<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
December 18, 1996
Date of Report (Date of earliest event reported)
CKS GROUP, INC.
(Exact name of registrant as specified in its charter)
0-27090
(Commission File Number)
<TABLE>
<S> <C> <C>
Delaware 0-27090 77-0385435
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer Identification No.)
incorporation)
</TABLE>
10441 Bandley Drive
Cupertino, California 95014
(Address of principal executive offices)
(408) 366-5100
(Registrant's telephone number, including area code)
<PAGE> 2
ITEM 5. OTHER EVENTS.
On December 18, 1996, CKS Group, Inc., a Delaware corporation
(the"Registrant") issued a press release announcing the Registrant's financial
results for the fiscal quarter and the fiscal year ended November 30, 1996.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The following financial statements and exhibits are filed as
part of this report.
(a) Financial statements of the Registrant:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 4
Consolidated Balance Sheets 5
Consolidated Statements of Income 6
Consolidated Statements of Stockholders' Equity 7
Consolidated Statements of Cash Flows 8
Notes to Financial Statements 9
</TABLE>
(b) Exhibits.
99.1 Press Release dated December 18, 1996.
2
<PAGE> 3
CKS GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CKS Group, Inc. and Subsidiaries:
Independent Auditors' Report......................................... 1
Consolidated Balance Sheets.......................................... 2
Consolidated Statements of Income.................................... 3
Consolidated Statements of Stockholders' Equity...................... 4
Consolidated Statements of Cash Flows................................ 5
Notes to Consolidated Financial Statements........................... 6
</TABLE>
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CKS Group, Inc.:
We have audited the consolidated balance sheets of CKS Group, Inc. and
subsidiaries as of November 30, 1995 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended November 30, 1996. 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, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended November 30, 1996, in conformity with generally accepted accounting
principles.
San Jose, California
December 16, 1996
1
<PAGE> 5
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------
ASSETS 1995 1996
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,327 $ 7,528
Marketable securities -- 37,895
Accounts receivable, net of allowances of $868 and $762,
in 1995 and 1996, respectively 7,203 14,542
Fees and expenditures in excess of billings 471 2,043
Prepaid expenses and other current assets 1,095 1,429
-------- --------
Total current assets 11,096 63,437
Property and equipment, net 2,408 3,252
Goodwill and other assets 182 6,219
-------- --------
Total assets $ 13,686 $ 72,908
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,681 $ 5,224
Accrued expenses 2,371 6,284
Billings in excess of fees and expenditures 959 1,720
Current portion of notes payable and capital lease obligations 316 417
Income taxes payable 972 188
-------- --------
Total current liabilities 8,299 13,833
Notes payable and capital lease obligations, less current portion 412 419
Deferred income taxes 380 --
-------- --------
Total liabilities 9,091 14,252
-------- --------
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; 3,114,437 and no shares issued and
outstanding in 1995 and 1996, respectively 3 --
Common stock; 7,125,000 and 13,162,000 shares issued and
outstanding in 1995 and 1996, respectively 7 13
Additional paid-in capital 2,380 50,824
Unrealized loss on marketable securities -- (65)
Notes receivable from stockholders (292) (292)
Retained earnings 2,497 8,176
-------- --------
Total stockholders' equity 4,595 58,656
-------- --------
Total liabilities and stockholders' equity $ 13,686 $ 72,908
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 6
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 22,938 $ 34,792 $56,951
-------- -------- -------
Operating expenses:
Direct salaries and related expenses 6,168 10,485 16,542
Other direct operating expenses 11,121 13,164 19,866
General and administrative expenses 5,131 8,688 13,355
-------- -------- -------
Total operating expenses 22,420 32,337 49,763
-------- -------- -------
Operating income 518 2,455 7,188
Other income (expense), net (38) (27) 1,757
-------- -------- -------
Income before income taxes 480 2,428 8,945
Income taxes 192 1,062 3,266
-------- -------- -------
Net income $ 288 $ 1,366 $ 5,679
======== ======== =======
Net income per share $ 0.03 $ 0.13 $ 0.43
======== ======== =======
Shares used in per share computation 9,944 10,726 13,362
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 7
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED NOTES
SERIES A ADDITIONAL LOSS ON RECEIVABLE
COMMON STOCK COMMON STOCK PAID-IN MARKETABLE FROM
---------------- ------------------
SHARES AMOUNT SHARES AMOUNTS CAPITAL SECURITIES STOCKHOLDERS
------ ------ ------ ------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, November 30, 1993 -- $-- 7,840 $ 8 $ 363 $-- $ (319)
Issuance of common stock -- -- 2,273 2 204 -- (146)
