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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 1, 1998
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)
<TABLE>
<S> <C> <C>
Delaware 77-0385435
- --------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10441 Bandley Drive
Cupertino, CA 95014 (408) 366-5100 95014
- --------------------------------- -------------------------------- --------------------------
(Address of principal (Registrant's telephone number, (Zip Code)
executive offices) including are 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 [ ]
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 1, 1998
----- -------------
<S> <C>
Common Stock - $0.001 par value 15,215,008
</TABLE>
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<PAGE> 2
CKS GROUP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C>
ITEM 1.FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of March 1, 1998 and November 30, 1997..... 3
Condensed Consolidated Statements of Income - Three months ended March 1, 1998
and March 2, 1997................................................................ 4
Condensed Consolidated Statements of Cash Flows - Three months ended March 1,
1998 and March 2, 1997........................................................... 5
Notes to Condensed Consolidated Financial Statements................................ 6
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.................................................................... 8
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS........................................................... 15
ITEM 2.CHANGES IN SECURITIES....................................................... 15
ITEM 3.DEFAULTS UPON SENIOR SECURITIES............................................. 15
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS....................... 15
ITEM 5.OTHER INFORMATION........................................................... 15
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K............................................ 15
SIGNATURES................................................................................. 16
</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>
MARCH 1, 1998 NOVEMBER 30, 1997
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,269 $ 18,223
Marketable securities 22,284 24,041
Accounts receivable, net of allowances of $1,713
and $1,442 at March 1, 1998 and November 30,
1997, respectively 36,038 50,049
Fees and expenditures in excess of billings 6,762 4,594
Prepaid expenses and other current assets 1,938 1,949
Deferred income taxes 1,500 1,400
---------- ----------
Total current assets 86,791 100,256
Property and equipment, net 5,574 5,849
Deferred income taxes 10,218 10,140
Goodwill and other assets 33,423 30,228
---------- ----------
Total assets $ 136,006 $ 146,473
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,664 $ 38,161
Accrued expenses 6,528 7,515
Billings in excess of fees and expenditures 2,614 2,417
Liabilities to related parties 4,025 2,284
Current portion of notes payable and capital lease
obligations 709 765
Income taxes payable 37 --
---------- ----------
Total current liabilities 36,577 51,142
Notes payable and capital lease obligations, less
current portion 774 739
---------- ----------
Total liabilities 37,351 51,881
---------- ----------
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:
15,215,000 and 14,865,000 issued and outstanding at March 1,
1998 and November 30, 1997, respectively 15 15
Additional paid-in capital 83,238 80,103
Unrealized gain (loss) on marketable securities (46) 12
Notes receivable from stockholders (198) (198)
Cumulative translation adjustment (181) (62)
Retained earnings 15,827 14,722
---------- ----------
Total stockholders' equity 98,655 94,592
---------- ----------
Total liabilities and stockholders' equity $ 136,006 $ 146,473
========== ==========
</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
-------------------------
MARCH 1, MARCH 2,
1998 1997
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(Unaudited)
<S> <C> <C>
Revenues $ 32,190 $ 24,319
-------- --------
Operating expenses:
Direct salaries and related expenses 10,125 7,110
Other direct operating expenses 12,883 9,157
General and administrative expenses 7,810 5,619
Merger costs -- 1,593
-------- --------
Total operating expenses 30,818 23,479
-------- --------
Operating income 1,372 840
Other income, net 437 523
-------- --------
Income before income taxes 1,809 1,363
Income taxes 704 174
-------- --------
Net income $ 1,105 $ 1,189
======== ========
Pro forma net income and per share data: (1)
Income before income taxes, as reported $ 1,363
Pro forma income taxes 492
--------
Pro forma net income $ 871
========
Basic net income per share $ 0.07
========
Pro forma basic net income per share $ 0.06
========
Shares used in basic per share computation 15,311 14,112
======== ========
Diluted net income per share $ 0.07
========
Pro forma diluted net income per share $ 0.06
========
Shares used in diluted per share computation 16,001 15,215
======== ========
</TABLE>
(1) Pro forma net income gives effect to pooling-of-interests combinations
between the Company, McKinney & Silver ("M&S") and SiteSpecific, Inc.
