<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
JANUARY 31, 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 (Commission File Number) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation
or organization)
10441 Bandley Drive
Cupertino, California 95014
(Address of principal executive offices)
(408) 366-5100
(Registrant's telephone number, including area code)
<PAGE> 2
This Amendment to the Current Report on Form 8-K filed by the
Registrant with the Securities and Exchange Commission on February 14, 1997 is
being filed in order to amend Item 7 thereto as set forth below. The
undersigned Registrant hereby amends the following item of its Current Report
on Form 8-K, originally filed with the Securities and Exchange Commission on
February 14, 1997 as set forth on the pages attached hereto.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The following financial statements and exhibits are filed as part of
this report, where indicated.
Page
(a) Financial statements of business acquired, prepared pursuant
to Rule 3-05 of Regulation S-X:
<TABLE>
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Income and Partners' Capital . . . . . . . . . . . . . . . . . . . . . . . . 5
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-11
</TABLE>
(b) Pro forma financial information required pursuant to Article
11 of Regulation S-X:
<TABLE>
<S> <C>
Unaudited Pro Forma Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . 13
Unaudited Pro Forma Consolidated Statements of Operations . . . . . . . . . . . . . . . . 14-16
Notes to Pro Forma Consolidated Financial Information . . . . . . . . . . . . . . . . . . 17-19
</TABLE>
(c) Exhibits in accordance with Item 601 of Regulation S-K:
Exhibits:
2.1 Acquisition Agreement, dated as of January 31, 1997,
by and among Registrant, the current and former
partners of McKinney & Silver, a North Carolina
general partnership, Raleigh Acquisition Inc., a
Delaware corporation, Robert C. Doherty and Donald S.
Maurer, as Partner Representatives, and Chemical
Trust Company of California as Escrow Agent.*
4.1 Registration Rights Agreement among CKS, Raleigh
Acquisition, Inc. and the current and former partners
of McKinney & Silver dated January 31, 1997.*
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG Peat Marwick LLP
99.1 Supplemental Financial Statements:
Independent Auditors' Report
Supplemental Consolidated Balance Sheets
Supplemental Consolidated Statements of Income
Supplemental Consolidated Statements of Stockholders'
Equity
Supplemental Consolidated Statements of Cash Flows
Notes to Supplemental Consolidated Financial
Statements
____________________
*Previously filed as Exhibit to the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on February 14, 1997.
-2-
<PAGE> 3
Report of Independent Auditors
Partners
McKinney & Silver
We have audited the accompanying balance sheets of McKinney & Silver (a
Partnership) as of December 31, 1996 and 1995, and the related statements of
income, partners' capital, and cash flows for the three years then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of McKinney & Silver (a
Partnership) at December 31, 1996 and 1995, and the results of its operations
and its cash flows for the three years then ended in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
January 31, 1997
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<PAGE> 4
McKinney & Silver (A Partnership)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 11,844,410 $ 2,461,544
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . 7,992,367 5,783,797
Employee receivables . . . . . . . . . . . . . . . . . . . . . 6,150 250
Unbilled production costs . . . . . . . . . . . . . . . . . . . 749,282 674,298
-------------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 20,592,209 8,919,889
Property and equipment:
Furniture, fixtures and equipment . . . . . . . . . . . . . . . 1,526,167 1,273,974
Leasehold improvements . . . . . . . . . . . . . . . . . . . . 538,058 478,868
-------------- --------------
2,064,225 1,752,842
Less allowances for depreciation and amortization . . . . . . . (1,089,796) (811,452)
-------------- --------------
974,429 941,390
-------------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,566,638 $ 9,861,279
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . $15,965,306 $5,106,120
Deposits from clients . . . . . . . . . . . . . . . . . . . . . 1,480,721 1,560,007
Due to withdrawn partner (Note 4) . . . . . . . . . . . . . . . 1,804,419 1,301,471
Guaranteed payments to partners . . . . . . . . . . . . . . . . 61,412 39,546
Current portion of deferred rent . . . . . . . . . . . . . . . 22,343 22,343
Current portion of payable for redemption of partners' capital
(Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . 89,216 --
-------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 19,423,417 8,029,487
Long term portion of deferred rent . . . . . . . . . . . . . . . . 61,441 83,786
Long term portion of payable for redemption of partners' capital
(Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223,046 --
-------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 19,707,904 8,113,273
Partners' capital . . . . . . . . . . . . . . . . . . . . . . . . . 1,858,734 1,748,006
-------------- --------------
Total liabilities and partners capital . . . . . . . . . . . . . . $ 21,566,638 $ 9,861,279
============== ==============
</TABLE>
See accompanying notes.
-4-
<PAGE> 5
McKinney & Silver (A Partnership)
Statements of Income and Partners' Capital
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Agency income . . . . . . . . . . . . . . . . . . . . . . . . $15,833,901 $13,732,988 $12,732,119
Operating expenses:
Direct salaries and related expenses . . . . . . . . . . 5,579,694 4,930,621 4,269,601
Other direct operating expenses . . . . . . . . . . . . . 2,271,615 1,903,455 1,585,820
General and administrative expenses . . . . . . . . . . . 3,257,767 2,785,667 2,407,895
------------- ------------ ------------
Total operating expenses . . . . . . . . . . . . . . . . . . 11,109,076 9,619,743 8,263,316
Operating income . . . . . . . . . . . . . . . . . . . . . . 4,724,825 4,113,245 4,468,803
Other income, principally interest . . . . . . . . . . . . . 353,964 322,553 159,129
------------- ------------ ------------
Income before payments to withdrawn partner . . . . . . . . . 5,078,789 4,435,798 4,627,932
Payments to a withdrawn partner (Note 4) . . . . . . . . . . (2,552,547) (2,439,224) (2,465,221)
------------- ------------ ------------
Income available to partners . . . . . . . . . . . . . . . . 2,526,242 1,996,574 2,162,711
Partners' capital at beginning of year. . . . . . . . . . . . 1,748,006 1,755,305 1,143,812
Distribution of capital to partners . . . . . . . . . . . . . (1,926,976) (2,036,933) (1,572,358)
Partners' capital contributions . . . . . . . . . . . . . . . 10,500 33,060 21,140
Redemption of partnership capital . . . . . . . . . . . . . . (499,038) -- --
------------- ------------ ------------
Partners' capital at end of year. . . . . . . . . . . . . . . $ 1,858,734 $ 1,748,006 $ 1,755,305
============= ============ ============
</TABLE>
See accompanying notes.
