASE SUBLEASE NET LEASE
DECEMBER 31, COMMITMENTS INCOME COMMITMENTS
-------------------------------------------------- ----------- -------- -----------
<S> <C> <C> <C>
1996......................................... $ 525 359 166
1997......................................... 566 246 320
1998......................................... 560 246 314
1999......................................... 571 246 325
2000......................................... 382 246 136
2001......................................... 328 226 102
------ ------ ------
$ 2,932 1,569 1,363
====== ====== ======
</TABLE>
F-20
<PAGE> 74
SCHELL/MULLANEY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
The components of income taxes, as presented in the accompanying statements
of income and retained earnings, are comprised of state and local alternative
income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1993 1994 1995
--- --- ---
<S> <C> <C> <C>
Current......................................... $56 $49 $55
Deferred........................................ (2) 12 20
---- ---- ----
--- --- ---
$54 $61 $75
======= ======= =======
</TABLE>
The pro forma provision for income taxes reflects the income tax expense
that would have been reported if the Company had been a C Corporation using the
asset and liability method. Under this approach deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. The components of unaudited pro
forma income taxes for the year ended December 31, 1995 are as follows (in
thousands):
Pro forma income taxes:
<TABLE>
<S> <C>
Current...................................................... $ 37
Deferred..................................................... 140
-----
--
Total pro forma income taxes................................. $177
=======
</TABLE>
The following tabulation reconciles the expected pro forma corporate
federal income tax expense (computed by multiplying the Company's income before
income taxes by 34%) to the Company's unaudited pro forma income tax expense for
the periods ended December 31, 1995 (in thousands):
<TABLE>
<S> <C>
Expected pro forma income taxes.............................. $151
State income taxes, net of federal effect.................... 26
----
Total pro forma income taxes............................... $177
=====
</TABLE>
The Company reports income on the cash method of accounting for income tax
purposes which would have resulted in a deferred tax liability of $327,000 on a
pro forma basis.
(7) EMPLOYEE SAVINGS PLAN
The Company has a salary reduction employee savings plan for all employees
meeting certain minimum requirements. The plan, which is a qualified plan under
Section 401(k) of the Internal Revenue Code, allows eligible employees to
contribute percentages of their compensation with statutory maximum amounts. The
Company may also make contributions at its discretion. Contributions were
$25,000, $19,000, and $33,000 for the years ended December 31, 1993, 1994, and
1995, respectively.
(8) PROPOSED ACQUISITION BY CKS GROUP, INC.
On June 7, 1996, the Company agreed to be acquired by CKS Group, Inc. (CKS)
for initial consideration consisting of CKS common stock valued at $5 million
and up to $9 million of additional common stock if certain performance targets
are achieved in 1997 and 1998. Consummation of the transaction is subject to a
number of conditions, including the issuance of a permit by the California
Department of Corporations following a hearing as to the fairness of the
proposed acquisition, the absence of a material adverse change in the business
of the Company and other matters.
F-21
<PAGE> 75
CKS GROUP INC. -- SCHELL/MULLANEY, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet has been
derived from the CKS Group, Inc. (the Company) unaudited consolidated balance
sheet as of May 31, 1996 included elsewhere herein. Adjustments have been made
to such information to give effect to the acquisition of Schell/Mullaney, Inc.
(Schell/Mullaney) as if it had occurred on the balance sheet date. The unaudited
pro forma consolidated balance sheet combines CKS Group, Inc.'s consolidated
balance sheet as of May 31, 1996 with Schell/Mullaney's balance sheet as of
March 31, 1996. The unaudited pro forma consolidated balance sheet should be
read in conjunction with the consolidated financial statements of the CKS Group,
Inc. and Subsidiaries and Schell/Mullaney, including the notes thereto,
contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
THE COMPANY SCHELL/MULLANEY PRO FORMA PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS COMBINED
----------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $38,960 $ 283 $ 500(a)
(783)(b) $38,960
Accounts receivable, net......................... 10,744 2,121 12,865
Fees and expenditures in excess of billings...... 1,669 -- 1,669
Prepaid expenses and other current assets........ 924 30 954
------- ------- ------- -------
Total current assets..................... 52,297 2,434 (283) 54,448
Property and equipment, net........................ 3,398 428 3,826
Note receivable from officer....................... -- 500 (500)(a) --
Deposits........................................... -- 71 71
Goodwill........................................... -- -- 4,101(c) 4,101
------- ------- ------- -------
Total assets............................. $55,695 $ 3,433 $ 3,318 $62,446
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 4,652 $ 264 $ $ 4,916
Accrued expenses................................. 3,373 258 3,631
Billings in excess of fees and expenditures...... 1,879 666 2,545
Current portion of notes payable and capital
lease obligations............................. 327 40 367
Income taxes payable............................. 381 -- 381
Deferred income taxes............................ -- 36 337(c) 373
------- ------- ------- -------
Total current liabilities................ 10,612 1,264 337 12,213
Notes payable and capital lease obligations, less
current portion.................................. 311 150 461
Deferred rent...................................... -- 356 (356)(c) --
Deferred income taxes.............................. 256 -- 256
------- ------- ------- -------
Total liabilities........................ 11,179 1,770 (19) 12,930
------- ------- ------- -------
Commitments
Stockholders' equity:
Preferred stock; $.001 par value; none issued and
outstanding................................... -- -- --
Common stock; $.001 par value; actual --
12,714,437 shares issued and outstanding; pro
forma -- 12,846,887 shares issued and
outstanding................................... 13 -- 13
Common stock; $1.00 par value; actual -- 100
shares issued and outstanding; pro forma --
none issued and outstanding................... -- --
Additional paid-in capital....................... 40,253 -- 5,000 45,253
Notes receivable from stockholders............... (292) -- (292)
Retained earnings................................ 4,542 1,663 (783)(b)
(880)(c) 4,542
------- ------- ------- -------
Total stockholders' equity............... 44,516 1,663 3,337 49,516
------- ------- ------- -------
Total liabilities and stockholders'
equity................................. $55,695 $ 3,433 $ 3,318 $62,446
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
information.
F-22
<PAGE> 76
CKS GROUP INC. -- SCHELL/MULLANEY, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated statements of income combine
CKS Group, Inc.'s operating results for the year ended November 30, 1995 and six
month period ended May 31, 1996 with Schell/Mullaney's operating results for the
year ended December 31, 1995 and six months ended March 31, 1996, respectively.
The unaudited pro forma consolidated statements of income are not necessarily
indicative of the future results of operations of the Company or the results of
operations which would have resulted had the Company and Schell/Mullaney been
combined during the periods presented. In addition, the pro forma results are
not intended to be a projection of future results. The unaudited pro forma
statements of income should be read in conjunction with the consolidated
financial statements of the CKS Group, Inc. and subsidiaries and
Schell/Mullaney, including the notes thereto, contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, 1995
-------------------------------------------------------
THE COMPANY SCHELL/MULLANEY PRO FORMA PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS COMBINED
----------- --------------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues............................................................ $34,792 $ 5,046 $ $39,838
------- ------- ------- -------
Operating expenses:
Direct salaries and related expenses.............................. 10,485 3,492 (1,517)(a) 12,460
Other direct operating expenses................................... 13,164 408 -- 13,572
General and administrative expenses............................... 8,688 602 205(c) 9,495
------- ------- ------- -------
Total operating expenses.................................... 32,337 4,502 (1,312) 35,527
------- ------- ------- -------
Operating income.................................................... 2,455 544 1,312 4,311
Other income (expense).............................................. (27) (101) (20)(b) (148)
------- ------- ------- -------
Income before income taxes.................................. 2,428 443 1,292 4,163
Income taxes........................................................ 1,062 75 701(d) 1,838
------- ------- ------- -------
Net income.................................................. $ 1,366 $ 368 $ 591 $ 2,325
======= ======= ======= =======
Pro forma net income........................................
Pro forma net income per share...................................... $ 0.13 $ 0.21
======= =======
Shares used in per share compensation............................... 10,726 132 10,858
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31, 1996
-------------------------------------------------------
THE COMPANY SCHELL/MULLANEY PRO FORMA PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS COMBINED
----------- --------------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues............................................................ $22,895 $ 3,346 $ $26,241
------- ------- ------- -------
Operating expenses:
Direct salaries and related expenses.............................. 6,775 2,336 (1,536)(a) 7,575
Other direct operating expenses................................... 8,459 223 -- 8,682
General and administrative expenses............................... 5,284 282 103(c) 5,669
------- ------- ------- -------
Total operating expenses.................................... 20,518 2,841 (1,433) 21,926
------- ------- ------- -------
Operating income.................................................... 2,377 505 1,433 4,315
Other income (expense).............................................. 774 26 (10)(b) 790
------- ------- ------- -------
Income before income taxes.................................. 3,151 531 1,423 5,105
Income taxes........................................................ 1,106 -- 823(d) 1,929
------- ------- ------- -------
Net income.................................................. $ 2,045 $ 531 $ 600 $ 3,176
======= ======= ======= =======
Pro forma net income (loss) per share............................... $ 0.16 $ 0.24
======= =======
Shares used in per share computation................................ 13,147 132 13,279
======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
information.
F-23
<PAGE> 77
CKS GROUP, INC. -- SCHELL/MULLANEY, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
All of the shares of outstanding common stock of Schell/Mullaney will be
exchanged for 132,450 shares of the Company's common stock based on the closing
price of the Company's common stock on June 6, 1996. The actual number of shares
issued will depend upon the closing price of the Company's common stock around
the closing date, such amount determined by dividing $5,000,000 by the average
closing price of the Company's common stock for the 40 days following the
closing date. The following adjustments have been reflected in the unaudited pro
forma consolidated balance sheet:
(a) To record the anticipated repayment of the $500,000 note receivable
from officer prior to closing.
(b) To reflect the anticipated final $783,000 S Corporation distribution
prior to closing.
(c) To record the allocation of purchase price to the net assets of
Schell/Mullaney as follows (in thousands):
<TABLE>
<S> <C>
Book value of net assets of Schell/Mullaney after adjustments (a) and
(b)................................................................... $ 880
Deferred rent........................................................... 356
Deferred tax liability resulting from conversion to C Corporation
status................................................................ (337)
Goodwill................................................................ 4,101
------
Fair value of common stock to be issued in the exchange................. $5,000
======
</TABLE>
The actual allocation of the purchase price will depend upon the
composition of Schell/Mullaney's net assets on the closing date and the
Company's evaluation of the fair value of such net assets as of such date.
Consequently, the ultimate allocation of purchase price could differ from that
presented above.
The acquisition agreement also provides for additional payments up to $9
million in the form of the Company's common stock in the event certain
performance targets are achieved in 1997 and 1998. In the event such payments
are made, additional goodwill will be recorded and amortized over its remaining
estimated life.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
The following adjustments have been reflected in the unaudited pro forma
consolidated statements of income:
(a) To reflect the anticipated reduction in salary and bonus expense as if
the employment agreements entered into in conjunction with the
acquisition had been in effect from the beginning of the periods
presented.
(b) To eliminate interest income related to the $500,000 note receivable
from officer which is expected to be repaid prior to the closing.
(c) To record amortization of goodwill over an estimated life of 20 years.
(d) To record additional income tax expense at the combined statutory rate
as a result of the termination of Schell/Mullaney's S Corporation status
effective upon the closing, net of nondeductible goodwill amortization
resulting from the acquisition.
F-24
<PAGE> 78
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below (the "Underwriters"), and each of such Underwriters has
severally agreed to purchase from the Company and the Selling Stockholders, the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------------------------------------------------------------- ---------
<S> <C>
Goldman, Sachs & Co. ............................................
Dean Witter Reynolds Inc. .......................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................
