<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
June 25, 1997
Date of Report (Date of earliest event reported)
CKS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-27090 77-0385435
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
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 ITEMS.
CKS Group, Inc. (the "Company") has included herein supplemental
consolidated balance sheets of the Company as of November 30, 1995 and 1996 and
March 2, 1997, and related supplemental consolidated statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended November 30, 1996 and the three-month periods ended February 29,
1996 and March 2, 1997 (the "Supplemental Financials"). The Supplemental
Financials give retroactive effect to the merger of SiteSpecific, Inc. with and
into a wholly owned subsidiary of the Company on June 17, 1997, which
transaction has been accounted for as a pooling of interests.
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:
Page
Independent Auditors' Report 3
Supplemental Consolidated Balance Sheets 4
Supplemental Consolidated Statements of Income 5
Supplemental Consolidated Statements of Stockholders' Equity 6
Supplemental Consolidated Statements of Cash Flows 7
Notes to Supplemental Financial Statements 8
(b) Exhibits.
23.1 Consent of KPMG Peat Marwick LLP, independent auditors.
2
<PAGE> 3
Independent Auditors' Report
The Board of Directors and Stockholders
CKS Group, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of CKS
Group, Inc. and subsidiaries (the Company) as of November 30, 1995 and 1996, and
the related supplemental consolidated statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
November 30, 1996. These supplemental consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental consolidated financial statements based on our
audits. We did not audit the financial statements of McKinney & Silver (M&S),
which statements reflect total assets constituting 42% and 23% as of November
30, 1995 and 1996, respectively, and total revenues constituting 49%, 40%, and
33%, and income before income taxes constituting 91%, 65%, and 38% in each of
the years in the three-year period ended November 30, 1996, respectively, of the
related supplemental consolidated totals. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to amounts included for M&S, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of CKS Group, Inc. and SiteSpecific on June 17, 1997, which has been
accounted for as pooling of interests as described in Note 2 to the supplemental
consolidated financial statements. Generally accepted accounting principles
proscribe giving effect to a consummated business combination accounted for by
the pooling-of-interests method in financial statements that do not include the
date of consummation. These financial statements do not extend through the date
of consummation. However, they will become the historical consolidated financial
statements of CKS Group, Inc. and subsidiaries after financial statements
covering the date of consummation of the business combination are issued.
In our opinion, based on our audits and the report of the other auditors, the
supplemental 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 applicable after financial statements are issued for a period which
includes the date of consummation of the business combination.
KPMG PEAT MARWICK LLP
San Jose, California
June 17, 1997
3
<PAGE> 4
CKS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30, MARCH 2,
ASSETS 1995 1996 1997
-------- ------- --------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and equivalents $ 4,817 19,385 15,321
Marketable securities - 37,895 29,161
Accounts receivable, net of allowance of $868, $762, and $945
in 1995, 1996, and 1997, respectively 12,997 22,651 23,730
Fees and expenditures in excess of billings 1,145 2,792 4,035
Prepaid expenses and other 1,097 1,707 2,390
-------- ------- --------
Total current assets 20,056 84,430 74,637
Property and equipment, net 3,415 4,571 4,839
Goodwill and other assets 188 6,237 25,858
-------- ------- --------
Total assets $ 23,659 95,238 105,334
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,822 21,392 16,895
Accrued expenses 2,421 6,424 5,667
Billings in excess of fees and expenditures 2,519 3,257 3,618
Current portion of liabilities to related parties 1,342 1,955 2,747
Current portion of notes payable and capital lease obligations 352 433 995
Income taxes payable 974 188 -
-------- ------- --------
Total current liabilities 16,430 33,649 29,922
Deferred taxes 383 - -
Notes payable and capital lease obligations, less current portion 496 502 491
Liabilities to related parties, less current portion - 223 882
-------- ------- --------