("SiteSpecific") during fiscal 1997. M&S was a general partnership and, as
a result, M&S's historical results of operations prior to acquisition by
the Company, 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.
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<PAGE> 5
CKS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
MARCH 1, 1998 MARCH 2, 1997
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(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,105 $ 1,189
Adjustments to reconcile net income to net cash used
in operating activities:
Deferred taxes (178) (200)
Compensation related to stock options 32 44
Tax benefit from disqualifying dispositions 404 909
Depreciation and amortization 1,003 625
Loss on disposition of property due to acquisition -- 227
Changes in operating assets and liabilities:
Accounts receivable 13,892 3,021
Fees and expenditures in excess of billings (2,168) (807)
Prepaid expenses and other current assets 11 (1,212)
Accounts payable (15,497) (6,024)
Accrued expenses (1,091) (1,050)
Billings in excess of fees and expenditures 197 1,689
Income taxes payable 37 (190)
-------- --------
Net cash used in operating activities (2,253) (1,779)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (244) (398)
Purchases of marketable securities (7,482) (4,327)
Sale of marketable securities 9,193 13,007
Businesses acquired, net of cash received -- (4,927)
Other assets 38 (126)
-------- --------
Net cash provided by investing activities 1,505 3,229
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) on line of credit and note
payable (21) 7
Proceeds from sale of common stock 815 1,288
Liabilities to related parties -- (2,550)
-------- --------
Net cash provided by (used in)
financing activities 794 (1,255)
-------- --------
Net change in cash and cash equivalents 46 195
Change in subsidiaries' fiscal year ends -- (4,259)
Cash and cash equivalents, beginning of period 18,223 19,385
-------- --------
Cash and cash equivalents, end of period $ 18,269 $ 15,321
======== ========
Supplementary disclosure of cash paid during the period:
Cash paid:
Interest $ 26 $ 22
======== ========
Income taxes $ 16 $ 402
======== ========
Noncash investing and financing activities:
Businesses acquired for payable to related parties $ 1,788 $ 3,385
======== ========
Businesses acquired for common stock $ 1,884 $ 1,611
======== ========
Deferred tax asset recorded in connection with
taxable pooling of interests $ -- $ 9,346
======== ========
</TABLE>
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<PAGE> 6
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") and SiteSpecific, Inc. ("SiteSpecific")
in business combinations accounted for under the pooling-of-interests method for
all periods presented. Results of operations for the quarter ended March 1,
1998, and March 2, 1997, 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, together with management's discussion and analysis
of financial condition and results of operations, contained in the Company's
Annual Report on Form 10-K for the fiscal year ended November 30, 1997. The
results of operations for the quarter ended March 1, 1998, are not necessarily
indicative of the results expected for any subsequent quarter or for the entire
fiscal year ending November 29, 1998.
2. PRO FORMA NET INCOME AND PRO FORMA NET INCOME PER SHARE
Pro forma net income gives effect to the pooling-of-interests
combinations between the Company and M&S and the Company and SiteSpecific during
fiscal 1997. M&S was a general partnership and, as a result, M&S's historical
results of operations prior to the acquisition by the Company, 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.
On December 1, 1997, The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share. In accordance with
SFAS No. 128, basic net income per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding during the period, using the treasury stock
method for options and warrants after giving effect to contingently issuable
shares under acquisition agreements. The Company has restated net income per
share for all periods presented in accordance with SFAS No. 128.
Reconciliation of basic and diluted net income per share and pro forma
net income per share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 1, 1998 THREE MONTHS ENDED MARCH 2, 1997
------------------------------------- --------------------------------------
PRO PRO
FORMA FORMA
NET INCOME SHARES EPS NET INCOME SHARES EPS
---------- -------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic net income per share $ 1,105 15,311 $ 0.07 $ 871 14,112 $ 0.06
Effect of dilutive shares:
Common equivalent shares -- 273 -- -- 834 --
Contingent shares -- 417 -- -- 269 --
-------- -------- -------- -------- -------- --------
Diluted net income per share $ 1,105 16,001 $ 0.07 $ 871 15,215 $ 0.06
======== ======== ======== ======== ======== ========
</TABLE>
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3. BUSINESS COMBINATIONS
Donovan & Green, Inc.