Repurchase of common stock -- -- (650) (1) (313) -- 94
Net income -- -- -- -- -- -- --
------ -- ------- -------- -------- ----- -------
Balances, November 30, 1994 -- -- 9,463 9 254 -- (371)
Issuance of Series A common stock 739 1 -- -- 1,923 -- --
Conversion of common stock to Series A
common stock 2,375 2 (2,375) (2) -- -- --
Repurchase of common stock -- -- (31) -- (23) -- 8
Issuance of common stock -- -- 68 -- 70 -- --
Compensation related to stock options -- -- -- -- 156 -- --
Collections on stockholder notes receivable -- -- -- -- -- -- 71
Net income -- -- -- -- -- -- --
------ -- ------- -------- -------- ----- -------
Balances, November 30, 1995 3,114 3 7,125 7 2,380 -- (292)
Conversion of Series A common stock to
common stock (3,114) (3) 3,114 3 -- -- --
Issuance of common stock -- -- 2,923 3 47,416 -- --
Compensation related to stock options -- -- -- -- 102 -- --
Tax benefit from disqualifying dispositions -- -- -- -- 926 -- --
Unrealized loss on marketable securities -- -- -- -- -- (65) --
Net income -- -- -- -- -- -- --
------ -- ------- -------- -------- ----- -------
Balances, November 30, 1996 -- $-- 13,162 $ 13 $ 50,824 $ (65) $ (292)
====== == ======= ======== ======== ===== =======
<CAPTION>
TOTAL
RETAINED STOCKHOLDERS'
EARNINGS EQUITY
-------- ------
<S> <C> <C>
Balances, November 30, 1993 $ 843 $ 895
Issuance of common stock -- 60
Repurchase of common stock -- (220)
Net income 288 288
------- --------
Balances, November 30, 1994 1,131 1,023
Issuance of Series A common stock -- 1,924
Conversion of common stock to Series A
common stock -- --
Repurchase of common stock -- (15)
Issuance of common stock -- 70
Compensation related to stock options -- 156
Collections on stockholder notes receivable -- 71
Net income 1,366 1,366
------- --------
Balances, November 30, 1995 2,497 4,595
Conversion of Series A common stock to
common stock -- --
Issuance of common stock -- 47,419
Compensation related to stock options -- 102
Tax benefit from disqualifying dispositions -- 926
Unrealized loss on marketable securities -- (65)
Net income 5,679 5,679
------- --------
Balances, November 30, 1996 $ 8,176 $ 58,656
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 8
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 288 $ 1,366 $ 5,679
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income taxes (127) (10) (1,325)
Compensation related to stock options -- 156 102
Tax benefit from disqualifying dispositions -- -- 926
Depreciation and amortization 514 738 850
Changes in operating assets and liabilities:
Accounts receivable (2,914) (1,550) (5,833)
Fees and expenditures in excess of billings (24) (292) (1,572)
Prepaid expenses and other current assets (140) (952) 72
Accounts payable 2,154 335 1,169
Accrued expenses 384 1,565 3,492
Billings in excess of fees and expenditures 616 137 269
Income taxes payable 293 654 (784)
------- ------- --------
Net cash provided by operating activities 1,044 2,147 3,045
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,649) (1,239) (1,368)
Purchases of marketable securities -- -- (39,710)
Sale of marketable securities -- -- 1,750
Cash acquired in business combination -- -- 55
Other assets -- -- (574)
------- ------- --------
Net cash used in investing activities (1,649) (1,239) (39,847)
------- ------- --------
Cash flows from financing activities:
Net borrowings (repayments) on line of credit and notes
payable 706 (674) (419)
Collections on stockholder notes receivable -- 71 --
Proceeds from sale of common stock 60 1,994 42,422
Repurchase of common stock (220) (15) --
------- ------- --------
Net cash provided by financing activities 546 1,376 42,003
------- ------- --------
Net change in cash and cash equivalents (59) 2,284 5,201
Cash and cash equivalents, beginning of year 102 43 2,327
------- ------- --------
Cash and cash equivalents, end of year $ 43 $ 2,327 $ 7,528
======= ======= ========
Supplementary disclosure of cash flow information:
Cash paid:
Interest $ 60 $ 91 $ 63
======= ======= ========
Income taxes $ 30 $ 647 $ 4,488
======= ======= ========
Noncash investing and financing activities:
Sale of common stock in exchange for stockholder notes
receivable $ 146 $ -- $ --
======= ======= ========
Issuance of common stock in business acquisition $ -- $ -- $ 4,997
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 9
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1994, 1995, AND 1996
(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 Company was formed in January 1995 in a merger of three entities
that were under common control: CKS Partners, Inc., CKS Interactive,
Inc., and CKS Pictures, Inc. (collectively, the Former Affiliates). The
accompanying consolidated financial statements have been prepared on
the basis that these entities were combined at the beginning of their
existence for financial reporting purposes. The combined entities have
been under common control since inception and have been included in the
consolidated financial statements at historical cost, in a manner
similar to a pooling of interests, since their respective dates of
inception. All transactions and accounts between the combined entities
have been eliminated in the accompanying consolidated financial
statements.