Total liabilities 17,309 34,374 31,295
-------- ------- --------
Stockholders' equity:
Preferred stock; $0.001 par value; 5,000,000 shares authorized;
none issued and outstanding - - -
Common stock; $0.001 par value; 30,000,000 shares authorized:
Series A common stock; 3,114,437 shares issued and
outstanding in 1995 3 - -
Common stock; 7,314,000, 13,336,000, and 14,335,000
shares issued and outstanding in 1995, 1996, and 1997,
respectively 7 13 14
Additional paid-in capital 3,108 51,716 64,901
Unrealized loss on marketable securities - (65) (119)
Notes receivable from stockholders (292) (292) (292)
Retained earnings 3,524 9,492 9,535
-------- ------- --------
Total stockholders' equity 6,350 60,864 74,039
-------- ------- --------
Total liabilities and stockholders' equity $ 23,659 95,238 105,334
======== ======= ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
4
<PAGE> 5
CKS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED NOVEMBER 30, PERIODS ENDED
------------------------------- FEBRUARY 29, MARCH 2,
1994 1995 1996 1996 1997
------- ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues $44,761 58,383 88,248 14,086 24,319
------- ------ ------ ------ ------
Operating expenses:
Direct salaries and related expenses 10,437 15,440 22,962 4,400 7,110
Other direct operating expenses 21,798 24,820 36,355 5,395 9,157
General and administrative expenses 7,539 11,545 17,570 3,048 5,619
Merger costs - - - - 1,593
------- ------ ------ ------ ------
Total operating expenses 39,774 51,805 76,887 12,843 23,479
------- ------ ------ ------ ------
Operating income 4,987 6,578 11,361 1,243 840
Other income, net 121 296 2,113 338 523
------- ------ ------ ------ ------
Income before income taxes 5,108 6,874 13,474 1,581 1,363
Income taxes 192 1,065 3,025 349 174
------- ------ ------ ------ ------
Net income $ 4,916 5,809 10,449 1,232 1,189
======= ====== ====== ====== ======
Unaudited pro forma net income and per share data:
Income before income taxes, as reported $ 5,108 6,874 13,474 1,581 1,363
Pro forma income taxes 2,021 2,823 5,108 595 492
------- ------ ------ ------ ------
Pro forma net income $ 3,087 4,051 8,366 986 871
======= ====== ====== ====== ======
Pro forma net income per share $ 0.29 0.35 0.58 0.07 0.06
====== ====== ======
Shares used in per share computation 10,808 11,653 14,435 14,040 15,123
======= ====== ====== ====== ======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
5
<PAGE> 6
CKS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A UNREALIZED
COMMON STOCK COMMON STOCK ADDITIONAL LOSS ON
---------------- ------------------ PAID-IN MARKETABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES
------ ------ ------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, November 30, 1993 - $ - 7,840 $ 8 1,037 -
Issuance of common stock - - 2,273 2 225 -
Repurchase of common stock - - (650) (1) (313) -
Distributions to stockholders - - - - - -
Net income - - - - - -
------ --- ------ ---- ------ ----
Balances, November 30, 1994 - - 9,463 9 949 -
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) -
Issuance of common stock - - 257 - 103 -
Compensation related to stock options - - - - 156 -
Collections on stockholder notes receivable - - - - - -
Distributions to stockholders - - - - - -
Net income - - - - - -
------ --- ------ ---- ------ ----
Balances, November 30, 1995 3,114 3 7,314 7 3,108 -
Conversion of Series A common stock to common
stock (3,114) (3) 3,114 3 - -
Issuance of common stock warrants - - - - 100 -
Issuance of common stock - - 2,991 3 48,060 -
Compensation related to stock options - - - - 130 -
Tax benefit from disqualifying dispositions - - - - 926 -
Unrealized loss on marketable securities - - - - - (65)
Distributions to stockholders - - - - (499) -
Repurchase of common stock - - (83) - (109) -
Net income - - - - - -
------ --- ------ ---- ------ ----
Balances, November 30, 1996 - - 13,336 13 51,716 (65)
Issuance of common stock (unaudited) - - 999 1 1,284 -
Compensation related to stock options
(unaudited) - - - - 44 -
Unrealized loss on marketable securities
(unaudited) - - - - - (54)
Tax benefit from disqualifying dispositions
(unaudited) - - - - 909 -
Guaranteed common stock to be issued for business
acquisition (unaudited) - - - - 1,602 -
Distribution to stockholders (unaudited) - - - - - -
Deferred tax asset recorded in connection with
taxable pooling of interests (unaudited) - - - - 9,346 -
Change in subsidiary's fiscal year-end
(unaudited) - - - - - -
Net income (unaudited) - - - - - -
------ --- ------ ---- ------ ----
Balances, March 2, 1997 (unaudited) - $ - 14,335 $ 14 64,901 (119)
====== ====== ====== ==== ====== ====
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
