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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 1, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO __________.
COMMISSION FILE NUMBER: 0-27090
CKS GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0385435
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
<TABLE>
<S> <C> <C>
10441 Bandley Drive 95014
Cupertino, CA 95014 (408) 366-5100
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(Address of principal executive (Registrant's telephone number, (Zip Code)
offices) including area code)
</TABLE>
N/A
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(Former Name, Former Address & Former Fiscal Year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES ____ NO ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT
JUNE 1, 1997
<S> <C> <C>
Common Stock - $0.001 par value 14,354,806
</TABLE>
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CKS GROUP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C>
ITEM 1. FINANCIAL STATEMENT:
Condensed Consolidated Balance Sheets as of June 1, 1997
and November 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income--Three and six months
ended June 1, 1997 and May 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows--Six months ended
June 1, 1997 and May 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 18
ITEM 2. CHANGES IN SECURITIES. 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. 18
ITEM 5. OTHER INFORMATION. 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CKS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 1, 1997 NOVEMBER 30, 1996
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,464 $19,372
Marketable securities 23,852 37,895
Accounts receivable, net of allowances of $1,196 and $762 in
1997 and 1996, respectively 33,832 22,541
Fees and expenditures in excess of billings 6,799 2,792
Prepaid expenses and other current assets 1,506 629
Deferred income taxes 968 800
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Total current assets 73,421 84,029
Property and equipment, net 5,206 4,226
Deferred income taxes 9,902 300
Goodwill and other assets 26,242 5,919
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Total assets $114,771 $94,474
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,267 $21,109
Accrued expenses 7,500 6,386
Billings in excess of fees and expenditures 3,694 3,201
Current portion of liabilities to related parties 2,366 1,955
Current portion of notes payable and capital lease
obligations 822 417
Income taxes payable 878 188
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Total current liabilities 34,527 33,256
Deferred income taxes 45 --
Liabilities to related parties, less current portion -- 223
Notes payable and capital lease obligations,
less current portion 400 481
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Total liabilities 34,972 33,960
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Commitments
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares
authorized; none issued and outstanding -- --
Common stock; $.001 par value; 30,000,000 shares authorized:
14,355,000 and 13,162,000 issued and outstanding in 1997
and 1996, respectively 14 13
Additional paid-in capital 68,805 51,064
Unrealized loss on marketable securities (205) (65)
Notes receivable from stockholders (292) (292)
Retained earnings 11,477 9,794
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79,799 60,514
Total stockholders' equity
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Total liabilities and stockholders' equity $114,771 $94,474
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</TABLE>
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CKS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- ----------------------
JUNE 1, MAY 31, JUNE 1, MAY 31,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenues $34,988 $22,730 $58,551 $36,603
------- ------- ------- -------
Operating expenses:
Direct salaries and related expenses 7,954 5,157 14,676 9,462
Other direct operating expenses 14,712 10,374 23,663 15,739
General and administrative expense 7,759 3,971 13,103 6,835
Merger costs -- -- 1,593 --
------- ------- ------- -------
Total operating expenses 30,425 19,502 53,035 32,036
------- ------- ------- -------
Operating income 4,563 3,228 5,516 4,567
Other income, net 265 581 788 919
------- ------- ------- -------
Income before income taxes 4,828 3,809 6,304 5,486
Income taxes 1,990 887 2,216 1,278
------- ------- ------- -------
Net income $ 2,838 $ 2,922 $ 4,088 $ 4,208
======= ======= ======= =======
Pro forma net income and per share data:
Income before income taxes, as reported $ 4,828 $ 3,809 $ 6,304 $ 5,486
Pro forma income taxes 1,990 1,453 2,534 2,092
------- ------- ------- -------
Pro forma net income $ 2,838 $ 2,356 $ 3,770 $ 3,394
======= ======= ======= =======
Pro forma net income per share $ 0.19 $ 0.17 $ 0.25 $ 0.24
======= ======= ======= =======
Shares used in per share computation 14,987 14,250 14,953 14,036
======= ======= ======= =======
</TABLE>
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CKS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------
JUNE 1, 1997 MAY 31, 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,088 $ 4,208
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred taxes (348) (125)
Compensation related to stock options 48 53
Tax benefit from disqualifying dispositions 1,158 --
Depreciation and amortization 1,485 587
Loss on disposition of property due to acquisition 227 --
Changes in operating assets and liabilities:
Accounts receivable (3,150) (9,743)
Fees and expenditures in excess of billings (2,528) (1,396)
Prepaid expenses and other current assets (1,079) (80)
Accounts payable (5,650) 10,925
Accrued expenses (702) 1,066
Billings in excess of fees and expenditures 1,333 (76)
Income taxes payable 690 (417)
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Net cash provided by (used in) operating activities (4,428) 5,002
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Cash flows from investing activities:
Purchases of property and equipment (658) (1,204)
Purchases of marketable securities (10,221) --
Sale of marketable securities 24,073 --
Businesses acquired, net of cash received (12,996) --
Other assets 146 --
------- -------
Net cash provided by (used in) investing activities 344 (1,204)
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Cash flows from financing activities:
Repayment on line of credit and notes (1,609) (79)
Proceeds from sale of common stock 1,170 37,823
Distribution to stockholders (2,405) (3,326)
Liabilities to related parties (1,793) --
------- -------
Net cash provided by (used in) financing activities (4,637) 34,418
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Net change in cash and cash equivalents (8,721) 38,216
Change in subsidiary's fiscal year-end (4,187) --
Cash and cash equivalents, beginning of period 19,372 4,789
------- -------
Cash and cash equivalents, end of period $ 6,464 $43,005
======= =======
Supplementary disclosure of cash paid during the period:
Interest $ 46 $ 30
======= =======
Income taxes $ 796 $ 2,237
======= =======
Noncash investing and financing activites:
Businesses acquired for payable to related parties $ 2,652
=======
Businesses acquired for common stock $ 6,030
=======
Deferred tax asset recorded in connection with
taxable pooling of interests $ 9,346
=======
</TABLE>
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CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements and
related notes to condensed consolidated financial statements include the
accounts of CKS Group, Inc. (the "Company" or "CKS Group") and its wholly-owned
subsidiaries. Companies acquired in business combinations accounted for under
the purchase method have been included from their respective acquisition dates.