In accordance with the merger of the Former Affiliates, each entity's
capital stock was converted, using a predetermined conversion factor,
to give effect to the merger. All share and per share information has
been retroactively restated to give the effect to the merger.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents.
The Company classifies its investments in certain debt and equity
securities as "available-for- sale." Such investments are recorded at
fair value, with unrealized gains and losses reported as a separate
component of stockholders' equity. The cost of securities sold is based
upon the specific identification method.
Fair Value of Financial Instruments and Concentrations of Credit Risk
The carrying value of the Company's financial instruments, including
accounts receivable, approximates fair market value.
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist principally of accounts
receivable. The Company's services are provided to clients in a variety
of industries. The Company performs ongoing credit evaluation of its
clients, generally does not require collateral, and records allowances
for potential credit losses.
6
<PAGE> 10
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
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 four to seven
years. Leasehold improvements are amortized over the lesser of their
useful lives or the remaining term of the related lease.
Goodwill
Goodwill is amortized on a straight-line basis over 20 years. The
Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's
average cost of funds.
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
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
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 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.
7
<PAGE> 11
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
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 Company's initial
public offering (IPO) date as if they were outstanding for all prior
periods presented using the treasury stock method and the IPO price.
Recent Accounting Pronouncements
The Financial Accounting Standard Board (FASB) recently adopted SFAS
No. 121, Accounting for the Impairments of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. This statement requires long-lived
assets to be evaluated for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be
recoverable. The Company will adopt SFAS No. 121 in fiscal 1997. The
adoption of SFAS No. 121 is not expected to have a material effect on
the Company's consolidated results of operations.
Reclassifications
Certain amounts in the accompanying 1994 and 1995 consolidated
financial statements have been reclassified in order to conform them
with the 1996 consolidated financial statement presentation.
(2) ACQUISITIONS
Schell/Mullaney, Inc.
On August 1, 1996, the Company acquired Schell/Mullaney, Inc. (SMI).
Upon the closing of the merger the shares of common stock of SMI (SMI
common stock) that were issued and outstanding immediately prior to the
closing were converted into 183,066 shares of the Company's common
stock valued at $5,000,000, and the right to receive up to an
additional $9,000,000 in common stock of the Company in 1998 and 1999
upon attainment of certain financial performance goals by SMI. The
number of additional shares to be issued to the former shareholders of
SMI will be determined based on the average closing price of the
Company's common stock during the 40-day period ending 2 days prior to
the issuance dates of such shares. In the event additional shares are
issued to the former shareholders of SMI, they will be accounted for as
additional purchase price.
The acquisition was accounted for as a purchase with the results of SMI
included from the acquisition date. The excess of the purchase price
over the fair value of net assets acquired amounted to $4,577,000 and
was attributed to goodwill. Accumulated amortization amounted to
$74,000 as of November 30, 1996.
8
<PAGE> 12
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The following summary, prepared on a pro forma basis, combines the
Company's consolidated results of operations for the years ended
November 30, 1995 and 1996, with SMI's results of operations for the
years ended December 31, 1995, and November 30, 1996, respectively, as
if SMI had been acquired as of the beginning of the periods presented
(in thousands, except share data):
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------
1995 1996
---- ----
<S> <C> <C>
Revenues $ 39,838 $61,239
Net income 2,325 6,994
Net income per share 0.21 0.52
Shares used in per share computation 10,858 13,484
</TABLE>
The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the periods
presented. In addition, they are not intended to be a projection of
future results and do not reflect any synergies that might be achieved
from combined operations.
Donovan & Green, Inc.