NOTES
RECEIVABLE TOTAL
FROM RETAINED STOCKHOLDERS'
STOCKHOLDERS EARNINGS EQUITY
------------ -------- -------------
<S> <C> <C> <C>
Balances, November 30, 1993 (319) 1,313 2,039
Issuance of common stock (146) - 81
Repurchase of common stock 94 - (220)
Distributions to stockholders - (4,037) (4,037)
Net income - 4,916 4,916
---- ------- -------
Balances, November 30, 1994 (371) 2,192 2,779
Issuance of Series A common stock - - 1,924
Conversion of common stock to Series A common
stock - - -
Repurchase of common stock 8 - (15)
Issuance of common stock - - 103
Compensation related to stock options - - 156
Collections on stockholder notes receivable 71 - 71
Distributions to stockholders - (4,477) (4,477)
Net income - 5,809 5,809
---- ------- -------
Balances, November 30, 1995 (292) 3,524 6,350
Conversion of Series A common stock to common
stock - - -
Issuance of common stock warrants - - 100
Issuance of common stock - - 48,063
Compensation related to stock options - - 130
Tax benefit from disqualifying dispositions - - 926
Unrealized loss on marketable securities - - (65)
Distributions to stockholders - (4,481) (4,980)
Repurchase of common stock - - (109)
Net income - 10,449 10,449
---- ------- -------
Balances, November 30, 1996 (292) 9,492 60,864
Issuance of common stock (unaudited) - - 1,285
Compensation related to stock options
(unaudited) - - 44
Unrealized loss on marketable securities
(unaudited) - - (54)
Tax benefit from disqualifying dispositions
(unaudited) - - 909
Guaranteed common stock to be issued for business
acquisition (unaudited) - - 1,602
Distribution to stockholders (unaudited) - (898) (898)
Deferred tax asset recorded in connection with
taxable pooling of interests (unaudited) - - 9,346
Change in subsidiary's fiscal year-end
(unaudited) - (248) (248)
Net income (unaudited) - 1,187 1,187
---- ------- -------
Balances, March 2, 1997 (unaudited) (292) 9,535 74,039
==== ===== ======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
7
<PAGE> 8
CKS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED NOVEMBER 30, PERIODS ENDED
----------------------------- FEBRUARY 29, MARCH 2,
1994 1995 1996 1996 1997
------- ------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,916 5,809 10,449 1,190 1,189
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred income taxes (127) (7) (1,566) (125) (2520)
Compensation related to stock options - 156 130 26 44
Tax benefit from disqualifying dispositions - - 926 - 910
Depreciation and amortization 723 1,000 1,181 280 794
Changes in operating assets and liabilities:
Accounts receivable (6,523) (1,392) (8,148) (1,555) (4,047)
Fees and expenditures in excess of billings (890) 354 (1,647) (315) (1,119)
Prepaid expenses and other current assets (141) (943) 38 23 (1,218)
Accounts payable 5,182 (1,783) 12,195 2,804 (3,898)
Accrued expenses 512 1,553 3,556 (528) (990)
Billings in excess of fees and expenditures 1,803 (240) 246 666 (1,084)
Income taxes payable 293 656 (784) (579) (188)
------- ------ ------- ------- -------
Net cash provided by (used in) operating
activities 5,748 5,163 16,576 1,887 (9,859)
------- ------ ------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment (1,976) (1,574) (2,011) (658) (398)
Purchases of marketable securities - - (39,710) - (4,327)
Sales of marketable securities - - 1,750 - 13,007
Business acquired, net of cash received - - 55 - (4,927)
Other assets - (6) (586) (1) (130)
------- ------ ------- ------- -------
Net cash (used in) provided by
investing activities (1,976) (1,580) (40,502) (659) 3,225
------- ------ ------- ------- -------
Cash flows from financing activities:
Net borrowings (repayments) on line of credit and note payable 642 (676) (382) (103) 12
Collection (repayment) of stockholder notes receivable - 71 (37) - -
Proceeds from sale of common stock and warrants 60 1,994 43,154 38,378 1,285
Repurchase of common stock (220) (15) (109) (35) -
Distributions to stockholders (4,016) (4,444) (4,635) (2,364) (1,147)
Liabilities to related parties 377 (10) 503 - (1,767)
------- ------ ------- ------- -------
Net cash (used in) provided by
financing activities (3,157) (3,080) 38,494 35,876 (1,617)
------- ------ ------- ------- -------
Net change in cash and cash equivalents 615 503 14,568 37,104 (8,251)
Adjustment for change in subsidiary's fiscal year-end - - - - 4,187
Cash and cash equivalents, beginning of period 3,699 4,314 4,817 4,817 19,385
------- ------ ------- ------- -------
Cash and cash equivalents, end of period $ 4,314 4,817 19,385 41,921 15,321
======= ====== ======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid:
Interest $ 60 91 63 15 22
======= ====== ======= ======= =======