The condensed consolidated financial statements also give retroactive effect to
the acquisition of McKinney & Silver ("M&S") in a business combination
accounted for under the pooling-of interest method for all periods presented.
Results for the three month and six month periods ended June 1, 1997 and May
31, 1996 are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the Company's financial position and operating results for
the interim periods. The condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto, contained in the Company's audited consolidated financial statements
for the fiscal year ended November 30, 1996, included in the Company's report
on Form 8-K/A, dated January 31, 1997 which was filed with the Securities
Exchange Commission ("SEC") on May 28, 1997, and the supplemental consolidated
financial statements for the fiscal year ended November 30, 1996, included in
the Company's report on Form 8-K/A, dated June 25, 1997, which was filed with
the SEC on June 26, 1997. The results of operations for the three and six
month periods ended June 1, 1997 are not necessarily indicative of the results
for the entire fiscal year ending November 30, 1997.
2. PRO FORMA NET INCOME PER SHARE
Pro forma 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.
Pro forma net income gives effect to the pooling-of-interests
combination between the Company and M&S. M&S was a general partnership and,
as a result, M&S's historical results of operations, which have been included
with the Company's under the pooling of interests method, do not include a
provision for income taxes. Pro forma net income and net income per share data
include a tax provision as if M&S had been a taxable "C" corporation for all
periods.
3. BUSINESS COMBINATIONS
Schell/Mullaney, Inc.
On August 1, 1996, the Company acquired Schell/Mullaney, Inc.
("Schell/Mullaney"). The acquisition of Schell/Mullaney was accounted for as a
purchase with the results of Schell/Mullaney included in the Company's results
from the acquisition date. The following summary, prepared on a pro forma
basis, combines the Company's consolidated results of operations for the three
month and six month periods ended May 31, 1996, with Schell/Mullaney results of
operations for the three month and six month periods ended June 30, 1996, as if
Schell/Mullaney had been acquired as of the beginning of the periods presented
(in thousands, except per share data):
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<TABLE>
<CAPTION>
SIX MONTHS
THREE MONTHS ENDED ENDED
MAY 31,1996 MAY 31,1996
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<S> <C> <C>
Revenues $ 24,108 $ 39,488
Net income $ 2,798 $ 4,379
Net income per share $ 0.19 $ 0.31
Shares used in per share computation 14,433 14,219
</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. The
Company made guaranteed payments to D&G consisting of $2,219,000 in cash and
issued 41,259 shares of the Company's common stock on April 18, 1997. In
addition, D&G will be entitled to receive an additional $1,003,000 in cash and
a number of shares of common stock of the Company with a value of $496,000 over
the next two fiscal years. D&G will also have the right to receive additional
payments if it attains certain earnings goals during the fiscal years ending
November 30, 1997, 1998, 1999, and 2000. D&G may receive up to $889,000 in
cash and shares of the Company's common stock with a value of up to $444,000 in
each of 1998 and 1999 if it meets its earnings 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. Pro forma financial
information giving effect to the acquisition of the assets and certain
liabilities of D&G has not been presented because such pro forma results would
not have differed materially from the Company's.
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
McKinney & Silver ("M&S"). The combination 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 combination to include the
results of operations, financial position and cash flows of M&S.
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
the three month and six month periods ended June 30, 1996 have been combined
with the Company's consolidated financial statements as of and for the three
month and six month periods ended May 31, 1996. Total revenues and net income
for the individual entities as previously reported are as follows (in
thousands):
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<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
MAY 31,1996 MAY 31,1996
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<S> <C> <C>
Total revenues:
CKS $13,745 $22,895
M&S 8,985 13,708
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$22,730 $36,603
Net income:
CKS $ 1,302 $ 2,045
M&S 1,620 2,163
------- -------
$ 2,922 $ 4,208
</TABLE>
In 1997, M&S changed its fiscal year end to the Sunday nearest
November 30 to conform to CKS's fiscal year end. M&S unaudited results of
operations for the month ended December 31, 1996, included revenue of
$2,230,000 and net income of $248,000. The net decrease in cash and cash
equivalents for the six month period ended June 1, 1997, has been adjusted to
eliminate the effect of including M&S's net income and cash flows for the month
ended December 31, 1996.
