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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended November 30, 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 jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10441 BANDLEY DRIVE, CUPERTINO, CA 95014
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: (408) 366-5100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.001 par value
(Title of Class)
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 period that 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
February 12, 1998 as reported on the National Market of The Nasdaq Stock Market,
was approximately $167 million. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. As of February 12, 1998, registrant had outstanding
14,947,511 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for Registrant's Annual Meeting of
Stockholders to be held April 22, 1998.
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FORWARD-LOOKING STATEMENTS
This Report contains, and incorporates by reference, certain
forward-looking statements (as such term is defined in the rules promulgated
pursuant to the Securities Act of 1933, as amended) that are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. Such forward-
looking statements are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. When used in this document and in the
documents incorporated herein by reference, the words "anticipate," "believe,"
"estimate," "expect" and similar expressions, as they relate to the Company or
its management, are intended to identify such forward-looking statements. Such
statements reflect the current views of the Company or its management with
respect to future events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, the Company's actual results,
performance or achievements could differ materially from those expressed in, or
implied by, any such forward-looking statements. Factors that could cause or
contribute to such material differences include, but are not limited to, those
discussed below in "Business--Factors Affecting Operating Results and Market
Price of Stock", as well as those discussed elsewhere in this Report and in the
documents incorporated herein by reference. The inclusion of such
forward-looking information should not be regarded as a representation by the
Company or any other person that the future events, plans or expectations
contemplated by the Company will be achieved. The Company undertakes no
obligation to release publicly any updates or revisions to any such
forward-looking statements that may reflect events or circumstances occurring
after the date of this Report.
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PART I
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ITEM 1. BUSINESS
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THE COMPANY
CKS Group is an international integrated marketing services and
technology company headquartered in Cupertino, California. The Company
specializes in offering a wide range of integrated marketing communication
services and technology solutions that help companies market their products,
services and messages. The integrated marketing communication services CKS Group
provides include strategic corporate and product positioning, corporate identity
and product branding, new media, systems integration, environmental design,
packaging, electronic commerce, collateral systems, advertising, direct
marketing, consumer promotions, trade promotions and media placement services.
CKS Group is a provider of integrated marketing communication programs that
utilize advanced technology solutions and new media. New media is defined by the
Company as media that delivers content to the end user in digital form,
including the World Wide Web, the Internet, proprietary online services,
CD-ROMs, laptop PC presentations and interactive kiosks. New media services
represented approximately 25.8%, 25.2% and 15.5% of the Company's revenues for
fiscal years 1997, 1996 and 1995, respectively. The balance of the Company's
revenue for such periods was derived from the Company's other integrated
marketing communication services, including strategic corporate and product
positioning, corporate identity and product branding, systems integration,
environmental design, packaging, electronic commerce, collateral systems,
advertising, direct marketing, consumer promotions, trade promotions and media
placement.
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The Company was incorporated in California in 1994 and is the
successor to three predecessor corporations, CKS Partners, Inc., CKS Pictures,
Inc., and CKS Interactive, Inc., which are now wholly owned subsidiaries of the
Company. CKS Partners, Inc. originally began business in 1987 with two employees
as Cleary Communications. CKS Pictures, Inc. and CKS Interactive, Inc. were
incorporated in 1994 and merged into CKS Partners, Inc. in January 1998. The
Company was reincorporated in Delaware in December 1995. The Company acquired
Schell/Mullaney, Inc. ("Schell/Mullaney") in August 1996; Donovan & Green, Inc.
("Donovan & Green") and McKinney & Silver ("M&S") in January 1997; CKS Holding
(Deutschland) GmbH ("CKS GmbH"), formerly Electronische Publikationen GmbH and
Gormley & Partners, Inc. ("Gormley") in March 1997; and SiteSpecific, Inc.
("SiteSpecific") in June 1997. Unless otherwise indicated, all references in
this Report to the "Company" shall mean CKS Group, Inc. and its subsidiaries.
The Company's executive offices are located at 10441 Bandley Drive, Cupertino,
California 95014. The telephone number at this address is (408) 366-5100.
INDUSTRY BACKGROUND
Several recent trends within the U.S. and international business
communities are changing the marketing communications needs of businesses
throughout the world. These trends include the following:
o Shortening product life cycles and preparation times for
marketing campaigns, which increase the need for rapid
development and execution of marketing strategies.
o Rapid growth of new media, such as the World Wide Web,
proprietary online services, CD-ROMs, laptop PC presentations and
interactive kiosks, as an integral component of marketing
communication strategy.
o Increasing complexity of sophisticated digital delivery, storage
and multimedia enhancement tools and technologies designed to
improve the effectiveness of new media communications.
o Advancements in electronic commerce technology and the
technological sophistication required by large corporate web
presences.
o The development of narrowly focused media delivery vehicles, such
as proprietary online services, the World Wide Web, satellite
television and special interest magazines, which allow greater
market segmentation, but demand coordination of multiple
variations of marketing messages aimed at particular market
subsegments.
o Corporate downsizing, which has led many corporations to reduce
the size of their in-house marketing departments, which in turn
has led to an increased need to outsource the creation,
coordination and implementation of such corporations' marketing
strategies.
CKS STRATEGY
The Company's overall strategy is to consistently deliver integrated
marketing communication services and products to its clients through the
creative use of advanced technology, breakthrough design and superior account
management. The Company goals are to expand its client base and continue to
diversify upon its core
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strengths in order to further enhance its ability to provide high quality
marketing solutions that must be developed quickly and efficiently.* The
Company's strategy also includes the following:
Creative Excellence. The Company attempts to provide creative solutions
in all areas of marketing communications to meet or exceed the highest standards
of service within each individual discipline. The Company has received numerous
honors and awards, including Addy Awards, Margaret Larsen Awards for Design,
Murphy Awards, Telly Awards and a Communication Arts Design Annual Award. In
order to maintain high levels of creativity and quality, the Company places
great importance on recruiting and retaining talented employees. The Company's
investment in tools and technologies has been an important factor in recruiting
and retaining talented employees who are attracted to the Company's
technology-driven culture. In addition, the Company's integrated approach to
marketing communications services attracts many highly qualified employees who
are interested in applying their skills to more than one marketing discipline.
Utilization of Technology as a Competitive Factor. The Company seeks to
capitalize on the fundamental changes in the marketing communication services
marketplace by becoming the premier supplier of integrated marketing
communications through the continued use of its advanced technology expertise.
The Company employs its extensive information technology expertise and
experience to provide clients with end-to-end new media content delivery
solutions. The engineering staff includes individuals with extensive experience
in computer systems, networking and relational database technology and provides
a broad range of information technology services, such as systems database
design, systems architectural design and performance tuning. These services
enable clients to extend new media marketing content to include live audio and
video event broadcasts over the World Wide Web, Internet commerce infrastructure
and access to corporate intranets and commercial databases. The Company's
programming staff is skilled in Java, PL/SQL, HTML, C/C++, Perl, Visual Basic
and other programming languages, and Oracle, Microsoft SQL Server, Sybase and
Informix database environments, as well as multimedia tools such as Director,
JavaScript, QuickTime VR and various content distribution, or "push"
technologies. Finally, the Company's engineering staff is experienced in
integrating a wide variety of Internet-oriented software solutions.
Use Integration as a Tool for Building Client Relationships. The Company
has been able to utilize its integrated approach to marketing communication
services as an effective tool in forming its present client relationships, and
the Company believes that such integration will continue to serve this function
in the future.* The Company's client relationships have typically begun with a
single assignment that might encompass corporate identity or packaging, a
brochure or a World Wide Web site. Such single project relationships have
allowed clients to experience the Company's services with minimal long-term
risk. In many instances, with clients such as Fujitsu PC Corporation, Apple
Computer, and Audi of America, Inc., the Company has been successful in
expanding relationships beyond the single-project assignment to include
additional projects in other marketing disciplines.
Capitalize on Leadership Position and Market Opportunities in New Media.
The Company has been and continues to be a leader in the development and
application of new media marketing communication services and products. The
Company believes that the proliferation of the Internet and other new media will
continue to
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* This statement is a forward-looking statement reflecting current
expectations. Investors are strongly encouraged to review the section entitled
"Factors Affecting Operating Results and Market Price of Stock" commencing on
page 9, for a discussion of factors that could affect future performance.