-5-
<PAGE> 6
McKinney & Silver (A Partnership)
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income available to partners . . . . . . . . . . . . . . . . $2,526,242 $1,996,574 $2,162,711
Adjustments to reconcile income available to partners
to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 278,344 258,127 209,396
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . (2,208,570) 167,255 (3,621,994)
Employee receivables . . . . . . . . . . . . . . . . (5,900) 610 13,180
Unbilled production inventory . . . . . . . . . . . (74,984) 646,415 (865,578)
Prepaid expenses . . . . . . . . . . . . . . . . . . -- 10,642 (1,648)
Accounts payable and accrued expenses . . . . . . . 10,859,186 (2,170,708) 3,028,449
Deposits from clients . . . . . . . . . . . . . . . (79,286) (377,302) 1,186,787
Due to withdrawn partner . . . . . . . . . . . . . . 502,948 (11,260) 377,451
Deferred rent . . . . . . . . . . . . . . . . . . . (22,345) (22,344) 128,473
-------------- -------------- --------------
Net cash provided by operating activities . . . . . . . . . . 11,775,635 498,009 2,617,227
INVESTING ACTIVITIES
Purchases of property and equipment . . . . . . . . . . . . . (252,194) (255,440) (321,488)
Increase in leasehold improvements . . . . . . . . . . . . . (59,190) (9,113) (5,471)
-------------- -------------- --------------
Net cash used in investing activities . . . . . . . . . . . . (311,384) (264,553) (326,959)
FINANCING ACTIVITIES
Partnership distributions . . . . . . . . . . . . . . . . . . (1,926,976) (2,036,933) (1,572,358)
Partnership redemption . . . . . . . . . . . . . . . . . . . (164,909) -- --
Partners' capital contributions . . . . . . . . . . . . . . . 10,500 33,060 21,140
Capital lease payments . . . . . . . . . . . . . . . . . . . -- (39,097) (65,279)
-------------- -------------- --------------
Net cash used in financing activities . . . . . . . . . . . . (2,081,385) (2,042,970) (1,616,497)
-------------- -------------- --------------
Net increase (decrease) in cash . . . . . . . . . . . . . . . 9,382,866 (1,809,514) 673,771
Cash and cash equivalents at beginning of year . . . . . . . 2,461,544 4,271,058 3,597,287
-------------- -------------- --------------
Cash and cash equivalents at end of year . . . . . . . . . . $11,844,410 $2,461,544 $4,271,058
============== ============== ==============
</TABLE>
See accompanying notes.
-6-
<PAGE> 7
McKinney & Silver (A Partnership)
Notes to Financial Statements
December 31, 1996
1. ACCOUNTING POLICIES
ORGANIZATION
On January 1, 1991 a new partnership ("the Partnership") was formed to acquire
the assets and liabilities and continue the operations of McKinney & Silver (A
Partnership) ("M&S") (See Note 4). The name of the new partnership was then
changed to McKinney & Silver (A Partnership). Certain partners of the
Partnership were also officers and partners of M&S. For purposes of financial
and tax reporting the Partnership is being accounted for as a continuation of
the business of M&S.
The Partnership specializes in advertising, research and marketing studies, the
placement of advertising with various forms of media and the production of
collateral material such as brochures. Its principal market is medium to large
advertisers located throughout the United States. Its major customers are in
the automobile and cruise line industries.
INCOME RECOGNITION
Agency income represents amounts earned from advertising placed with various
forms of media, production commissions earned on expenditures incurred for
clients, and fees derived from other services performed in connection with
advertising, research and marketing studies.
Income is recognized as follows:
a. Commissions earned from advertising placed with media
generally are recorded at the time the advertising appears or
is broadcast.
b. Commissions earned for production expenditures and fees
derived from other services are recognized upon performance of
the service.
-7-
<PAGE> 8
1. ACCOUNTING POLICIES (CONTINUED)
ALLOCATION OF PARTNERSHIP INCOME
Income available to partners was allocated on a pro-rata basis to 10,620
partnership units through December 31, 1996.
CASH EQUIVALENTS
The Partnership considers all highly liquid investments with a maturity of
three months or less when purchased, to be cash equivalents. Cash equivalents
are invested in U.S. government backed securities at a commercial bank.
UNBILLED PRODUCTION COSTS
Unbilled production costs include actual expenses incurred with outside
suppliers and expenses incurred by employees and partners which will ultimately
be billed to clients. Salaries and other employee benefits are charged to
operations as incurred, which is in accordance with industry practice.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. The Partnership's
policy is to provide for depreciation of furniture, fixtures and equipment
principally by accelerated methods. The cost of leasehold improvements is being
amortized over 31 1/2 years using the straight-line method.
INCOME TAXES
No provision has been made for income taxes as the income is taxable
individually to the partners rather than being taxed at the partnership level.
SIGNIFICANT CUSTOMERS
During 1996, 1995 and 1994, two clients accounted for 74%, 75% and 85% of
agency billings, respectively.