On January 3, 1997, the Company acquired the assets and assumed substantially
all the liabilities of Donovan & Green, Inc. ("D&G"), and its results of
operations have been included in the Company's consolidated financial statements
from that date. The purchase agreement provided for initial payments to D&G of
$5.1 million. The Company also made a guaranteed payment to D&G consisting of
$3.3 million in cash and Common Stock on April 18, 1997. In addition, D&G will
receive additional guaranteed payments totaling $1.5 million in cash and Common
Stock over the next two fiscal years. D&G will also have the right to receive
additional payments if the subsidiary attains certain earnings goals during
fiscal years 1998, 1999 and 2000. The acquisition was accounted for as a
purchase, and, as a result, the Company recorded goodwill of approximately $8.3
million. In the event additional contingent consideration is paid to D&G, it
will be recorded as additional purchase price. 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 actual results.
CKS Holding (Deutschland) GmbH
On March 10, 1997, the Company acquired all the capital stock of CKS
Holding (Deutschland) GmbH (formerly Elektronische Publikationen GmbH), a German
corporation ("CKS GmbH"), and its results of operations have been included in
the Company's consolidated financial statements from that date. In consideration
for the sale of their shares in CKS GmbH, the former shareholders of CKS GmbH
received $5.9 million in cash and Common Stock of CKS Group. Also under the
purchase agreement, the Company is required to make a guaranteed payment with a
value of $0.7 million in cash and Common Stock of CKS Group in fiscal 1998. In
addition, the former shareholders of CKS GmbH have the right to receive up to an
additional $10.0 million in cash and additional shares of Common Stock during
fiscal 1998, 1999 and 2000 upon attainment of certain financial performance
goals by CKS GmbH. The acquisition of the capital stock of CKS GmbH was treated
as a purchase and, as a result, the Company initially recorded goodwill of
approximately $5.6 million. In the event additional contingent consideration is
paid to the former shareholders of CKS GmbH, it will be recorded as additional
purchase price.
The following summary, prepared on a pro forma basis, combines the
Company's consolidated results of operations for the three month period ended
March 2, 1997 with CKS GmbH's results of operation for the three month period
ended March 31, 1997, as if CKS GmbH had been acquired as of the beginning of
the period presented (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 2, 1997
-------------
<S> <C>
Revenues ........................................................ $ 26,765
Net income ...................................................... $ 812
Basic net income per share ...................................... $ 0.06
Shares used in basic per share computation ...................... 14,199
Diluted net income per share .................................... $ 0.05
Shares used in diluted per share computation .................... 15,302
</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.
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<PAGE> 8
Gormley & Partners, Inc.
On March 12, 1997, the Company acquired certain assets of Gormley &
Partners, Inc. ("Gormley"), a Connecticut corporation, and its results of
operations have been included in the Company's consolidated financial statements
from that date. The purchase agreement provided for an initial payment of
approximately $3.2 million in cash and 40,206 shares of CKS Group Common Stock
to Gormley and an additional $1.5 million in cash and CKS Group Common Stock
payable during fiscal 1998. In addition, Gormley will be entitled to receive
additional payments if it attains certain earnings goals over the next three
fiscal years. The acquisition was accounted for as a purchase and, as a result,
the Company initially recorded goodwill of approximately $5.8 million. In the
event additional contingent consideration is paid to Gormley, it will be
recorded as additional purchase price. 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 actual results.