On October 4, 1996 the Company entered into an agreement to acquire the
assets and assume substantially all the liabilities of Donovan & Green,
Inc. (DGI). The Purchase Agreement provides for initial payments to DGI
of $3,330,000 in cash and shares of the Company's common stock with a
fair market value of $1,820,000. In addition, DGI will be entitled to
receive an additional $3,220,000 in cash and a number of shares of
common stock of the Company with a value of up to $1,610,000 over the
next three fiscal years. DGI will also have the right to receive
additional payments if the subsidiary attains certain earnings goals
during the fiscal years ending November 30, 1997, 1998, 1999, and 2000.
DGI may receive $889,000 in cash and shares of the Company's common
stock with a value of $444,000 in each of 1998 and 1999 if the
subsidiary meets its earnings goals for the 1997 and 1998 fiscal years.
To the extent that the subsidiary exceeds its earnings goals for the
1997, 1998, 1999, and 2000 fiscal years by more than 10%, DGI will be
entitled to receive cash and common stock of the Company with a
combined value of up to $1,000,000 per year for each of these four
years. The Company anticipates closing the acquisition in December
1996.
9
<PAGE> 13
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
(3) MARKETABLE SECURITIES
Marketable securities include the following as of November 30, 1996 (in
thousands):
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Municipal obligations $ 37,771 $ -- $ -- $ 37,771
Marketable equity security 189 -- 65 124
-------- ----- ---- --------
$ 37,960 $ -- $ 65 $ 37,895
======== ===== ==== ========
</TABLE>
The contractual maturities of available-for-sale debt securities,
regardless of their balance sheet classification as of November 30,
1996, are as follows (in thousands):
<TABLE>
<CAPTION>
AVAILABLE-FOR-
SALE SECURITIES
-------------------------
FAIR
COST VALUE
--------- --------
<S> <C> <C>
Due within one year $ 14,037 $ 14,037
Due after one year through five years 1,034 1,034
Due after five years through ten years 2,500 2,500
Due after ten years 20,200 20,200
--------- --------
$ 37,771 $ 37,771
========= ========
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment include the following (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------------
1995 1996
--------- ---------
<S> <C> <C>
Computer equipment and software $ 2,149 $ 3,033
Furniture and fixtures 718 891
Video production equipment 750 928
Leasehold improvements 558 877
-------- -------
4,175 5,729
Less accumulated depreciation and amortization 1,767 2,477
-------- -------
$ 2,408 $ 3,252
======== =======
</TABLE>
10
<PAGE> 14
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
(5) 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 lines of credit have maturities of September 30,
1997. 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 for the $3,000,000 facility and at prime rate plus
.5% for the $1,000,000 facility. Borrowings are secured by all assets
of the Company. As of November 30, 1995 and 1996, the Company had not
drawn on the line of credit.
Notes payable consisted of the following (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------
1995 1996
---- ----
<S> <C> <C>
Borrowings under term loan, prime rate plus 1.5%,
due December 1, 2000 $ -- $ 163
Borrowings under term loan, prime rate plus .75%,
due July 30, 1997 408 89
Purchase contracts, with interest at 5.65% to 10.25%,
expiring at various dates through December 1, 2000 116 190
Other 204 394
----- ----
728 836
Less current maturities 316 417
----- ----
$ 412 $ 419
===== =====
</TABLE>
Future maturities of the long-term portion of notes payable are as
follows: $417,000 in fiscal 1997; $142,000 in fiscal 1998; $133,000 in
fiscal 1999; $105,000 in fiscal 2000; and $39,000 in fiscal 2001.
(6) 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, which begin to expire
in 1996.
Total rent expense for facilities and office equipment was
approximately $1,128,000, $2,183,000, and $3,607,000 for the years
ended November 30, 1994, 1995, and 1996, respectively.
11
<PAGE> 15
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Future minimum operating lease payments for facilities and equipment
are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending
November 30,
------------------
<S> <C>
1997 $2,485
1998 1,918
1999 1,635
2000 1,552
2001 1,160
Thereafter 673
------
$9,423
======
</TABLE>
(7) STOCKHOLDERS' EQUITY
Reincorporation
On December 7, 1995, the Company was reincorporated in Delaware. The
certificate of incorporation provides for 5,000,000 authorized shares
of preferred stock with a $.001 par value per share and for 30,000,000
authorized shares of common stock with a $.001 par value per share. The
accompanying 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 the Company's common stock,
and all outstanding options to purchase shares of the Company's Series
B common stock were converted into options to purchase an equal number
of shares of the Company's common stock.
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.