-8-
<PAGE> 9
1. ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
RECLASSIFICATION
Certain 1995 and 1994 balances were reclassified to conform to 1996
presentation. The reclassifications had no impact on net income or partners'
capital as previously reported.
CONCENTRATION OF CREDIT RISK
The Partnership's principal financial instrument subject to potential
concentration of credit risk is accounts receivable which are unsecured. The
Partnership's exposure to credit loss in the event that payment is not received
for revenue recognized equals the outstanding accounts receivable balance.
2. LEASES
The Partnership occupied leased premises under an operating lease at a rental
of $586,963, $580,952 and $580,944 for 1996, 1995 and 1994, respectively.
Rental expense for automobiles and office equipment leased by the Partnership
under operating leases was $181,295, $170,706 and $126,221 for 1996, 1995 and
1994, respectively.
At December 31, 1996, minimum future rental payments under non-cancelable
operating leases, are as follows for each of the next five calendar years:
<TABLE>
<S> <C>
1997 $786,649
1998 763,149
1999 708,320
2000 517,148
2001 1,092
-------------
$ 2,776,358
=============
</TABLE>
-9-
<PAGE> 10
3. EMPLOYEE BENEFIT PLAN
In May 1993, the Partnership adopted a savings plan that qualifies as a cash or
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the plan, employees may defer up to 15% of their pre-tax compensation.
The Partnership will match 50% of employee (excluding partners) contributions
to a maximum of 6% of the employee's wages. The Partnership pays the Plan
expenses which totaled $10,482, $8,550 and $8,600 in 1996, 1995 and 1994,
respectively. Partnership contributions to the plan for 1996, 1995 and 1994
were $77,019, $72,056 and $59,290, respectively.
4. DUE TO WITHDRAWN PARTNER
In connection with the acquisition of the assets, liabilities and operations of
M&S, the Partnership redeemed the equity interest of the principal partner.
Consideration provided by the redemption agreement for the principal partner's
equity interest included a contingent amount of 50% of the Partnership's
adjusted income (as defined by the redemption agreement), for the years
1991-1996, and 33 1/3% of such adjusted income for the years 1997-2000. The
redemption agreement also provides for specific payout terms should the
business be sold in years 1 through 10.
Until amounts owed are fully paid to the withdrawn partner, the Partnership
shall abide by certain guidelines as specified in the redemption agreements.
If certain provisions, as defined in the agreement are violated, including the
decline of agency net profits below 25% of agency income the withdrawn partner
may demand an increase to a 60% share of profits for the balance of the payout
period. Additionally, if the Partnership suffers insolvency prior to payout,
the withdrawn partner can declare all amounts due and payable and is deemed a
creditor as to the amounts due, plus 60% of the gross value of all assets of
the Partnership. A UCC security interest has been filed to this effect.
5. LINE OF CREDIT
During 1996, the Partnership entered into a $500,000 line of credit with a bank
which bears interest at prime plus .25 percent The line is unsecured. The
balance outstanding at December 31, 1996 is $0. The line of credit expires
April 1, 1997.
-10-
<PAGE> 11
6. PAYABLE FOR REDEMPTION OF PARTNERS' CAPITAL
The Partnership reached an agreement with the estate of a deceased partner to
redeem all of her partnership shares for $456,870. 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 at December 31, 1996 is $312,262.
7. PRODUCTION ACTIVITIES BILLED TO CLIENTS
The Company recognizes production income net of amounts which it bills as
direct cost pass through to its clients. Had the amount of these pass through
been included in revenue and expenses, production revenue and direct expenses
would be increased by $13,614,442, $9,592,880 and $9,091,414 for 1996, 1995 and
1994, respectively.
8. SUBSEQUENT EVENT
On January 31, 1997, the Partnership was acquired by CKS Group, Inc. (CKS).
CKS acquired 100% of the Partnership interest in exchange for 841,291
shares of CKS, Inc.'s common stock with a market value of approximately $24
million based on the market price of CKS stock on the date of the transaction.
Approximately $600,000 of costs related to the transaction were incurred by the
Partnership subsequent to year end. Additionally, the Partnership expects to
incur $350,000 of escrow administration expense related to the transaction in
1997.
Additionally, the partnership redemption agreement described in Note 6 above
included an acceleration clause providing the amounts payable under the
agreement would become due and payable immediately in a lump sum payment in the
event of a merger or sale of the Partnership.
-11-
<PAGE> 12
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements have
been prepared to give effect to the acquisition by CKS Group, Inc. (CKS) of
McKinney & Silver (M&S), using the pooling of interests method of accounting.
The pro forma combined condensed balance sheet assumes that the acquisition
occurred on November 30, 1996, and combines CKS' November 30, 1996 consolidated
balance sheet with Donovan & Green, Inc.'s (D&G) and M&S's December 31, 1996
balance sheet. The pro forma combined condensed statements of income combine
CKS' consolidated results of operations for each of the years in the three-year
period ended November 30, 1996, with M&S's results of operations for each of the
years in the three-year period ended December 31, 1996, giving effect to the
acquisition as if it had occurred on December 1, 1993. The pro forma combined
condensed statement of income for the year ended November 30, 1996 also gives
effect to the August 1, 1996 acquisition of Schell/Mullaney, Inc. (SMI) and the
January 3, 1997 acquisition of D&G as if each acquisition occurred on December
1, 1995. Certain reclassifications have been made to the historical data to make
classifications for similar items consistent between the companies on a pro
forma combined basis.
CKS and M&S estimate that they will incur direct transaction costs of
approximately $1,500,000 associated with the acquisition which will be charged
to operations during the quarter ended February 28, 1997.