In connection with the M&S transaction, the Company recorded a
nonrecurring charge for transaction related costs of approximately $1.6 million
for the quarter ending March 2, 1997, consisting primarily of accounting,
consulting and legal fees, financial printing and other related costs. In
addition, because the combination is taxable, CKS recorded a deferred tax asset
of approximately $9.3 million for the difference between the financial
statement and tax carrying amounts of M&S's net assets upon the closing of the
transaction.
CKS Holding Deutschland GmbH
On March 10, 1997, the Company acquired CKS Holding Deutschland GmbH
(formerly Elektronische Publikationen GmbH), a German corporation ("CKS GmbH").
In consideration for the sale of their shares in CKS GmbH, the shareholders of
CKS GmbH received $2,925,000 cash and 86,603 shares of common stock of CKS and
the right to receive up to an additional $10,000,000 in cash and additional
shares of common stock over the next three fiscal years upon attainment of
certain financial performance goals by CKS GmbH. The number of additional
shares of CKS common stock to be issued to stockholders of CKS GmbH will be
determined based on the closing price of CKS common stock over a ten business
day period ending two business days prior to the issuance date of such shares.
The acquisition of the capital stock of CKS GmbH was treated as a purchase for
financial accounting purposes.
The following summary, prepared on a pro forma basis, combines the
Company's consolidated results of operations for the three month and six month
periods ended May 31, 1996 with CKS GmbH results of operations for the three
month and six month periods ended June 30, 1996, as if CKS GmbH had been
acquired as of the beginning of the period presented (in thousands, except per
share data):
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<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
MAY 31, 1996 MAY 31, 1996
------------ ------------
<S> <C> <C>
Revenues $26,276 $43,662
Net income $ 2,228 $ 3,125
Net income per share $ 0.16 $ 0.22
Shares used in per share computation 14,337 14,123
</TABLE>
Pro forma financial information for the three month and six month
periods ended June 1, 1997 giving effect to the acquisition of CKS GmbH has not
been presented because such pro forma results would not have differed materially
from the Company's reported results.
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.
Gormley & Partners, Inc.
On March 12, 1997, the Company acquired certain assets of Gormley &
Partners, Inc. ("Gormley"), a Connecticut corporation. The Purchase Agreement
provides for initial payment of $3,150,000 in cash and 40,206 shares of CKS
common stock to Gormley and an additional $1,500,000 in cash and CKS Common
Stock payable during fiscal 1998. In addition, Gormley will also have the
right to receive additional payments if it attains certain earnings goals
during the fiscal years ending November 30, 1997, 1998, 1999, and 2000. Pro
forma financial information giving effect to the acquisition of the certain
assets of Gormley has not been presented because such pro forma results would
not have differed materially from the Company's.
4. PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary pro forma consolidated statements of income data
gives effect to the pooling of interests business combination between the
Company and M&S. The data excludes the $1.6 million nonrecurring charge for
merger costs recorded by the Company during fiscal 1997 and includes a tax
provision as if M&S had been a taxable C Corporation for all periods. The pro
forma consolidated statements of income data for the three month and six month
periods ended May 31, 1996 gives effect to the implementation of a management
bonus plan for the former partners of M&S as if such plan had been in effect as
of the beginning of the periods presented. The effect of such pro forma
adjustment was to increase direct salaries and related expenses by $461,000 and
$512,000 during the three months and six months ended May 31, 1996. (In
thousands, except share data.):
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<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
--------------------------------- -----------------------------
JUNE 1, 1997 MAY 31, 1996 JUNE 1, 1997 MAY 31, 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $34,998 $22,730 $58,551 $36,603
Net income $ 2,838 $ 2,071 $ 4,765 $ 3,077
Pro forma net income per share $ 0.19 $ 0.15 $ 0.32 $ 0.22
Shares used in per share
computation 14,987 14,250 14,953 14,036
</TABLE>
5. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) recently issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share.
This statement simplifies the standards for computing earnings per share (EPS)
previously found in Accounting Principles Board Opinion (APB) No. 15 and
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures. The Company will
adopt SFAS No. 128 in fiscal 1998. The adoption of SFAS No. 128 is expected to
result in basic EPS greater than primary EPS, computed under APB No. 15, and
diluted EPS approximating primary EPS, computed under APB No. 15.
6. SUBSEQUENT EVENTS
On June 17, 1997, the Company issued 241,108 shares of its common
stock for all of the outstanding capital stock of SiteSpecific, and assumed
options to purchase 18,892 shares of CKS common stock under an option plan.
