<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 2, 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
- -------------------------- ----------------------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
10441 Bandley Drive
Cupertino, CA 95014 (408) 366-5100 95014
- --------------------------- --------------------- -----------------------
(Address of principal (Registrant's telephone (Zip Code)
executive offices) number, including area code)
N/A
- --------------------------------------------------------------------------------
(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>
OUTSTANDING AT
CLASS MARCH 2, 1997
----- -------------
<S> <C>
Common Stock - $0.001 par value 14,153,422
</TABLE>
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<PAGE> 2
CKS GROUP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of March 2, 1997 and November
30, 1996.................................................................. 3
Condensed Consolidated Statements of Income-Three months ended March 2,
1997 and February 29, 1996............................................. 4
Pro Forma Condensed Consolidated Statements of Income - Three Months
Ended March 2, 1997 and February 29, 1996.............................. 5
Condensed Consolidated Statements of Cash Flows-Three months ended March
2, 1997 and February 29, 1996.......................................... 6
Notes to Condensed Consolidated Financial Statements...................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................. 13
ITEM 2. CHANGES IN SECURITIES......................................... 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS......... 14
ITEM 5. OTHER INFORMATION............................................. 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 14
SIGNATURES...................................................................... 15
</TABLE>
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<PAGE> 3
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>
MARCH 2, NOVEMBER 30,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,322 $ 19,372
Marketable securities 29,161 37,895
Accounts receivable, net of allowances of
$945 and $841 in 1997 and 1996, respectively 23,228 22,541
Fees and expenditures in excess of billings 4,035 2,792
Prepaid expenses and other current assets 1,706 629
Deferred income taxes 335 800
--------- --------
Total current assets 73,787 84,029
Property and equipment, net 4,425 4,226
Deferred income taxes 10,311 300
Goodwill and other assets 15,529 5,919
--------- --------
Total assets $ 104,052 $ 94,474
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,474 $ 21,109
Accrued expenses 5,599 6,386
Billings in excess of fees and expenditures 3,371 3,201
Current portion of liabilities to related
parties 2,747 1,955
Current portion of notes payable and
capital lease obligations 974 417
Income taxes payable -- 188
--------- --------
Total current liabilities 29,165 33,256
Liabilities to related parties, less current
portion 882 223
Notes payable and capital lease obligations,
less current portion 475 481
--------- --------
Total liabilities 30,522 33,960
--------- --------
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: 14,153,000 and 13,162,000
issued and outstanding in 1997 and 1996, respectively 14 13
Additional paid-in capital 64,029 51,064
Unrealized loss on marketable securities (119) (65)
Notes receivable from stockholders (292) (292)
Retained earnings 9,898 9,794
--------- --------
Total stockholders' equity 73,530 60,514
--------- --------
Total liabilities and stockholders'
equity $ 104,052 $ 94,474
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
CKS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
MARCH 2, 1997 FEBRUARY 29, 1996
------------- -----------------
<S> <C> <C>
Revenues $23,563 $13,873
------- -------
Operating expenses:
Direct salaries and related expenses 6,722 4,305
Other direct operating expenses 8,951 5,365
General and administrative expense 5,344 2,864
Merger costs 1,593 --
------- -------
Total operating expenses 22,610 12,534
------- -------
Operating income 953 1,339
Other income, net 523 338
------- -------
Income before income taxes 1,476 1,677
Income taxes 226 391
------- -------
Net income $ 1,250 $ 1,286
======= =======
Pro forma net income and per share data(1):
Income before income taxes, as reported $ 1,476 $ 1,677
Pro forma income taxes 544 639
------- -------
Pro forma net income $ 932 $ 1,038
======= =======
Pro forma net income per share $ 0.06 $ 0.08
======= =======
Shares used in per share computation 14,946 13,831
======= =======
</TABLE>
- ----------
(1) 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 net income
and net income per share include a tax provision as if M&S had been a
taxable "C" corporation for all periods.