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
And Market Price Of Stock." Readers are also encouraged to refer to the
Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997
for 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 fiscal 1997, the Company
acquired M&S and SiteSpecific in business combinations accounted for under the
pooling-of-interests method of accounting. Prior to acquisition by the Company,
M&S and SiteSpecific prepared their financial statements on a calendar year
basis. Under generally accepted accounting principles ("GAAP"), after the
Company acquired M&S and SiteSpecific, the Company restated its financial
results to include the financial results of M&S and SiteSpecific for all periods
presented.
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 1, 1998 AND MARCH 2, 1997
Revenues
The Company generates a significant portion of its revenues through
project fees on a fixed fee for service basis and contract based retainer fees.
Revenues increased to $32.2 million in the quarter ended March 1, 1998 from
$24.3 million in the first quarter of fiscal 1997, representing an increase of
approximately 32.4%. 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 D&G, CKS GmbH
and Gormley revenues in the Company's consolidated results for the quarter ended
March 2, 1998. Revenues from new media projects increased to $7.9 million in the
quarter ended March 1, 1998 from $6.6 million in the same quarter of fiscal
1997, representing an increase of approximately 19%. New media revenues
represented approximately 25% of revenues for the quarter ended March 1, 1998,
compared to approximately 27% for the quarter ended March 2, 1997 (after giving
effect to the restatement to include the operating results of M&S and
SiteSpecific). In the Company's quarterly report on Form 10-Q for the quarter
ended March 2, 1997, the Company reported that revenues from new media projects
were approximately 25% of total revenues for the quarter ended March 2, 1997,
without giving effect to the restatement to include SiteSpecific. SiteSpecific
historically had only new media revenues, so the effect of the restatement to
include the operating results of SiteSpecific was to increase new media revenues
as a percentage of total revenues for the quarter ended March 2, 1997 from
approximately 25% to approximately 27%.
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<PAGE> 9
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 approximately 42.4% to $10.1 million in the quarter ended
March 1, 1998 from $7.1 million during the same quarter of fiscal 1997,
representing 31.5% and 29.2% of revenues in the first quarter of fiscal 1998 and
fiscal 1997, respectively. The increase in absolute dollars was primarily
attributable to an increase in salaries and related expenses necessary to
support the Company's growth. The increase in these expenses as a percentage of
revenues reflects an increase in the number of temporary workers during the
period ending March 1, 1998, necessary to support the higher level of revenues.
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 40.7% to $12.9 million in the quarter
ended March 1, 1998, from $9.2 million in the same quarter of fiscal 1997,
representing 40.0% and 37.7% of revenues in the first quarter of fiscal 1998 and
fiscal 1997, respectively. The increase in absolute dollars was primarily
attributable to increases in freelance and facilities costs necessary to support
the higher level of revenues. The increase in other direct operating expenses as
a percentage of revenues reflects an increase in freelance and facilities costs,
partially offset by a reduction in production costs.
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 approximately 39.0% to
$7.8 million in the quarter ended March 1, 1998 from $5.6 million in the same
quarter of fiscal 1997, representing 24.3% and 23.1% of revenues in the first
quarter of fiscal 1998 and fiscal 1997, respectively. This period over period
increase in absolute dollars was primarily attributable to increases in
facilities costs, administrative expenses, general and administrative payroll,
and goodwill amortization related to the Company's acquisitions. The first
quarter of fiscal 1998 includes three months of general and administrative
expenses for D&G, CKS GmbH and Gormley, subsidiaries that were acquired during
or after the first quarter of fiscal 1997, as well as goodwill amortization
related to the acquisition of these companies. The increase in these expenses as
a percentage of revenues reflects an increase in facilities costs,
administrative expenses and goodwill amortization, partially offset by a
reduction in general and administrative payroll.
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
for the three month period ended March 2, 1997. The costs consisted primarily of
investment banking, accounting, consulting and legal fees, financial printing
and other related costs.
Other Income, Net
Other income, net 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 and interest expense related to debt
recorded by the subsidiaries. Other income, net decreased to approximately $0.4
million in the quarter ended March 1, 1998, from $0.5 million in the quarter
ended March 2, 1997. The decrease is primarily attributable to an increase in
interest expense related to the amortization of imputed interest and interest
expense related to debt held by subsidiaries.