These unaudited pro forma combined condensed financial statements should be read
in conjunction with the historical consolidated financial statements and the
related notes thereto of CKS, SMI, D&G, and M&S included in CKS' reports on Form
8-K dated August 1, 1996, December 18, 1996, January 3, 1997, or included
elsewhere herein.
-12-
<PAGE> 13
CKS GROUP, INC. - MCKINNEY & SILVER
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
NOVEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
CKS/D&G/
CKS/D&G M&S
PRO FORMA COMBINED PRO FORMA COMBINED
ASSETS CKS D&G ADJUSTMENTS PRO FORMA M&S ADJUSTMENTS PRO FORMA
------ --- --- ----------- --------- --- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and equivalents $ 7,528 $ - $(5,146)(b) $ 2,382 $11,844 $(1,518)(d) $
(999)(e) 11,709
Marketable securities 37,895 - - 37,895 - 37,895
Accounts receivable, net 14,542 540 - 15,082 7,999 23,081
Fees and expenditures in
excess of billings 2,043 287 - 2,330 749 3,079
Prepaid expenses and other 1,429 377 (290)(a) 1,516 - 1,516
------- ------ ------- ------ ------- ------ --------
Total current assets 63,437 1,204 (5,436) 59,205 20,592 (2,517) 77,280
Property and equipment, net 3,252 502 - 3,754 974 4,728
Deferred taxes 300 - - 300 - 9,169(f) 9,469
Goodwill and other assets 5,919 188 9,300(b) 15,407 - 15,407
------- ------ ------ ------ ------- ------ --------
Total assets $72,908 $1,894 $ 3,864 $78,666 $21,566 $ 6,652 $106,884
======= ====== ====== ====== ======= ====== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,224 $ 612 $ (254)(a) $ 5,582 $15,885 $ $ 21,467
Accrued expenses 6,284 139 (36)(a)
2,169(b) 8,556 102 1,500(c) 10,158
Billings in excess of fees
and expenditures 1,720 91 - 1,811 1,481 3,292
Current portion of notes
payable and
capital lease obligations 417 505 - 922 - 922
Current portion of
liabilities to related
parties - - - - 1,955 (1,518)(d) 437
Income taxes payable 188 - - 188 - 188
------- ------ ------ ------ ------- ------ --------
Total current liabilities 13,833 1,347 1,879 17,059 19,423 (18) 36,464
Notes payable and capital lease
obligations, less current
portion 419 304 (270)(b)
886 (b) 1,339 62 1,401
Liabilities to related parties,
less current portion - - - - 223 223
------ ------ ------ ------ ------- ------ --------
Total liabilities 14,252 1,651 2,495 18,398 19,708 (18) 38,088
------- ------ ------ ------ ------- ------ --------
Stockholders' equity:
Common stock 13 2 - 15 - 15
Additional paid-in capital 50,824 - 1,612(b) 52,436 240 9,169(f) 61,845
Unrealized loss on
marketable securities (65) - - (65) - (65)
Notes receivable from
stockholders (292) - - (292) - (292)
Retained earnings 8,176 241 (243)(b) 8,174 1,618 (1,500)(c)
(999)(e) 7,293
------ ------ ------ ------ ------- ------ --------
Total stockholders'
equity 58,656 243 1,369 60,268 1,858 6,670 68,796
------- ------ ------ ------ ------- ------ --------
Total liabilities and
stockholders' equity $72,908 $1,894 $3,864 $78,666 $21,566 $ 6,652 $106,884
======= ====== ====== ====== ======= ====== ========
</TABLE>
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<PAGE> 14
CKS GROUP, INC. - MCKINNEY & SILVER
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED NOVEMBER 30, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CKS/M&S
PRO FORMA PRO FORMA
CKS M&S ADJUSTMENTS COMBINED
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Revenues $ 22,938 $ 12,732 $ 9,091(i) $ 44,761
----------- ----------- ----------- --------
Operating expenses:
Direct salaries and related expenses 6,168 4,269 10,437
Other direct operating expenses 11,121 1,586 9,091(i) 21,798
General and administrative expenses 5,131 2,408 7,539
----------- ----------- ----------- --------
Total operating expenses 22,420 8,263 9,091 39,774
----------- ----------- ----------- --------
Operating income 518 4,469 - 4,987
Other income (expense), net (38) 159 - 121
----------- ----------- ----------- --------
Income before income taxes 480 4,628 - 5,108
Income taxes 192 - 1,829(j) 2,021
----------- ----------- ----------- --------
Net income $ 288 $ 4,628 $ (1,829) $ 3,087
=========== =========== =========== ========
Net income per share $ 0.03 $ 0.29
=========== ========
Shares used in per share computation 9,944 864(m) 10,808
=========== ========
</TABLE>
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<PAGE> 15
CKS GROUP, INC. - MCKINNEY & SILVER
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED NOVEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CKS/M&S
PRO FORMA PRO FORMA
CKS M&S ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 34,792 $ 13,733 $ 9,593(i) $ 58,118
----------- ----------- ----------- -----------
Operating expenses:
Direct salaries and related expenses 10,485 4,931 15,416
Other direct operating expenses 13,164 1,903 9,593(i) 24,660
General and administrative expenses 8,688 2,786 11,474
----------- ----------- ----------- -----------
Total operating expenses 32,337 9,620 9,593 51,550
----------- ----------- ----------- -----------
Operating income 2,455 4,113 - 6,568
Other income (expense), net (27) 323 - 296
----------- ----------- ----------- -----------
Income before income taxes 2,428 4,436 - 6,864
Income taxes 1,062 - 1,758(j) 2,820
----------- ----------- ----------- -----------
Net income $ 1,366 $ 4,436 $ (1,758) $ 4,044
=========== =========== =========== ===========
Net income per share $ 0.13 $ 0.35
=========== ===========
Shares used in per share computation 10,726 864(m) 11,590
=========== =========== ===========
</TABLE>
-15-
<PAGE> 16
CKS GROUP, INC. - MCKINNEY & SILVER
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED NOVEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CKS/ CKS/SMI/
SMI/D&G D&G/M&S
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