1995 Series B Common Stock Plan
On April 28, 1995, the Company's Board of Directors approved the 1995
Series B common stock plan (the Plan). Under the Plan, 750,000 shares
of Series B common stock have been reserved for issuance. Options
granted under the Plan may be either incentive stock options or
nonstatutory stock options, as designated by the Company's Board of
Directors. The Plan expires 10 years after adoption.
12
<PAGE> 16
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Series B common stock possessed 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 NUMBER OF PRICE
FOR 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
-------- --------
Balances, November 30, 1995 115,784 634,216 0.50 - 9.00
-------- -------
Options granted (87,800) 87,800 10.00
Options exercised -- (82,685) 0.50 - 9.00
Options canceled 44,175 (44,175) 0.50 - 9.00
Plan shares expired (72,159) -- 0.50 - 9.00
-------- --------
Balances, November 30, 1996 -- 595,156 0.50 - 10.00
======== =======
</TABLE>
As of November 30, 1995 and 1996, options to purchase 155,492 and
211,749 shares, respectively, were vested.
1995 Stock Plan
In October 1995, the Company's 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
eligible employees, officers, and consultants of the Company. The
Company's Board of Directors or a committee thereof, has the authority
to select the persons to whom awards are granted and determine the
terms of each award. As of November 30, 1995, no options or rights had
been granted pursuant to the Stock Plan, and 1,000,000 shares were
available for future grant under the Stock Plan.
In November 1996, the Company's Board of Directors authorized the
repricing of outstanding options to purchase the Company's common stock
with exercise prices in excess of $20.00 per share to reduce their
exercise price to $20.00 per share. The repricing has been reflected
in the plan activity for the year ended November 30, 1996 as follows:
13
<PAGE> 17
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
-------------------------
AVAILABLE NUMBER OF PRICE
FOR GRANT SHARES PER SHARE
--------- --------- ---------
<S> <C> <C> <C>
Options available for grant under plan 1,000,000 -- $ --
Options granted (934,700) 934,700 20.00
Options canceled 35,000 (35,000) 20.00
--------- ---------- ------
Balances, November 30, 1996 100,300 899,700 20.00
========= ========== ======
</TABLE>
As of November 30, 1996, no options under the Stock Plan were vested.
In December 1996, the total number of shares reserved for issuance
under the Stock Plan was increased to 2,600,000.
1995 Employee Stock Purchase Plan
The Company's 1995 Employee Stock Purchase Plan (the Purchase Plan) was
approved by the Company's Board of Directors in October 1995 and
provides for the purchase 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 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. To date, 35,000 options have been
granted under the Directors' Option Plan.
14
<PAGE> 18
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Public Offerings
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 $37,800,000 in cash, net of
underwriting discounts, commissions, and other costs. In June 1996, the
Company completed a secondary public offering of 1,800,000 shares of
its common stock at a per share price to the public of $34.00. Of these
shares, 131,500 were sold by the Company, and 1,668,500 were sold by
certain stockholders. The Company received proceeds of approximately
$3,800,000 in cash, net of underwriting discounts, commissions, and
other costs.
(8) INCOME TAXES
The provision for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-------------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 260 $ 1,201 $ 3,047
State 70 340 1,148
Foreign 3 -- --
------- ------- -------
333 1,541 4,195
------- ------- -------
Deferred:
Federal (106) (377) (762)
State (35) (102) (167)
------- ------- -------
(141) (479) (929)
------- ------- -------
$ 192 $ 1,062 $ 3,266
======= ======= =======
</TABLE>
15
<PAGE> 19
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and liabilities as of
November 30, 1995 and 1996, are presented below:
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowances $ 297 $ 327
Depreciation -- 314
Federal benefit of state taxes 125 266
Billing in excess of fees and expenditures -- 106
Deferred compensation -- 657
Benefit and other accruals 129 198
------- -------
Total gross deferred tax assets 551 1,868
------- -------
Deferred tax liabilities:
Deferred rent -- (148)
Change from cash to accrual method of accounting for income tax
purposes (322) (620)
Depreciation (58) --
------- -------
Total gross deferred tax liabilities (380) (768)
------- -------
Deferred tax assets $ 171 $ 1,100
======= =======
</TABLE>
The Company's effective tax rate differs from the statutory federal
income tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------
1995 1996
------ ------
<S> <C> <C>
Federal tax statutory rate 34.0% 34.0%
State income taxes, net of federal benefit 6.0 7.4
Tax exempt income -- (5.5)
Other 3.7 0.6
------ ------
43.7% 36.5%
====== ======
</TABLE>
16
<PAGE> 20
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
(9) SIGNIFICANT CUSTOMERS
In the years ended November 30, 1995 and 1996, professional fees from a
major telecommunications company amounted to approximately $6,730,000
and $8,003,000, respectively, representing approximately 19% and 14%,
respectively, of total professional fees. This customer owed the
Company a total of approximately $1,212,000 and $2,092,000 as of
November 30, 1995 and 1996, respectively. During 1994, professional
fees from a computer hardware company amounted to approximately
$3,194,000 representing approximately 14% of total professional fees
for 1994.