The merger will be accounted for as a pooling of interests.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This section contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements as a result of factors,
including those set forth under "Factors Affecting Operating Results." Readers
are also encouraged to refer to the Company's Annual Report on Form 10-K for
the fiscal year ended November 30, 1996 for a further discussion of the
Company's business and the risks and opportunities attendant thereto.
INTRODUCTION
In reviewing the Company's consolidated financial statements and the
discussion of the Consolidated Results of Operations that appears below, the
following should be taken into consideration. During the quarter ended March 2,
1997, the Company acquired McKinney & Silver ("M&S") in a business combination
accounted for under the pooling-of-interests method. Prior to acquisition by
the Company, M&S prepared its financial statements on a calendar year basis.
Under Generally Accepted Accounting Principles ("GAAP"), after CKS acquired M&S,
CKS restated its financial results to include the financial results of M&S for
all periods presented. Pursuant to GAAP, M&S's results for January 1, 1996
through June 30, 1996 period were included in CKS's results for the period from
December 1, 1995 through May 31, 1996 (the first six months of the Company's
1996 fiscal year). Beginning with the Company's current fiscal year, M&S's
fiscal year has been conformed to CKS's fiscal year.
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<PAGE> 11
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 1, 1997 AND MAY 31, 1996
REVENUES
The Company generates its revenues through project fees on a fixed fee
for service basis and contract based retainer fees. Revenues increased to
$35.0 million in the quarter ended June 1, 1997 from $22.7 million in the same
quarter of fiscal year 1996, representing an increase of 54%. This increase in
revenues was due to an increase in the number and value of projects undertaken
for existing clients of the Company, the establishment of new client
relationships, and the inclusion of Schell/Mullaney, D&G, CKS GmbH and Gormley
revenues in the Company's consolidated results. Revenues from new media
projects increased to $8.4 million in the quarter ended June 1, 1997 from $4.6
million in the same quarter of fiscal 1996, representing an increase of 83%.
New media revenues represented approximately 24% of revenues for the quarter
compared to 20% for the quarter ended May 31, 1996 (after giving effect to the
restatement to include M&S). In the Company's quarterly report on Form 10-Q
for the quarter ended May 31, 1996, the Company reported that revenue from new
media projects was approximately 33% of total revenues for the quarter ended
May 31, 1996, without giving effect to the restatement to include M&S. M&S
historically has not had any significant new media revenues, so the effect of
the restatement was to reduce new media revenues for the quarter ended May 31,
1996 from 33% to 20%.
DIRECT SALARIES AND RELATED EXPENSES
Direct salaries and related expenses consist primarily of wages for
regular and temporary employees, as well as incentive bonus payments and
benefits for regular employees. The Company's direct salaries and related
expenses increased 54.2% to approximately $8.0 million in the quarter ended
June 1, 1997 from approximately $5.2 million during the same quarter of fiscal
1996, representing 22.7% of revenues both for the second quarter of fiscal 1997
and the same quarter of fiscal 1996. The increase in absolute dollars was
primarily attributable to an increase in salaries and related expenses
necessary to support the Company's growth. As a percentage of revenues, direct
salaries and related expenses remained relatively unchanged from quarter to
quarter.
OTHER DIRECT OPERATING EXPENSES
Other direct operating expenses include materials, contract freelance
talent (independent consultants and contractors), facilities and equipment
expenses necessary to provide services to the Company's clients. Other direct
operating expenses increased approximately 41.8% to approximately $14.7 million
in the quarter ended June 1, 1997, from approximately $10.4 million in the same
quarter of fiscal year 1996, representing 42.0% of revenues in the second
quarter of 1997 and 45.6% of revenues in the same quarter of fiscal 1996. The
increase in absolute dollars was primarily attributable to increases in
materials costs and freelance talent costs necessary to support the higher
level of revenues. As a percentage of revenues, other direct operating
expenses decreased as a result of a more rapid increase in revenues than in
other direct operating expenses.
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<PAGE> 12
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include headquarters expenses,
insurance, personnel costs for finance and administration, accounting and legal
fees, bad debt expense, management information systems expenses, and employee
benefits. General and administrative expenses increased 95.4% to approximately
$7.8 million in the fiscal quarter ended June 1, 1997 from approximately $4.0
million in the same quarter of fiscal 1996, and represented 22.2% and 17.5% of
revenues in the second quarter of fiscal 1997 and fiscal 1996, respectively.
This period over period increase in absolute dollars was primarily attributable
to higher general and administrative payroll and general office costs to
support the Company's growth both internally and through acquisitions. The
second quarter of fiscal 1997 includes general and administrative expenses for
Schell/Mullaney, D&G, CKS GmbH and Gormley, subsidiaries which were acquired
after the second quarter of fiscal 1996, as well as goodwill amortization
related to the acquisition of these companies. The quarter over quarter
increase in these expenses as a percentage of revenues was attributable
principally to higher general and administrative payroll costs to support the
Company's growth, goodwill amortization expense related to acquisitions, and
facilities costs to provide capacity to accommodate new business.