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provide substantial opportunities to the Company.* These opportunities have
enabled companies to better focus their marketing messages and may ultimately
result in one-on-one marketing to specific individuals. Towards this end, the
Company seeks to provide clients with integrated new media design and
development services as well as support in implementing and maintaining key
content delivery technologies.
Grow Through Acquisitions of Complementary Businesses. The Company seeks
to acquire businesses that offer complementary marketing communication services,
products and technologies.* The Company evaluates potential acquisitions for
their ability to add to the Company's new media capabilities, technological
proficiency, creative excellence, management expertise and integrated marketing
services skills. Other factors that the Company evaluates in considering
potential acquisitions include a reputation for superb creative work both in
specialities where the Company is particularly strong and in specialties that
have not been the Company's historic strengths. Additional factors include the
accessibility of proprietary technology and new media expertise, potential for
geographic expansion, relationships with certain companies and clients and the
degree to which the potential acquisition candidate shares the Company's vision
of combining integrated marketing communications services with an understanding
of technology. To date, the Company has completed the following acquisitions:
ACQUIRED ENTITY ACQUISITION DATE
SCHELL/MULLANEY -- a New York advertising and marketing firm August 1996
specializing August 1996 in marketing communication services
for high technology clients.
DONOVAN & GREEN -- a New York integrated marketing January 1997
communications firm January 1997 with a strong emphasis in
environmental design, brand identity and imaging and the
evolving discipline of information architecture.
MCKINNEY & SILVER -- a Raleigh, North Carolina advertising and January 1997
marketing January 1997 services firm.
CKS HOLDING (DEUTSCHLAND) -- an integrated marketing March 1997
communications firm March 1997 that provides direct marketing,
advertising, event marketing, public relations and channel
marketing services in Germany, Switzerland and Austria.
GORMLEY & PARTNERS -- a Greenwich, Connecticut strategic March 1997
corporate and March 1997 product positioning strategy firm.
SITESPECIFIC -- a New York marketing communications firm June 1997
specializing in June 1997 new media and online network
marketing services.
See "Factors Affecting Operating Results and Market Price of Stock--Risks
Associated with Acquisitions," "--Risks Associated with Expansion" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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* This statement is a forward-looking statement reflecting current
expectations. Investors are strongly encouraged to review the section entitled
"Factors Affecting Operating Results and Market Price of Stock" commencing on
page 9, for a discussion of factors that could affect future performance.
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CKS CLIENTS AND SERVICES
The Company provides a broad range of marketing communication services.
Depending on the scope of the assignment, the Company's services to its clients
range from execution of a discrete marketing project, such as designing product
packaging, to taking responsibility for the overall marketing message through
multiple methods. When the Company assumes responsibility for the overall
marketing message, the Company works with the client to analyze the client's
products or services and the market for those services and to evaluate the
appropriate media to reach the desired market efficiently. The Company then
creates and distributes various versions of the message through the chosen
media. The Company's services include the following:
o Strategic Corporate and Product Positioning -- Development of a
unique selling proposition for either a company or product that
differentiates it from the competition.
o Corporate Identity and Product Branding -- Development of a
creative look and feel that establishes a corporate or brand
personality to differentiate it from the competition.
o New Media -- Development of media to be delivered to end users in
digital form, including the World Wide Web, the Internet,
proprietary online services, CD-ROMs, laptop PC presentations and
interactive kiosks.
o Systems Integration -- Development and execution of information
technology services such as systems database design, systems
architectural design and performance tuning, that enable clients
to extend new media marketing content to include live audio and
video broadcasts over the World Wide Web, Internet commerce
infrastructure and access to corporate intranets and commercial
databases.
o Environmental Design -- Creative design, development and
management of virtual and physical images as well as information
and entertainment environments, including the development of
public exhibition spaces and retail store formats.
o Packaging -- Creative development, design and production of
individual retail packages or integrated retail packaging
systems.
o Electronic Commerce -- Architecture, development, integration and
implementation of complex and secure systems that enable clients
to conduct business electronically.
o Collateral Systems -- Development and implementation of
literature systems including, for example, individual brochures,
flyers and data sheets.
o Advertising -- Broadcast and/or print advertising designed to
generate awareness of a company, product, or service over an
extended period of time.
o Direct Marketing -- Development of marketing programs designed to
generate demand among a specific target audience within a limited
time frame.
o Consumer Promotions -- Marketing communications campaigns and
merchandising materials designed to increase sales among
consumers.
o Trade Promotions -- Marketing communications campaigns designed
to provide information and incentives to specific industry trade
groups in a limited time frame.
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o Media Placement Services -- Strategic planning, negotiation
and purchase of both traditional and new media.
DEVELOPMENT OF NEW CLIENT RELATIONSHIPS
The Company attracts new clients through a number of different methods.
In December 1997, the Company established a new business development
organization composed of senior executives from several of the Company's
operating units. The charter of this organization is to pursue larger client
relationships through a more centralized and focused sales effort. Additionally,
the Company has relied heavily on referrals from existing clients to attract new
clients. The Company's executive officers have historically engaged in numerous
speaking tours and other presentations aimed at attracting new clients. These
speaking tours have led directly to the formation of new client relationships by
the Company as well as substantial press and other media coverage of the
Company, which has indirectly assisted the Company in forming new client
relationships. The Company also advertises its integrated marketing
communication services in certain business magazines.
USE OF TECHNOLOGY
The Company's founders' and many of its employees' prior experience in
technology companies, along with the location of the Company's headquarters in
Silicon Valley, have helped the Company to utilize technology as a major
competitive advantage. The Company employs its extensive information technology
expertise and experience in providing clients with end-to-end new media content
creation and delivery solutions. The Company also acquires licenses to certain
third-party software products and tools prior to the time such products and
tools are generally available by acting as a beta site for pre-release versions
of these products and tools. In addition, the Company employs technology to
maximize its ability to provide high quality, integrated marketing communication
services to its clients in a timely and cost-effective manner.
Access to New Technologies
The Company's reputation as a technological innovator frequently allows
it access to advanced media and communications technologies before such
technologies are available to the general public or to the Company's
competitors. In addition, the Company is frequently involved in alpha and beta
test programs for pre-release versions of new information technologies. Early
access to emerging technologies often allows the Company to provide innovative
media and marketing solutions to its customers before the Company's competitors,
and to more rapidly explore and exploit the benefits of such new technologies.
As a result of these relationships, the Company's engineers and creative staff
regularly interact with the persons who design and develop the new media tools
the Company uses. The Company believes it enjoys an advantage over its
competition in effectively utilizing advanced multimedia and communications
technologies to deliver its clients' marketing messages.
Digital Content
The Company has made a substantial investment in technology that allows
all of its employees to share and utilize digital content as well as other
Company and client information in an easy and efficient manner. A substantial
portion of the work performed by most of the Company's offices are maintained in
digital form on CD-ROMs. The Company has created an electronic network among its
offices, which facilitates the sharing of information and allows each office to
benefit from the experience and knowledge of other offices. The Company believes
that its use of digital technology for the production and shipping of audio and
video content, packaging and design assignments, frequent updating of content
for whatever distribution medium being used, virtual sets, internal
communication, and cost control enable the Company to provide superior solutions
to its clients at lower costs than traditional marketing communication services
companies.
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Electronic Job Jacket Software
The Electronic Job Jacket is a proprietary software system that the
Company uses for internal purposes to track financial and other information
relating to completed and open projects being worked on by the Company. The
Company uses the Electronic Job Jacket in project bids to help estimate, based
upon historical information from prior projects, the various resources that will
be needed to complete the project. When a project commences, each person working
on the project records, on a daily or weekly basis, the time spent on the
project. This allows the account manager, individuals working on the account,
the Company's executive officers and finance personnel to compare, at any time,
the Company's performance against the estimates that formed the basis for the
Company's project quote. The system allows the Company to evaluate, throughout a
project, if its costs of performing the services are likely to exceed the
revenue received, or result in lower margins than anticipated. By closely
monitoring the information contained in the Electronic Job Jacket, the Company
is better able to manage its projects. The Company can also obtain data on the
cost of performing certain services, thereby improving its ability to prepare
appropriate bids on future projects. Additionally, the Electronic Job Jacket is
linked with the Company's accounting system, allowing the Company to obtain
accurate information as to the extent of project completion for the purpose of
recognizing revenues.