CKS SMI D&G ADJUSTMENTS COMBINED M&S ADJUSTMENTS COMBINED
------ ----- ----- ----------- --------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 56,951 $ 4,288 $ 4,910 $ $ 66,149 $ 15,834 $ 13,614(i) $ 95,597
------ ----- ----- ------ ------ ------ ------ ------
Operating expenses:
Direct salaries and
related expenses 16,542 4,110 2,477 (3,162)(a) 19,967 5,580 25,547
Other direct operating
expenses 19,866 218 365 20,449 2,272 13,614(i) 36,335
General and
administrative
expense 13,355 808 2,020 163(c)
(83)(e)
458(g) 16,721 3,257 19,978
------ ----- ----- ------ ------ ------ ------ ------
Total operating
expenses 49,763 5,136 4,862 (2,624) 57,137 11,109 13,614 81,860
------ ----- ----- ------ ------ ------ ------ ------
Operating income 7,188 (848) 48 2,624 9,012 4,725 - 13,737
Other income (expense), net 1,757 (66) (39) (13)(b)
(413)(f) 1,226 354 - 1,580
------ ----- ----- ------ ------ ------ ------ ------
Income before
income taxes 8,945 (914) 9 2,198 10,238 5,079 15,317
Income taxes 3,266 - 816(d)
(118)(h) 3,964 2,083(j) 6,047
------ ----- ----- ------ ------ ------ ------ ------
Net income $ 5,679 $ (914) $ 9 $ 1,500 $ 6,274 $ 5,079 $ (2,083) $9,270
====== ===== ===== ====== ====== ====== ====== ======
Net income per share $ 0.43 $ 0.46 $ 0.64
===== ===== ======
Shares used in per share 122(k)
computation 13,362 78(l) 13,562 864(m) 14,426
====== ====== ====== ======
</TABLE>
-16-
<PAGE> 17
CKS GROUP, INC. - MCKINNEY & SILVER
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
(1) UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
Donovan & Green
Substantially of all of the assets and certain liabilities of D&G were
exchanged for an initial payment of $5,146,000 in cash. In addition, D&G
is 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. The actual number of shares issued will
depend upon the closing price of the Company's common stock around the
date of determination, such amount determined by dividing $1,610,000 by
the average of the bid and asking price of the Company's common stock, as
reported by NASDAQ, of the first business day prior to the date of
determination.
D&G will also have the right to receive additional payments if they attain
certain earning goals during 1997, 1998, 1999, and 2000. D&G may received
$889,000 in cash and shares of common stock of the Company with a value of
$444,000 in each of 1998 and 1999 if D&G meets its earning goals for the
1997 and 1998 fiscal years. To the extent that D&G 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. In the event such payments are made, additional goodwill will be
recorded and amortized over its remaining estimated life.
The following adjustments have been reflected in the unaudited pro forma
consolidated balance sheet.
(a) To eliminate certain assets and related liabilities associated
with the acquisition which are excluded pursuant to the D&G
Purchase Agreement.
(b) To record the allocation of purchase price to the net assets
of D&G as follows (in thousands):
<TABLE>
<S> <C>
Book value of net assets of D&G after adjustment (a) $ 243
Eliminate deferred rent 270
Goodwill 9,300
-------
Fair value of cash and common stock to be
issued in exchange $ 9,813
=======
</TABLE>
The actual allocation of the purchase price will depend upon the
composition of D&G's net assets on the closing date and the Company's
evaluation of the fair value of such net assets as of such date.
Consequently, the ultimate allocation of purchase price could differ from
that presented above.
-17-
<PAGE> 18
CKS GROUP, INC. - MCKINNEY & SILVER
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
McKinney & Silver
The pro forma combined condensed financial statements reflect the issuance
of 841,291 shares of CKS common stock in exchange for 10,620 outstanding
partnership units and the residual partnership interest of a retired
partner of M&S based on an exchange ratio of 59.41 shares of CKS common
stock for each outstanding partnership unit of M&S.
(c) CKS and M&S estimate they will incur direct transaction costs
of approximately $1,500,000 associated with the merger
consisting of transaction fees for attorneys, accountants,
financial printing, and other related charges. These
nonrecurring charges will be charged to operations during the
three months ended February 28, 1997.
(d) To record the payment of $1,518,000 of liabilities to related
parties prior to the closing.
(e) To record partnership distributions of $999,000 made prior to
closing.
(f) To record a deferred tax asset for the difference between the
financial statement and tax carrying amounts of M&S's net
assets upon the closing of the transaction.
(2) UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
Schell/Mullaney, Inc.
All of the shares of outstanding common stock of SMI were exchanged for
183,066 shares of the Company's common stock based on the closing price of
the Company's common stock on August 1, 1996. The acquisition agreement
also provides for additional payment up to $9,000,000 in the form of the
Company's common stock in the event certain performance targets are
achieved in 1997 and 1998. In the event such payments are made, additional
goodwill will be recorded and amortized over its remaining estimated life.
The following adjustments have been reflected in the unaudited pro forma
consolidated statements of operations:
(a) To reduce salary and bonus expense as if the employment
agreements entered into in conjunction with the acquisition
had been in effect from the beginning of the period presented.
(b) To eliminate interest income related to the $500,000 note
receivable from officer which was repaid prior to the closing.
(c) To amortize goodwill over an estimated life of 20 years.