OTHER INCOME (EXPENSE), NET
Other income and expense decreased primarily due to a decrease of
approximately $160,000 in interest income due to the use of cash in
acquisitions. In addition, the second quarter of fiscal 1996 included a
nonrecurring gain of approximately $187,000 from the sale of stock accepted
from a client in lieu of fees.
INCOME TAXES
Combined actual federal and state income tax rates were 41.2% in the
quarter ended June 1, 1997 and 23.3% in the quarter ended May 31, 1996. These
tax rates do not include a provision for income taxes for M&S prior to January
31, 1996, which was a general partnership prior to the acquisition by CKS
Group. Combined pro forma federal and state income tax rates were 41.2% in the
quarter ended June 1, 1997 and 38.1% in the second quarter of fiscal 1996. Pro
forma tax rates include a tax provision to reflect M&S income as if M&S had
been a taxable "C"corporation for all periods presented.
SIX MONTHS ENDED JUNE 1, 1997 AND MAY 31, 1996
REVENUES
Revenues increased to $58.6 million in the six month period ended June
1, 1997 from $36.6 million in the six months ended May 31, 1996, representing
an increase of 60.0%. This increase in revenues was due to an increase in the
number and value of projects undertaken for existing clients of the Company,
the establishment of new client relationships, and the inclusion of
Schell/Mullaney, D&G, M&S, CKS GmbH, and Gormley revenues in the Company's
consolidated results. Revenues from new media projects increased $14.3 million
for the six months ended June 1, 1997 from $7.3 million in the same period of
fiscal 1996, representing an increase of 96%. New media revenues represented
approximately 24% of revenues for the six months ended June 1, 1997 compared to
20% for the six months ended May 31, 1996 (after giving effect to the
restatement to include M&S).
-12-
<PAGE> 13
DIRECT SALARIES AND RELATED EXPENSES
The Company's direct salaries and related expenses increased 55.1% to
approximately $14.7 million for the six months ended June 1, 1997 from
approximately $9.5 million during the six months ended May 31, 1996,
representing 25.1% of revenues for the first six months of fiscal 1997 and
25.9% of revenues in the same period of fiscal 1996. In absolute dollars,
this increase was primarily attributable to an increase in salaries and related
expenses necessary to support the Company's growth. As a percentage of
revenues, direct salaries and related expenses remained relatively unchanged
from year to year.
OTHER DIRECT OPERATING EXPENSES
Other direct operating expenses increased approximately 50.3% to $23.7
million in the six months ended June 1, 1997, from $15.7 million in the first
six months of fiscal 1996, representing 40.4% of revenues in the first six
months of fiscal 1997 and 43.0% of revenues in the first six months of fiscal
1996. In absolute dollars, this increase was primarily attributable to
increases in materials costs and freelance talent costs necessary to support
the higher level of revenues. As a percentage of revenues, other direct
operating expenses decreased as a result of a more rapid increase in revenues
than in other direct operating expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased approximately 91.7% to
$13.1 million in the first six months ended June 1, 1997 from approximately
$6.8 million in the same period of fiscal 1996, and represented 22.4% and 18.7%
of revenues in the first six months of fiscal 1997 and fiscal 1996,
respectively. This increase in absolute dollars was primarily attributable to
higher general and administrative payroll and facilities costs to support the
Company's growth, the inclusion in the first six months of fiscal 1997 of
Schell/Mullaney expenses, Donovan & Green expenses and goodwill amortization
related to these acquisitions, as well as the inclusion in the second quarter
of fiscal 1997 of CKS GmbH expenses, Gormley expenses, and goodwill
amortization related to these acquisitions. The increase in these expenses as
a percentage of revenues was attributable principally to higher general and
administrative payroll costs and business development costs incurred to support
the Company's growth and goodwill amortization related to the acquisitions.
MERGER COSTS
In connection with the acquisition of M&S, the Company recorded a
nonrecurring charge for transaction-related costs of approximately $1.6 million
in the first quarter of fiscal 1997, consisting primarily of fees for
investment banking services, accounting services, consulting and legal
services, financial printing costs and other related costs.
OTHER INCOME (EXPENSE), NET
Other income and expense consists primarily of interest earned on the
Company's holdings in cash, cash equivalents and marketable securities, offset
by interest expense incurred due to the amortization of imputed interest on
guaranteed cash payments related to subsidiary acquisitions. Other income and
expense decreased year over year due to a nonrecurring gain in the second
quarter of fiscal 1996 of approximately $187,000 from the sale of stock
accepted from a client in lieu of fees.
-13-
<PAGE> 14
INCOME TAXES
Combined actual federal and state income tax rates were 35.1% in the
six month period ended June 1, 1997 and 23.3% in the same period of fiscal
1996. These tax rates do not include a provision for income taxes for M&S
prior to January 31, 1996, which was a general partnership prior to the
acquisition by CKS Group. Combined pro forma federal and state income tax
rates were 40.2% in the six month period ended June 1, 1997 and 38.1% in the
same period of 1996. Pro forma tax rates include a tax provision to reflect
M&S income as if M&S had been a taxable "C" corporation for all periods
presented.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and
investments in property and equipment through cash generated from operations,
bank borrowing, equity financing and capital lease financing arrangements. At
June 1, 1997, the Company had no material capital commitments.