-----
Total.................................................. 1,800,000
=====
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Company has granted to the Underwriters an option exercisable for 30
calendar days after the date of this Prospectus to purchase up to an aggregate
of 270,000 additional shares of Common Stock solely to cover over-allotments, if
any. If the Underwriters exercise their over-allotment option, the Underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 1,800,000 shares of Common
Stock offered.
The Company and the Selling Stockholders have agreed, with certain limited
exceptions, not to offer, sell, contract to sell, or otherwise dispose of any
securities of the Company that are substantially similar to the Common Stock,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, shares of Common Stock
or any such substantially similar securities for a period of 90 days after the
date of this Prospectus, without the prior written consent of the designated
Underwriters' representative, except that the Company may issue securities
pursuant to the 1995 Stock Plan, Employee Stock Purchase Plan and the Directors'
Option Plan, and upon the exercise of outstanding stock options or purchase
rights under such plans and the Series B Plan. See "Shares Eligible for Future
Sale."
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, Including liabilities under
the Securities Act of 1933, as amended.
In connection with this offering, certain Underwriters may engage in
passive market making transactions in the Common Stock on The Nasdaq National
Market immediately prior to the commencement of sales in this offering, in
accordance with Rule 10b-6A under the Exchange Act. Passive market making
consists of displaying bids on The Nasdaq National Market limited by the bid
prices of independent market makers for a security and making purchases of a
security that are limited by such prices and effected in response to order flow.
Net purchases by a passive market
U-1
<PAGE> 79
maker on each day are limited to a specified percentage of the passive market
maker's average daily trading volume in the Common Stock during a specified
prior period and must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Common Stock at a level above that
which might otherwise prevail and, if commenced, may be discontinued at any
time.
U-2
<PAGE> 80
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Prospectus Summary.................... 3
Risk Factors.......................... 6
The Company........................... 13
Dividend Policy....................... 13
Use of Proceeds....................... 13
Price Range of Common Stock........... 13
Capitalization........................ 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 24
Management............................ 36
Certain Transactions.................. 42
Principal and Selling Stockholders.... 46
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 49
Legal Matters......................... 50
Experts............................... 51
Additional Information................ 51
Index to Consolidated Financial
Statements.......................... F-1
Underwriting.......................... U-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,800,000 SHARES
CKS GROUP, INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
------------------
[CKS LOGO]
------------------
GOLDMAN, SACHS & CO.
DEAN WITTER REYNOLDS INC.
MERRILL LYNCH & CO.
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 81
APPENDIX
The images displayed on these pages are a sample of some of the integrated
marketing communication services provided by the Company to certain of its
clients. With the exception of MCI, Yes! Entertainment and Apple Computer,
each of which generated approximately 20%, 5% and 4% of the Company's revenues,
none of these clients generated more than 4% of the Company's revenues during
the six months ended May 31, 1996. Since the Company's clients generally retain
the Company on a project-by-project basis, there can be no assurance that any of
the Company's existing client relationships will continue in the future. The
sizes and placements of the images are not intended to indicate the relative
revenues generated from the services provided to the clients displayed.
CORPORATE IDENTITY
Development of a creative look and feel that establishes a corporate or brand
personality to differentiate it from the competition.
Picture of two Pixar Corporation business cards.
[Caption] The Company created a corporate identity program for Pixar
Corporation.
PACKAGING
Creative development, design and production of an individual retail package or
integrated retail packaging system.
Picture of a package for McDonald's french fries
lying on top of french fries.
[Caption] The Company was retained to produce a worldwide package design system
for McDonald's Corporation in 1994.
- -------------------------------------------------------------------------------
The CKS Group provides integrated marketing communication programs that utilize
advanced technology solutions and new media.
- -------------------------------------------------------------------------------
NEW MEDIA
Development of media to be delivered to end users in digital form, including
the World Wide Web, the Internet, proprietary online services, CD-ROMs, laptop
PC presentations and interactive kiosks.
Picture of a page from the World Wide Web site for
General Motors and a picture of the interior of an automobile from the site.
[Caption] The Company was hired to design and implement the World Wide Web
site for General Motors in 1996.
ADVERTISING
Broadcast and/or print advertising designed to generate awareness of a company,
product or service over an extended period of time.
Picture of a television set showing a broadcast image of a
man holding a Power Penz(TM) product.
[Caption] The Company created a broadcast television advertisement
launching Power Penz(TM) for Yes! Entertainment.
-----------------------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
NEW MEDIA
Picture of two pages from the Clinique World Wide Web site.
[Caption] The Company designed and implemented a World Wide Web site for
Clinique in 1996. The Company maintains and hosts this site on an ongoing
basis.
Picture of two pages from the Visa World Wide Web site.
[Caption] The Company designed and implemented a World Wide Web site for Visa in
1996. The Company updates this site on an ongoing basis.
Picture of two pages from the Prudential World Wide Web site.
[Caption] The Company designed and implemented a World Wide Web site for
Prudential in 1995. The Company updates this on an ongoing basis.
Picture of still images from Corbis' product demonstration CD-ROM.
[Caption] The Company designed and inplemented a sales promotion and product
demonstration CD-ROM for Corbis in 1996.
Picture of an Evoke CD-ROM and an image from the CD-ROM.
[Caption] The Company produced multiple CD-ROM titles for Evoke in 1995 and
1996 utilizing a reusable object-oriented C++ engine developed by the
Company.
Picture of two pages from Apple Computer's World Wide Web site.
[Caption] The Company developed the design system for Apple Computer's World
Wide Web presence in 1996.
- -------------------------------------------------------------------------------
From strategic positioning to new media, Internet sites to interactive kiosks,
branding to collateral, packaging to direct marketing, CKS has helped give
clients the edge, letting them move faster and with greater impact in
rapidly-changing markets.
- -------------------------------------------------------------------------------
The following customer case studies illustrate the Company's integrated
marketing communications solutions for certain of the Company's customers, in
each case indicating the various services provided by the Company. MCI,
Widmer and YES! Entertainment each generated approximately 20%, 2% and 5%
of the Company's revenues for the six months ended May 31, 1996.
MCI
From February 1996 to June 1996, CKS provided an integrated marketing
communications program for MCI One, a fully integrated communication service
which provides consumers with long distance, paging, cellular, personal (800),
calling card and Internet services for one flat fee per month.
Series of pictures containing product packages, sales collateral, a service
welcome kit, and an Internet home page and an Internet site design.
[PHOTO]
[Caption] BRAND IDENTITY
[PHOTO]
[Caption] PROGRAM DEPICTION
[PHOTO]
[Caption] SALES COLLATERAL
[PHOTO]
[Caption] SERVICE WELCOME KIT
[PHOTO]
[Caption] PRODUCT PACKAGING & MANUAL
[PHOTO]
[Caption] INTERNET HOME PAGE
[PHOTO]
[Caption] INTERNET SITE DESIGN
- -------------------------------------------------------------------------------
WIDMER BROTHERS
From August 1995 to June 1996, CKS completed the identity, advertising,
packaging, collateral, an Internet site and media placement for Widmer Brothers
Brewing Company to promote its entry into the bottled beer market.
Series of pictures containing a bottle cap, four bottles of beer, three
cardboard beer cases, cardboard point of purchase tents, advertising posters and
pictures of an Internet home page and an Internet site design.
[PHOTO]
[Caption] CORPORATE IDENTITY AND BRANDING
[PHOTO]
[Caption] PRODUCT BRANDING & LABEL DESIGN
[PHOTO]
[Caption] PACKAGING DESIGN
[PHOTO]
[Caption] POINT OF PURCHASE DESIGN
[PHOTO]
[Caption] ADVERTISING POSTERS
[PHOTO]
[Caption] INTERNET HOME PAGE
[PHOTO]
[Caption] INTERNET SITE DESIGN
- -------------------------------------------------------------------------------
YES! ENTERTAINMENT
From August 1994 to June 1996, CKS has helped position a number of new
interactive toys for children, including the Yak Bak, Yak Bak II, Yak Bak sfx,
Mega Mouth, Pull the Pals and Power Penz products.
Still picture of a child from a research video.
[PHOTO]
[Caption] TRADE COMMUNICATIONS BROCHURE
Series of pictures containing a product brochure, the Yak Bak product, Yak Bak
product packages, a television containing an image of a child and text from a
broadcast commercial, a television containing an image of a man holding a Power
Penz product from a broadcast commercial, a television containing an image of a
child holding a Mega Mouth product from a broadcast commercial and a television
containing an image of a Yak Bak sfx from a broadcast commercial, product names,
printed product literature, a product brochure and a product package; and still
picture of a child's hand and a man from the neck up from a broadcast
commercial.
[PHOTO]
[Caption] PRODUCT LOGO DESIGN
[PHOTO]
[Caption] PACKAGE DESIGN
[PHOTO]
[Caption] 30-SECOND BROADCAST COMMUNICATIONS
[PHOTO]
[Caption] 30-SECOND BROADCAST COMMUNICATIONS
[PHOTO]
[Caption] 30-SECOND BROADCAST COMMUNICATIONS
[PHOTO]
[Caption] 30-SECOND BROADCAST COMMUNICATIONS
USE OF TECHNOLOGY
Picture of a man operating a personal computer.
[Caption] CKS employs technology to maximize its ability to provide high
quality, integrated marketing and communication services to its clients in a
timely and cost-effective manner.
DATA CENTER
Picture of computer hardware in the Company's data center.
[Caption] CKS operates a full 24 hours by 7 days a week data center for its
internal use and for providing Internet hosting for the Company's clients.
CKS PICTURES
Picture of a production studio and sound stage.
[Caption] CKS Pictures' approximate 22,000-square-foot facility, located in
Cupertino, California, houses digital video production, broadcast and
multimedia technology, including a fully equipped sound stage. This facility
also features satellite and fiber link capabilities.
- -------------------------------------------------------------------------------
CKS is structured to create, manage and distribute integrated marketing
communications through traditional and new media.
- -------------------------------------------------------------------------------
The Company maintains offices in the following locations: Campbell, Cupertino,
New York, Portland (Oregon), San Francisco and Washington D.C. The offices are
connected by a network to facilitate interaction among and capitalize upon the
resources of the various branch offices of the Company. Each computer
represents approximately two employees (either full-time regular or full-time
equivalent temporary) as of May 31, 1996.
Graphic picture Graphic picture of
of 18 1/2 computers 19 computers
San Francisco Silicon Valley -- Campbell
Graphic picture Graphic picture of Graphic picture of
of 10 1/2 computers computer server 54 computers
Portland CKS Central Server Silicon Valley -- Cupertino
Graphic picture Graphic picture of Graphic picture of
of 5 1/2 computers 4 computers 3 computers
Washington, D.C. New York Los Angeles
--------------------
Table with a header setting forth the following services provided by the
Company: Strategic Corporate & Product Positioning, Corporate ID & Product
Branding, New Media, Packaging, Collateral Systems, Advertising, Direct Mail,
Consumer Promotions, Trade Promotions and Media Placement Services. Alongside
the table is a list of certain of the Company's clients. In the body of the
table, there are boxes for each client, which boxes correspond to the services
provided, as applicable, by the Company to each such client.
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company will bear no expenses in connection with any sale or other
distribution by any Selling Stockholder of the shares being registered other
than the expenses of preparation of this Registration Statement and the
Prospectus included in this Registration Statement and the SEC registration fee.
Such expenses are set forth in the following table. All of the amounts shown are
estimates except the Securities and Exchange Commission ("SEC") registration
fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 29,000
NASD filing fees................................................. $ 9,000
Printing and engraving expenses.................................. $150,000
Transfer Agent and registrar fees................................ $ 5,000
Blue Sky fees and expenses....................................... $ 10,000
Legal fees and expenses.......................................... $150,000
Accounting fees and expenses..................................... $150,000
Miscellaneous expenses........................................... $ 22,000
--------
Total.................................................. $525,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145(a) of the Delaware General Corporation Law (the "Corporation
Law") provides in relevant part that "[a] corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he 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 expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful." With respect to derivative actions, Section 145(b) of the
Corporation Law provides in relevant part that "[a] corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor . . . [by reason of his service
in one of the capacities specified in the preceding sentence] against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expense which the Court of Chancery
and such other court shall deem proper."