COMPETITION
The markets for the Company's services are highly competitive and are
characterized by pressures to reduce prices, incorporate new capabilities and
accelerate job completion schedules.
The Company faces competition from a number of sources. These sources
include national and regional advertising agencies as well as specialized and
integrated marketing communication firms. In addition, with respect to new
media, many national advertising agencies have internally developed or acquired
new media capabilities. New competitors that either provide integrated or
specialized services (e.g., corporate identity and packaging, advertising
services or World Wide Web site design) or are technologically proficient,
especially in the new media arena, have emerged and are competing with the
Company. Many of the Company's competitors or potential competitors have longer
operating histories, longer client relationships and significantly greater
financial, management, technology, development, sales, marketing and other
resources than the Company. In addition, the Company's ability to maintain its
existing client relationships and generate new clients depends, to a significant
degree, on the quality of its services and its reputation among its clients and
potential clients, compared with the quality of services provided by, and the
reputations of, the Company's competitors. To the extent the Company loses
clients to the Company's competitors because of dissatisfaction with the
Company's services or the Company's reputation is adversely impacted for any
other reason, the Company's business, financial condition and operating results
could be materially adversely affected.
There are relatively low barriers to entry into the Company's business.
The Company has no significant proprietary technology that would preclude or
inhibit competitors from entering the integrated marketing communication
solutions market. The Company expects that it will face additional competition
from new entrants into the market in the future. There can be no assurance that
existing or future competitors will not develop or offer marketing communication
services and products that provide significant performance, price, creative or
other advantages over those offered by the Company, which could have a material
adverse effect on the Company business, financial condition and operating
results.
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The principal factors on which the Company competes are creative
quality, client service, technological and new media sophistication, price and
intangible factors such as the interpersonal skills of the individuals managing
the client account. The Company believes that it competes favorably with respect
to each of these factors.*
EMPLOYEES
As of November 30, 1997, the Company had a total of 641 employees,
580 of which were full-time regular employees.
The Company's success depends to a significant extent upon certain
members of senior management, and other key employees. Although the Company
maintains key man life insurance policies on certain key personnel, there can be
no assurance that such insurance policies will adequately compensate for the
loss of such individuals. The loss of any senior manager or other key employee
could have a material adverse effect upon the Company's business, financial
condition and operating results. See "Directors and Officers of the Company". In
addition, the Company's ability to generate revenues relates directly to the
Company's personnel, both in terms of the number and expertise of the personnel
the Company has available to work on its projects and the mix of such personnel
(i.e., full time or temporary employees or contract service providers). As a
result, any failure by the Company to retain existing employees or hire new
employees when necessary could have a material adverse effect upon the Company's
business, financial condition and operating results. In addition, if one or more
of the Company's key employees resigns from the Company to join a competitor or
to form a competing company, the loss of such personnel, and any resulting loss
of existing or potential clients to any such competitor, could have a material
adverse effect upon the Company's business, financial condition and operating
results. Further, in the event of the loss of any such personnel there can be no
assurance that the Company would be able to prevent the unauthorized disclosure
or use of its technical knowledge, practices, procedures or client lists. The
Company believes that its future success will depend in large part upon its
ability to attract and retain additional highly skilled creative, technical,
financial and strategic marketing personnel. Competition for such personnel,
especially creative talent, is intense. There can be no assurance the Company
will be successful in attracting and retaining such personnel, and the failure
to do so could have a direct and immediate material adverse effect on the
Company's business, financial condition and operating results.
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
CKS operates in a rapidly changing environment that involves a number of
uncertainties, some of which are beyond the Company's control. In addition to
the uncertainties described elsewhere in this report, these uncertainties
include:
Dependence on Key Accounts. 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 fluctuations in the amount of
revenue contribution from each such client from quarter to quarter. Audi of
America, Inc. and Computer Associates International, Inc., the Company's two
largest clients during the fiscal year ended November 30, 1997, accounted for
approximately 15% and 7% of the Company's revenues, respectively, during the
period. Since many of the Company's clients generally retain the Company on a
project
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* This statement is a forward-looking statement reflecting current
expectations. Investors are strongly encouraged to review the section entitled
"Factors Affecting Operating Results and Market Price of Stock" commencing on
page 9, for a discussion of factors that could affect future performance.
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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.
For example, of the five largest clients (in terms of fees paid to the Company)
during the fiscal year ended November 30, 1997, only two were in the top five
for the fiscal year ended November 30, 1996. 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. For instance, one of the
Company's major client's, Barnett Bank, was acquired during the fourth quarter
of 1997 and, as a result, substantially reduced its level of spending with the
Company. This reduction in spending contributed to a significant decline in the
Company's earnings during that quarter. 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.
Fluctuations in Quarterly Operating Results and Margins; Seasonality of
Business. 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 of 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 of 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.
Developing Market for New Media; New Entrants; Unproven Acceptance of
the Company's New Media Solutions. 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
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* This statement is a forward-looking statement reflecting current
expectations. Investors are strongly encouraged to review the section entitled
"Factors Affecting Operating Results and Market Price of Stock" commencing on
page 9, for a discussion of factors that could affect future performance.
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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.
Risks Associated with Expansion. 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
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 members 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.
Risks Associated with Acquisitions. 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. During fiscal 1997, the Company completed
acquisitions of five businesses. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Business Combinations." 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 relating 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
-11-
<PAGE> 12
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 on its statement
of operations for the period in which such impairment occurred. 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview," and "--
Business Combinations."
Project Profit Exposures. 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. 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.
Market Acceptance of the Company's Approach; Service Development; Rapid
Technological Change. The Company provides an integrated approach to meet the
marketing communications needs of its clients. To compete successfully against
specialized service providers, the Company believes that its products and
services in each marketing communication discipline will need to be competitive
with the services offered by the firms that specialize in each discipline. There
can be no assurance that the Company will be successful in providing competitive
solutions to clients in each of its integrated marketing communication services
and products. Failure to do so could result in the loss of existing customers or
the inability to attract and retain new customers, either of which developments
could have a material adverse effect on the Company's business, financial
condition and operating results.
Susceptibility to General Economic Conditions. The Company's revenues
and results of operations are subject to fluctuations based upon general
economic conditions. If there were to be a general economic downturn or a
recession in the United States, then the Company expects that business
enterprises, including its clients and potential clients, likely will
substantially and immediately reduce their advertising and marketing budgets.
Because certain of the Company's largest clients have substantial overseas
operations, their advertising and marketing budgets may also be adversely
affected by economic conditions in overseas markets, including the
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<PAGE> 13
recent volatility in Asian currency markets. In the event of such an economic
downturn, there can be no assurance that the Company's business, financial
condition and operating results would not be materially and adversely affected.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two-digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century dates. As
a result, in approximately two years, computer systems and/or software used by
many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists concerning the potential effects
associated with compliance. Although the Company believes that it will be Year
2000 compliant, there can be no assurance that coding errors or other defects
will not be discovered in the future. Any Year 2000 compliance problem of the
Company, its customers or the internet infrastructure could result in a material
adverse effect on the Company's business, financial conditions and operating
results.
- --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------
The Company's primary facility consists of approximately 93,000 square
feet in Cupertino, California including a 22,000 square foot video production
facility. The Company's other facilities include the following: New York --
approximately 19,500 square feet; Portland, Oregon -- approximately 8,500 square
feet; San Francisco -- approximately 12,850 square feet; Washington, D.C., --
approximately 10,900 square feet; Atlanta, Georgia -- approximately 3,825 square
feet; Raleigh, North Carolina, -- approximately 30,307 square feet; and
Greenwich, Connecticut, approximately 2,635 square feet. The Company leases all
of its facilities.
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
None.
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
Not applicable.
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<PAGE> 14
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
The Company's Common Stock, $0.001 par value, has been traded on the
Nasdaq National Market System under the symbol CKSG since December 15, 1995.