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<PAGE> 10
Pro Forma Consolidated Financial Data (Unaudited)
The following summary of pro forma consolidated statements of income data gives
effect to the pooling-of-interests business combinations between the Company,
M&S and SiteSpecific. The data excludes approximately $1.6 million in
nonrecurring charges for merger costs recorded by the Company during the three
months ended March 2, 1997 and includes a tax provision as if M&S has been a
taxable C corporation for all periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 1, MARCH 2,
1998 1997
------- -------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues ......................................... $32,190 $24,319
Net income ....................................... $ 1,105 $ 1,866
Pro forma basic net income per share ............. $ 0.07 $ 0.13
Shares used in basic per share computation ....... 15,311 14,112
Pro forma diluted net income per share ........... $ 0.07 $ 0.12
Shares used in diluted per share computation ..... 16,001 15,215
</TABLE>
Income Taxes
Combined actual federal and state income tax rates were 38.9% in the
quarter ended March 1, 1998 and 12.8% in the quarter ended March 2, 1997. These
rates do not include a provision for income taxes for M&S prior to January 31,
1997, which was a general partnership prior to its acquisition by CKS Group.
Combined pro forma federal and state income tax rates were 38.9% in the quarter
ended March 1, 1998 and 36.1% in the first quarter of 1997. 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 effective tax rate was higher during
the three month period ended March 1, 1998, primarily due to an increase in
profitability in higher tax rate jurisdictions and the decrease of tax exempt
interest as a percentage of total revenues.
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
1, 1998, the Company owed approximately $1.5 million in bank borrowings and
capital lease financing arrangements.
Cash, cash equivalents and marketable securities, consisting primarily
of high-quality municipal bonds and tax-advantaged money market instruments,
totaled $40.6 million and $42.3 million at March 1, 1998 and November 30, 1997,
respectively. The decrease in cash, cash equivalents and marketable securities
during this period was primarily due to approximately $2.3 million used in
operations and approximately $0.2 million used for capital expenditures,
partially offset by $0.8 million in proceeds from the issuance of common stock.
Net cash used for operating activities was approximately $2.3 million in
the quarter ended March 1, 1998, reflecting a $4.6 million use of cash to fund
working capital fluctuations, partially offset by $1.1 million in net income and
a $0.4 million tax benefit from disqualifying dispositions.
Net cash provided by investing activities was approximately $1.5 million
in the quarter ended March 1, 1998, and included approximately $1.7 million in
net proceeds from the sale of marketable securities, of which approximately $0.2
million was used for capital expenditures.
Net cash provided for financing activities was approximately $0.8
million in the quarter ended March 1, 1998, reflecting $0.8 million in proceeds
from the sale of Common Stock through the Company's Employee Stock Purchase Plan
and upon exercise of options.
-10-
<PAGE> 11
In recording the business combinations with M&S and SiteSpecific, the
Company's balance sheet as of November 30, 1996 was combined with M&S's and
SiteSpecific's balance sheets as of December 31, 1996. Subsequent to November
30, 1996, M&S and SiteSpecific changed their fiscal year ends to conform to the
Company's fiscal year end. The net decrease in cash and cash equivalents for the
three month period ended March 2, 1997 has been adjusted to eliminate the effect
of including M&S's and SiteSpecific's net income and cash flows for the month
ended December 31, 1996. The cash adjustment amounted to $4.3 million, primarily
as a result of a substantial payment received by M&S in December 1996 from a
client for media placement, for which related costs were not paid until January
1997. This adjustment is reflected in the Company's Condensed Consolidated
Statements of Cash Flows under the line item "Change is subsidiaries' fiscal
year ends".
As of March 1, 1998, the Company and its subsidiaries had $3.9 million
in credit facilities available under revolving lines of credit. The Company and
its subsidiaries also had $0.2 million in term loan facilities available for
purchases of 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 both the
lines of credit and the term loans. At March 1, 1998, there was $0.8 million of
indebtedness outstanding under these credit facilities. These credit agreements,
which are scheduled to expire May 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 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 at all.