See accompanying notes to consolidated financial statements.
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<PAGE> 5
CKS GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
MARCH 2, 1997 FEBRUARY 29, 1996
------------- -----------------
<S> <C> <C>
Revenues $23,563 $13,873
------- -------
Operating expenses:
Direct salaries and related expenses 6,722 4,305
Other direct operating expenses 8,951 5,365
General and administrative expense 5,344 2,864
------- -------
Total operating expenses 21,017 12,534
------- -------
Operating income 2,546 1,339
Other income, net 523 338
------- -------
Income before income taxes $ 3,069 $ 1,677
Income taxes 1,142 639
------- -------
Net income $ 1,927 $ 1,038
======= =======
Pro forma net income per share $ 0.13 $ 0.08
======= =======
Shares used in per share computation 14,946 13,831
======= =======
</TABLE>
- ----------
(1) The pro forma consolidated statements of income give effect to the
pooling-of-interests business combination between the Company and M&S as if
such combination had occurred at the beginning of the periods presented.
The statement excludes a $1.6 million nonrecurring charge for merger costs
recorded by the Company and includes a tax provision as if M&S had been a
taxable "C" corporation for all periods.
See accompanying notes to consolidated financial statements.
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<PAGE> 6
CKS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
MARCH 2, 1997 FEBRUARY 29, 1996
------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,250 $ 1,286
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Deferred taxes (200) (125)
Compensation related to stock options 24 26
Tax benefit from disqualifying dispositions 910 --
Depreciation and amortization 799 275
Changes in operating assets and
liabilities:
Accounts receivable (199) (1,498)
Fees and expenditures in excess of billings (948) (315)
Prepaid expenses and other current assets (1,199) 89
Accounts payable (5,035) (2,813)
Accrued expenses (1,020) (524)
Billings in excess of fees and expenditures 88 666
Income taxes payable (188) (579)
Payable to related parties (1,601) --
-------- --------
Net cash provided provided by (used in)
operating activities (7,319) 2,114
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (305) (579)
Purchases of marketable securities (4,327) --
Sale of marketable securities 13,007 --
Businesses acquired, net of cash received (4,927) --
Other assets (129) --
-------- --------
Net cash provided by (used in)
investing activities 3,319 (579)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) on line of
credit and notes payable 12 (81)
Proceeds from sale of common stock 1,085 37,946
Distribution to stockholders (1,147) (2,364)
-------- --------
Net cash provided by (used in)
financing activities (50) 35,501
-------- --------
Net change in cash and cash equivalents (4,050) 37,036
Cash and cash equivalents, beginning of year 19,372 4,789
-------- --------
Cash and cash equivalents, end of quarter $ 15,322 $ 41,825
======== ========
Supplementary disclosure of cash paid during the period:
Interest 22 15
======== ========
Income taxes $ 402 $ 1,490
======== ========
Supplementary disclosures of noncash investing
and financing activities:
Net assets acquired for payable to related
parties $ 3,385 $ --
======== ========
Net assets acquired for stock $ 1,611 $ --
======== ========
Deferred tax asset recorded from taxable
pooling of interests with partnership $ 9,346 --
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 7
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Fiscal Year
On February 27, 1997, the Board of Directors of the Company approved a
change in the Company's fiscal year end, such that each fiscal quarter of the
Company shall end on the Sunday that is closest to the end of February, May,
August, and November of each fiscal year. The fiscal year shall end on the
Sunday that is closest to the end of November.
2. 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") 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-interests method for all periods presented. Results
for the three month periods ended March 2, 1997 and February 29, 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 and Exchange
Commission ("SEC") on January 31, 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 January 31, 1997, which was filed
with the SEC on March 6, 1997. The results of operations for the three months
ended March 2, 1997 are not necessarily indicative of the results for the
entire fiscal year ending November 30, 1997.
3. 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.