Prior to that, there was no public market for the Company's Common Stock. The
high and low per share sale prices for the Company's Common Stock for the period
from December 15, 1995 through November 30, 1997 are set forth below. Price data
reflect actual transactions, but do not reflect mark-ups, mark-downs or
commissions.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR ENDED NOVEMBER 30, 1997
First Quarter.................................... $ 36.25 $ 20.63
Second Quarter................................... $ 34.25 $ 20.25
Third Quarter.................................... $ 44.75 $ 29.00
Fourth Quarter................................... $ 46.25 $ 11.38
HIGH LOW
------- -------
FISCAL YEAR ENDED NOVEMBER 30, 1996
First Quarter (Beginning December 15, 1995) ..... $ 39.00 $ 20.00
Second Quarter................................... $ 45.13 $ 24.38
Third Quarter.................................... $ 39.00 $ 22.88
Fourth Quarter................................... $ 28.63 $ 18.00
</TABLE>
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.
As of February 12, 1998, there were 163 stockholders of record.
The Company currently intends to retain future earnings to fund the
development and growth of its business and therefore does not anticipate paying
cash dividends within the foreseeable future. Any future payment of dividends
will be determined by the Company's Board of Directors and will depend on the
Company's financial condition, results of operations and other factors deemed
relevant by its Board of Directors.
-14-
<PAGE> 15
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
The selected consolidated financial data set forth below should be read
in conjunction with the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements, notes thereto and other financial information included elsewhere
herein.
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues................................ $133,602 $ 88,248 $ 58,383 $ 44,761 $ 27,383
-------- -------- -------- -------- --------
Operating expenses:
Direct salaries and related expenses 34,714 22,962 15,440 10,437 6,650
Other direct operating expenses..... 55,175 36,355 24,820 21,798 12,784
General and administrative expenses. 29,827 17,570 11,545 7,539 5,535
Merger costs........................ 2,452 -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses.......... 122,168 76,887 51,805 39,774 24,969
---------- --------- --------- -------- ---------
Operating income........................ 11,434 11,361 6,578 4,987 2,414
Other income, net....................... 1,549 2,114 296 121 62
--------- --------- --------- --------- ---------
Income before income taxes.............. 12,983 13,475 6,874 5,108 2,476
Income taxes............................ 5,317 3,026 1,065 192 185
--------- --------- --------- --------- ---------
Net income.............................. $ 7,666 $ 10,449 $ 5,809 $ 4,916 $ 2,291
======== ======== ======== ======== ========
UNAUDITED PRO FORMA INCOME, NET INCOME
AND PER SHARE DATA:
Income before income taxes, as reported. $ 12,983 $ 13,475 $ 6,874 $ 5,108 $ 2,476
Pro forma income taxes.................. 5,635 5,108 2,823 2,021 974
--------- --------- --------- --------- ---------
Pro forma net income.................... $ 7,348 $ 8,367 $ 4,051 $ 3,087 $ 1,502
========= ========= ========= ========= =========
Pro forma net income per share.......... $ 0.46 $ 0.58 $ 0.35 $ 0.29 $ 0.16
========= ========= ========= ========= =========
Shares used in per share computation.... 15,590 14,435 11,653 10,808 9,346
========= ========= ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............... $ 18,223 $ 19,385 $ 4,817 $ 4,314 $ 3,699
Marketable securities................... 24,041 37,895 -- -- --
Working capital......................... 49,114 50,775 3,626 3,056 1,677
Total assets............................ 146,473 95,476 23,659 20,596 11,175
Notes payable and capital lease
obligations, less current portion....... 739 502 496 446 145
Total stockholders' equity.............. 94,592 60,858 6,350 5,244 3,282
</TABLE>
-15-
<PAGE> 16
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
This section and other parts of this Report contain 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. Factors that might cause such a difference include, but are not
limited to, those discussed in the subsection entitled "Business--Factors
Affecting Operating Results and Market Price of Stock" commencing on page 9. See
"Forward Looking Statements."
OVERVIEW
The Company was originally founded in 1987 as Cleary Communications and
initially concentrated on the development and implementation of marketing plans
and programs. Over the last several years, the Company has developed its vision
as an integrated marketing communications company utilizing both traditional
marketing disciplines, such as product branding and advertising, as well as
advanced technology solutions and new media including Internet development,
Intranet development, database architecture and enterprise systems integration.
The Company hires personnel with the appropriate skills and acquires companies
with the appropriate marketing focus to expand its service offerings to
encompass a full range of marketing communications including strategic corporate
and product positioning, corporate identity and product branding, new media,
systems integration, environmental design, packaging, electronic commerce,
collateral systems, advertising, direct mail, consumer promotions, trade
promotions and media placement services.
The Company defines new media as media that delivers content to the end
user in digital form, including the World Wide Web, the Internet, proprietary
online services, CD-ROMs, laptop PC presentations and interactive kiosks. New
media services represented approximately 25.8%, 25.2% and 15.5% of the Company's
revenues for fiscal years 1997, 1996 and 1995, respectively. The balance of the
Company's revenues for such periods were derived from the Company's other
integrated marketing communication services, including strategic corporate and
product positioning, corporate identity and product branding, systems
integration, environmental design, packaging, collateral systems, advertising,
direct mail, consumer promotions, trade promotions and media placement services.
The Company generates a significant portion of its revenues through
project fees on a fixed fee for service basis and contract based retainer fees.
When the Company prepares to bid on a new project, the Company develops internal
estimates for the number of hours required to complete various segments of the
project, based in large part on the Company's database of similar projects
archived in the Company's proprietary project management software, the
Electronic Job Jacket. The Company's policy is generally to bill 50% of project
fees at the commencement of the project, with the balance billed upon
completion.
The Company recognizes revenues related to fixed fee for service
projects using the percentage of completion method based on the ratio of costs
incurred to total estimated project costs. The Company updates its estimated
costs on each project monthly. Fees and expenditures in excess of billings
represent the costs incurred and anticipated profits earned on projects in
progress in excess of amounts billed, and is recorded as an asset. Billings in
excess of fees and expenditures represent amounts billed in excess of costs
incurred and estimated profits earned, and is recorded as a liability. To the
extent costs incurred and anticipated costs to complete projects in progress
exceed anticipated billings, a loss is accrued for the excess.
The Company generates higher profit margins when a greater percentage of
its services are performed by full time employees rather than independent
consultants. Accordingly, the Company actively monitors and manages its level of
full time and temporary employees as compared to independent consultants to
ensure that
-16-
<PAGE> 17
future projects are adequately staffed. The Company has made a strategic
decision to incur the incremental costs of independent consultants to staff
growth in projects rather than increase the number of full time employees until
the Company has determined that the increased revenue levels are sustainable.
BUSINESS COMBINATIONS
The Company also made a strategic decision to grow through the
acquisition of businesses that offer complementary marketing communications
services, products and technologies.
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 purchase agreement provided for an initial payment in
Common Stock of the Company of $5.0 million, and additional future consideration
of up to $9.0 million in Common Stock of the Company if certain operating
results were achieved in 1997 and 1998. Of the latter amount, $4.5 million in
Common Stock of the Company was paid in February 1998 based on the operating
results achieved in 1997.
On January 3, 1997, the Company acquired the assets and assumed
substantially all the liabilities of Donovan & Green, Inc. ("D&G"). The
acquisition of D&G was accounted for as a purchase. The purchase agreement
provided for initial payments to D&G of $5.1 million. The Company also made a
guaranteed payment to D&G of $3.3 million in cash and 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 of up to $3.0 million in cash and
stock if it attains certain earnings goals during the fiscal years 1998,
1999 and 2000.
On January 31, 1997, the Company issued 841,291 shares of its Common
Stock for all of the partnership units and residual partnership interests of
McKinney & Silver ("M&S"). The combination has been accounted for as a pooling
of interests, and, accordingly, the Company's consolidated financial statements
have been restated for all periods prior to the combination to include the
results of operations, financial position and cash flows of M&S.
On March 10, 1997, the Company acquired all the shares of CKS Holding
(Deutschland) GmbH (formerly Prisma Holding GmbH), a German limited liability
company ("CKS GmbH"). The acquisition of CKS GmbH was accounted for as a
purchase. In consideration for the sale of their shares in CKS GmbH, the
shareholders of CKS GmbH received $2.9 million in cash and 86,603 shares of
Common Stock of CKS. Also, in 1998, the Company will make guaranteed payments
with a value of $0.7 million in cash and Common Stock of CKS. The former
shareholders of CKS GmbH also have the right to receive up to an additional
$10.0 million in cash and additional shares of Common Stock over the next three
fiscal years upon attainment of certain financial performance goals by CKS GmbH.