Article V of the Company's Bylaws provides that the Company may indemnify
each person who is or was a director of the Company to the full extent permitted
by Corporation Law. Such Article also provides that the Company may, but is not
required to, indemnify its employees and agents (other than directors and
officers) to the extent and in the manner permitted by the Corporation Law.
II-1
<PAGE> 83
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
the Underwriters of the Registrant, its directors and officers and other persons
for certain liabilities, including liabilities arising under the Securities Act
of 1933.
The Registrant has entered into an indemnification agreement with each of
its directors and officers and intends to maintain insurance for the benefit of
its directors and officers insuring such persons against certain liabilities,
including liabilities under the securities laws.
See also the undertakings set out in response to Item 17 herein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since December 1, 1994, Registrant has sold and issued the following
securities which were not registered under the Securities Act:
1. On December 1, 1994, the Registrant issued 8,442,784 shares of its
Common Stock to certain shareholders of CKS Partners, Inc., CKS Pictures, Inc.
and CKS Interactive, Inc. (collectively, the "Subsidiaries"), in exchange for
all shares of the Subsidiaries held by such shareholders. No additional
consideration was paid for such shares of Common Stock. The persons who received
shares of Common Stock pursuant to such share exchange were William T. Cleary
(2,571,265 shares), Mark D. Kvamme (2,733,744 shares), Thomas K. Suiter
(2,733,744 shares), the Pierre R. and Christine E. Lamond Trust Dated 11/22/85
(277,478 shares), Carlton H. Baab (110,305 shares) Stanley E. Doty (11,373
shares) and the Sundheim Family Trust (4,875 shares).
2. On January 9, 1995, the Registrant issued 1,057,216 shares of its Common
Stock to certain shareholders of the Subsidiaries, in exchange for all shares of
the Subsidiaries held by such shareholders. No additional consideration was paid
for such shares of Common Stock. The persons who received shares of Common Stock
pursuant to such shares exchange were David R. Siskin (385,420 shares), Robert
J. Gemell (358,496 shares), Bernhard Schroeder (58,631 shares), Jill K. Savini
(57,749 shares), Jay R. Tannenbaum (61,321 shares), Wade H. Snell III (53,174),
Thomas A. Marchionna (16,248 shares), Brian Fortune (32,496 shares), Christopher
Briggs (14,770 shares), Philip Battat (14,770 shares) and Mark Loncar (7,385
shares).
3. On January 27, 1995 the Registrant sold and issued 739,437 shares of
Series A Common Stock to The Interpublic Group of Companies, Inc. ("IPG") for
$2,000,000 in cash. On such date, the Registrant also issued to IPG 2,375,000
shares of Series A Common Stock in exchange for 2,375,000 shares of Common Stock
purchased by IPG from certain shareholders of the Registrant. On such date, Mark
D. Kvamme, William T. Cleary and Thomas K. Suiter sold 703,199, 703,198 and
703,198 shares of Common Stock, respectively, to IPG. For such sales, Messrs.
Kvamme, Cleary and Suiter received cash payment from IPG in the amounts of
$1,184,335.16, $1,184,333.47 and $1,184,333.47. As additional consideration for
such sale of stock, IPG agreed to pay to each of Messrs. Kvamme, Cleary and
Suiter 29.6% of the following contingent amounts:
(a) $1.5 million in the event that the Company's financial statements
for the 1995 fiscal year reflect a gross margin of more than $21.4 million.
(b) If the Company's gross margin for the 1995 fiscal year is less
than $21.4 million, $1.5 million minus one fourth of the amount by which
such gross margin is less than $21.4 million.
(c) $1.5 million in the event that the Company's financial statements
for the 1996 fiscal year reflect a gross margin of more than $32.1 million.
(d) If the Company's gross margin for the 1996 fiscal year is less
than $32.1 million, $1.5 million minus one fourth of the amount by which
such gross margin is less than $32.1 million.
(e) In the event that the Company's gross margin in the 1995 fiscal
year is less than $21.4 million, and the Company's gross margin in the 1996
fiscal year is greater than $32.1 million, an amount equal to one fourth
the amount by which the Company's gross margin for the 1996
II-2
<PAGE> 84
fiscal year exceeds $32.1 million, up to a maximum equal to the amount by
which the payment previously made based on the Company's gross margin for
the 1995 fiscal year was less than $1.5 million.
4. On August 29, 1995, the Registrant issued 31,018 shares of Common Stock
to IPG for $69,790.50 in cash.
5. On October 16, 1995, William T. Cleary, Thomas K. Suiter and Jill K.
Savini sold 201,406, 276,654, and 3,000 shares of Common Stock of the
Registrant, respectively, to IPG. Messrs. Cleary and Suiter and Ms. Savini
received $1,478,320, $2,030,640 and $22,020, respectively, from IPG in
consideration for the purchase of such shares. No other consideration was
exchanged in this transaction.
6. Between June 22, 1995 and December 15, 1995, the Registrant issued to
officers, employees and directors of the Registrant options to purchase a total
of 735,822 shares of Series B Common Stock of the Registrant. All such options
were issued under the Registrant's 1995 Series B Common Stock Plan. No cash
consideration was received by the Registrant.
For additional information concerning certain of these equity investment
transactions, reference is made to the information continued under the caption
"Certain Transactions" in the form of Prospectus included herein.
The issuances of the securities in the transactions described in paragraphs
1, 2, 3, 4 and 5 above were deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act and Regulation
D promulgated thereunder as transactions by an issuer not involving any public
offering. The securities were sold to a limited number of persons with no
general soliciting or advertising. The purchasers were sophisticated investors
with access to all relevant information necessary to evaluate the investment who
represented to the Registrant that the shares were being acquired for
investment. The option issuances described in paragraph 6 above were made
pursuant to the exemption from Registration under the Securities Act afforded by
Rule 701 promulgated thereunder as transactions pursuant to a compensatory
benefit plan or a written contract relating to compensation.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- ------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Underwriting Agreement.
3.1* -- Certificate of Incorporation of the Registrant.
3.2* -- Bylaws of the Registrant.
4.1* -- Form of Stock Certificate.
5.1** -- Opinion and Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, with respect to the Common Stock being registered.
10.1* -- Form of Indemnification Agreement entered into between Registrant and its
officers and directors.
10.2* -- The Registrant's 1995 Series B Common Stock Plan, as amended.
10.3* -- The Registrants 1995 Stock Plan.
10.4* -- The Registrant's 1995 Employee Stock Purchase Plan.
10.5* -- The Registrant's 1995 Director Stock Option Plan.
10.6* -- Amended and Restated Purchase Agreement dated as of October 17, 1995 by and
among the Registrant, The Interpublic Group of Companies, Inc. and certain
stockholders of the Registrant.
</TABLE>
II-3
<PAGE> 85
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- ------------------------------------------------------------------------------
<S> <C> <C>
10.7* -- Shareholder Rights Agreement dated January 13, 1995 by and among the
Registrant, the Interpublic Group of Companies, Inc. and certain stockholders
of the Registrant.
10.8* -- Lease Agreement dated as of March 8, 1995 between Registrant and Devcon
Associates XVI for Registrant's headquarters facility at 10441 Bandley,
Cupertino, CA.
10.9* -- Voting Agreement dated as of January 27, 1995 by and among Registrant, The
Interpublic Group of Companies, Inc. and certain stockholders of Registrant.
10.10* -- Exchange Agreement, dated as of December 1, 1994 among Registrant and certain
stockholders of CKS Partners, Inc., CKS Pictures, Inc. and CKS Interactive,
Inc.
10.11* -- Stock Purchase Agreement among the Registrant, The Interpublic Group of
Companies, Inc. and certain stockholders of the registrant dated October 16,
1995.
10.12* -- Services Agreement effective as of March 1, 1995 among CKS Partners, Inc.,
10.13* -- CKS Interactive, Inc. and MCI Telecommunications, Inc. Management Service
Agreement effective as of January 27, 1995 by and between The Interpublic
Group of Companies, Inc. and the Registrant.
10.14* -- Letter agreement dated October 14, 1995 between the Registrant and The
Interpublic Group of Companies, Inc. ("IPG") regarding Shelf Registration
Statement to be filed to enable IPG to sell shares of Common Stock of
Registrant.
11.1 -- Statement Regarding Computation of Earnings Per Share.
16.1* -- Letter re: Change in Certifying Accountant.
23.1 -- Consent and Independent Auditors' Report on Schedule (See page S-1).
24.1** -- Power of Attorney.
24.2 -- Power of Attorney executed by Michael B. Slade.
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed as an Exhibit to Registrant's Registration Statement on Form
S-1 (File No. 33-98312), which became effective December 14, 1995.
** Previously filed.
(b) Financial Statement Schedule.
Schedule II -- Valuation and Qualifying Accounts (included as page S-2)
All other schedules are omitted because they are not required, are not
applicable or the information is included in the Consolidated Financial
Statements or notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions referenced in Item 14 of this Registration Statement
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, Officer or
controlling persons of the Registrant in the successful defense of any action,
suite or proceeding) is asserted by such director, Officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the
II-4
<PAGE> 86
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) For the purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(2) That, for the purpose of determining any liability under the Act,
each post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the Closing, as specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-5
<PAGE> 87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Cupertino,
State of California, on June 7, 1996.
CKS GROUP, INC.
By: /s/ CARLTON H. BAAB
------------------------------------
Carlton H. Baab
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- -------------
<S> <C> <C>
MARK D. KVAMME* Chairman and Chief Executive June 7, 1996
- --------------------------------------------- Officer (Principal Executive
Mark D. Kvamme Officer)
/s/ CARLTON H. BAAB Executive Vice President and June 7, 1996
- --------------------------------------------- Chief Financial Officer
Carlton H. Baab (Principal Financial and
Accounting Officer)
THOMAS K. SUITER* Director June 7, 1996
- ---------------------------------------------
Thomas K. Suiter
ALEXANDRE BALKANSKI* Director June 7, 1996
- ---------------------------------------------
Alexandre Balkanski
PIERRE R. LAMOND* Director June 7, 1996
- ---------------------------------------------
Pierre R. Lamond
</TABLE>
II-6
<PAGE> 88
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- -------------
<S> <C> <C>
BARRY R. LINSKY* Director June 7, 1996
- ---------------------------------------------
Barry R. Linsky
MICHAEL B. SLADE* Director June 7, 1996
- ---------------------------------------------
Michael Slade
*By: /s/ CARLTON H. BAAB June 7, 1996
----------------------------------------
Carlton H. Baab
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 89
CKS GROUP, INC.
REGISTRATION STATEMENT ON FORM S-1
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT TITLE NUMBER
- ------- ------------------------------------------------------------------ ----------
<S> <C> <C> <C>
1.1 -- Underwriting Agreement.
3.1* -- Certificate of Incorporation of the Registrant.
3.2* -- Bylaws of the Registrant.
5.1** -- Opinion and Consent of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, with respect to the Common Stock being
registered.
10.1* -- Form of Indemnification Agreement entered into between Registrant
and its officers and directors.
10.2* -- The Registrant's 1995 Series B Common Stock Plan, as amended.
10.3* -- The Registrant's 1995 Stock Plan.
10.4* -- The Registrant's 1995 Employee Stock Purchase Plan.
10.5* -- The Registrant's 1995 Director Stock Option Plan.
10.6* -- Amended and Restated Purchase Agreement dated as of October 17,
1996 by and among the Registrant, The Interpublic Group of
Companies, Inc. and certain stockholders of the Registrant.
10.7* -- Shareholder Rights Agreement dated as of January 13, 1995 by and
among the Registrant, The Interpublic Group of Companies, Inc. and
certain stockholders of the Registrant.