Income taxes $ 30 647 4,488 1,491 403
======= ====== ======= ======= =======
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 - -
======= ====== ======= ======= =======
Exchange of note payable for common stock $ - - 457 - -
======= ====== ======= ======= =======
Business acquired for payable to related parties $ - - - - 3,385
======= ====== ======= ======= =======
Business acquired for common stock $ - - - - 1,611
======= ====== ======= ======= =======
Deferred tax asset recorded in connection
with taxable pooling of interests $ - - - - 9,346
======= ====== ======= ======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
8
<PAGE> 9
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1994, 1995, AND 1996
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Principles of Combination
CKS Group, Inc. (CKS or 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
supplemental 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 supplemental 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
supplemental 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.
The accompanying supplemental consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The supplemental consolidated financial statements have been restated to reflect
the effect of the mergers with McKinney & Silver (M&S) and SiteSpecific, Inc.
(SiteSpecific) discussed in Note 2.
Fiscal Year
In February 1997, the Company changed its fiscal year-end, such that each fiscal
quarter of the Company shall end on the Sunday that is closest to the end of
February, May, August, and November of each fiscal year. The fiscal year shall
end on the Sunday that is closest to the end of November.
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.
9
<PAGE> 10
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
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 marketable securities and accounts
receivable. The Company's services are provided to clients in a variety of
industries. The Company performs ongoing credit evaluations of its clients,
generally does not require collateral, and records allowances for potential
credit losses.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment are depreciated on a straight-line basis
over estimated useful lives of three to seven years. Leasehold improvements are
amortized over the lesser of their useful lives or the remaining term of the
related lease.
Goodwill
Goodwill is amortized on a straight-line basis over 20 years. The Company
assesses recoverability 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 supplemental consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
10
<PAGE> 11
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
Revenue Recognition
Revenues are generally 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.
Commissions earned from advertising placed with media generally are recorded at
the time the advertising appears or is broadcast. Commissions earned for
production expenditures and fees derived from other services are recognized upon
performance of the services.
Income Taxes
The Company records income taxes using the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
As a partnership, M&S's earnings were taxed at the individual partner level,
therefore no provision for income taxes has been made in the accompanying
supplemental consolidated financial statements for income attributable to M&S.
The accompanying supplemental consolidated statements of income include a
provision for income taxes on an unaudited pro forma basis as if M&S had been a
C corporation fully subject to income taxes.
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.
11
<PAGE> 12
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) recently adopted Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. 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.
The FASB recently issued SFAS No. 128, Earnings Per Share. This statement
simplifies the standards for computing earnings per share (EPS) previously found
in Accounting Principles Board (APB) No. 15 and requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures. The Company will adopt SFAS No. 128 in fiscal 1998.
The adoption of SFAS No. 128 is expected to result in basic EPS greater than
primary EPS, computed under APB No. 15, and diluted EPS approximating primary
EPS, computed under APB No. 15.
(2) BUSINESS COMBINATIONS
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 1997
and 1998 upon attainment of certain financial performance goals by SMI. The
number of additional shares to be issued to the former stockholders 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 stockholders of
SMI, they will be recorded 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.