4. Unaudited Pro Forma Income Tax Information
Unaudited pro forma income tax information is presented with the Company's
condensed consolidated financial statements as if the pooled financial results
of M&S, which was a general partnership prior to its business combination with
the Company, had been subject to federal income taxes throughout the periods
presented.
5. 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 period ended February 29, 1996 with Schell/Mullaney results of operations
for the three month period ended March 31, 1996, as if Schell/Mullaney had been
acquired as of the beginning of the period presented (in thousands, except per
share data):
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<PAGE> 8
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FEBRUARY 29,
1996
------------
<S> <C>
Revenues .............................. $15,380
Net income ............................ 1,581
Net income per share .................. $ 0.11
Shares used in per share computation .. 14,014
</TABLE>
The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the period 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
agreement provides for initial payments to the acquiree of $5,146,000. In
addition, the acquiree 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. The acquiree will also have the
right to receive additional payments if it attains certain earnings goals during
the fiscal years 1997, 1998, 1999, and 2000. The acquiree 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 it meets its earnings goals for the 1997 and 1998
fiscal years. To the extent that the acquiree exceeds its earnings goals for the
1997, 1998, 1999 and 2000 fiscal years by more than 10%, the acquiree 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 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
quarter ended March 31, 1996 have been combined with the Company's consolidated
financial statements as of and for the quarter ended February 29, 1996. Total
revenues and net income for the individual entities as previously reported are
as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FEBRUARY 29,
1996
------------
<S> <C>
Total revenues:
CKS $ 9,150
M&S 4,723
-------
$13,873
=======
Net income:
CKS $ 743
M&S 543
-------
$ 1,286
=======
</TABLE>
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<PAGE> 9
In connection with the M&S transaction, the Company has 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 merger 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' net assets upon the closing of the
transaction.
6. 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 (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 fully diluted EPS, computed under APB No. 15.
7. Subsequent Events
On March 10, 1997, CKS acquired all of the capital stock of EPG
Elektronische Publikationen GmbH, a German corporation (formerly Prisma Holding
GmbH) ("EPG"). In consideration for the sale of their shares in EPG, the
shareholders of EPG received $6,500,000 cash and Common Stock of CKS and up to
an additional $10,000,000 in cash and additional shares of Common Stock over
the next three fiscal years upon attainment of certain financial performance
goals by EPG (the "Subsequent Payments"). The number of additional shares of
CKS Common Stock to be issued to shareholders of EPG 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 value of the
Subsequent Payments is subject to reduction in the event CKS suffers damages as
a result of a breach of the guarantees made by EPG and its shareholders. The
acquisition of the capital stock of EPG will be treated as a purchase for
financial accounting purposes.
On March 13, 1997, the Company acquired certain assets of Gormley &
Partners, Inc., a Connecticut corporation ("Gormley"). The Purchase Agreement
provides for an initial payment in cash and shares of CKS Group Common Stock to
Gormley. In addition, Gormley will be entitled to receive an additional payment
in April 1998 and certain additional payments upon the attainment of certain
performance goals over the next four fiscal years.
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 a number 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.
PRELIMINARY NOTE
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 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' results for the January 1,
1996 through March 31, 1996 period were included in CKS' results for the period
from December 1, 1995 through February 29, 1996 (the first quarter of the
Company's fiscal year). Beginning with the Company's current fiscal year, M&S'
fiscal year has been conformed to CKS' fiscal year.
-9-
<PAGE> 10
RESULTS OF OPERATIONS
Revenues
The Company generates its revenues through project fees on a fixed fee for
service basis and contract based retainer fees. Revenues increased to $23.6
million in the quarter ended March 2, 1997 from $13.9 million in the first
quarter of 1996, representing an increase of 70%. 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's and D&G's revenues in the Company's consolidated
results for the quarter ended March 2, 1997. The Company experiences some
seasonality in its business in that revenues tend to be somewhat lower for the
first fiscal quarter because many clients have expended most of their marketing
budgets prior to the end of the calendar year and do not release funds from the
next calendar year's marketing budget until mid to late January. Revenues from
new media projects represented approximately 25% of revenues for the quarter
compared to 20% for the quarter ended February 29, 1996 (after giving effect to
the restatement to include M&S). In the Company's 10-Q report for the quarter
ended February 29, 1996, the Company reported revenue from new media projects
as approximately 30% of revenues for the quarter ended February 29, 1996,
without giving effect to the restatement to include M&S.