10.8* -- Lease Agreement dated as of March 8, 1995 between Registrant and
Devcon Associates XVI for Registrant's headquarters facility at
10441 Bandley, Cupertino, CA.
10.9* -- Voting Agreement dated as of January 27, 1995 by and among the
Registrant, The Interpublic Group of Companies, Inc. and certain
stockholders of the Registrant.
10.10* -- Exchange Agreement, dated as of December 1, 1994 among Registrant
and certain stockholders of CKS Partners, Inc., CKS Pictures, Inc.
and CKS Interactive, Inc.
10.11* -- Stock Purchase Agreement among the Registrant, The Interpublic
Group of Companies, Inc. and certain stockholders of the
Registrant dated October 16, 1995.
10.12* -- Services Agreement effective as of March 1, 1995 among CKS
Partners, Inc., CKS Interactive, Inc. and MCI Telecommunications
Corporation.
</TABLE>
<TABLE>
<S> <C> <C> <C>
10.13* -- Management Service Agreement effective as of January 27, 1995 by
and between The Interpublic Group of Companies, Inc. and the
Registrant.
10.14* -- Letter agreement dated October 14, 1995 between the Registrant and
The Interpublic Group of Companies, Inc. ("IPG") regarding Shelf
Registration Statement to be filed to enable IPG to sell shares of
Common Stock of Registrant.
11.1 -- Statement regarding Computation of Earnings Per Share.
16.1 * -- Letter re: Change in Certifying Accountant.
</TABLE>
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT TITLE NUMBER
- ------- ------------------------------------------------------------------ ----------
<S> <C> <C> <C>
23.1 -- Consent and Independent Auditors' Report on Schedule (See page
S-1).
24.1** -- Power of Attorney.
24.2 -- Power of Attorney executed by Michael B. Slade.
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed as an Exhibit to Registrant's Registration Statement on Form
S-1 (File No. 33-98312), which became effective December 14, 1995.
** Previously filed.
<PAGE> 91
EXHIBIT 11.1
CKS GROUP, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF
EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
NOVEMBER 30, -------------------
----------------------------- MAY 31, MAY 31,
1993 1994 1995 1995 1996
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net income.............................. $ 279 $ 288 $ 1,366 $ 409 $ 2,045
------ ------ ------- ------- -------
Weighted average number of common shares
outstanding........................... 7,311 8,775 10,140 10,051 12,513
Number of common stock equivalents as a
result of stock options outstanding
using the treasury stock method....... -- -- 198 -- 634
Number of common shares issued and stock
options granted in accordance with
Staff Accounting Bulletin No. 83...... 1,171 1,169 388 669 --
------ ------ ------- ------- -------
Shares used in per share computation.... 8,482 9,944 10,726 10,720 13,147
------ ------ ------- ------- -------
Net income per share.................... $ 0.03 $ 0.03 $ 0.13 $ 0.04 $ 0.16
====== ====== ======= ======= =======
</TABLE>
<PAGE> 92
CONSENT AND INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors of
CKS Group, Inc.:
The audits referred to in our report dated December 15, 1995, except as to
Note 5 which is as of December 20, 1995, included the related financial
statement schedule as of November 30, 1995, and for each of the years in the
three-year period ended November 30, 1995, included in this registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the use of our report dated June 6, 1996 on the financial
statements of Schell/Mullaney, Inc. included herein. We also consent to the use
of our reports dated December 15, 1995, except as to Note 5 which is as of
December 20, 1995, on the consolidated financial statements and schedule of CKS
Group, Inc. included herein and to the reference to our firm under the headings
"Selected Consolidated Financial Data" and "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
San Jose, California
June 6, 1996
S-1
<PAGE> 93
EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Carlton H. Baab and Mark D. Kvamme and each of
them singly, as true and lawful attorneys-in-fact and agents will full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any or all amendments to CKS Group, Inc.'s
Registration Statement on Form S-1 (File NO. 333-2178) (including post-effective
amendments), and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
granting unto said attorneys-in-fact and agents and full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the foregoing, as full to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his substitute, may lawfully do
or cause to be done by virtue hereof.
By: /s/ MICHAEL SLADE
------------------------------------
Michael Slade
Date: June 7, 1996
<PAGE> 94
SCHEDULE II
CKS GROUP INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
ACCOUNT DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ---------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended November 30, 1993
Allowance for doubtful accounts....... $ -- $ 30 -- $ (10) $ 20
Year ended November 30, 1994
Allowance for doubtful accounts....... 20 $377 -- $ (313) $ 84
Year ended November 30, 1995
Allowance for doubtful accounts....... 84 $869 -- $ (85) $868
</TABLE>
S-2
<PAGE> 1
EXHIBIT 1.1
CKS GROUP, INC.
COMMON STOCK,
$0.001 PAR VALUE PER SHARE
----------
UNDERWRITING AGREEMENT
, 1996
-------
Goldman, Sachs & Co.
Dean Witter Reynolds Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
CKS Group, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
131,500 shares and, at the election of the Underwriters, up to 270,000
additional shares of Common Stock, $.001 par value per share ("Stock"), of the
Company and the stockholders of the Company named in Schedule II hereto (the
"Selling Stockholders") propose, subject to the terms and conditions stated
herein, to sell to the Underwriters an aggregate of 1,668,500 shares of Stock.
The aggregate of 1,800,000 shares to be sold by the Company and the Selling
Stockholders is herein called the "Firm Shares" and the aggregate of 270,000
additional shares to be sold by the Company is herein called the "Optional
Shares." The Firm Shares and the Optional Shares that the Underwriters elect to
purchase pursuant to Section 2 hereof are herein collectively called the
"Shares."
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters and the Selling Stockholders that:
(i) A registration statement on Form S-1 (File No. 333-2178)
(the "Initial Registration Statement") in respect of the Shares has
been filed with the Securities and Exchange Commission (the
"Commission"); the Initial Registration Statement, and any
post-effective amendment thereto, each in the form heretofore delivered
to you, and, excluding exhibits thereto, to you for each of the other
Underwriters, have been declared effective by the Commission in such
form, other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended
(the "Act"), which became effective upon filing, no other document with
respect to the Initial Registration Statement has heretofore been filed
with the Commission; and no stop order suspending the effectiveness of
the Initial Registration Statement, any post-effective amendment
thereto or the Rule 462(b) Registration Statement, if any, has been
issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in
the Initial Registration Statement or filed with the Commission
pursuant to Rule 424(a) of the rules and regulations of the Commission
under the Act, is hereinafter called a "Preliminary Prospectus"; the
various parts
<PAGE> 2
of the Initial Registration Statement and the Rule 424(b) Registration
Statement, if any, including all exhibits thereto and including the
information contained in the form of final prospectus filed with the
Commission pursuant to Rule 424(b) under the Act in accordance with
Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to
be part of the Initial Registration Statement at the time it was
declared effective or such part of the Rule 462(b) Registration
Statement, if any, became or hereafter becomes effective, each as
amended at the time such part of the registration statement became
effective, are hereinafter collectively called the "Registration
Statement"; and such final prospectus, in the form first filed pursuant
to Rule 424(b) under the Act, is hereinafter called the "Prospectus");
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use
therein or by a Selling Stockholder expressly for use in the
preparation of the answers therein to Items 7 and 11(l) of Form S-1;
(iii) The Registration Statement conforms, and the Prospectus
and any further amendments or supplements to the Registration Statement
or the Prospectus will conform, in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder and do not and will not, as of the applicable effective date
as to the Registration Statement and any amendment thereto and as of
the applicable filing date as to the Prospectus and any amendment or
supplement thereto, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter
through Goldman, Sachs & Co. expressly for use therein or by a Selling
Stockholder expressly for use in the preparation of the answers therein
to Items 7 and 11(l) of Form S-1;
(iv) Neither the Company nor any of its subsidiaries has
sustained since the date of the latest audited financial statements
included in the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or in
the short-term or long-term debt of the Company or any of its
subsidiaries or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity
or results of operations of the Company and its subsidiaries, otherwise
than as set forth or contemplated in the Prospectus;
(v) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title
to all personal property owned by them, in each case free and clear of
all liens, encumbrances and defects except such as are
-2-
<PAGE> 3
described in the Prospectus or such as do not materially affect the
value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by
the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company and its subsidiaries;
(vi) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, or is subject to no
material liability or disability by reason of the failure to be so
qualified in any such jurisdiction; and each subsidiary of the Company
has been duly incorporated and is validly existing as a corporation in
good standing under the laws of its jurisdiction of incorporation;
(vii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully
paid and non-assessable and conform to the description of the Stock
contained in the Prospectus; and all of the issued shares of capital
stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and (except
for directors' qualifying shares) are owned directly or indirectly by
the Company, free and clear of all liens, encumbrances, equities or
claims; the holders of outstanding shares of capital stock of the
Company are not entitled to preemptive or other rights to acquire the
Shares which have not been complied with; there are no outstanding
securities convertible into or exchangeable for, or warrants, rights or
options to purchase from the Company, or obligations of the Company to
issue, shares of Common Stock or any other class of capital stock of
the Company (except as set forth in the Prospectus under "Description
of Capital Stock"); and there are no restrictions on subsequent
transfers of the Shares;
(viii) The unissued Shares to be issued and sold by the Company
to the Underwriters hereunder have been duly and validly authorized
and, when issued and delivered against payment therefor as provided
herein, will be duly and validly issued and fully paid and
non-assessable and will conform to the description of the Stock
contained in the Prospectus;
(ix) The issue and sale of the Shares to be sold by the
Company and the compliance by the Company with all of the provisions of
this Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries is bound
or to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation
of the provisions of the Certificate of Incorporation or By-laws of the
Company or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any
of its subsidiaries or any of their properties; and no consent,
approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the
issue and sale of the Shares or the consummation by the Company of the
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<PAGE> 4
transactions contemplated by this Agreement, except the registration
under the Act of the Shares and such consents, approvals,
authorizations, registrations or qualifications as may be required
under state securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters;
(x) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default
in the performance or observance of any material obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which
it is a party or by which it or any of its properties may be bound;
(xi) The statements set forth in the Prospectus under the
caption "Description of Capital Stock," insofar as they purport to
constitute a summary of the terms of the Stock, and under the caption
"Underwriting," insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete and
fair;
(xii) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any property of the Company
or any of its subsidiaries is the subject which, if determined
adversely to the Company or any of its subsidiaries, would individually
or in the aggregate have a material adverse effect on the current or
future consolidated financial position, stockholders' equity or results
of operations of the Company and its subsidiaries; and, to the best of
the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(xiii) Neither the Company nor any of its subsidiaries has
taken, directly or indirectly, any action which was designed to or
which has constituted or which might reasonably be expected to cause or
result in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares;
(xiv) Except as disclosed in the Prospectus, the Company is not
subject to any agreements or arrangements which restrict the Company's
ability to engage in business with or to compete with any entity or any
type of business;
(xv) The Company has complied with all agreements or
arrangements which grant registration rights to holders of the
Company's securities;
(xvi) Except as disclosed in the Prospectus, each of the
Company and its subsidiaries owns or possesses adequate licenses or
other rights to use all patents, patent licenses, trademarks, trade
names, service marks, service names, copyrights and other intellectual
property rights ("Intellectual Property") necessary to carry on its
business as presently conducted and neither the Company nor any of its
subsidiaries has received any notice of infringement or conflict with
asserted rights of others with respect to the Intellectual Property
which, singly or in the aggregate, if the subject of any unfavorable
decision, ruling or finding, would result in a material adverse effect
on the business, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole;
(xvii) The Company and each of its subsidiaries have all
licenses, franchises, permits, authorizations, approvals and orders and
other concessions of and from all governmental authorities that are
necessary to own or lease their other properties and conduct their
businesses as described in the Prospectus;
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<PAGE> 5
(xviii) The Stock, including the Shares, is listed for quotation
on the Nasdaq National Market ("NASDAQ");
(xix) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company" or
an entity "controlled" by an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
(xx) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba within the meaning of Section 517.075, Florida
Statutes; and
(xxi) KPMG Peat Marwick LLP, who have certified certain
financial statements of the Company and its subsidiaries, are
independent public accountants as required by the Act and the rules and
regulations of the Commission thereunder.