Cash, cash equivalents and marketable securities, consisting primarily
of high-quality municipal bonds and tax-advantaged money market instruments,
totaled $30.3 million and $57.3 at June 1, 1997 and November 30, 1996,
respectively. The decrease in cash, cash equivalents and marketable securities
during this period was primarily due to approximately $4.4 million used in
operations, approximately $13.0 million in cash payments to acquire D&G, CKS
GmbH and Gormley & Partners, Inc., $4.6 million used for financing activities,
and from a $4.2 million adjustment related to the change in M&S's fiscal year.
Net cash used for operating activities was approximately $4.4 million
in the six month period ended June 1, 1997, principally to fund working capital
fluctuations in the acquired companies and pay merger costs related to the M&S
acquisition.
Net cash provided by investing activities was approximately $344,000
in the six month period ended June 1, 1997, and includes $13.8 million in net
proceeds from the sale of marketable securities, of which $13.0 million was
used to finance acquisitions during fiscal 1997, and $658,000 was used for
capital expenditures.
Net cash used for financing activities was approximately $4.6 million
in the six month period ended June 1, 1997, reflecting post merger
distributions of pre-acquisition M&S partnership contributions and earnings
totaling approximately $4.2 million, and $1.6 million in debt repayment by
acquired companies, partially offset by $1.2 million in proceeds from the sale
of common stock through the Company's 1996 Employee Stock Purchase Plan and
upon exercise of options.
In recording the business combination with M&S, the Company's balance
sheet as of November 30, 1996 was combined with M&S's balance sheet as of
December 31, 1996. Subsequent to year end, M&S changed its fiscal year end to
conform with the Company's fiscal year end. The net decrease in cash and cash
equivalents for the six month period ended June 1, 1997 has been adjusted to
eliminate the effect of including M&S's net income and cash flows for the month
ended December 31, 1996. The adjustment amounted to $4.2 million, primarily as
a result of a substantial payment received by M&S in December 1996 from a
client for media placements, for which related costs were not paid until
January 1997. This adjustment is reflected in the Company's Consolidated
Statements of Cash Flows under the line item "Change in subsidiary's fiscal
year end".
The Company and its subsidiaries have $4.4 million in credit
facilities available under revolving lines of credit. The Company also has a
$1.0 million three year term loan facility available for purchases of
-14-
<PAGE> 15
equipment. The credit facilities are secured by all the assets of the Company
and bear interest at rates of prime to prime plus 1% for the lines of credit
and prime plus 0.5% for the term loan. At June 1, 1997, there was $719,000 of
indebtedness outstanding under these credit facilities. These credit
agreements, which are scheduled to expire between September 30, 1997 and March
31, 1998, require compliance with various financial covenants and restrictions,
including maintenance of minimum levels of net worth and profitability, and
restrict the Company's ability to pay dividends or to effect mergers or
acquisitions without the bank's consent.
The Company believes that its current cash, cash equivalents and
marketable securities, together with existing credit facilities and cash flows
from operations, if any, will be sufficient to meet the Company's cash
requirements for at least the next twelve months, including the cost of
business acquisitions, if any.* The Company may need to raise additional funds
through public or private debt or equity financing in order to take advantage
of opportunities that may become available to the Company, including more rapid
expansion and acquisition of businesses, products or technologies, or to
otherwise respond to competitive pressures. There can be no assurance that the
Company will be able to raise capital on favorable terms or at all.
__________________________________
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company s actual performance
will meet the Company s current expectations.
-15-
<PAGE> 16
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
The Company's operating results and the market price of the Company's
Common Stock may be affected by numerous factors, many of which are beyond the
Company's control. In addition to the factors described below, the Company
encourages review of the more extensive discussion set forth in the section
entitled "Business -- Factors Affecting Operating Results and Market Price of
Stock" in the Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1996.
CKS operates in a rapidly changing environment that involves a number
of uncertainties, some of which are beyond the Company's control. In addition
to the uncertainties described elsewhere in this report and in the Company's
Annual Report on Form 10-K for the fiscal year ended November 30, 1996, these
uncertainties include the following:
The Company's five largest clients accounted for approximately 36% of
the Company's revenues for the six month period ended June 1, 1997. Since many
of the Company's clients retain the Company on a project by project basis, a
client from whom the Company generates substantial revenue in one period may
not be a substantial source of revenue in a subsequent period. To the extent
that the Company's major clients do not remain a significant source of
revenues, and the Company is unable to replace these clients, there could be a
direct and immediate material adverse effect on the Company's business,
financial condition and operating results.