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
56% to approximately $6.7 million in the quarter ended March 2, 1997 from
approximately $4.3 million during the same quarter of fiscal 1996, representing
28.5% of revenues for the first quarter of fiscal 1997 and 31.0% of revenues in
the same quarter of fiscal 1996. The decrease in these expenses as a percentage
of revenues reflects a more rapid increase in revenues than in direct salaries
and related expenses.
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 66.8% to $9.0 million in the quarter ended March 2, 1997,
from $5.4 million in the same quarter of fiscal year 1996, representing 38.0% of
revenues in the first quarter of 1997 and 38.7% of revenues in the same quarter
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 remained relatively flat from quarter to quarter.
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 86.6% to approximately
$5.3 million in the fiscal quarter ended March 2, 1997 from approximately $2.9
million in the same quarter of fiscal 1996, and represented 22.7% and 20.6% of
revenues in the first quarters 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, the inclusion in the first quarter of fiscal 1997
of Schell/Mullaney 's and D&G's expenses and goodwill amortization related to
the acquisition of these companies, as well as an increase in bad debt expense.
The bad debt expense for the first quarter of fiscal 1996 was lower than normal
because the Company collected a large receivable for which a reserve had
previously been taken during that period. 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 related to acquisitions and an increase in bad
debt expense, which was lower than normal in the first quarter of fiscal 1996,
offset in part by decreased facilities and administrative costs.
-10-
<PAGE> 11
Merger Costs
In connection with the merger with M&S, the Company has recorded a
nonrecurring charge for transaction-related costs of approximately $1.6 million
for the quarter ending March 2, 1997, consisting primarily of fees for
investment banking fees, accounting fees, consulting and legal fees, financial
printing costs and other related costs.
Other Income, Net
Other income, net increased primarily due to an increase in interest income
of approximately $159,000 in the fiscal quarter ended March 2, 1997 versus the
same quarter of fiscal 1996 due to higher average cash, cash equivalents
and marketable securities balances.
Income Taxes
Combined actual federal and state income tax rates were 15.3% in the
quarter ended March 2, 1997 and 23.3% in the first quarter of 1996. These 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 merger with CKS Group. Combined
pro forma federal and state income tax rates were 36.8% in the quarter ended
March 2, 1997 and 38.1% in the first quarter 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. The reduction in rate under both
treatments is primarily due to the impact of income generated by the Company's
holdings in tax advantaged investments.
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 March 2, 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 $44.5 million and $57.3 at March 2, 1997 and November 30, 1996,
respectively. The decrease in cash, cash equivalents and marketable securities
during this period was primarily due to approximately $7.3 million used in
operations, and the $4.9 million cash payment in connection with the D&G
acquisition. The $7.3 million used in operations resulted principally from a
large cash payment received by M&S in the previous quarter used to fund media
placements payments in December 1996. In addition, the Company paid its Employee
Stock Purchase Plan and fiscal 1996 bonus liabilities, as well as nonrecurring
M&S merger costs, and recorded a substantial income tax receivable. On January
3, 1997, the Company completed its acquisition of the net assets of D&G in a
transaction accounted from under the purchase method. The net cash flow effect
of the $4.9 million in line item assets and liabilities acquired are reflected
in the Company's Consolidated Statements of Cash Flows under the cash flows from
investing activities section on line "Business acquired, net of cash".