On March 12, 1997, the Company acquired certain assets of Gormley &
Partners, Inc. ("Gormley"), a Connecticut corporation, in a transaction
accounted for as a purchase. The purchase agreement provided for an initial
payment of $3.2 million in cash and 40,206 shares of CKS Common Stock to Gormley
and an additional $1.5 million in cash and CKS Common Stock payable during
fiscal 1998. Gormley will have the right to receive additional payments if it
attains certain earnings goals during the fiscal years 1997, 1998, 1999 and
2000.
On June 17, 1997, the Company issued 241,108 shares of its Common Stock
for all of the outstanding capital stock of SiteSpecific, Inc. ("SiteSpecific"),
and granted options to purchase 18,884 shares of CKS Common Stock under an
option plan. 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
-17-
<PAGE> 18
combination to include the results of operations, financial position and cash
flows of SiteSpecific.
RESULTS OF OPERATIONS
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. These business combinations were accounted for
under the pooling-of-interests method. Prior to acquisition by the Company, M&S
and SiteSpecific prepared their financial statements on a calendar year basis.
In accordance with 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. Pursuant to GAAP, M&S's and SiteSpecific's results for the period
from January 1, 1996 through December 31, 1996 and January 1, 1995 through
December 31, 1995 were included in the Company's results for the period from
December 1, 1995 through November 30, 1996 and December 1, 1994 through November
30, 1995, respectively. Beginning with fiscal 1997, M&S' and SiteSpecific's
fiscal years were conformed to the Company's fiscal year.
The following table sets forth the percentage of revenue of certain
items included in the Company's statements of operations for the periods
indicated:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
---------------------------------
YEARS ENDED NOVEMBER 30,
---------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Operating expenses:
Direct salaries and related expenses.............. 26.0 26.0 26.4
Other direct operating expenses................... 41.3 41.2 42.5
General & administrative expenses................. 22.3 19.9 19.8
Merger costs...................................... 1.8 -- --
----- ----- -----
Total operating expenses...................... 91.4 87.1 88.7
----- ----- -----
Operating income....................................... 8.6 12.9 11.3
Other income, net ..................................... 1.1 2.4 0.5
----- ----- -----
Income before taxes.................................... 9.7 15.3 11.8
Income taxes........................................... 4.0 3.5 1.9
----- ----- -----
Net income............................................. 5.7% 11.8% 9.9%
===== ===== =====
UNAUDITED PRO FORMA NET INCOME:
Income before tax, as reported......................... 9.7% 15.3% 11.8%
Pro forma income taxes................................. 4.2 5.8 4.9
----- ----- -----
Pro forma net income................................... 5.5% 9.5% 6.9%
===== ===== =====
</TABLE>
-18-
<PAGE> 19
FISCAL YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
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 $133.6 million in fiscal 1997 from $88.2 million in fiscal
1996, representing an increase of 51.4%. 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
Schell/Mullaney, D&G, CKS GmbH and Gormley revenues in the Company's
consolidated results for the year ending November 30, 1997. Revenues from new
media projects increased to $34.5 million for fiscal year 1997 from $22.3
million in fiscal year 1996, representing an increase of approximately 55.0%.
New media revenues represented approximately 25.8% of total revenues in fiscal
1997 compared to 25.2% for fiscal 1996 (after giving effect to the restatement
to include M&S and SiteSpecific). In the Company's annual report on Form 10-K
for fiscal 1996, the Company reported that revenues from new media projects were
approximately 35.8% of total revenues for fiscal 1996, without giving effect to
the restatement to include M&S and SiteSpecific. M&S historically has not had
any significant new media revenues, so the effect of the restatement was to
reduce new media revenues as a percentage of total revenues for fiscal 1996 from
35.8% to 25.2%.
Revenues increased to $88.2 million in fiscal 1996 from $58.4 million in
fiscal 1995, representing an increase of 51.2%. This increase in revenues was
due to an increase in the value of creative and design projects undertaken for
existing clients of the Company, the establishment of new client relationships,
and the inclusion of Schell/Mullaney revenues in the Company's consolidated
results for the year ending November 30, 1996. Revenues from new media projects
increased to $22.3 million for fiscal year 1996 from $9.1 million in fiscal year
1995, representing an increase of approximately 145.8%. New media revenues
represented approximately 25.2% of total revenues in fiscal 1996 compared to
15.5% for fiscal 1995 (after giving effect to the restatement to include M&S and
SiteSpecific). In the Company's annual report on Form 10-K for fiscal 1996, the
Company reported that revenues from new media projects were approximately 25.3%
of total revenues for fiscal 1995 without giving effect to the restatement to
include M&S and SiteSpecific.
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 51.2% to $34.7 million in fiscal 1997 from
$23.0 million during fiscal 1996, representing 26.0% of revenues in both fiscal
1997 and fiscal 1996. The increase in absolute dollars was primarily
attributable to an increase in salaries and related expenses necessary to
support the Company's growth. As a percentage of revenues, direct salaries and
related expenses remained unchanged.
The Company's direct salaries and related expenses increased
approximately 48.7% to $23.0 million in fiscal 1996 from $15.4 million during
fiscal 1995, representing 26.0% and 26.4% of revenues in fiscal 1996 and fiscal
1995, respectively. The increase in absolute dollars was primarily attributable
to an increase in salaries and related expenses necessary to support the
Company's growth. As a percentage of revenue, direct salaries and related
expenses remained relatively unchanged.
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 51.8% to $55.2 million in fiscal 1997
from $36.4 million
-19-
<PAGE> 20
during fiscal 1996, representing 41.3% and 41.2% of revenues in fiscal 1997 and
fiscal 1996, respectively. The increase in absolute dollars was primarily
attributable to increases in material costs, production costs and freelance
talent costs necessary to support the higher level of revenues. As a percentage
of revenues, other direct operating expenses remained relatively unchanged.
The Company's other direct operating expenses increased 46.5% to $36.4
million in fiscal 1996 from $24.8 million for fiscal 1995, representing 41.2%
and 42.5% of revenues in fiscal 1996 and fiscal 1995, respectively. The increase
in absolute dollars was primarily attributable to increases in material costs
and freelance talent costs necessary to support the higher level of revenues. As
a percentage of revenues, other direct operating expenses decreased as a result
of a more rapid increase in revenues than in other direct operating expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses 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 69.8% to
$29.8 million in fiscal 1997 from $17.6 million in fiscal 1996, representing
22.3% and 19.9% of revenues in fiscal 1997 and fiscal 1996, respectively. The
period over period increase in absolute dollars was primarily attributable to
increases in general and administrative payroll, facilities costs,
administration expenses, and business development costs necessary to support the
Company's growth both internally and through acquisitions and goodwill
amortization expense related to acquisitions. Fiscal 1997 includes a full year
of Schell/Mullaney expenses and, since acquisition, D&G, CKS GmbH and Gormley
expenses, as well as goodwill amortization related to these acquisitions. The
Company also increased its bad debt reserve to support growth in total revenues
and accounts receivable. As a percentage of revenues, general and administrative
expenses increased primarily as a result of increases in administrative payroll
costs, goodwill amortization expenses related to acquisitions, and facilities
costs to provide capacity to accommodate new business.
General and administrative expenses increased approximately 52.2% to
$17.6 million in fiscal 1996 from $11.5 million in fiscal 1995, representing
19.9% and 19.8% of revenues in fiscal 1996 and 1995, respectively. This period
over period increase in absolute dollars was attributable principally to higher
general and administrative payroll costs, increased general office and business
development costs to support the Company's growth, offset in part by reductions
in bad debt expense and management fees paid to the Interpublic Group of
Companies ("IPG"). As a percentage of revenues, general and administrative
expenses remained relatively unchanged.
MERGER COSTS
In connection with the acquisition of M&S and SiteSpecific, the Company
recorded a nonrecurring charge for transaction related costs of approximately
$2.5 million for the twelve month period ended November 30, 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 certain subsidiary acquisitions. Other income, net decreased
to approximately $1.5 million in fiscal 1997 from $2.1 million in fiscal 1996.