12
<PAGE> 13
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
The following summary, prepared on an unaudited pro forma basis, combines the
Company's supplemental consolidated results of operations for the years ended
November 30, 1995 and 1996 and the three-month period ended February 29, 1996,
with SMI's results of operations for the years ended December 31, 1995, and
November 30, 1996 and the three-month period ended February 29, 1996,
respectively, as if SMI had been acquired as of the beginning of the periods
presented (in thousands, except share data):
<TABLE>
<CAPTION>
YEARS ENDED THREE-MONTH
NOVEMBER 30, PERIODS ENDED
----------------- FEBRUARY 29,
1995 1996 1996
------- ------- --------
<S> <C> <C> <C>
Revenues $63,429 $92,536 $15,593
Pro forma net income 5,010 8,440 1,485
Pro forma net income per share 0.43 0.58 0.10
Shares used in pro forma per share computation 11,785 14,557 14,223
</TABLE>
The pro forma results are not necessarily indicative of what would have occurred
if the acquisition had been in effect for the periods presented. In addition,
they are not intended to be a projection of future results and do not reflect
any synergies that might be achieved from combined operations.
Donovan & Green, Inc.
On January 3, 1997, the Company acquired the assets and assumed substantially
all the liabilities of Donovan & Green, Inc. (D&G). The Purchase Agreement
provides for initial payments to D&G of $5,146,000. In addition, D&G 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. D&G 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. D&G may receive $889,000 in cash and
shares of the Company's common stock with a value of $444,000 in each of 1998
and 1999 if the subsidiary meets its earnings goals for the 1997 and 1998 fiscal
years. To the extent that the subsidiary exceeds its earnings goals for the
1997, 1998, 1999, and 2000 fiscal years by more than 10%, D&G will be entitled
to receive cash and common stock of the Company with a combined value of up to
$1,000,000 per year for each of these four years.
13
<PAGE> 14
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
The following summary, prepared on an unaudited pro forma basis,
combines the Company's supplemental consolidated results of
operations for the year ended November 30, 1996 and the three-month
periods ended February 29, 1996 and March 2, 1997, with D&G's
results of operations for the year ended December 31, 1996 and the
three month period ended March 31, 1996 and March 2, 1997,
respectively, as if D&G had been acquired as of the beginning of the
periods presented (in thousands, except share data):
<TABLE>
<CAPTION>
THREE-MONTH
PERIODS ENDED
YEAR ENDED ------------------------
NOVEMBER 30, FEBRUARY 29, MARCH 2,
1996 1996 1997
----------- ----------- --------
<S> <C> <C> <C>
Revenue $93,158 $15,508 $24,629
Pro forma net income 7,705 866 757
Pro forma net income per share 0.53 0.06 0.05
Shares used in pro forma per share computation 14,513 14,118 15,201
</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.
EPG Elektronische Publikationen GmbH
On March 10, 1997, CKS acquired all of the capital stock of EPG
Elektronische Publikationen GmbH (EPG), a German corporation. In
consideration for the sale of their shares in EPG, the stockholders
of EPG received $2,925,000 in cash and 86,603 shares of common stock
of CKS and the right to up to an additional $10,000,000 in cash and
additional shares of common stock over the next three fiscal years
upon attainment of certain financial performance goals by EPG. The
number of additional shares of CKS common stock to be issued to
stockholders of EPG will be determined based on the closing price of
CKS common stock over a 10 business day period ending 2 business
days prior to the issuance date of such shares. The acquisition of
the capital stock of EPG will be treated as a purchase for financial
accounting purposes.
14
<PAGE> 15
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
Gormley & Partners, Inc.
On March 13, 1997, the Company acquired certain assets of Gormley &
Partners, Inc. (Gormley), a Connecticut corporation. The Purchase
Agreement provides for an initial payment of $3,150,000 in cash and
40,206 shares of CKS common stock to Gormley. In addition, Gormley
will be entitled to receive an additional payment in April 1998 and
certain additional payments upon the attainment of certain
performance goals over the next four fiscal years.
McKinney & Silver
On January 31, 1997, the Company issued 841,291 shares of its common
stock for all of the partnership units and residual partnership
interests of M&S. The merger has been accounted for as a pooling of
interests, and, accordingly, the Company's supplemental consolidated
financial statements have been restated for all periods prior to the
merger to include the results of operations, financial position, and
cash flows of M&S. In M&S's historical financial statements, certain
direct operating expenses were offset against revenues. Such amounts
have been reclassified in the accompanying supplemental consolidated
financial statements to conform to CKS's presentation. The effect of
the reclassification was to increase revenues and other direct
operating expenses by $9,091,000, $9,593,000, and $13,614,000 during
1994, 1995, and 1996, respectively.