The Company has a $3.0 million credit facility available under a revolving
line of credit. The Company also has a $1.0 million three year term loan
facility available for purchases of equipment. The credit facilities are
secured by all the assets of the Company and bear interest at prime for the
line of credit and prime plus 0.5% for the term loan. At March 2, 1997, there
was no indebtedness outstanding under these credit facilities. These credit
agreements, which are scheduled to expire on September 30, 1997, restrict the
Company's ability to pay dividends or to effect mergers or acquisitions without
the bank's consent. The credit agreements also require compliance with various
financial covenants and restrictions, including maintenance of minimum levels
of net worth and profitability. The Company believes that, as of February 28,
1996, it was incompliance with such covenants and restrictions.
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.* 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.
-11-
<PAGE> 12
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.
The Company's five largest clients accounted for approximately 36% of the
Company's revenues for the fiscal quarter ended March 2, 1997, with fluctuations
in the amount of revenue contribution from each such client from quarter to
quarter. Although the Company has recently acquired several continuing
relationships with significant clients through business acquisitions, many of
the Company's clients generally retain the Company on a project by project
basis. Accordingly 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 has historically generated the substantial 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, with
revenue and income for the first fiscal quarter generally being less than
revenue and income for the fourth fiscal quarter. 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 is subject to extreme
fluctuations in response both to business related issues, such as has been and
is expected to continue to be to quarterly variations in operating results, and
announcements of technological innovations or new products or services by the
Company or its competitors and stock market-related influences, such as changes
in analyst estimates, the presence or absences of short-selling of the
Comapany'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 price and volume fluctuations which have particularly affected
the market price of technology-oriented and media companies, which often have
been unrelated to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock.
The Company's future growth is dependent to a significant extent upon its
ability to increase the amount of revenue it derives from providing integrated
marketing communications services 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. Revenues from new media projects represented
approximately 25% of revenues for the quarter ended March 2, 1997 compared to
20% for the fiscal quarter of 1996.
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<PAGE> 13
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. In addition,
the Company has acquired offices in Raleigh, North Carolina; Hamburg, Germany;
Vienna, Austria; and Greenwich, Connecticut through various business
combinations. 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, EPG and Gormley and any future acquisitions or
investments involve or may involve numerous risks commonly encountered in the
acquisitions of businesses. Such risks include, among others, 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, the impairment of
relationships with employees and clients as a result of any integration of new
management personnel, and the retention of the personnel of acquired businesses
essential for the continued success and growth of such businesses. The
occurrence of any of these contingencies could have a material adverse effect on
the Company's business, financial condition and operating results. 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 the operating statement in the future.
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.
There can be no assurance that any additional potential acquisitions will be
consummated.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
On January 31, 1997, the Company issued 841,291 shares of its Common
Stock in exchange for all of the partnership units and residual partnership
interests of M&S. The Common Stock was issued to the former partners of M&S. The
Company did not employ an underwriter or placement agent in connection with this
transaction. 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
-13-
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
a. The Company held a Special Meeting of Stockholders (the
"Meeting") on December 17, 1996. Proxies were solicited for the
meeting.
b. The only matter voted on at the Meeting was a proposal to amend
the Company's 1995 Stock Plan to increase the number of shares
reserved for issuance thereunder by 1,600,000 shares. The
proposal was approved. Of the 13,160,614 shares eligible to vote
at the Meeting, 11,366,450 were voted at the Meeting. Of the
shares voted at the Meeting, 9,555,171 were voted in favor of
the proposal, 1,646,279 were voted against the proposal, and
165,000 were abstained from voting.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits Page
11.1 Statement Regarding Computation of Per-Share
Earnings 16
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 dated December 18, 1996 and filed with the Commission on
December 27, 1996 reporting information under items 5 and 7. This form 8-K
filing included the Company's balance sheet information as of November 30, 1996
as well as its consolidated statement of income, stockholders' equity and cash
flows as of November 30, 1996, and the report of KPMG Peat Marwick LLP,
independent auditors, dated December 16, 1996.