The decrease was primarily attributable to a reduction in interest income due to
the use of cash for acquisitions, and the amortization of
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<PAGE> 21
imputed interest on guaranteed payments related to acquisitions, partially
offset by interest income earned by subsidiaries. In addition, other income
decreased year over year due to a nonrecurring gain in fiscal 1996 from the sale
of client stock accepted in lieu of fees.
Other income, net increased by approximately $1.8 million during fiscal
1996 over fiscal 1995 primarily due to an increase in interest income related to
higher average cash, cash equivalent and marketable securities balances.
Pro Forma Consolidated Financial Data (Unaudited)
The following summary pro forma consolidated statements of income data
give effect to the pooling-of-interests business combinations between the
Company and M&S and the Company and SiteSpecific. The data exclude $2.4 million
in nonrecurring charges for merger costs recorded by the Company during fiscal
1997 and include a tax provision as if M&S had been a taxable "C" corporation
for all periods. The pro forma consolidated statements of income data for each
of the years in the three year period ended November 30, 1997 give effect to the
implementation of a management bonus plan for the former partners of M&S as if
such plan had been in effect as of the beginning of the periods presented. The
effect of such pro forma adjustment was to increase direct salaries and related
expenses by $0.9 million during fiscal 1996 (in thousands, except share data.):
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-----------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Revenues $133,602 $88,248 $58,383
Net income 9,202 7,816 4,051
Pro forma net income per share 0.58 0.54 0.35
Shares used in per share computation 15,590 14,435 11,653
</TABLE>
INCOME TAXES
Combined actual federal and state income tax rates were 41.0% in fiscal
1997, 22.5% in fiscal 1996 and 15.5% in fiscal 1995. 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 the Company. Combined pro forma
federal and state income tax rates were 43.4% for fiscal 1997, 37.9% for fiscal
1996 and 41.1% for fiscal 1995. 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 for fiscal 1997 primarily due to the
nondeductible merger costs incurred in connection with the acquisition of
SiteSpecific, nondeductible goodwill amortization and a decrease of tax exempt
interest as a percentage of total revenue. The effective tax rate was lower for
fiscal 1996 primarily due to the effect of income generated by the Company's
investments in tax-advantaged money market instruments.
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
November 30, 1997, the Company owed approximately $1.5 million in bank
borrowings, capital lease financing arrangements and other liabilities.
-21-
<PAGE> 22
Cash, cash equivalents and marketable securities, consisting primarily
of high-quality municipal bonds and tax-advantaged money market instruments,
totaled $42.3 million and $57.3 million at November 30, 1997 and November 30,
1996, respectively. The decrease in cash, cash equivalents and marketable
securities during this period was due primarily to approximately $13.7 million
in cash payments, net of cash received, to acquire D&G, CKS GmbH and Gormley,
approximately $2.0 million used for capital expenditures, approximately $0.6
million, net used for financing activities and a $4.3 million adjustment related
to the change in M&S' and SiteSpecific's fiscal year ends. These decreases were
partially offset by approximately $5.6 million in cash provided by operations.
Net cash provided by operating activities was approximately $5.6 million
in fiscal 1997, reflecting $7.7 million in net income and a $3.3 million tax
benefit from disqualifying dispositions, partially offset by use of cash to fund
working capital fluctuations in the acquired companies and to pay transaction
related costs for the M&S and SiteSpecific acquisitions. Accounts receivable and
accounts payable balances increased from November 30, 1996 to November 30, 1997
in proportion to the overall increase in Company revenues, and also reflect
increases in accounts receivable and accounts payable related to media
placement. In addition, balances at November 30, 1996 reflect the timing impact
of a substantial payment received by M&S in December 1996 from a client for
media placements, for which related costs were not paid until January 1997.
Net cash used in investing activities was approximately $1.9 million in
fiscal 1997, and included approximately $13.8 million in net proceeds from the
sale of marketable securities, of which approximately $13.7 million was used to
finance acquisitions during fiscal 1997, and approximately $2.0 million was used
for capital expenditures.
Net cash used in financing activities was approximately $0.6 million in
fiscal 1997, reflecting post merger distributions of pre-acquisition M&S
partnership contributions and earnings totaling approximately $4.4 million, and
$1.4 million in debt repayment by acquired companies, partially offset by $5.2
million in proceeds from the sale of Common Stock through the Company's 1995
Employee Stock Purchase Plan and upon exercise of stock options.
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 sheet 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
twelve month period ended November 30, 1997 has been adjusted to eliminate the
effect of including M&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 the result of a substantial payment received by M&S in December
1996 from a client for media placements, for which related costs were not paid
until January 1997. This adjustment is reflected in the Company's Consolidated
Statements of Cash Flows under the line item "Change in subsidiaries' fiscal
year-ends."
As of November 30, 1997, the Company and its subsidiaries had $4.4
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 with maturities over the next four years.
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 November 30, 1997, there was $0.8 million in indebtedness
outstanding under these credit facilities. These credit agreements, which are
scheduled to expire on March 31, 1998, require compliance with various financial
covenants and restrictions, including maintenance of minimum levels of net worth
and profitability, and restrict the Company's ability to pay dividends or to
effect mergers or acquisitions without the bank's consent.
-22-
<PAGE> 23
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 the 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.
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
The information required by Item 8 is incorporated by reference herein
from Part IV Item 14(a)(1) and (2).
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
Not applicable.
- ----------
* This statement is a forward-looking statement reflecting current
expectations. Investors are strongly encouraged to review the section entitled
"Factors Affecting Operating Results and Market Price of Stock" commencing on
page 9, for a discussion of factors that could affect future performance.
-23-
<PAGE> 24
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference.
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY
- --------------------------------------------------------------------------------
Certain of information required by Item 10 is set forth under the
captions, "Proposal 1: Election of Directors," "Director Compensation and
Director Option Plan," and "Compliance with Section 16(a) of the Exchange Act"
in the Company's Proxy Statement, which information is incorporated herein by
reference.
The current executive officers and directors of the Company, and their
ages as of January 1, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --- -------------------------------------------------
<S> <C> <C>
Mark D. Kvamme.................... 36 Chief Executive Officer and Chairman of the Board
Thomas K. Suiter.................. 43 Chief Creative Officer and Director
Carlton H. Baab................... 40 Executive Vice President, Chief Financial Officer
and Assistant Secretary
Robert T. Clarkson................ 44 Executive Vice President, Operations, CKS Technology
Group, CKS International and Business
Development and Secretary
Kimberly A. Johnson............... 32 Executive Vice President of Operations, CKS West
Fergus O'Daly..................... 54 President, CKS New York
Ian Small......................... 33 Executive Vice President and Chief Technology
Officer
Richard Villante.................. 54 Executive Vice President of Operations, CKS East
Alexandre Balkanski(1) ........... 37 Director
Pierre R. Lamond(1) .............. 67 Director
Barry R. Linsky(2) ............... 56 Director
Michael B. Slade(2)............... 40 Director
</TABLE>
- ----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Each director of the Company serves a three-year term. Mr. Kvamme's and
Mr. Lamond's terms expire at the 1998 Annual Meeting of Stockholders,
Mr. Suiter's and Mr. Slade's terms expire at the 1999 Annual Meeting of
Stockholders, and Mr. Balkanski's and Mr. Linsky's terms expire at the 2000
Annual Meeting of Stockholders.
Mark D. Kvamme joined the Company in 1989 as a Partner and since 1991
has served as the Chairman of the Company's Board of Directors and Chief
Executive Officer. Prior to joining the Company, Mr. Kvamme served as Vice
President of Marketing for Pillar Corporation. From September 1986 to January
1989, Mr. Kvamme was International Marketing Manager for Wyse Technology, Inc.,
a terminal and personal computer manufacturer. Before joining Wyse, Mr. Kvamme
founded and served as President and Chief Executive Officer of International
Solutions, Inc., a global distributor of hardware and software products, from
-24-
<PAGE> 25
1984 to 1986. From 1980 to 1984, Mr. Kvamme held various management positions in
international sales and marketing and in product development at Apple Computer,
as well as being one of the initial managers of Apple France. Mr. Kvamme holds a
B.A. in French Economics and Literature from the University of California at
Berkeley.
Thomas K. Suiter joined CKS in 1991 as Chief Creative Officer, and has
served as a member of the Company's Board of Directors since that time. Mr.