Prior to the combination, M&S's fiscal year ended on December 31. In
recording the business combination, M&S's financial statements as of
and for each of the years in the three-year periods ended December
31, 1996, have been combined with the Company's consolidated
financial statements as of and for each of the years in the
three-year periods ended November 30, 1996.
In 1997, M&S changed its fiscal year-end to the Sunday nearest
November 30 to conform with CKS's fiscal year-end. M&S's unaudited
result of operations for the month ended December 31, 1996, included
revenues of $2,230,000 and net income of $248,000. An adjustment has
been made to stockholders' equity as of March 2, 1997, to eliminate
the effect of including M&S's unaudited results of operations for
the month ended December 31, 1996, in both the year ended November
30, 1996, and the three-month period ended March 2, 1997.
In connection with the merger with M&S, the Company recorded a
nonrecurring charge for transaction related costs of approximately
$1,500,000, consisting primarily of fees for attorneys, accountants,
financial printing, and other related costs. In addition, because
the merger is taxable, in the first quarter of fiscal 1997, CKS
recorded a deferred tax asset and an increase to stockholders'
equity of approximately $9,346,000 for the difference between the
financial statement and tax carrying amounts of M&S's net assets
upon the closing of the transaction.
15
<PAGE> 16
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
SiteSpecific, Inc.
On June 17, 1997, the Company issued 260,000 shares of its common
stock for all of the outstanding capital stock of SiteSpecific, and
assumed approximately 125,000 warrants to purchase common stock and
all outstanding options to purchase common stock under an option
plan. The merger has been accounted for as a pooling of interests,
and accordingly, the Company's supplemental consolidated financial
statements have been restated for all periods prior to the merger to
include the results of operations, financial position, and cash
flows of SiteSpecific.
SiteSpecific's fiscal year ends on December 31. In recording the
business combination, SiteSpecific's financial statements as of
December 31, 1995 and 1996, and from inception to December 31, 1995,
and for the year ended December 31, 1996, have been combined with
the Company's consolidated financial statements as of and for each
of the years in the two-year periods ended November 30, 1996.
In connection with the merger with SiteSpecific, the Company
recorded a nonrecurring charge for transaction related costs of
approximately $800,000, consisting primarily of fees for attorneys,
accountants, financial printing, and other related costs.
Total revenues and net income for the individual entities as
previously reported were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED THREE-MONTH
NOVEMBER 30, PERIODS ENDED
---------------------------------- FEBRUARY 29, MARCH 2,
1994 1995 1996 1996 1997
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total revenue:
CKS $22,938 $34,792 $ 56,951 $ 9,150 $ 23,563
M&S 21,823 23,326 29,448 4,723 -
SiteSpecific - 265 1,849 213 756
------- ------- -------- -------- --------
$44,761 $58,383 $ 88,248 $ 14,086 $ 24,319
======= ======= ======== ======== ========
Total net income (loss):
CKS $ 288 $ 1,366 $ 5,679 $ 743 $ 1,250
M&S 4,628 4,436 5,079 543 -
SiteSpecific - 7 (550) (96) (113)
------- ------- -------- -------- --------
$ 4,916 $ 5,809 $ 10,208 $ 1,190 $ 1,137
======= ======= ======== ======== ========
</TABLE>
16
<PAGE> 17
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
(3) MARKETABLE SECURITIES
Marketable securities included the following as of November 30, 1996
(in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Municipal obligations $37,771 $ - $ - $37,771
Marketable equity security 189 - 65 124
------- ------ ------- -------
$37,960 $ - $ 65 $37,895
======= ====== ======= =======
</TABLE>
The contractual maturities of available-for-sale debt securities,
regardless of their balance sheet classification as of November 30,
1996, were as follows (in thousands):
<TABLE>
<CAPTION>
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 included the following (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
1995 1996
---- ----
<S> <C> <C>
Computer equipment and software $2,217 3,375
Furniture and fixtures 1,992 2,459
Video production equipment 750 928
Leasehold improvements 1,038 1,430
------ -----
5,997 8,192
Less accumulated depreciation and amortization 2,582 3,621
------ -----
$3,415 4,571
====== =====
</TABLE>
17
<PAGE> 18
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
(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 expire on 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 0.5% for the $1,000,000 facility. Borrowings are
secured by all assets of the Company. As of November 30, 1995 and
1996, the Company has not drawn on the lines of credit.