(d) To record additional income tax expense at the combined
effective rate as a result of the termination of SMI's
S corporation status effective upon the closing, net of
nondeductible goodwill amortization resulting from the
acquisition.
-18-
<PAGE> 19
CKS GROUP, INC. - MCKINNEY & SILVER
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
Donovan & Green, Inc.
The following adjustments have been reflected in the unaudited pro forma
consolidated statements of operations:
(e) To reduce salary and bonus expense as if the employment
agreements entered into in conjunction with the acquisition
had been in effect from the beginning of the period presented.
(f) To reduce interest income and increase interest expense as if
the initial cash payment of $5,146,000 and deferred
acquisition payments of $3,220,000 had been paid or incurred
as of the beginning of the period.
(g) To amortize goodwill over an estimated life of 20 years.
(h) To reduce income tax expense at the combined effective rate as
a result of the pretax loss of D&G and deductible goodwill
amortization resulting from the acquisition.
McKinney & Silver
The pro forma statements of income exclude the direct transaction costs
associated with the merger. These costs are estimated to be $1,500,000 and
consist of fees for attorneys, accountants, and financial printing and
other related costs. CKS will record a nonrecurring charge during the
three months ended February 28, 1997 for these costs.
The pro forma adjustments related to the acquisition of M&S consist of the
following:
(i) To reclassify revenues and other direct operating expenses for
amounts that have been offset in M&S's historical financial
statements and conform to CKS's presentation for similar
items.
(j) To record additional income tax expense at the combined
effective rate as a result of the termination of M&S's
Partnership status effective upon the closing.
(3) UNAUDITED PRO FORMA NET INCOME PER SHARE
(k) To reflect the weighted average shares issued by the Company
in conjunction with the acquisition of SMI.
(l) To reflect the estimated shares to be issued in the future as
consideration for the acquisition of D&G based on the closing
price of the Company's common stock on November 30, 1996.
(m) Based on the weighted average number of partnership units
outstanding of M&S for each period using an exchange ratio of
59.41 shares of CKS common stock for each outstanding
partnership unit of M&S. Also, includes 210,323 shares issued
for the residual partnership interest of a former partner of
M&S.
-19-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: March 5, 1997 CKS GROUP, INC.
By: /s/ CARLTON H. BAAB
---------------------------------
Carlton H. Baab
Executive Vice President and
Chief Financial Officer
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors of
CKS Group, Inc.:
We consent to the use of our report dated January 31, 1997, with
respect to the balance sheets of McKinney & Silver as of December 31, 1995 and
1996, and the related statements of income and partners' capital and cash flows
for each of the years in the three year period ended December 31, 1996, which
report appears in the report on Form 8-K/A of CKS Group, Inc., dated March 5,
1997.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
March 5, 1997
<PAGE> 1
EXHIBIT 23.2
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, and 333-18085) on Forms S-3 and S-8 of CKS Group,
Inc. of our report dated February 28, 1997, with respect 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/A of CKS Group, Inc. dated March 3, 1997.
/s/ KPMG Peat Marwick LLP
San Jose, California
March 3, 1997
<PAGE> 1
EXHIBIT 99.1
<PAGE> 2
CKS GROUP, INC. AND SUBSIDIARIES
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report...............................................1
Supplemental Consolidated Balance Sheets...................................2
Supplemental Consolidated Statements of Income.............................3
Supplemental Consolidated Statements of Stockholders' Equity...............4
Supplemental Consolidated Statements of Cash Flows.........................5
Notes to Supplemental Consolidated Financial Statements....................6
</TABLE>
<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, which
statements reflect total assets constituting 42% and 23% as of November 30, 1995
and 1996, respectively, and total revenues constituting 49%, 40%, and 34%, and
income before income taxes constituting 91%, 65%, and 36% 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 McKinney & Silver, 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 provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of CKS Group, Inc. and McKinney & Silver on January 31, 1997, which
has been accounted for as a 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, 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.
/s/ KPMG Peat Marwick LLP
San Jose, California
February 28, 1997
- 1 -
<PAGE> 4
CKS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------------------
ASSETS 1995 1996
---------- ------------
<S> <C> <C>
Current assets:
Cash and equivalents $ 4,789 $ 19,372
Marketable securities - 37,895
Accounts receivable, net of allowance of $868 and $762 in 1995 and
1996, respectively 12,987 22,541
Fees and expenditures in excess of billings 1,145 2,792
Prepaid expenses and other 1,095 1,429
---------- ------------
Total current assets 20,016 84,029
Property and equipment, net 3,349 4,226
Goodwill and other assets 182 6,219
---------- ------------
Total assets $ 23,547 $ 94,474
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,769 $ 21,109
Accrued expenses 2,411 6,386
Billings in excess of fees and expenditures 2,519 3,201
Current portion of liabilities to related parties 1,341 1,955
Current portion of notes payable and
capital lease obligations 316 417
Income taxes payable 972 188
---------- ------------
Total current liabilities 16,328 33,256
Deferred taxes 380 -
Notes payable and capital lease obligations, less current portion 496 481
Liabilities to related parties, less current portion - 223
---------- ------------
Total liabilities 17,204 33,960
---------- ------------
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 shares issued and outstanding in 1995 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 3,108 51,064
Notes receivable from stockholders (292) (292)
Unrealized loss on marketable securities - (65)
Retained earnings 3,517 9,794
---------- ------------
Total stockholders' equity 6,343 60,514
---------- ------------
Total liabilities and stockholders' equity $ 23,547 $ 94,474