(b) Each of the Selling Stockholders severally represents and
warrants to, and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders
necessary for the execution and delivery by such Selling Stockholder of
this Agreement and, if the Selling Stockholder is listed under Part B
or Part C of Schedule II hereto, the Power of Attorney and the Custody
Agreement hereinafter referred to, and for the sale and delivery of the
Shares to be sold by such Selling Stockholder hereunder, have been
obtained; and such Selling Stockholder has full right, power and
authority to enter into this Agreement and, if the Selling Stockholder
is listed under Part B or Part C of Schedule II hereto, the Power of
Attorney and the Custody Agreement, and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder hereunder;
(ii) The sale of the Shares to be sold by such Selling
Stockholder hereunder and the compliance by such Selling Stockholder
with all of the provisions of this Agreement and, if the Selling
Stockholder is listed under Part B or Part C of Schedule II hereto, the
Power of Attorney and the Custody Agreement, and the consummation of
the transactions herein and therein contemplated will not conflict with
or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any statute, indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which
such Selling Stockholder is a party or by which such Selling
Stockholder is bound or to which any of the property or assets of such
Selling Stockholder is subject, nor will such action result in any
violation of the provisions of the Certificate of Incorporation or
By-laws of such Selling Stockholder if such Selling Stockholder is a
corporation, the Partnership Agreement of such Selling Stockholder if
such Selling Stockholder is a partnership or any statute or any order,
rule or regulation of any court or governmental agency or body having
jurisdiction over such Selling Stockholder or the property of such
Selling Stockholder;
(iii) Such Selling Stockholder has, and immediately prior to
each Time of Delivery (as defined in Section 4 hereof) such Selling
Stockholder will have, legal and beneficial ownership of the Shares to
be sold by such Selling Stockholder hereunder, free and clear of all
liens, encumbrances, equities or claims; and, upon delivery of such
Shares and payment therefor pursuant hereto, the Underwriters will
acquire legal and beneficial ownership of such Shares, free and clear
of all liens, encumbrances, equities or claims;
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<PAGE> 6
(iv) During the period beginning from the date hereof and
continuing to and including the date 90 days after the date of the
Prospectus, not to offer, sell, contract to sell or otherwise dispose
of, except as provided hereunder, any securities of the Company that
are substantially similar to the Shares, including but not limited to
any securities that are convertible into or exchangeable for, or that
represent the right to receive, Stock or any such substantially similar
securities (other than pursuant to employee stock option or employee
stock purchase plans existing on, or upon the conversion or exchange of
convertible or exchangeable securities outstanding as of, the date of
this Agreement), without your prior written consent;
(v) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares;
(vi) To the extent that any statements or omissions made in
the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto are made in reliance upon and in
conformity with written information furnished to the Company by such
Selling Stockholder expressly for use therein, such Preliminary
Prospectus and the Registration Statement did, and the Prospectus and
any further amendments or supplements to the Registration Statement and
the Prospectus, when they become effective or are filed with the
Commission, as the case may be, will conform in all material respects
to the requirements of the Act and the rules and regulations of the
Commission thereunder and will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading;
(vii) In order to document the Underwriters' compliance with
the reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Stockholder will deliver to you prior to or
at the First Time of Delivery (as hereinafter defined) a properly
completed and executed United States Treasury Department Form W-9 (or
other applicable form or statement specified by Treasury Department
regulations in lieu thereof);
(viii) Certificates in negotiable form representing all of the
Shares to be sold by each Selling Stockholder listed under Part B or
Part C of Schedule II hereto have been placed in custody under a
Custody Agreement, in the form heretofore furnished to you (the
"Custody Agreement"), duly executed and delivered by such Selling
Stockholder to First Interstate Bank of California, as custodian (the
"Custodian"), and each such Selling Stockholder has duly executed and
delivered a Power of Attorney, in the form heretofore furnished to you
(the "Power of Attorney"), appointing the persons indicated in Schedule
II hereto, and each of them, as such Selling Stockholder's
attorneys-in-fact (the "Attorneys-in-Fact") with authority to execute
and deliver this Agreement on behalf of such Selling Stockholder, to
determine the purchase price to be paid by the Underwriters to such
Selling Stockholders as provided in Section 2 hereof, to authorize the
delivery of the Shares to be sold by such Selling Stockholder hereunder
and otherwise to act on behalf of such Selling Stockholder in
connection with the transactions contemplated by this Agreement and the
Custody Agreement;
(ix) The Shares represented by the certificates held in
custody for each Selling Stockholder listed under Part B or Part C of
Schedule II hereto under the Custody
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<PAGE> 7
Agreement are subject to the interests of the Underwriters hereunder;
the arrangements made by each such Selling Stockholder for such
custody, and the appointment by such Selling Stockholder of the
Attorneys-in-Fact by the Power of Attorney, are to that extent
irrevocable; the obligations of the Selling Stockholders hereunder
shall not be terminated by operation of law, whether by the death or
incapacity of any individual Selling Stockholder or, in the case of an
estate or trust, by the death or incapacity of any executor or trustee
or the termination of such estate or trust, or in the case of a
partnership or corporation, by the dissolution of such partnership or
corporation, or by the occurrence of any other event; if any individual
Selling Stockholder or any such executor or trustee should die or
become incapacitated, or if any such estate or trust should be
terminated, or if any such partnership or corporation should be
dissolved, or if any other such event should occur, before the delivery
of the Shares hereunder, certificates representing the Shares shall be
delivered by or on behalf of the Selling Stockholders in accordance
with the terms and conditions of this Agreement and, with respect to
any Selling Stockholder listed under Part B or Part C of Schedule II
hereto, of the Custody Agreements; and actions taken by the
Attorneys-in-Fact pursuant to the Powers of Attorney shall be as valid
as if such death, incapacity, termination, dissolution or other event
had not occurred, regardless of whether or not the Custodian, the
Attorneys-in-Fact, or any of them, shall have received notice of such
death, incapacity, termination, dissolution or other event; and
(x) Certificates in negotiable form representing all of the
Shares to be sold by the Selling Stockholder listed under Part A of
Schedule II hereto shall be delivered to First Interstate Bank of
California, as transfer agent of the Company, on the business day
following the date of this Agreement, duly endorsed for transfer in
accordance with the terms of this Agreement and accompanied by such
other documents as may be necessary to effect such transfer, in form
and substance satisfactory to you.
2. Subject to the terms and conditions herein set forth, (a) the
Company and each of the Selling Stockholders agree, severally and not jointly,
to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company and each of the Selling
Stockholders, at a purchase price per share of $__________, the number of Firm
Shares (to be adjusted by you so as to eliminate fractional shares) determined
by multiplying the aggregate number of Shares to be sold by the Company and each
of the Selling Stockholders as set forth opposite their respective names in
Schedule II hereto by a fraction, the numerator of which is the aggregate number
of Firm Shares to be purchased by such Underwriter as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the aggregate number of Firm Shares to be purchased by all of the Underwriters
from the Company and all of the Selling Stockholders hereunder and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company agrees to sell to each
of the Underwriters, and each of the Underwriters agrees, severally, to purchase
from the Company, at the purchase price per share set forth in clause (a) of
this Section 2, that portion of the number of Optional Shares as to which such
election shall have been exercised (to be adjusted by you so as to eliminate
fractional shares) determined by multiplying such number of Optional Shares by a
fraction, the numerator of which is the maximum number of Optional Shares which
such Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to purchase
hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 270,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the
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<PAGE> 8
sole purpose of covering overallotments in the sale of the Firm Shares. Any such
election to purchase Optional Shares may be exercised only by written notice
from you to the Company, given within a period of 30 calendar days after the
date of this Agreement and setting forth the aggregate number of Optional Shares
to be purchased and the date on which such Optional Shares are to be delivered,
as determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Company otherwise agree in
writing, earlier than two or later than ten business days after the date of such
notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company and the Selling Stockholders shall be delivered by or on
behalf of the Company and the Selling Stockholders to Goldman, Sachs & Co.,
through the facilities of the Depository Trust Company ("DTC"), for the account
of such Underwriter, against payment by or on behalf of such Underwriter of the
purchase price therefor by certified or official bank check or checks, payable
to the order of the Company and the Custodian in New York Clearing House (same
day) funds. The Company will cause the certificates representing the Shares to
be made available for checking and packaging at least twenty-four hours prior to
the Time of Delivery (as defined below) with respect thereto at the office of
DTC or its designated custodian (the "Designated Office"). The time and date of
such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m.,
New York time, on __________, 1996 or such other time and date as Goldman, Sachs
& Co., the Company and the Selling Stockholders may agree upon in writing, and,
with respect to the Optional Shares, 9:30 a.m., New York time, on the date
specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs
& Co. of the Underwriters' election to purchase such Optional Shares, or such
other time and date as Goldman, Sachs & Co. and the Company may agree upon in
writing. Such time and date for delivery of the Firm Shares is herein called the
"First Time of Delivery," such time and date for delivery of the Optional
Shares, if not the First Time of Delivery, is herein called the "Second Time of
Delivery," and each such time and date for delivery is herein called a "Time of
Delivery."
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(l) hereof, will be delivered at the offices
of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, 650 Page Mill
Road, Palo Alto, California 94304 (the "Closing Location"), and the Shares will
be delivered at the Designated Office, all at such Time of Delivery. A meeting
will be held at the Closing Location at 3:00 p.m., New York City time, on the
New York Business Day next preceding such Time of Delivery, at which meeting the
final drafts of the documents to be delivered pursuant to the preceding sentence
will be available for review by the parties hereto. For the purposes of this
Section 4, "New York Business Day" shall mean each Monday, Tuesday, Wednesday,
Thursday and Friday which is not a day on which banking institutions in New York
are generally authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business
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<PAGE> 9
on the second business day following the execution and delivery of this
Agreement, or, if applicable, such earlier time as may be required by Rule
430A(a)(3) under the Act; to make no further amendment or any supplement to the
Registration Statement or Prospectus which shall be disapproved by you promptly
after reasonable notice thereof; to advise you, promptly after it receives
notice thereof, of the time when any amendment to the Registration Statement has
been filed or becomes effective or any supplement to the Prospectus or any
amended Prospectus has been filed and to furnish you with copies thereof; to
advise you, promptly after it receives notice thereof, of the issuance by the
Commission of any stop order or of any order preventing or suspending the use of
any Preliminary Prospectus or prospectus, of the suspension of the qualification
of the Shares for offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the Registration Statement or
Prospectus or for additional information; and, in the event of the issuance of
any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such qualification,
promptly to use its best efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time to time,
to furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Shares and if at such time any events shall have occurred as a result of
which the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary during such period to amend or
supplement the Prospectus in order to comply with the Act, to notify you and
upon your request to prepare and furnish without charge to each Underwriter and
to any dealer in securities as many copies as you may from time to time
reasonably request of an amended Prospectus or a supplement to the Prospectus
which will correct such statement or omission or effect such compliance, and in
case any Underwriter is required to deliver a prospectus in connection with
sales of any of the Shares at any time nine months or more after the time of
issue of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as you
may request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
of the Commission thereunder (including, at the option of the Company, Rule
158);
(e) During the period beginning from the date hereof and continuing
to and including the date 90 days after the date of the Prospectus, not to
offer, sell, contract to sell or
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<PAGE> 10
otherwise dispose of, except as provided hereunder, any securities of the
Company that are substantially similar to the Shares, including but not limited
to any securities that are convertible into or exchangeable for, or that
represent the right to receive, Stock or any such substantially similar
securities (other than pursuant to employee stock option plans existing on, or
upon the conversion or exchange of convertible or exchangeable securities
outstanding as of, the date of this Agreement), without your prior written
consent;
(f) To furnish to its stockholders as soon as practicable after the
end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective date
of the Registration Statement), consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds";
(i) To use its best efforts to maintain the listing for quotation of
the Stock, including the Shares, on NASDAQ; and
(j) If the Company elects to rely upon Rule 462(b), the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) by 10:00 p.m., Washington, D. C. time, on the date
of this Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act.