During 1996, M&S entered into a $500,000 line of credit with a bank
bearing interest at the bank's prime rate plus 0.25%. Borrowings are
unsecured and the line of credit expires on April 1, 1997. No
amounts were outstanding as of December 31, 1996, under this
arrangement.
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 0.75%,
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 324 493
---- ---
848 935
Less current maturities 352 433
---- ---
$496 502
==== ===
</TABLE>
Future maturities of notes payable are as follows: $433,000 in
fiscal 1997; $225,000 in fiscal 1998; $133,000 in fiscal 1999;
$105,000 in fiscal 2000; and $39,000 thereafter.
(6) RELATED PARTY TRANSACTIONS
In connection with the acquisition of the assets, liabilities, and
operations of M&S in 1990, M&S redeemed the equity interest of the
principal partner. Consideration provided by the redemption
agreement included a contingent amount of 50% of the Partnership's
adjusted income (as defined by the redemption agreement), for the
years 1991 through 1996, and 33-1/3% of such adjusted income for the
years 1997 through 2000. The redemption agreement also provided for
specific payout terms should the business be sold in years 1 through
10. The current portion of liabilities to related parties included
$1,301,000 and $1,804,000 as of December 1995 and 1996,
respectively, related to this arrangement.
18
<PAGE> 19
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
M&S reached an agreement with the estate of a deceased partner to
redeem all of her partnership shares for $457,000. The redemption
agreement provided for an initial $100,000 payment in December 1996
with the balance payable in quarterly installments without interest
over four years. The balance outstanding as of December 31, 1996, is
$312,000.
(7) LEASES
As of November 30, 1996, the Company maintains an executive office
and two operating offices in Northern California as well as
operating offices in Oregon, New York, Washington D.C., 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 $1,835,000, $2,935,000, and $4,427,000 for the years
ended November 30, 1994, 1995, and 1996, respectively.
Future minimum operating lease payments for facilities and equipment
are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending
November 30,
------------------
<S> <C>
1997 $ 3,340
1998 2,751
1999 2,415
2000 2,074
2001 1,161
Thereafter 673
-------
$12,414
=======
</TABLE>
(8) 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 $0.001 par value per share and for
30,000,000 authorized shares of common stock with a $0.001 par value
per share. The accompanying supplemental consolidated financial
statements have been
19
<PAGE> 20
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
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.
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.
20
<PAGE> 21
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
Plan activity is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
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 below.
21
<PAGE> 22
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
Plan activity for the year ended November 30, 1996, is summarized as
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
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.
SiteSpecific Option Plan
In connection with the SiteSpecific merger discussed in Note 2, the
SiteSpecific option plan was assumed by the Company, thereby
allowing participants to purchase CKS stock in amounts and at prices
adjusted to reflect the exchange ratio of the merger. As of November
30, 1996, 39,750 options are outstanding at a weighted-average
exercise price of $0.66 per share. No options are exercisable as of
year-end.
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.
22
<PAGE> 23
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
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.
Warrants to Purchase Common Stock
During 1996, SiteSpecific issued and sold warrants to purchase
58,902 shares of common stock. A warrant to purchase 30,292 shares
is exercisable through January 31, 1998, at an exercise price of
$1.64 per share. A warrant to purchase 28,610 shares is exercisable
for a two-year term commencing April 1, 1997, at an exercise price
equal to the greater of $6.99 per share or a formula based on
earnings before interest, taxes, depreciation, and amortization.