Suiter held the position of President, CKS Partners from May 1996 to November
1997. Before joining the Company, Mr. Suiter was World Wide Creative Director of
Landor Associates from 1985 to 1991. Prior to joining Landor, Mr. Suiter was
Director of Creative Services of Apple Computer from 1984 to 1985 and Creative
Director from 1982 to 1984 where he and his group were responsible for Apple's
corporate identity and the marketing communication materials for the MacIntosh
and Apple II product lines. Mr. Suiter attended San Diego State University and
the Art Center College of Design, Pasadena, California.
Carlton H. Baab has served as the Company's Chief Financial Officer and
Vice President of Finance and Administration since joining the Company in
February 1994. Mr. Baab was promoted to Executive Vice President, Chief
Operating Officer and Secretary in August 1995. Mr. Baab's duties were
consolidated under the titles of Executive Vice President, Chief Financial
Officer and Secretary in May 1996. Prior to joining the Company, Mr. Baab
co-founded and served as President and Chief Executive Officer of MobileSoft
Corporation, a software application developer for the Apple Newton. Mr. Baab was
the Vice President & General Manager of the Contract Division at the Levolor
Corporation from August 1989 to August 1993. At Levolor, Mr. Baab was also Vice
President of Information Technology and Re-Engineering and a member of the
executive turnaround team. Mr. Baab holds a B.S. in Electrical Engineering from
the University of Southern California and an M.B.A. from the Harvard Graduate
School of Business Administration.
Robert T. Clarkson joined the Company as Executive Vice President,
Business Development and Secretary of the Company in February 1997 and assumed
the positions of Executive Vice President, Operations, CKS Technology Group and
CKS International in December 1997. From February 1989 to January 1997, Mr.
Clarkson served as a member of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, the Company's primary outside counsel. Mr. Clarkson holds a B.A. in
History from Stanford University and a J.D. from the University of California at
Los Angeles.
Kimberly A. Johnson was appointed Executive Vice President of
Operations, CKS West in January 1998. Ms. Johnson joined the Company as Account
Manager in August 1990, and served as Management Supervisor of its Silicon
Valley Office from January 1994 to March 1995, as General Manager of the Silicon
Valley Office from March 1995 to March 1997, and as Director of West Coast
Operations from July 1997 to December 1997.
Fergus O'Daly joined the Company as President of CKS East in May 1997.
Before joining the Company Mr. O'Daly served as Chief Executive Officer and
Chairman of the Poppy Tyson, Inc. advertising agency, which Mr. O'Daly
co-founded in 1967.
Ian Small assumed the position of Executive Vice President and Chief
Technology Officer of the Company in January 1998. Mr. Small served as Vice
President of Technology of the Company from March 1997 to December 1997, and as
Technology Director of the Company's former CKS Interactive, Inc. subsidiary
from December 1995 to March 1997. Mr. Small joined the Company from from Apple
Computer in December 1995, where he had served as Engineering Manager for the
QuickTime VR group of Apple's Advanced Technology division from September 1993
to December 1995, as Project Leader for the interactive television group of the
Human Interactive Group of Apple's Advanced Technology Group from March 1993 to
August 1993, and in other senior engineering positions prior to that. Mr. Small
holds a B.S. in Applied Science (Engineering Science) and an M.S. in Computer
Science from the University of Toronto.
-25-
<PAGE> 26
Richard Villante joined the Company as President of its Global
Communications Network division in May 1997, and has served as Executive Vice
President of Operations, CKS East since December 1997. Mr. Villante was
President of Allied Communications Group, an IPG advertising unit, from January
1995 to May 1997. He served as Vice President of Lowe & Partners, another IPG
agency, from February 1992 to January 1995.
Alexandre Balkanski has been a member of the Company's Board of
Directors since March 1995. Dr. Balkanski is the President and CEO of C-Cube
Microsystems, Inc. ("C-Cube"), a publicly-held company specializing in digital
video compression solutions, which he co-founded in July 1988. Dr. Balkanski was
named Senior Vice President of C-Cube in August 1989, served as its Vice
President of Worldwide Sales and Marketing from February 1994 to June 1995, and
served as its Executive Vice President and Chief Operating Officer from February
1994 to June 1995. Dr. Balkanski currently serves on the board of directors of
both C-Cube and Sierra Semiconductor Corporation. Dr. Balkanski holds graduate
degrees from Harvard University in Physics, Economics and Business, as well as a
B.A. in Physics from Harvard College.
Pierre R. Lamond has been a member of the Company's Board of Directors
since 1990. Mr. Lamond has been a general partner of Sequoia Capital, a venture
capital firm, since 1981. Prior to joining Sequoia, Mr. Lamond was Vice
President and Technical Director of National Semiconductor, a company he
co-founded in 1967. Mr. Lamond currently serves as the Chairman of the Board of
Directors of Cypress Semiconductor Corporation and Vitesse Semiconductor
Corporation, and is a director of a number of privately held companies. He holds
a B.S. in Electrical Engineering and an M.S. in Physics from the University of
Toulouse, France, as well as an M.S. in Electrical Engineering from Northeastern
University.
Barry R. Linsky has been a member of the Company's Board of Directors
since January 1995. Mr. Linsky has served as Senior Vice President, Planning and
Business Development of IPG since December 1990. Prior to joining IPG at the
parent company level, Mr. Linsky was Executive Vice President, Account Service,
of Lowe & Partners (formerly The Marschalk Company, a subsidiary of IPG), from
1980 until 1990. From 1972 to 1980, Mr. Linsky held various positions at The
Marschalk Company, including Senior Vice President and Director of the agency's
New Products Group and positions in account management. Previously, Mr. Linsky
had worked in consumer marketing for Lever Brothers Co., Bristol-Myers Company
and Squibb Beech-Nut, Inc. He holds a B.A. in Liberal Arts from Dartmouth
College and an M.B.A. from the Amos Tuck School of Business.
Michael B. Slade has been a member of the Company's Board of Directors
since June 1996. Mr. Slade has served as President and Chief Executive Officer
of Starwave Corp., a developer of multimedia information services for the
Internet, since February 1993. Prior to joining Starwave, Mr. Slade was Vice
President of Special Projects at Asymetrix, a multimedia software developer,
from October 1992 to February 1993. From May 1991 to October 1992, Mr. Slade
served as Vice President of Marketing at NeXT Computer, Inc., a developer of
object-oriented software. Mr. Slade holds a B.A. in Economics from Colorado
College and an M.B.A. from Stanford University.
- --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
The information required by Item 11 is set forth under the caption,
"Executive Compensation" in the Company's Proxy Statement, which information is
incorporated herein by reference.
-26-
<PAGE> 27
- --------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
The information required by Item 12 is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement, which information is incorporated herein by
reference.
- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
The information required by Item 13 is set forth under the captions
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" in the Company's Proxy Statement, which information is
incorporated herein by reference.
-27-
<PAGE> 28
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) The following documents are filed as part of this Report:
1. CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of CKS Group,
Inc. and subsidiaries are filed as part of this Report:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report of KPMG Peat Marwick LLP.................. F-2
Independent Auditors' Report of Ernst & Young LLP...................... F-3
Consolidated Balance Sheets............................................ F-4
Consolidated Statements of Income...................................... F-5
Consolidated Statements of Stockholders' Equity........................ F-6
Consolidated Statements of Cash Flows.................................. F-7
Notes to Consolidated Financial Statements............................. F-8
</TABLE>
2. CONSOLIDATED FINANCIAL STATEMENTS SCHEDULE
The following consolidated financial statement schedule of
CKS Group, Inc. is filed as part of this Report and should be read in
conjunction with the consolidated financial statements of CKS Group, Inc.:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report on Schedule................................ S-1
Schedule II -- Valuation and Qualifying Accounts........................ S-2
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
-28-
<PAGE> 29
3. EXHIBITS
(a) The following exhibits are filed with this Report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- -------- -----------------------------------------------------------------------------------
<S> <C>
3.1(1) Certificate of Incorporation of the Registrant.
3.2(1) Bylaws of the Registrant.
10.1(1) Form of Indemnification Agreement between Registrant and its officers and directors.
10.2(1) The Registrant's 1995 Series B Common Stock Plan, as amended.
10.3(1) The Registrant's 1995 Stock Plan.