6. The Company and each of the Selling Stockholders covenant and agree
with one another and with the several Underwriters that (a) the Company will pay
or cause to be paid the following: (i) the fees, disbursements and expenses of
the Company's counsel and accountants in connection with the registration of the
Shares under the Act and all other expenses in connection with the preparation,
printing and filing of the Registration Statement, any Preliminary Prospectus
and the Prospectus and amendments and supplements thereto and the mailing and
delivering of copies thereof to the Underwriters and dealers; (ii) the cost of
printing or producing any Agreement among Underwriters, this Agreement, the Blue
Sky Memorandum, closing documents (including any compilations thereof) and any
other documents in connection with the offering, purchase, sale and delivery of
the Shares; (iii) all expenses in connection with the qualification of the
Shares for offering and sale under state securities laws as provided in Section
5(b) hereof, including the fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky survey; (iv) all fees and expenses in connection with listing the
Shares on NASDAQ; (v) the filing fees incident to, and the fees and
disbursements of counsel for the Underwriters in
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<PAGE> 11
connection with, securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the Shares; (vi) reasonable
fees and disbursements of one counsel to the Selling Stockholders; (vii) the
cost of preparing stock certificates; (viii) the cost and charges of any
transfer agent, registrar or custodian; and (ix) all other costs and expenses
incident to the performance of its obligations hereunder which are not otherwise
specifically provided for in this Section; and (b) such Selling Stockholder will
pay or cause to be paid a pro rata share (based on the number of Shares to be
sold by such Selling Stockholder hereunder) of all costs and expenses incident
to the performance of its obligations hereunder which are not otherwise
specifically provided for in this section, including (i) any fees and expenses
of counsel for such Selling Stockholder (other than the reasonable fees and
disbursements of one counsel to the Selling Stockholders, which shall be borne
by the Company, as provided above) and (ii) all underwriting discounts, selling
commissions and stock transfer taxes incident to the sale and delivery of the
Shares to be sold by such Selling Stockholder to the Underwriters hereunder. In
connection with clause (b) of the preceding sentence, Goldman, Sachs & Co.
agrees to pay New York State stock transfer tax, and the Selling Stockholder
agrees to reimburse Goldman, Sachs & Co. for associated carrying costs if such
tax payment is not rebated on the day of payment and for any portion of such tax
payment not rebated. It is understood, however, that the Company shall bear, and
the Selling Stockholders shall not be required to pay or to reimburse the
Company for, the cost of any other matters not directly relating to the sale and
purchase of the Shares pursuant to this Agreement, and that, except as provided
in this Section, and Sections 8 and 11 hereof, the Underwriters will pay all of
their own costs and expenses, including the fees of their counsel, stock
transfer taxes on resale of any of the Shares by them, and any advertising
expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Stockholders herein are, at and as of such Time
of Delivery, true and correct, the condition that the Company and the Selling
Stockholders shall have performed all of its and their obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing by the rules and regulations under the Act and in accordance with Section
5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have become effective by 10:00 p.m.,
Washington, D.C. time, on the date of this Agreement; no stop order suspending
the effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Venture Law Group, A Professional Corporation, counsel for the
Underwriters, shall have furnished to you such opinion or opinions, (a draft of
each such opinion is attached as Annex II(a) hereto) dated such Time of
Delivery, with respect to the matters covered in paragraphs (i), (ii), (vii),
(xi) and (xiii) of subsection (c) below as well as such other related matters as
you may reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters;
(c) Wilson, Sonsini, Goodrich & Rosati, A Professional Corporation,
counsel for the Company, shall have furnished to you and to the Selling
Stockholders their written opinion (a draft of
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<PAGE> 12
each such opinion is attached as Annex II(b) hereto), dated such Time of
Delivery, in form and substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the
Company (including the Shares being delivered at such Time of Delivery)
have been duly and validly authorized and issued and are fully paid and
non-assessable; the Shares conform to the description of the Stock
contained in the Prospectus; and the holders of outstanding shares of
capital stock of the Company are not entitled to preemptive or other
rights to acquire the Shares to be purchased from the Company
hereunder;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification, or is subject to no material liability or disability by
reason of failure to be so qualified in any such jurisdiction (such
counsel being entitled to rely in respect of the opinion in this clause
upon opinions of local counsel and in respect of matters of fact upon
certificates of officers of the Company, provided that such counsel
shall state that they believe that both you and they are justified in
relying upon such opinions and certificates, and that copies of such
opinions and certificates be provided to counsel for the Underwriters);
(iv) Each subsidiary of the Company has been duly incorporated
and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation; and all of the issued shares
of capital stock of each such subsidiary have been duly and validly
authorized and issued, are fully paid and non-assessable, and (except
for directors' qualifying shares) are owned directly or indirectly by
the Company, free and clear of all liens, encumbrances, equities or
claims (such counsel being entitled to rely in respect of the opinion
in this clause upon opinions of local counsel and in respect of matters
of fact upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that they believe
that both you and they are justified in relying upon such opinions and
certificates, and that copies of such opinions and certificates be
provided to counsel for the Underwriters);
(v) To the best of such counsel's knowledge, the Company and
its subsidiaries do not own any real property. Any real property and
buildings held under lease by the Company and its subsidiaries are held
by them under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company
and its subsidiaries (in giving the opinion in this clause, such
counsel may state that no examination of record titles for the purpose
of such opinion has been made, and that they are relying upon a general
review of the titles of the Company and its subsidiaries, upon opinions
of local counsel and abstracts, reports and policies of title companies
rendered or issued at or subsequent to the time of acquisition of such
property by the Company or its subsidiaries, upon opinions of counsel
to the lessors of such property and, in respect of matters of fact,
upon certificates of officers of the Company or its subsidiaries,
provided that such counsel shall state that they believe that
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<PAGE> 13
both you and they are justified in relying upon such opinions,
abstracts, reports, policies and certificates, and that copies of such
opinions and such certificates of officers of the Company be provided
to counsel for the Underwriters);
(vi) To the best of such counsel's knowledge and other than as
set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is
a party or of which any property of the Company or any of its
subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, would individually or in the
aggregate have a material adverse effect on the current or future
consolidated financial position, stockholders' equity or results of
operations of the Company and its subsidiaries; and, to the best of
such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(vii) This Agreement has been duly authorized, executed and
delivered by the Company;
(viii) The issue and sale of the Shares being delivered at such
Time of Delivery to be sold by the Company and the compliance by the
Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument known to
such counsel to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries
is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the
Company or any statute or any order, rule or regulation known to such
counsel of any court or governmental agency or body having jurisdiction
over the Company or any of its subsidiaries or any of their properties;
(ix) No consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or
body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the Shares, and
such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the Shares by
the Underwriters;
(x) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default
in the performance or observance of any material obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, or lease or agreement or other instrument known
to such counsel after reasonable investigation to which it is a party
or by which it or any of its properties may be bound;
(xi) The statements set forth in the Prospectus under the
caption "Description of Capital Stock," insofar as they purport to
constitute a summary of the terms of the Stock, and under the caption
"Underwriting," insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete and
fair;
(xii) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in
the Investment Company Act;
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<PAGE> 14
(xiii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to
such Time of Delivery (other than the financial statements, financial
data and related schedules therein, as to which such counsel need
express no opinion) comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder;
although they do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for those referred to
in the opinion in subsection (xi) of this Section 7(c), they have no
reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior to
such Time of Delivery (other than the financial statements, financial
data and related schedules therein, as to which such counsel need
express no opinion) contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that, as of
its date, the Prospectus or any further amendment or supplement thereto
made by the Company prior to such Time of Delivery (other than the
financial statements, financial data and related schedules therein, as
to which such counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as of
such Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements, financial data and related schedules therein, as to which
such counsel need express no opinion) contains an untrue statement of a
material fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; and they do not know of any amendment to the
Registration Statement required to be filed or of any contracts or
other documents of a character required to be filed as an exhibit to
the Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed or
described as required; and
(xiv) The Company has complied with all agreements or
arrangements known to such counsel after reasonable investigation which
grant registration rights to holders of the Company's securities.
(d) The respective counsel for each of the Selling Stockholders, as
indicated in Schedule II hereto, each shall have furnished to you their written
opinion (a draft of each such opinion is attached as Annex II(c)) with respect
to each of the Selling Stockholders for whom they are acting as counsel, dated
the First Time of Delivery, in form and substance satisfactory to you, to the
effect that:
(i) With respect to each Selling Stockholder listed under
Part B or Part C of Schedule II hereto, a Power of Attorney and a
Custody Agreement have been duly authorized, executed and delivered by
such Selling Stockholder and constitute valid and binding agreements of
such Selling Stockholder in accordance with their terms and, with
respect to each Selling Stockholder, such Selling Stockholder has full
right, power and authority to sell, assign, transfer and deliver the
Shares to be sold by such Selling Stockholder hereunder;
(ii) This Agreement has been duly executed and delivered by or
on behalf of such Selling Stockholder; and the sale of the Shares to be
sold by such Selling Stockholder hereunder and the compliance by such
Selling Stockholder with all of the provisions of this Agreement and,
with respect to each Selling Stockholder listed under Part B or Part C
of
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<PAGE> 15
Schedule II hereto, the Power of Attorney and the Custody Agreement,
and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation
of any terms or provisions of, or constitute a default under, any
statute, indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which such Selling
Stockholder is a party or by which such Selling Stockholder is bound or
to which any of the property or assets of such Selling Stockholder is
subject, nor will such action result in any violation of the provisions
of the Certificate of Incorporation or By-laws of such Selling
Stockholder if such Selling Stockholder is a corporation, the
Partnership Agreement of such Selling Stockholder if such Selling
Stockholder is a partnership or any order, rule or regulation known to
such counsel of any court or governmental agency or body having
jurisdiction over such Selling Stockholder or the property of such
Selling Stockholder;
(iii) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement in connection with the
Shares to be sold by such Selling Stockholder hereunder, except such as
have been obtained under the Act and such as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of such Shares by the Underwriters;
(iv) Upon delivery to the Underwriters of a certificate
evidencing the Shares to be sold by such Selling Stockholder issued in
the name of the Underwriters or endorsed to the Underwriters or
endorsed in blank and payment therefor by the Underwriters pursuant to
the terms of this Agreement, the Underwriters will own such Shares free
and clear of any adverse claim, assuming that each Underwriter takes
delivery of such Shares in good faith and without notice of any adverse
claims.