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, 1997.
The Company's five largest clients accounted for 37% and 39% of the
Company's revenues for the fiscal years ended November 30, 1997 and November 30,
1996, respectively, with the fluctuations in the amount of revenue contribution
from each such client from quarter to quarter. Since many of the Company's
clients generally 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 any of
the Company's major clients does not remain a significant source of revenues,
there could be a direct and immediate material adverse effect on the Company's
business, financial condition and operating results. Historically, the Company's
typical project has lasted only four to six weeks, and once a project is
completed there can be no assurance that a client will engage the Company for
further services. In addition, the Company's clients may unilaterally reduce
their use of the Company's services or terminate existing projects without
penalty. The termination of the Company's business relationship with any of its
significant clients or a material reduction in the use of the Company's services
by a significant client would have a material adverse effect on the Company's
business, financial condition and operating results.
- ----------
* This statement is a forward-looking statement reflecting current expectations.
Investors are strongly encourage to review the section entitled "Factors
Affecting Operating Results And Market Price Of Stock" commencing on this page,
for a discussion of factors that could affect future performance.
-11-
<PAGE> 12
The Company's operating results have fluctuated in the past and may
fluctuate in the future as a result of a variety of factors. Some of these
factors include 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. For instance, reductions in marketing
expenditures by several of the Company's largest clients resulted in a
significant decline in the Company's earnings for the fourth quarter fiscal
1997, which in turn resulted in a 63% decline in the market price of the
Company's Common Stock in a single day. Operating results could also be
materially adversely affected by increased competition in the Company's markets.
The Company's operating margins may fluctuate from quarter to quarter depending
on the relative mix of lower cost full time employees versus higher cost
independent contractors. The Company experiences some seasonality in its
business which results from timing of product introductions and business cycles
of the Company's clients. During the fourth quarter fiscal 1997, for example,
the Company's largest client, Audi of America, significantly reduced its
marketing spending after completing a major product launch. The Company's
revenues for the first fiscal quarter tend to be somewhat lower than for the
preceding fourth 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. The
Company expects this seasonality to continue in the future. 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 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 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. The
Company believes that its focus on and expertise in new media-based marketing
services has been an important factor in attracting new clients. To the extent
that the Company's leadership in providing new media solutions erodes as
established advertising agencies and other competitors expand their new media
capabilities, the Company's competitive position and operating results may be
materially adversely affected.
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 Company may continue to expand its
business and customer base by acquiring complementary businesses, opening new
offices or expanding its offerings of the marketing communications products or
services. There can be no assurance that the Company will be able to operate
profitably in any new geographic location, that it will be successful in
identifying new services or products that will be attractive to clients or that
it will ultimately generate revenues in excess of costs of implementing them.
Expansion of the Company's operations would result 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 member of senior management to operate effectively,
both independently and as a group. No assurance can be given that existing and
new members of the Company's management will succeed in their roles, or that the
Company can efficiently allocate management responsibilities and cause its
officers and senior managers to operate effectively as a group. Difficulties in
recruiting and assimilating new personnel, enhancing the Company's financial and
operational controls and expanding the Company's marketing and customer support
capabilities may impede the Company's ability to pursue its growth strategy. In
general, there can be no assurance that the Company will be able to manage its
recent or any future expansions effectively, and any inability to do so would
have a material adverse effect on the Company's business, financial condition
and operating results.
-12-
<PAGE> 13
As part of its business strategy, the Company has made and expects to
make acquisitions of, or significant investments in, businesses that offer
complementary marketing communication services, products and technologies. The
Company's past and any future acquisitions or investments are and will be
accompanied by the risks commonly encountered in acquisitions of businesses.