========== ============
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
-2-
<PAGE> 5
CKS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues $44,761 58,118 86,399
------- ------- -------
Operating expenses:
Direct salaries and related expenses 10,437 15,416 22,122
Other direct operating expenses 21,798 24,660 35,752
General and administrative expenses 7,539 11,474 16,612
------- ------- -------
Total operating expense 39,774 51,550 74,486
------- ------- -------
Operating income 4,987 6,568 11,913
Other income, net 121 296 2,111
------- ------- -------
Income before income taxes 5,108 6,864 14,024
Income taxes 192 1,062 3,266
------- ------- -------
Net income $ 4,916 5,802 10,758
======= ======= =======
Unaudited pro forma net income and per share data:
Income before income taxes, as reported $ 5,108 6,864 14,024
Pro forma income taxes 2,021 2,820 5,349
------- ------- -------
Pro forma net income $ 3,087 4,044 8,675
======= ======= =======
Pro forma net income per share $ 0.29 0.35 0.61
======= ======= =======
Shares used in per share computation 10,808 11,590 14,226
======= ======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
-3-
<PAGE> 6
CKS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
COMMON STOCK COMMON STOCK
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balances, November 30, 1993 - $ - 7,840 $ 8
Issuance of common stock - - 2,273 2
Repurchase of common stock - - (650) (1)
Distributions to stockholders - - - -
Net income - - - -
-------- ------ -------- ----
Balances November 30, 1994 - - 9,463 9
Issuance of Series A common stock 739 1 - -
Conversion of common stock to Series
A common stock 2,375 2 (2,375) (2)
Repurchase of common stock - - (31) -
Issuance of common stock - - 68 -
Compensation related to stock options - - - -
Collections on stockholder notes
receivable - - - -
Distributions to stockholders - - - -
Net income - - - -
-------- ------ -------- ----
Balances, November 30, 1995 3,114 3 7,125 7
Conversion of Series A common stock
to common stock (3,114) (3) 3,114 3
Issuance of common stock - - 2,923 3
Compensation related to stock options - - - -
Tax benefit from disqualifying
dispositions - - - -
Unrealized loss on marketable
securities - - - -
Distributions to stockholders - - - -
Net income - - - -
-------- ------ -------- ----
Balances, November 30, 1996 - $ - 13,162 $ 13
======== ====== ======== ====
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED NOTES
ADDITIONAL LOSS ON RECEIVABLE TOTAL
PAID-IN MARKETABLE FROM RETAINED STOCKHOLDERS'
CAPITAL SECURITIES STOCKHOLDERS EARNINGS EQUITY
------- ---------- ------------ -------- ------
<S> <C> <C> <C> <C> <C>
Balances, November 30, 1993 $ 1,037 $ - $ (319) $ 1,313 $ 2,039
Issuance of common stock 225 - (146) - 81
Repurchase of common stock (313) - 94 - (220)
Distributions to stockholders - - - (4,037) (4,037)
Net income - - - 4,916 4,916
--------- ----- ------- -------- ---------
Balances November 30, 1994 949 - (371) 2,192 2,779
Issuance of Series A common stock 1,923 - - - 1,924
Conversion of common stock to Series
A common stock - - - - -
Repurchase of common stock (23) - 8 - (15)
Issuance of common stock 103 - - - 103
Compensation related to stock options 156 - - - 156
Collections on stockholder notes
receivable - - 71 - 71
Distributions to stockholders - - - (4,477) (4,477)
Net income - - - 5,802 5,802
--------- ----- ------- -------- ---------
Balances, November 30, 1995 3,108 - (292) 3,517 6,343
Conversion of Series A common stock
to common stock - - - - -
Issuance of common stock 47,427 - - - 47,430
Compensation related to stock options 102 - - - 102
Tax benefit from disqualifying
dispositions 926 - - - 926
Unrealized loss on marketable
securities - (65) - - (65)
Distributions to stockholders (499) - - (4,481) (4,980)
Net income - - - 10,758 10,758
--------- ----- ------- -------- ---------
Balances, November 30, 1996 $ 51,064 $ (65) $ (292) $ 9,794 $ 60,514
========= ===== ======= ======== =========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
- 4 -
<PAGE> 7
CKS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL 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 $ 4,916 5,802 10,758
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 723 996 1,128
Changes in operating assets and liabilities:
Accounts receivable (6,523) (1,382) (8,048)
Fees and expenditures in excess of billings (890) 354 (1,647)
Prepaid expenses and other current assets (141) (941) 72
Accounts payable 5,182 (1,836) 11,965
Accrued expenses 512 1,543 3,533
Billings in excess of fees and expenditures 1,803 (240) 190
Income taxes payable 293 654 (784)
--------- --------- -----------
Net cash provided by operating activities 5,748 5,096 16,870
--------- --------- ----------
Cash flows from investing activities:
Purchases of property and equipment (1,976) (1,504) (1,679)
Purchases of marketable securities - - (39,710)
Sales of marketable securities - - 1,750
Cash acquired in business combination - - 55
Other assets - - (574)
---------- ----------- ----------
Net cash used by investing activities (1,976) (1,504 (40,158)
--------- --------- -----------
Cash flows from financing activities:
Net borrowings (repayments) on line of credit and note payable 642 (712) (419)
Collections on stockholder notes receivable - 71 -
Proceeds from sale of common stock 60 1,994 42,422
Repurchase of common stock (220) (15) -
Distributions to stockholders (4,016) (4,444) (4,635)
Liabilities to related parties 377 (11) 503
--------- --------- ----------
Net cash (used) provided by financing activities (3,157) (3,117) 37,871
--------- --------- ----------
Net change in cash and cash equivalents 615 475 14,583
Cash and cash equivalents, beginning of year 3,699 4,314 4,789
--------- --------- ----------
Cash and cash equivalents, end of year $ 4,314 4,789 19,372
========= ========= ==========
Supplemental 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
========= ========= ==========
Exchange of note payable for common stock $ - - 457
========= ========= ==========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
- 5 -
<PAGE> 8
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL 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. (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 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
signification intercompany accounts and transactions have been
eliminated in consolidation. The supplemental consolidated financial
statements have been restated to reflect the effect of the merger with
McKinney & Silver (M&S) discussed in Note 2.
