<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 2
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, as
amended on March 6, 1997, is being filed in order to amend Item 7(c) 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 and as amended on March 6, 1997 as set
forth on the pages attached hereto.
ITEM 7(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 Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to 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.
**Previously filed as Exhibit to the Registrant's Amendment No. 1 to the
Current Report on Form 8-K filed with the Securities and Exchange Commission on
March 6, 1997.
-2-
<PAGE> 3
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: May 28, 1997 CKS GROUP, INC.
By: /s/ CARLTON H. BAAB
------------------------------------
Carlton H. Baab
Executive Vice President and
Chief Financial Officer
<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, 333-22953, 333-23523, 333-23783, 333-25447, 333-24763,
333-23783, and 333-27331) on Forms S-3 and S-8 of CKS Group, Inc. of our report
dated February 28, 1997, relating to the consolidated balance sheets of CKS
Group, Inc. and subsidiaries as of November 30, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three year period ended November 30, 1996, which report
appears in the report on Form 8-K/A of CKS Group, Inc. dated January 31, 1997.
/s/ KPMG Peat Marwick LLP
San Jose, California
May 28, 1997
<PAGE> 1
CKS GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report...............................................1
Consolidated Balance Sheets................................................2
Consolidated Statements of Income..........................................3
Consolidated Statements of Stockholders' Equity............................4
Consolidated Statements of Cash Flows......................................5
Notes to Consolidated Financial Statements.................................6
</TABLE>
- 1 -
<PAGE> 2
Independent Auditors' Report
The Board of Directors and Stockholders
CKS Group, Inc.:
We have audited the accompanying consolidated balance sheets of CKS Group, Inc.
and subsidiaries (the Company) as of November 30, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended November 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We 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 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.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of CKS Group, Inc. and subsidiaries as
of November 30, 1995 and 1996, and the results of their operations and their
cash flows for each of the years in the three-year period ended November 30,
1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
San Jose, California
February 28, 1997
<PAGE> 3
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------------------
ASSETS 1995 1996
---------- ------------
<S> <C> <C>
Current assets:
Cash and 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 consolidated financial statements.
-2-
<PAGE> 4
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues $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 expenses 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 consolidated financial statements.
-3-
<PAGE> 5
CKS GROUP, INC. AND SUBSIDIARIES
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 consolidated financial statements.
- 4 -
<PAGE> 6
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
--------------------------------------------
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 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 consolidated financial statements.
- 5 -
<PAGE> 7
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1994, 1995, AND 1996
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Principles of Combination
CKS Group, Inc. (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 consolidated financial statements have been prepared on
the basis that these entities were combined at the beginning of their
existence for financial reporting purposes. The combined entities have
been under common control since inception and have been included in the
consolidated financial statements at historical cost, in a manner
similar to a pooling of interests, since their respective dates of
inception. All transactions and accounts between the combined entities
have been eliminated in the accompanying consolidated financial
statements.
In accordance with the merger of the Former Affiliates, each entity's
capital stock was converted, using a predetermined conversion factor,
to give effect to the merger. All share and per share information has
been retroactively restated to give the effect to the merger.
The accompanying 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 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> 8
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Property and equipment are depreciated
on a straight-line basis over estimated useful lives of 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> 9
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO 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 consolidated financial statements for income attributable
to M&S. The accompanying 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> 10
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The following summary, prepared on a pro forma basis, combines the
Company's consolidated results of operations for the years ended
November 30, 1995 and 1996, with SMI's results of operations for the
years ended December 31, 1995 and November 30, 1996, respectively, as
if SMI had been acquired as of the beginning of the periods presented
(in thousands, except 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> 11
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO 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 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 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, in the first quarter of fiscal 1997 CKS will record
a deferred tax asset and an increase to stockholders' equity 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> 12
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
(3) MARKETABLE SECURITIES
Marketable securities include the following as of November 30, 1996 (in
thousands):
<TABLE>
<CAPTION>
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> 13
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
(5) NOTES PAYABLE
In July 1995, the Company entered into a credit agreement with a bank
for $4,600,000, including a $3,000,000 line of credit, a $1,000,000
equipment line of credit, and a $600,000 term loan to refinance
existing debt. The lines of credit have maturities of September 30,
1997. Advances under the $1,000,000 equipment loan facility are limited
to 80% of the equipment purchase price. Borrowings bear interest at the
bank's prime rate (8.25% as of November 30, 1996) 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> 14
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO 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 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> 15
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO 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> 16
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO 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> 17
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Public Offerings
In December 1995, the Company completed the IPO and issued 2,475,000
shares of its common stock at a per share price of $17.00. The Company
received 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> 18
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and liabilities 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> 19
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO 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> 20
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO 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,
during the first quarter of fiscal 1997 CKS will record a deferred tax
asset and an increase in stockholders' equity 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-