17
<PAGE> 21
EXHIBIT INDEX
Exhibit 99.1 Press Release dated December 18, 1996
<PAGE> 1
Exhibit 99.1
Carlton H. Baab
Chief Financial Officer
CKS Group, Inc.
408-366-5100
Gina L. Bianchini
Investor Relations
CKS Group, Inc.
408-342-5333
CKS GROUP, INC. ANNOUNCES FOURTH QUARTER FISCAL 1996 RESULTS; COMPANY
REPORTS 80% YEAR-OVER-YEAR INCREASE IN REVENUES AND RECORD NET
INCOME
CUPERTINO, Calif. (December 18,1996)-- CKS Group, Inc. (NASDAQ: CKSG) today
announced that revenues for the fourth quarter of fiscal 1996, ended November
30, 1996, reached $18.5 million, an increase of 80% from revenues of $10.3
million recorded in the same period of the prior year. The Company reported net
income of $2.2 million, or $0.16 per share, an increase of 275% from net income
of $577,000, or $0.05 per share, for the fourth quarter of fiscal 1995.
Revenues for the fiscal year ended November 30, 1996, were $57.0 million, an
increase of 64% from $34.8 million for the fiscal year 1995. Net income for the
fiscal year ended November 30, 1996 was $5.7 million, or $0.43 per share, an
increase of 316% from net income of $1.4 million, or $0.13 per share, for the
comparable period in the prior year.
New media services contributed approximately 42% of total revenues in the fourth
quarter. Revenues attributable to new media services increased approximately 41%
in the fourth quarter as compared to the third quarter of fiscal 1996.
"Our strong quarter-over-quarter as well as annual growth in both revenues and
profitability demonstrate not only the tremendous opportunity in new media
marketing communication services but also CKS Group's continued emphasis on
providing our clients with strategic integrated marketing solutions," commented
Mark D. Kvamme, CKS Group's Chairman and Chief Executive Officer.
In the fourth quarter, CKS Group expanded relationships with existing clients
such as Citibank, Fujitsu Computer, General Motors, Hughes Network Systems,
Microsoft, Mitsubishi Motors, Nicholas-Applegate, Prudential, The Dun &
Bradstreet Corporation and Visa. In addition, CKS Group initiated strategic
relationships with new clients such as Disney, NASDAQ, RR Donnelley & Sons and
Zenith Data Systems.
<PAGE> 2
As announced on October 7, 1996, CKS Group signed a definitive agreement to
acquire Donovan and Green, a premier New York-based integrated marketing
communications firm specializing in environmental design and information
architecture. Donovan and Green's clients include Celebrity Cruises, Citibank,
Coca Cola, Corning Glass, Hallmark Cards, Hoffman LaRoche, Sony, Texas
Instruments, and 3M. CKS Group will purchase 100% of the assets of Donovan and
Green, a privately held company. The consideration paid by CKS Group will
include cash and common stock of CKS Group and the acquisition will be accounted
for as a purchase.
Certain of the statements set forth in this news release are forward looking
statements. Actual results could differ materially from those set forth, or
contemplated, in these forward looking statements. Important factors that could
cause such actual results to differ materially include the establishment or loss
of key client relationships, the development of the market for new media, the
success of the Company's business acquisition strategy, the uncertain adoption
of the Internet as a medium of commerce and communications and other risks.
Investors are encouraged to read the Company's reports on Forms 10-Q and 10-K
filed with the Securities and Exchange Commission, particularly the risk factors
and "Factors Affecting Operating Results" set forth in those reports.
CKS Group, headquartered in Cupertino, California, 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 CKS Group provides 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. CKS Group is a provider of
integrated marketing communication programs that utilize advanced technology
solutions and new media--which CKS Group defines as media that delivers content
to the end users in digital form, including the World Wide Web, the Internet,
proprietary online services, CD-ROMs, laptop PC presentations and interactive
kiosks. CKS Group has offices in Silicon Valley, San Francisco, Portland, New
York and Washington, D.C.