In rendering the opinion in paragraph (iv), such counsel may rely upon
a certificate of such Selling Stockholder in respect of matters of fact as to
ownership of, and liens, encumbrances, equities or claims on, the Shares sold by
such Selling Stockholder, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such certificate
and that a copy of such certificate be provided to counsel for the Underwriters;
(e) On the date of the Prospectus at a time prior to the execution
of this Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective amendment to the Registration Statement filed subsequent to
the date of this Agreement and also at each Time of Delivery, KPMG Peat Marwick
LLP shall have furnished to you and to the Selling Stockholders a letter or
letters, dated the respective dates of delivery thereof, in form and substance
satisfactory to you, to the effect set forth in Annex I hereto (the executed
copy of the letter delivered prior to the execution of this Agreement is
attached as Annex I(a) hereto and a draft of the form of letter to be delivered
on the effective date of any post-effective amendment to the Registration
Statement and as of each Time of Delivery is attached as Annex I(b) hereto);
(f)(i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the capital stock or short-term or long-term debt of the Company or
any of its subsidiaries or any change, or any development involving a
prospective change, in or affecting the general affairs, management, financial
position, stockholders'
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<PAGE> 16
equity or results of operations of the Company and its subsidiaries, otherwise
than as set forth or contemplated in the Prospectus, the effect of which, in any
such case described in Clause (i) or (ii), is in the judgment of the
Representatives so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(g) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded the Company's debt securities or preferred stock
by any "nationally recognized statistical rating organization," as that term is
defined by the Commission for purposes of Rule 436(g)(2) under the Act, and (ii)
no such organization shall have publicly announced that it has under
surveillance or review, with possible negative implications, its rating of any
of the Company's debt securities or preferred stock;
(h) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or
material limitation in trading in the Company's securities on NASDAQ; (iii) a
general moratorium on commercial banking activities declared by either Federal
or New York State authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of a
national emergency or war, if the effect of any such event specified in this
Clause (iv) in the judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(i) The Stock, including the Shares, at such Time of Delivery shall
remain duly listed for quotation on NASDAQ;
(j) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from each holder of shares of Stock of the
Company which are "restricted" under the Act and from certain holders of options
to purchase shares of Stock of the Company, substantially to the effect set
forth in Subsection 1(b)(iv) hereof in form and substance satisfactory to you;
(k) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
(l) The Company and the Selling Stockholders shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of officers
of the Company and of the Selling Stockholders, respectively, satisfactory to
you as to the accuracy of the representations and warranties of the Company and
the Selling Stockholders, respectively, herein at and as of such Time of
Delivery, as to the performance by the Company and the Selling Stockholders of
all of their respective obligations hereunder to be performed at or prior to
such Time of Delivery, and as to such other matters as you may reasonably
request, and the Company shall have furnished or caused to be furnished
certificates as to the matters set forth in subsections (a) and (f) of this
Section.
8. (a) The Company and each of the Selling Stockholders listed under
Part A or Part B of Schedule II hereto, jointly and severally, will indemnify
and hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the
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<PAGE> 17
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that the
Company and such Selling Stockholders shall not be liable in any such case to
the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein; and provided, further,
that the liability of a Selling Stockholder pursuant to this subsection (a)
shall not exceed the product of the number of Shares sold by such Selling
Stockholder and the initial public offering price of the Shares as set forth in
the Prospectus and, in the case of The Interpublic Group of Companies, Inc.,
("IPG") such product less the underwriting discount payable with respect to the
sale of such Shares as set forth in the Prospectus. In the event that any
Underwriter brings an action against IPG to enforce the provisions of this
Section 8(a), such Underwriter shall use reasonable efforts to join the Company
in such action; provided, however, that if joining, or using reasonable efforts
to join, the Company in such action could, in the reasonable judgment of such
Underwriter, materially and adversely affect the position of such Underwriter in
such proceeding, the Underwriters shall not have any obligation under this
sentence; provided, further, that such Underwriter shall be so obligated only if
the Company is not subject to a stay in bankruptcy.
(b) Each of the Selling Stockholders listed under Part C of Schedule
II hereto will indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that the
liability of a Selling Stockholder pursuant to this subsection (b) shall not
exceed the product of the number of Shares sold by such Selling Stockholder and
the initial public offering price of the Shares as set forth in the Prospectus;
and provided, further, that such Selling Stockholder shall be liable to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Selling Stockholder expressly for use therein.
(c) Each Underwriter will indemnify and hold harmless the Company
and each Selling Stockholder against any losses, claims, damages or liabilities
to which the Company or such Selling Stockholder may become subject, under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or
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<PAGE> 18
any such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Goldman, Sachs
& Co. expressly for use therein; and will reimburse the Company and each Selling
Stockholder for any legal or other expenses reasonably incurred by the Company
or such Selling Stockholder in connection with investigating or defending any
such action or claim as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (d) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company and the Selling Stockholders on the one hand
and the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Stockholders bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
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<PAGE> 19
Company or the Selling Stockholders on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company, each
of the Selling Stockholders and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this subsection (e) were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (e) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders
under this Section 8 shall be in addition to any liability which the Company and
the respective Selling Stockholders may otherwise have and shall extend, upon
the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company or any Selling Stockholder within the
meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company and the Selling Stockholders shall be entitled to
a further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company and
the Selling Stockholders that you have so arranged for the purchase of such
Shares, or the Company and the Selling Stockholders notify you that they have so
arranged for the purchase of such Shares, you or the Company and the Selling
Stockholders shall have the right to postpone a Time of Delivery for a period of
not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company
and the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Stockholders shall have the right to require
each
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<PAGE> 20
non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company
and the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all of the Shares to be purchased at such Time of Delivery,
or if the Company and the Selling Stockholders shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the Optional Shares) shall
thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company or the Selling Stockholders, except for the expenses
to be borne by the Company and the Selling Stockholders and the Underwriters as
provided in Section 6 hereof and the indemnity and contribution agreements in
Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or any of the Selling Stockholders, or any officer
or director or controlling person of the Company, or any controlling person of
any Selling Stockholder, and shall survive delivery of and payment for the
Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholders shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof; but,
if for any other reason any Shares are not delivered by or on behalf of the
Company and the Selling Stockholders as provided herein, the Company will
reimburse the Underwriters through you for all out-of-pocket expenses approved
in writing by you, including fees and disbursements of counsel, reasonably
incurred by the Underwriters in making preparations for the purchase, sale and
delivery of the Shares not so delivered, but the Company and the Selling
Stockholders shall then be under no further liability to any Underwriter in
respect of the Shares not so delivered except as provided in Sections 6 and 8
hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with any Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Stockholder made or given by any
or all of the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the
-20-
<PAGE> 21
representatives in care of Goldman, Sachs & Co., 85 Broad Street, New York, New
York 10004, Attention: Registration Department; if to any Selling Stockholder
shall be delivered or sent by mail, telex or facsimile transmission to counsel
for such Selling Stockholder at its address set forth in Schedule II hereto; and
if to the Company shall be delivered or sent by mail, telex or facsimile
transmission to the address of the Company set forth in the Registration
Statement, Attention: Secretary; provided, however, that any notice to an
Underwriter pursuant to Section 8(d) hereof shall be delivered or sent by mail,
telex or facsimile transmission to such Underwriter at its address set forth in
its Underwriters' Questionnaire or telex constituting such Questionnaire, which
address will be supplied to the Company or the Selling Stockholders by you on
request. Any such statements, requests, notices or agreements shall take effect
upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and the Selling Stockholders and, to
the extent provided in Sections 8 and 10 hereof, the officers and directors of
the Company and each person who controls the Company, any Selling Stockholder or
any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us one for the Company and each of the Representatives plus one
for each counsel and the Custodian, counterparts hereof, and upon the acceptance
hereof by you, on behalf of each of the Underwriters, this letter and such
acceptance hereof shall constitute a binding agreement among each of the
Underwriters, the Company and each of the Selling Stockholders. It is understood
that your acceptance of this letter on behalf of each of the Underwriters is
pursuant to the authority set forth in a form of Agreement among Underwriters,
the form of which shall be submitted to the Company and the Selling Stockholders
for examination, upon request, but without warranty on your part as to the
authority of the signers thereof.
-21-
<PAGE> 22
Any person executing and delivering this Agreement as Attorney-in-Fact
for a Selling Stockholder represents by so doing that he has been duly appointed
as Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing
and binding Power-of-Attorney which authorizes such Attorney-in-Fact to take
such action.
Very truly yours,
CKS Group, Inc.
By: ____________________________________
Name:
Title:
Selling Stockholders
The Interpublic Group of Companies, Inc.
By: ____________________________________
Name:
Title:
By: ____________________________________
Name:
Title:
As Attorney-in-Fact acting on behalf
of each of the Selling Stockholders
listed under Part B or Part C of
Schedule II to this Agreement
Accepted as of the date hereof:
Goldman, Sachs & Co.
Dean Witter Reynolds Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
By: ______________________________
(Goldman, Sachs & Co.
-22-
<PAGE> 23
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM
TO BE OPTION
UNDERWRITER PURCHASED EXERCISED
----------- --------- ------------------
<S> <C> <C>
Goldman, Sachs & Co.........................................
Dean Witter Reynolds Inc....................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
--------- -------
Total....................................................... 1,800,000 270,000
========= =======
</TABLE>
-23-
<PAGE> 24
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF SOLD IF
FIRM SHARES MAXIMUM OPTION
TO BE SOLD EXERCISED
---------- ------------------
<S> <C> <C>
The Company.......................................... 131,500 270,000
The Selling Stockholders:
Part A:
The Interpublic Group of Companies, Inc. (a) ........ 1,160,000
Part B:
Carlton H. Baab (b) ................................. 32,000
William T. Cleary (b)................................ 100,000
Mark D. Kvamme (b)................................... 100,000
Thomas K. Suiter (b)................................. 100,000
Part C:
Phillip Battat (b) .................................. 5,000
Brian K. Fortune (b) ................................ 5,000
Robert J. Gemmel (b) ................................ 30,000
Kimberlie Johnson (b) ............................... 10,000
Mark Loncar (b) ..................................... 5,000
Suzan Packee (b) .................................... 9,000
Jill K. Savini (b) .................................. 20,000
Bernard Schroeder (b) ............................... 20,000
David Siskin (b) .................................... 50,000
Wade T. Snell (b) ................................... 12,500
Jay R. Tannenbaum (b) ............................... 10,000
--------- -------
Total................................................ 1,800,000 270,000
========= =======
</TABLE>
(a) This Selling Stockholder is represented by Cleary, Gottlieb, Steen &
Hamilton. The address for such Selling Stockholder is 1271 Avenue of the
Americas, New York, NY 10020.
(b) This Selling Stockholder is represented by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, and has appointed Mark D. Kvamme and Carlton H. Baab,
and each of them, as the Attorneys-in-Fact for such Selling Stockholder. The
address for such Selling Stockholder is 10441 Bandley Drive, Cupertino,
California 95014.