(2) Form 8-K dated January 3, 1997 and filed with the Commission on
January 17, 1997 under items 2 and 7. This Form 8-K filing included the
financial statements of D&G for the years ended December 31, 1994 and 1995 and
for the nine months ended September 30, 1995 and 1996, as well as the report of
Robbins, Spielman, Koenigsberg and Parker LLP dated November 4, 1996 except as
to note 9, which is as of December 30, 1996. This Form 8-K filing also included,
for CKS and D&G, the pro forma unaudited combined condensed balance sheet for
the year ended November 30, 1996 and the pro forma combined statement of income,
stockholders' equity and cash flows for the year ended November 30, 1996.
(3) Form 8-K/A dated January 31, 1997 and filed with the Commission on
January 31, 1997, amending the Form 8-K filing dated December 18, 1996.
(4) Form 8-K dated January 31, 1997 and filed with the Commission on
February 14, 1997 reporting information under item 5.
-14-
<PAGE> 15
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: April 15, 1997 By: /s/ Mark D. Kvamme
-----------------------------------
Mark D. Kvamme, Chairman, and
Chief Executive Officer
(Principle Executive Officer)
Date: April 15, 1997 By: /s/ Carlton H. Baab
-----------------------------------
Carlton H. Baab, Executive
Vice President, and Chief
Financial Officer (Principal
Financial and Accounting Officer)
-15-
<PAGE> 1
EXHIBIT 11.1
CKS GROUP, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION
OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Pro forma income including charge relating to acquisition of M&S
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
MARCH 2, FEBRUARY 29,
1997 1996
------- -----------
<S> <C> <C>
Pro forma net income* $ 932 $ 1,038
------- -------
Weighted average number of common shares
outstanding 14,112 13,194
Number of common stock equivalents as a
result of stock options outstanding using
the treasury stock method 834 637
------- -------
Shares used in per share computation 14,946 13,831
------- -------
Net income per share $ 0.06 $ 0.08
======= =======
</TABLE>
- ----------
*Pro forma net income gives effect to the pooling-of-interests business
combination between the Company and M&S and includes M&S' historical results of
operations, which have been included with the Company's under the pooling of
interests method. These results of operations do not include a provision for
income taxes because M&S was a general partnership. Pro forma net income and net
income per share include a tax provision as if M&S had been a taxable "C"
corporation for all periods.
Pro forma income excluding charge relating to acquisition of M&S
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
MARCH 2, FEBRUARY 29,
1997 1996
<S> <C> <C>
Pro forma net income** $ 1,927 $ 1,038
------- -------
Weighted average number of common
shares outstanding 14,112 13,194
Number of common stock equivalents as
a result of stock options outstanding
using the treasury stock method 834 637
------- -------
Shares used in per share computation 14,946 13,831
------- -------
Pro forma net income per share $ 0.13 $ 0.08
======= =======
</TABLE>
- ----------
**Pro forma net income gives effect to the pooling of interests business
combination between the Company and M&S. The $1.6 million nonrecurring charge
for acquisition-related costs recorded by the Company has been excluded, and a
tax provision as if M&S had been a taxable "C" corporation for all periods has
been included.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> MAR-02-1997
<CASH> 15,322
<SECURITIES> 29,161
<RECEIVABLES> 23,228
<ALLOWANCES> 945
<INVENTORY> 0
<CURRENT-ASSETS> 73,787
<PP&E> 4,425
<DEPRECIATION> 0
<TOTAL-ASSETS> 104,052
<CURRENT-LIABILITIES> 16,474
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 73,530
<TOTAL-LIABILITY-AND-EQUITY> 104,052
<SALES> 23,563
<TOTAL-REVENUES> 23,563
<CGS> 0
<TOTAL-COSTS> 21,017
<OTHER-EXPENSES> 1,593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,476
<INCOME-TAX> 226
<INCOME-CONTINUING> 1,250
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,250
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