The Company generates the majority of its revenues through project fees
on a fixed fee for service basis. The Company assumes greater financial risk on
fixed-price type contracts than on either time-and-material or cost-reimbursable
contracts. Failure to anticipate technical problems, estimate costs accurately
or control costs during performance of a fixed-price contract may reduce the
Company's profit or cause a loss. Although the majority of the Company's
projects typically last four to six weeks and therefore each individual short-
term project creates less exposure than a long-term fixed-price contract, in the
event the Company does not accurately anticipate the progress of a number of
significant revenue-generating projects, there could be a material adverse
effect on the Company's business, operating results and financial condition.
The Company's operating results have fluctuated in the past and may
fluctuate in the future as a result of a variety of factors, including timing
of the completion, material reduction or cancellation of major projects or the
loss of a major client, timing of the receipt of new business, timing of the
hiring or loss of personnel, timing of the opening or closing of an office, the
relative mix of high margin creative projects as compared to lower margin
production projects, changes in the pricing strategies and business model of
the Company or its competitors, capital expenditures and other costs relating
to the expansion of operations, and other factors that are outside of the
Company's control. Operating results could also be materially adversely
affected by increased competition in the Company's markets. The Company
experiences some seasonality in its business which results from timing of
product introductions and business cycles of the Company's clients. As a
result of the foregoing and other factors, the Company anticipates that it may
experience material and adverse fluctuations in future operating results on a
quarterly or annual basis. Therefore, the Company believes that period to
period comparisons of its revenues and operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance.
The trading price of the Company's Common Stock has been and in the
future is expected to continue to be subject to extreme fluctuations in response
to both business-related issues, such as quarterly variations in operating
results, announcements of new services or business acquisitions by the Company
or its competitors, the gain or loss of client accounts, and stock
market-related influences, such as changes in analysts' estimates, the presence
or absence of short-selling of the Company's stock and events affecting other
companies that the market deems to be comparable to the Company. In addition,
the stock market has from time to time experienced extreme price and volume
fluctuations that have particularly affected the market price of many
technology- oriented companies and that often have been unrelated or
disproportionate to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock. The trading prices of many high technology and Internet- related
companies' stocks, including the Common Stock of the Company, are at or near
their historical highs and reflect price/earning ratios substantially above
historical norms. There can be no assurance that the trading price of the
Company's Common Stock will remain at or near its current level.
-16-
<PAGE> 17
The Company's future growth is dependent to a significant extent upon
its ability to increase the amount of revenue it derives from providing
marketing and advertising solutions to its customers through new media, which
the Company defines as media that delivers content to end users in digital
form, including the World Wide Web, the Internet, proprietary online services,
CD-ROMs, laptop PC presentations and interactive kiosks. The market for
marketing and advertising through new media has only recently begun to develop,
is rapidly evolving and is characterized by an increasing number of market
entrants who have introduced or developed products and services for
communication and commerce through new media. Demand and market acceptance for
recently introduced products and services are subject to a high level of
uncertainty. There can be no assurance that commerce and communication through
new media will continue to grow.
Conflicts of interest are inherent in certain segments of the
marketing communications industry, particularly in advertising. The Company has
in the past and will in the future be unable to pursue potential advertising
and other opportunities because such opportunities will require the Company to
provide services to direct competitors of existing Company clients. In
addition, the Company risks alienating or straining relationships with existing
clients each time the Company agrees to provide services to even indirect
competitors of existing Company clients. Conflicts of interest may jeopardize
the stability of revenues generated from existing clients and preclude access
to business prospects, either of which developments could have a material
adverse effect on the Company's business, financial condition and operating
results.
The Company's business has grown rapidly in recent periods through
expansion of its existing operations and through acquisition of other marketing
communication services providers. The growth of the Company's business and
expansion of its customer base have placed a significant strain on the
Company's management and operations. In the last several years, the Company
has opened offices in Portland (Oregon), New York and Washington, D.C. The
Company's expansion has resulted, and is expected in the future to result, in
substantial growth in the number of its employees and in increased
responsibility for both existing and new management personnel and strain on the
Company's existing operational, financial and management information systems.
The Company's success depends to a significant extent on the ability of its
executive officers and other members of senior management to operate
effectively, both independently and as a group.
As part of its business strategy, the Company has made significant
investments in businesses that offer complementary marketing communication
services, products and technologies, and expects to make significant additional
acquisitions in the future. There can be no assurance that any of the acquired
companies or the Company's operations will be profitable. The acquisition of
Schell/Mullaney, D&G, M&S, CKS GmbH, Gormley, SiteSpecific and any future
acquisitions or investments involve or may involve numerous risks commonly
encountered in the acquisitions of businesses. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the
acquired businesses, the inability of management to maximize the financial and
strategic position of the Company through the successful incorporation of
acquired personnel and clients, unexpected liabilities, dilutive issuances of
equity securities, the maintenance of uniform standards, controls, procedures
and policies and the impairment of relationships with employees and clients as
a result of any integration of new management personnel. The occurrence of
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<PAGE> 18
any of these contingencies could have a material adverse effect on the
Company's business, financial condition and operating results. The Company
expects that future acquisitions, if any, could provide for consideration to be
paid in cash, stock or a combination of cash and stock. Acquisitions accounted
for as a purchase increase the amount of goodwill recorded as an asset on the
Company's financial statements and generally increase the amount of such
goodwill that must be amortized against operating results in the future. There
can be no assurance that the Company's prior acquisitions or any other
potential acquisitions will not have a material adverse effect on the Company's
business, financial condition and operating results.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
On March 10, 1997, the Company issued 86,603 shares of its Common
Stock for the purchase of shares of CKS Holding Deutschland GmbH ("CKS GmbH")
(formerly EPG Elektronische Publikationen GmbH). The Common Stock was issued
to the former shareholders of CKS GmbH. On March 12, 1997, the Company issued
40,206 shares of its Common Stock for the purchase of assets of ALI Consulting,
Inc. (formerly Gormley & Partners, Inc.). The Common Stock was issued to ALI.