23
<PAGE> 24
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
(9) INCOME TAXES
Historical 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 2,327
State 70 340 942
Foreign 3 - -
------- ------ ------
333 1,541 3,269
------- ------ ------
Deferred:
Federal (106) (374) (937)
State (35) (102) (233)
------- ------ ------
(141) (476) (1,170)
------- ------ ------
Charge in lieu of taxes attributable
to employee stock plans - - 926
------- ------ ------
$ 192 1,065 3,025
======= ====== ======
</TABLE>
24
<PAGE> 25
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and liabilities are
presented below (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------
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 costs - 106
Deferred compensation - 657
Benefit and other accruals 129 231
Net operating loss - 217
----- ------
Total deferred tax assets 551 2,118
----- ------
Deferred tax liabilities:
Deferred rent - (148)
Change from cash to accrual method of
accounting for income tax purposes (322) (620)
Depreciation (61) (12)
----- ------
Total deferred tax liabilities (383) (780)
----- ------
Net deferred tax assets $ 168 1,338
===== ======
</TABLE>
The Company's effective tax rate differs from the statutory federal
income tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
------------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Federal tax statutory rate 34.0% 34.0% 35.0%
Partnership benefit (31.0) (22.0) (12.7)
State income taxes, net of federal benefit 0.8 3.5 3.8
Tax exempt income - - (3.6)
----- ----- -----
3.8% 15.5% 22.5%
===== ===== =====
</TABLE>
25
<PAGE> 26
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
Unaudited Pro Forma Income Taxes
The pro forma provision for income taxes reflects the income tax
expense that would have been reported if M&S (a partnership for
income tax reporting purposes) had been a C corporation for each of
the years in the three-year periods ended November 30, 1996. The
components of pro forma income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Current:
Federal $ 1,727 2,612 4,008
State 432 687 1,344
Foreign 3 - -
------- ------ ------
Total current 2,162 3,299 5,352
------- ------ ------
Deferred:
Federal (106) (374) (937)
State (35) (102) (233)
Foreign - - -
------- ------ ------
Total deferred (141) (476) (1,170)
------- ------ ------
Change in lieu of taxes attributable
to employee stock plans - - 926
------- ------ ------
Total pro forma provision
for income taxes $ 2,021 2,823 5,108
======= ====== ======
</TABLE>
The Company's pro forma effective rate differs from statutory
federal income tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
--------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal tax statutory rate 34.0% 34.0% 35.0%
State tax expenses, net of federal benefit 5.2 5.7 6.4
Tax exempt income - - (3.6)
Other 0.4 1.4 0.1
---- ---- ----
Pro forma income tax expense 39.6% 41.1% 37.9%
==== ==== ====
</TABLE>
26
<PAGE> 27
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND MARCH 2, 1997 IS UNAUDITED.)
On an unaudited pro forma basis, the tax effects of temporary
differences that give rise to the significant portions of the
unaudited pro forma deferred tax assets and liabilities do not
differ significantly from the historical amounts presented above as
of November 30, 1995 and 1996. Because the merger with M&S is
taxable, during the first quarter of fiscal 1997, CKS recorded a
deferred tax asset and an increase in stockholders' equity of
approximately $9,346,000 for the difference between the financial
statement and tax carrying amounts of M&S's net assets upon the
closing of the transaction.
(10) SIGNIFICANT CUSTOMERS
In the year ended November 30, 1994, professional fees from a cruise
ship operator and automotive manufacturer amounted to approximately
$10,025,000 and $6,903,000, respectively, representing 22% and 15%
of total revenues for the year, respectively. In the year ended
November 30, 1995, professional fees from the cruise ship operator,
an automotive manufacturer, and a major telecommunications company
amounted to approximately $7,608,000, $8,222,000, and $6,730,000,
respectively, representing approximately 13%, 14%, and 12% of total
revenues for the year, respectively. In the year ended November 30,
1996, professional fees from the automotive manufacturer amounted to
approximately $12,429,000 representing approximately 14% of total
revenues for the year.
The cruise ship operator owed the Company a total of approximately
$2,401,000 and $6,741,000 as of November 30, 1995 and 1996,
respectively. The automotive manufacturer owed the Company
approximately $2,857,000 as of November 30, 1995.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CKS GROUP, INC.
Dated: June 25, 1997 By: /s/ ROBERT T. CLARKSON
----------------------------
Robert T. Clarkson
Executive Vice President and
Secretary
<PAGE> 29
EXHIBIT INDEX
Exhibit
No. Document
- ------- --------
23.1 Consent of KPMG Peat Marwick LLP, independent auditors.
<PAGE> 1
Exhibit 23.1
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors
CKS Group, Inc.:
We consent to the incorporation by reference in the registration statements
(Nos. 333-3412, 333-22953, 333-23523, 333-23783, 333-25447, 333-24763, and
333-27331) on Forms S-3 and S-8 of CKS Group, Inc. of our report dated June 17,
1997, relating to the supplemental consolidated balance sheets of CKS Group,
Inc. and subsidiaries as of November 30, 1995 and 1996, and the related
supplemental consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended November 30, 1996,
which report appears in the report on Form 8-K of CKS Group, Inc. dated June 25,
1997.
KPMG PEAT MARWICK LLP
San Jose, California
June 26, 1997