Such risks include, among other things, the difficulty of assimilating the
operations and personnel of the acquired businesses, the potential disruption of
the Company's ongoing business, the inability of management to maximize the
financial and strategic position of the Company through the successful
incorporation of acquired personnel and clients, 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 future performance of businesses acquired by the Company and
which may be acquired by the Company in the future is often highly dependent on
the continued employment and the performance of one or more key officers or
employees of such businesses. To the extent that such key officers or employees
terminate their employment with the Company, or fail to operate effectively,
either independently or together with other officers and personnel of the
Company, the Company's business, financial condition and operating results may
be materially adversely affected.
The Company regularly engages in discussions related to potential
acquisitions. 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. The number of shares, which may be issued in future acquisitions, will
depend on the market price of the Company's Common Stock and a variety of other
factors and, as a result, future acquisitions may have a significant dilutive
impact on the Company's existing stockholders. Any acquisitions accounted for as
purchase business combinations may increase the amount of goodwill recorded as
an asset on the Company's balance sheet and, accordingly, may increase the
amount of goodwill that must be amortized against operating results in the
future. In addition, the Company periodically reviews the goodwill related to
its acquisitions. If the Company were to determine that the goodwill associated
with one or more of its acquisitions were to become impaired, the Company would
be required to record the extent of such impairment as an expense in its
statement of operations for the period in which such impairment occurred.
Recording an expense for such impairment would likely have a material adverse
effect on the Company's operating results for the quarter in which such expense
was recorded. No assurance can be given that any potential acquisition will be
consummated. There can also 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.
The Company generates a significant portion 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 the Company to incur a loss. Although
many of the Company's projects 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, a material adverse
effect on the Company's business, financial condition and operating results
could result.
Conflicts of interest are inherent in certain segments of the marketing
communications industry, particularly in advertising. The Company has in the
past, and likely 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.
-13-
<PAGE> 14
VOLATILITY OF COMPANY'S COMMON STOCK
The trading price of the Company's Common Stock has been and in the
future is expected to be subject to extreme fluctuations in response to both
business-related issues, such as quarterly variations in operating results, the
timing of commencement or completion of client projects, reductions or increases
in client spending on marketing communications services, announcements of new
services or business acquisitions by the Company or its competitors, and the
gain or loss of client accounts, and stock market related influences, such as
changes in estimates of securities analysts, 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 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. The following
table reflects the high and low per share sale prices for the Company's Common
Stock for the five fiscal quarters ending March 1, 1998:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
First Quarter, Fiscal 1997 $36.25 $20.63
Second Quarter, Fiscal 1997 $34.25 $20.25
Third Quarter, Fiscal 1997 $44.75 $29.00
Fourth Quarter, Fiscal 1997 $46.25 $11.38
First Quarter, Fiscal 1998 $19.00 $12.38
</TABLE>
-14-
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
On February 13, 1998, the Company issued 261,628 shares of its Common
Stock to the former shareholders of Schell/Mullaney, Inc. ("Schell/Mullaney")
pursuant to the Agreement and Plan of Reorganization dated as of June 7, 1997 by
and among the Company, SMI Acquisition Corp., Schell/Mullaney, and former
shareholders of Schell/Mullaney, Inc. 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 3(a)(10) of Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
-15-
<PAGE> 16
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, 1998 By: /s/ MARK D. KVAMME
----------------------------------
Mark D. Kvamme, Chairman and Chief
Executive Officer (Principle
Executive Officer)
Date: April 15, 1998 By: /s/ CARLTON H. BAAB
----------------------------------
Carlton H. Baab, Executive Vice
President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
-16-
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> MAR-01-1998
<CASH> 18,269
<SECURITIES> 22,284
<RECEIVABLES> 37,751
<ALLOWANCES> 1,713
<INVENTORY> 0
<CURRENT-ASSETS> 86,791
<PP&E> 5,574
<DEPRECIATION> 0
<TOTAL-ASSETS> 136,006
<CURRENT-LIABILITIES> 36,577
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 98,640
<TOTAL-LIABILITY-AND-EQUITY> 136,006
<SALES> 32,190
<TOTAL-REVENUES> 32,190
<CGS> 0
<TOTAL-COSTS> 30,818
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,809
<INCOME-TAX> 704
<INCOME-CONTINUING> 1,105
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,105
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