In addition, on April 18, 1997, the Company issued 41,259 shares of its Common
Stock in connection with the Donovan & Green, Inc. ("D&G") asset purchase. The
Company did not employ an underwriter or placement agent in connection with
either of these transactions. The Common Stock was issued without registration
under the Securities Act of 1933 (the "Securities Act") in reliance on Section
4(2) of Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
-18-
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits Page
11.1 Statement Regarding Computation of
Per-Share Earnings 21
b. Reports on Form 8-K
During the period covered by this report, the Company filed
the following Current Reports on Form 8-K:
(1) Form 8-K/A dated January 31, 1997 and filed with the
Commission on March 6, 1997 under items 2 and 7, amending the Form 8-K filing
originally filed on February 14, 1997. This Form 8-K/A filing included the
financial statements of M&S for the years ended December 31, 1994, 1995 and
1996, as well as the report of Ernst & Young LLP dated January 31, 1997. This
Form 8-K filing also included, for CKS and M&S, the pro forma unaudited
combined condensed balance sheet as of November 30, 1996 and the pro forma
combined condensed statements of income for the years ended November 30, 1994,
1995 and 1996.
(2) Form 8-K dated February 27, 1997 and filed with the Commission
on March 11, 1997 reporting information under item 8.
(3) Form 8-K dated March 10, 1997 and filed with the Commission on
March 18, 1997 reporting information under item 2.
(4) Form 8-K dated March 24, 1997 and filed with the Commission on
March 25, 1997 reporting information under item 5. This Form 8-K filing
included restated quarterly results of operations for the Company for the four
quarters ended November 30, 1996.
(5) Form 8-K/A dated January 31, 1997 and filed with the
Commission on May 28, 1997 under item 2 and 7, amending the Form 8-K filing
originally filed on February 14, 1997, as amended on March 6, 1997.
-19-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CKS GROUP, INC.
---------------
(Registrant)
Date: July 15, 1997 By: /s/ MARK D. KVAMME
--------------------------------------
Mark D. Kvamme, Chairman, President and
Chief Executive Officer (Principle
Executive Officer)
Date: July 15, 1997 By: /s/ CARLTON H. BAAB
---------------------------------------
Carlton H. Baab, Executive Vice President,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
-20-
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit # Description
- --------- -----------
<S> <C>
11.1 Statement Regarding Computation of Per-Share Earnings
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.1
CKS GROUP, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION
OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ----------------------------
JUNE 1, 1997 MAY 31, 1996 JUNE 1, 1997 MAY 31, 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Pro forma net income* $ 2,838 $ 2,356 $ 3,770 $ 3,394
------- ------- ------- --------
Weighted average number of common shares
outstanding 14,317 13,610 14,198 13,402
Number of common stock equivalents
as a result of stock options outstanding using
the treasury stock method 670 640 755 634
------- ------- ------- --------
Shares used in per share computation 14,987 14,250 14,953 14,036
------- ------- ------- --------
Net income per share 0.19 0.17 0.25 0.24
======= ======= ======= ========
</TABLE>
____________
* Pro forma net income gives effect to the pooling-of-interests
combination between the Company and McKinney & Silver ("M&S"). M&S was a
general partnership and, as a result, M&S's historical results of
operations, which have been included with the Company's under the pooling
of interests method, do not include a provision for income taxes. Pro
forma income and net income per share include a tax provision as if M&S had
been a taxable "C" corporation for all periods.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> JUN-01-1997
<CASH> 6,464
<SECURITIES> 23,852
<RECEIVABLES> 35,028
<ALLOWANCES> 1,196
<INVENTORY> 0
<CURRENT-ASSETS> 73,421
<PP&E> 5,206
<DEPRECIATION> 0
<TOTAL-ASSETS> 114,771
<CURRENT-LIABILITIES> 34,527
<BONDS> 0
14
0
<COMMON> 0
<OTHER-SE> 79,785
<TOTAL-LIABILITY-AND-EQUITY> 114,771
<SALES> 58,551
<TOTAL-REVENUES> 58,551
<CGS> 0
<TOTAL-COSTS> 51,442
<OTHER-EXPENSES> 1,593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,304
<INCOME-TAX> 2,216
<INCOME-CONTINUING> 4,088
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,088
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