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 marketable
securities and 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> 9
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL 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 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 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 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 by M&S from advertising placed with media generally
are recorded at the time the advertising appears or is broadcast.
Commissions earned by M&S for production expenditures and fees derived
from other services by M&S 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.
-7-
<PAGE> 10
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
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.
Recent Accounting Pronouncements
The Financial Accounting Standard Board (FASB) recently adopted 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.
(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 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> 11
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The following summary, prepared on a pro forma basis, combines the
Company's supplemental 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 per share data):
<TABLE>
<CAPTION>
YEARS ENDED
NOVEMBER 30,
-------------------------
1995 1996
---- ----
<S> <C> <C>
Revenues $ 63,161 $ 90,687
Pro forma net income 5,003 9,990
Pro forma net income per share 0.43 0.70
Shares used in pro forma per share computation 11,722 14,348
</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.
- 9 -
<PAGE> 12
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
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. Total revenues and net income for
the individual entities as previously reported are as follows (in
thousands):
YEARS ENDED NOVEMBER 30,
---------------------------------------------
1994 1995 1996
---- ---- ----
Total revenue:
CKS $ 22,938 34,792 56,951
M&S 21,823 23,326 29,448
----------- ----------- ----------
$ 44,761 58,118 86,399
=========== =========== ==========
Net income:
CKS $ 288 1,366 5,679
M&S 4,628 4,436 5,079
----------- ----------- ----------
$ 4,916 5,802 10,758
=========== =========== ==========
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 period 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 period
ended November 30, 1996.
In connection with the merger with M&S, the Company will record 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, CKS will record a deferred tax asset of
approximately $9,200,000 for the difference between the financial
statement and tax carrying amounts of M&S's net assets upon the closing
of the transaction.
- 10 -
<PAGE> 13
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
(3) MARKETABLE SECURITIES
Marketable securities include 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, are 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 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 1,992 2,417
Video production equipment 750 928
Leasehold improvements 1,036 1,415
-------- -------
5,927 7,793
Less accumulated depreciation and amortization 2,578 3,567
-------- -------
$ 3,349 $ 4,226
======== =======
</TABLE>
- 11 -
<PAGE> 14
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL 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 has not
drawn on the line 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 .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 .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 288 456
--------- ---------
812 898
Less current maturities 316 417
--------- ---------
$ 496 $ 481
========= =========
</TABLE>
Future maturities of notes payable are as follows: $417,000 in fiscal
1997; $204,000 in fiscal 1998; $133,000 in fiscal 1999; $105,000 in
fiscal 2000; and $39,000 thereafter.
(6) LIABILITIES TO RELATED PARTIES
In connection with the acquisition of the assets, liabilities, and
operations of M&S in 1990, the Partnership redeemed the equity interest
of the principal partner. Consideration provided by the redemption
agreement for the principal partner's equity interest 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 includes $1,301,000 and $1,804,000 as of
December 1995 and 1996, respectively, related to this arrangement.
The Partnership 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.
-12-
<PAGE> 15
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
(7) LEASES
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 $4,375,000 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 $ 3,272
1998 2,681
1999 2,343
2000 2,069
2001 1,161
Thereafter 673
-----------
$ 12,199
</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 $.001 par value per share and for 30,000,000
authorized shares of common stock with a $.001 par value per share. The
accompanying supplemental 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.
-13-
<PAGE> 16
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
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.
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.
-14-
<PAGE> 17
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
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.
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.
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.
-15-
<PAGE> 18
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL 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 cash proceeds of approximately $37,800,000, 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 cash proceeds of
approximately $3,800,000, net of underwriting discounts, commissions,
and other costs.
(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) (377) (762)
State (35) (102) (167)
------ -------- --------
(141) (479) (929)
------ -------- --------
Charge in lieu of taxes
attributable to employee
stock plans - - 926
------ -------- --------
$ 192 $ 1,062 $ 3,266
====== ======== ========
</TABLE>
-16-
<PAGE> 19
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and liabilities 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 costs - 106
Deferred compensation - 657
Benefit and other accruals 129 198
------- -------
Total 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 deferred tax liabilities (380) (768)
------- -------
Net 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>
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 4.6
Tax exempt income - - (3.6)
-------- -------- --------
3.8% 15.5% 23.3%
======== ======== ========
</TABLE>
-17-
<PAGE> 20
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Unaudited Pro Forma Income Taxes
The pro forma provision for income taxes reflects the income tax
expense that would have been reported if McKinney & Silver (a
Partnership for income tax reporting purposes) had been a C corporation
for each of the years in the three year period 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) (377) (762)
State (35) (102) (167)
Foreign - - -
-------- -------- --------
Total deferred (141) (479) (929)
-------- -------- --------
Charge in lieu of taxes
attributable to employee
stock plans - - 926
-------- -------- --------
Total pro forma provision
for income taxes $ 2,021 $ 2,820 $ 5,349
======== ======== ========
</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 6.6
Tax exempt income - - (3.6)
Other 0.4 1.4 0.1
-------- -------- --------
Pro forma income tax expense 39.6% 41.1% 38.1%
======== ======== ========
</TABLE>
-18-
<PAGE> 21
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
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, CKS
will record a deferred tax asset of approximately $9,200,000 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, 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 and automotive
manufacturer and a major telecommunications company amounted to
approximately $7,608,000, $8,222,000, and $6,730,000, 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.
-19-