-24-
<PAGE> 25
ANNEX I
Pursuant to Section 7(e) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the
Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information, schedules, financial forecasts
and/or pro forma financial information required to be included in the
Prospectus or the Registration Statement pursuant to the requirements
of the Act are so included; the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included in the Prospectus or the Registration Statement
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim
financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company for the
periods specified in such letter, as indicated in their reports
thereon, copies of which have been separately furnished to the
representatives of the Underwriters (the "Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus as indicated in their reports thereon copies
of which have been separately furnished to the Representatives and on
the basis of specified procedures including inquiries of officials of
the Company who have responsibility for financial and accounting
matters regarding whether the unaudited condensed consolidated
financial statements referred to in paragraph (vi)(A)(i) below comply
as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations, nothing came to their attention that caused them to
believe that the unaudited condensed consolidated financial statements
do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(iv) The unaudited selected financial information with respect
to the consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the
Prospectus agrees with the corresponding amounts (after restatements
where applicable) in the audited or unaudited consolidated financial
statements for such five fiscal years, copies of which have been
separately furnished to the Representative;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K
and on the basis of limited procedures specified in such letter nothing
came to their attention as a result of the
F-1
<PAGE> 26
foregoing procedures that caused them to believe that this information
does not conform in all material respects with the disclosure
requirements of Items 301, 302, 402 and 503(d), respectively, of
Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements of the Company and its subsidiaries,
inspection of the minute books of the Company and its subsidiaries
since the date of the latest audited financial statements included in
the Prospectus, inquiries of officials of the Company and its
subsidiaries responsible for financial and accounting matters and such
other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of
the Act and the related published rules and regulations, or (ii)
any material modifications should be made to the unaudited
condensed consolidated statements of income, consolidated balance
sheets and consolidated statements of cash flows included in the
Prospectus for them to be in conformity with generally accepted
accounting principles;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and any
such unaudited data and items were not determined on a basis
substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements included
in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in Clause
(A) and any unaudited income statement data and balance sheet
items included in the Prospectus and referred to in Clause (B)
were not determined on a basis substantially consistent with the
basis for the audited consolidated financial statements included
in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in
all material respects with the applicable accounting requirements
of the Act and the published rules and regulations thereunder or
the pro forma adjustments have not been properly applied to the
historical amounts in the compilations of those statements;
(E) as of a specified date not more than five days prior to
the date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital stock
upon exercise of options and stock appreciation rights, upon
earn-outs of performance shares and upon conversions of
convertible securities, in each case which were outstanding on
the date of the latest financial statements included in the
Prospectus) or any
F-2
<PAGE> 27
increase in the consolidated long-term debt of the Company and
its subsidiaries, or any decreases in consolidated net current
assets or stockholders' equity or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with amounts shown in
the latest balance sheet included in the Prospectus, except in
each case for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which are
described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date
referred to in Clause (E) there were any decreases in
consolidated net revenues or operating profit or the total or per
share amounts of consolidated net income or other items specified
by the Representatives, or any increases in any items specified
by the Representatives, in each case as compared with the
comparable period of the preceding year and with any other period
of corresponding length specified by the Representatives, except
in each case for decreases or increases which the Prospectus
discloses have occurred or may occur or which are described in
such letter; and
(vii) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraphs (iii) and (vi) above, they have carried out certain
specified procedures, not constituting an examination in accordance
with generally accepted auditing standards, with respect to certain
amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records
of the Company and its subsidiaries, which appear in the Prospectus, or
in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Representatives, and have compared certain
of such amounts, percentages and financial information with the
accounting records of the Company and its subsidiaries and have found
them to be in agreement.
F-3
<PAGE> 28
ANNEX II(a)
Pursuant to Section 7(b) of the Underwriting Agreement, counsel for the
Underwriters shall furnish an opinion to the Underwriters to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus.
(ii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the shares of Common Stock to be sold by the
Company pursuant to the Underwriting Agreement have been duly authorized and,
upon delivery to the Underwriters against payment therefor in accordance with
the terms of the Underwriting Agreement, will be validly issued, fully paid and
non-assessable; the Shares conform to the description of the Stock contained in
the Prospectus; and the holders of outstanding shares of capital stock of the
Company are not entitled to preemptive or other rights pursuant to the Company's
Certificate of Incorporation to acquire the Shares to be purchased from the
Company under the Underwriting Agreement.
(iii) The Underwriting Agreement has been duly authorized,
executed and delivered by the Company.
(iv) The statements set forth in the Prospectus under the
caption "Description of Capital Stock," insofar as they purport to constitute a
summary of the terms of the Stock, and under the caption "Underwriting," insofar
as they purport to summarize the provisions of the laws and documents referred
to therein, summarize such provisions fairly.
(v) The Registration Statement and the Prospectus (other than
the financial statements and related schedules and the financial data therein,
as to which we express no opinion), as of their respective effective or issue
dates, comply as to form in all material respects with the requirements of the
Act and the rules and regulations thereunder.
F-4
<PAGE> 29
ANNEX II(b)
Pursuant to Section 7(c) of the Underwriting Agreement, counsel for the
Company shall furnish an opinion to the Underwriters to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the
Company (including the Shares being delivered at such Time of Delivery)
have been duly and validly authorized and issued and are fully paid and
non-assessable; the Shares conform to the description of the Stock
contained in the Prospectus; and the holders of outstanding shares of
capital stock of the Company are not entitled to preemptive or other
rights to acquire the Shares to be purchased from the Company
hereunder;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification, or is subject to no material liability or disability by
reason of failure to be so qualified in any such jurisdiction (such
counsel being entitled to rely in respect of the opinion in this clause
upon opinions of local counsel and in respect of matters of fact upon
certificates of officers of the Company, provided that such counsel
shall state that they believe that both you and they are justified in
relying upon such opinions and certificates, and that copies of such
opinions and certificates be provided to counsel for the Underwriters);
(iv) Each subsidiary of the Company has been duly incorporated
and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation; and all of the issued shares
of capital stock of each such subsidiary have been duly and validly
authorized and issued, are fully paid and non-assessable, and (except
for directors' qualifying shares) are owned directly or indirectly by
the Company, free and clear of all liens, encumbrances, equities or
claims (such counsel being entitled to rely in respect of the opinion
in this clause upon opinions of local counsel and in respect of matters
of fact upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that they believe
that both you and they are justified in relying upon such opinions and
certificates, and that copies of such opinions and certificates be
provided to counsel for the Underwriters);
(v) To the best of such counsel's knowledge, the Company and
its subsidiaries do not own any real property. Any real property and
buildings held under lease by the Company and its subsidiaries are held
by them under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company
and its subsidiaries (in giving the opinion in this clause, such
counsel may state that no examination of record titles for the purpose
of such opinion has been made, and that they are relying upon a general
review of the titles of the Company and its subsidiaries, upon opinions
of local counsel and abstracts, reports and policies of
F-5
<PAGE> 30
title companies rendered or issued at or subsequent to the time of
acquisition of such property by the Company or its subsidiaries, upon
opinions of counsel to the lessors of such property and, in respect of
matters of fact, upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that they believe
that both you and they are justified in relying upon such opinions,
abstracts, reports, policies and certificates, and that copies of such
opinions and such certificates of officers of the Company be provided
to counsel for the Underwriters);
(vi) To the best of such counsel's knowledge and other than as
set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is
a party or of which any property of the Company or any of its
subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, would individually or in the
aggregate have a material adverse effect on the current or future
consolidated financial position, stockholders' equity or results of
operations of the Company and its subsidiaries; and, to the best of
such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(vii) The Underwriting Agreement has been duly authorized,
executed and delivered by the Company;
(viii) The issue and sale of the Shares being delivered at such
Time of Delivery to be sold by the Company and the compliance by the
Company with all of the provisions of the Underwriting Agreement and
the consummation of the transactions therein contemplated will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument known to
such counsel to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries
is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the
Company or any statute or any order, rule or regulation known to such
counsel of any court or governmental agency or body having jurisdiction
over the Company or any of its subsidiaries or any of their properties;
(ix) No consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or
body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by the
Underwriting Agreement, except the registration under the Act of the
Shares, and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the Shares by
the Underwriters;
(x) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default
in the performance or observance of any material obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, or lease or agreement or other instrument known
to such counsel after reasonable investigation to which it is a party
or by which it or any of its properties may be bound;
F-6
<PAGE> 31
(xi) The statements set forth in the Prospectus under the
caption "Description of Capital Stock," insofar as they purport to
constitute a summary of the terms of the Stock, and under the caption
"Underwriting," insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete and
fair;
(xii) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in
the Investment Company Act;
(xiii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to
such Time of Delivery (other than the financial statements, financial
data and related schedules therein, as to which such counsel need
express no opinion) comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder;
although they do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for those referred to
in the opinion in subsection (xi) of this Section 7(c), they have no
reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior to
such Time of Delivery (other than the financial statements, financial
data and related schedules therein, as to which such counsel need
express no opinion) contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that, as of
its date, the Prospectus or any further amendment or supplement thereto
made by the Company prior to such Time of Delivery (other than the
financial statements, financial data and related schedules therein, as
to which such counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as of
such Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements, financial data and related schedules therein, as to which
such counsel need express no opinion) contains an untrue statement of a
material fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; and they do not know of any amendment to the
Registration Statement required to be filed or of any contracts or
other documents of a character required to be filed as an exhibit to
the Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed or
described as required; and
(xiv) The Company has complied with all agreements or
arrangements known to such counsel after reasonable investigation which
grant registration rights to holders of the Company's securities.
F-7
<PAGE> 32
ANNEX II(c)
Pursuant to Section 7(d) of the Underwriting Agreement, counsel for
each of the Selling Stockholders shall furnish an opinion to the Underwriters to
the effect that:
(i) With respect to each Selling Stockholder listed under Part
B or Part C of Schedule II to the Underwriting Agreement, a Power of
Attorney and a Custody Agreement have been duly authorized, executed
and delivered by such Selling Stockholder and constitute valid and
binding agreements of such Selling Stockholder in accordance with their
terms and, with respect to each Selling Stockholder, such Selling
Stockholder has full right, power and authority to sell, assign,
transfer and deliver the Shares to be sold by such Selling Stockholder
under the Underwriting Agreement;
(ii) The Underwriting Agreement has been duly executed and
delivered by or on behalf of such Selling Stockholder; and the sale of
the Shares to be sold by such Selling Stockholder thereunder and the
compliance by such Selling Stockholder with all of the provisions of
the Underwriting Agreement and, with respect to each Selling
Stockholder listed under Part B or Part C of Schedule II to the
Underwriting Agreement, the Power of Attorney and the Custody
Agreement, and the consummation of the transactions therein
contemplated will not conflict with or result in a breach or violation
of any terms or provisions of, or constitute a default under, any
statute, indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which such Selling
Stockholder is a party or by which such Selling Stockholder is bound or
to which any of the property or assets of such Selling Stockholder is
subject, nor will such action result in any violation of the provisions
of the Certificate of Incorporation or By-laws of such Selling
Stockholder if such Selling Stockholder is a corporation, the
Partnership Agreement of such Selling Stockholder if such Selling
Stockholder is a partnership or any order, rule or regulation known to
such counsel of any court or governmental agency or body having
jurisdiction over such Selling Stockholder or the property of such
Selling Stockholder;
(iii) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation of the
transactions contemplated by the Underwriting Agreement in connection
with the Shares to be sold by such Selling Stockholder hereunder,
except such as have been obtained under the Act and such as may be
required under state securities or Blue Sky laws in connection with the
purchase and distribution of such Shares by the Underwriters;
(iv) Upon delivery to the Underwriters of a certificate
evidencing the Shares to be sold by such Selling Stockholder issued in
the name of the Underwriters or endorsed to the Underwriters or
endorsed in blank and payment therefor by the Underwriters pursuant to
the terms of the Underwriting Agreement, the Underwriters will own such
Shares free and clear of any adverse claim, assuming that each
Underwriter takes delivery of such Shares in good faith and without
notice of any adverse claims.
F-8
<PAGE> 1
EXHIBIT 11.1
CKS GROUP, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF
EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
NOVEMBER 30, -------------------
----------------------------- MAY 31, MAY 31,
1993 1994 1995 1995 1996
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net income.............................. $ 279 $ 288 $ 1,366 $ 409 $ 2,045
------ ------ ------- ------- -------
Weighted average number of common shares
outstanding........................... 7,311 8,775 10,140 10,051 12,513
Number of common stock equivalents as a
result of stock options outstanding
using the treasury stock method....... -- -- 198 -- 634
Number of common shares issued and stock
options granted in accordance with
Staff Accounting Bulletin No. 83...... 1,171 1,169 388 669 --
------ ------ ------- ------- -------
Shares used in per share computation.... 8,482 9,944 10,726 10,720 13,147
------ ------ ------- ------- -------
Net income per share.................... $ 0.03 $ 0.03 $ 0.13 $ 0.04 $ 0.16
====== ====== ======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Carlton H. Baab and Mark D. Kvamme and each of
them singly, as true and lawful attorneys-in-fact and agents will full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any or all amendments to CKS Group, Inc.'s
Registration Statement on Form S-1 (File NO. 333-2178) (including post-effective
amendments), and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
granting unto said attorneys-in-fact and agents and full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the foregoing, as full to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his substitute, may lawfully do
or cause to be done by virtue hereof.
By: /s/ MICHAEL SLADE
------------------------------------
Michael Slade
Date: June 7, 1996
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