10.4(1) The Registrant's 1995 Employee Stock Purchase Plan.
10.5(1) The Registrant's 1995 Director Stock Option Plan.
10.6(1) Amended and Restated Purchase Agreement dated as of October 17, 1996 by and among
the Registrant, The Interpublic Group of Companies, Inc. and certain stockholders
of the Registrant.
10.7(1) Shareholder Rights Agreement dated as of January 13, 1995 by and among the
Registrant, The Interpublic Group of Companies, Inc. and certain stockholders of
the Registrant.
10.8(1) Lease Agreement dated as of March 8, 1995 between Registrant and
Devcon Associates XVI for Registrant's headquarters facility at
10441 Bandley, Cupertino, CA.
10.9(2) Lease Agreement dated June 11, 1996 between Registrant and Devcon
Associates XVI for Registrant's facility at 10381 Bandley,
Cupertino, CA.
10.10(2) Industrial Lease Agreement dated March 27, 1995 between CKS Partners, Inc. and
Lazaneo Partners, L.P. for Registrant's facility located at 10260 Bandley,
Cupertino, CA.
10.11(2) Industrial Lease Agreement dated November 16, 1995 between CKS Partners, Inc. and
The Leonard Company for Registrant's facility located at 20615
Lazaneo Drive, Cupertino, CA.
10.12(2) Office Lease Agreement dated February 29, 1996, between Registrant and Shorenstein
Realty Investors, L.P. for Registrant's facility located at 345 Spear Street, San
Francisco, CA.
10.13(1) Exchange Agreement, dated as of December 1, 1994 among Registrant
and certain stockholders of CKS Partners, Inc., CKS Pictures,
Inc. and CKS Interactive, Inc.
10.14(1) Stock Purchase Agreement among the Registrant, The Interpublic Group of Companies,
Inc. and certain stockholders of the Registrant dated October 16, 1995.
10.15(1) Letter agreement dated October 14, 1995 between the Registrant
and The Interpublic Group of Companies, Inc. ("IPG") regarding
Shelf Registration Statement to be filed to enable IPG to sell
shares of Common Stock of Registrant.
10.16(3)* Agreement and Plan of Reorganization, dated as of June 7, 1996, by and among
Registrant, Schell/Mullaney, Inc., a New York corporation,
Michael Schell, Brian Mullaney and First Interstate Bank of
California.
10.17(4) Asset Purchase Agreement, dated as of October 4, 1996, by and
among Registrant, Donovan & Green, Inc., a New York corporation
("Donovan & Green"), DG Acquisition, Inc., a Delaware corporation
("Sub"), Nancye L. Green and Michael Donovan.
10.18(4) Amendment No. 1 to Asset Purchase Agreement, dated December 30, 1996, by and among
Registrant, Donovan & Green, Sub, Nancye L. Green and Michael Donovan.
10.19(5) Acquisition Agreement dated January 31, 1996, by and among
Registrant, Raleigh Acquisition, Inc., a Delaware Corporation,
the current and former partners of McKinney & Silver, a North
Carolina partnership, Robert C. Doherty, Donald D. Maurer and
Chemical Trust Company of California.
</TABLE>
-29-
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- -------- -----------------------------------------------------------------------------------
<S> <C>
10.20(6) Share Acquisition Agreement, dated as of January 8, 1997, by and
among Registrant, EPG Elektronische Publikationen GmbH ("EPG"),
Ria 96 Vermogensverwaltungs GmbH ("Sub") and the shareholders of
EPG.
10.21(6) Amendment No. 1 to Share Acquisition Agreement, dated March 10, 1997, by and
among Registrant, EPG, Sub and the shareholders of EPG.
10.22 Employment Agreement dated February 1, 1997 between Registrant and Robert
T.Clarkson.
10.23 Employment Agreement dated September 25,1997 between Registrant and Carlton
H. Baab
10.24 Employment Agreement dated November 28, 1997 between Registrant and Richard
Villante.
10.25 The Company's 1997 Employee Stock Purchase Plan
11.1 Statement Regarding Computation of Earnings Per Share
23.1 Consent of KPMG Peat Marwick LLP, independent auditors
23.2 Consent of Ernst & Young LLP, independent auditors
27.1 Financial Data Schedule
</TABLE>
- ----------
(1) Previously filed as exhibits to Registrant's Registration Statement on
Form S-1 (File No. 33-98312), filed with Securities Exchange Commission
on October 19, 1995.
(2) Previously filed as exhibits to Registrant annual report on Form 10-K
for the fiscal year ended November 30, 1997.
(3) Previously filed as an exhibit to Registrant's report on Form 8-K dated
June 7, 1996.
(4) Previously filed as exhibits to Registrant's report on Form 8-K dated
January 3, 1997.
(5) Previously filed as exhibit to Registrant's report on Form 8-K dated
January 31, 1997.
(6) Previously filed as exhibits to Registrant's report on Form 8-K dated
March 10, 1997.
(*) Confidential treatment requested.
(b) Reports on Form 8-K filed in the fourth quarter of fiscal
1996.
During the fiscal quarter ended November 30, 1997, the
Company filed the following Current Reports on Form 8-K:
(1) Form 8-K/A dated June 25, 1997 and filed with the
Commission on October 24, 1997 reporting information under items 2 and 7,
amending the Form 8-K filing originally filed on June 26, 1997. This Form 8-K
filing included consolidated financial statements of the Company as of November
30, 1995 and 1996, and for the years ended November 30, 1994, 1995 and 1996, as
well as the report of KPMG Peat Marwick LLP dated June 17, 1997.
(2) Form 8-K dated November 7, 1997 and filed with
the Commission on November 24, 1997, reporting information under items 5 and 7.
-30-
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: February 27, 1998 CKS GROUP, INC.
By: /s/ CARLTON H. BAAB
------------------------------------
Carlton H. Baab
Executive Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mark D. Kvamme, Carlton H. Baab and
Robert T. Clarkson and each of them singly, as true and lawful attorneys-in-fact
and agents with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities to sign any or all
amendments to this report on Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission granting unto said attorneys-in-fact and agents the full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the foregoing, as full to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his
substitute, may lawfully do or cause to be done by virtue hereof. Witness our
hands on the date set forth below.
Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------- ---------------------------------------- -----------------
<S> <C> <C>
/s/ MARK D. KVAMME Chairman and Chief Executive Officer February 27, 1998
- --------------------------------- (Principal Executive Officer)
Mark D. Kvamme
/s/ CARLTON H. BAAB Executive Vice President and Chief February 27, 1998
- --------------------------------- Financial Officer (Principal Financial
Carlton H. Baab and Accounting Officer)
Director February 27, 1998
- ---------------------------------
Thomas K. Suiter
/s/ ALEXANDRE BALKANSKI Director February 27, 1998
- ---------------------------------
Alexandre Balkanski
/s/ PIERRE R. LAMOND Director February 27, 1998
- ---------------------------------
Pierre R. Lamond
/s/ BARRY R. LINSKY Director February 27, 1998
- ---------------------------------
Barry R. Linsky
/s/ MICHAEL B. SLADE Director February 27, 1998
- ---------------------------------
Michael B. Slade
</TABLE>
<PAGE> 32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report of KPMG Peat Marwick LLP............ F-2
Independent Auditors' Report of Ernst & Young LLP................ F-3
Consolidated Balance Sheets...................................... F-4
Consolidated Statements of Income................................ F-5
Consolidated Statements of Stockholders' Equity.................. F-6
Consolidated Statements of Cash Flows............................ F-7
Notes to Consolidated Financial Statements....................... F-8
</TABLE>
F-1
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CKS Group, Inc.:
We have audited the accompanying consolidated balance sheets of CKS
Group, Inc. and subsidiaries (the Company) as of November 30, 1997 and 1996, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended November 30, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of McKinney & Silver (M&S), which statements reflect total assets
constituting 23% as of November 30, 1996, and total revenues constituting 40%
and 33%, and income before income taxes constituting 65% and 38% in each of the
years in the two-year period ended November 30, 1996, respectively, of the
related consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
amounts included for M&S, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CKS Group, Inc. and
subsidiaries as of November 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended November 30, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
San Jose, California
December 15, 1997
F-2
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
Partners
McKinney & Silver
We have audited the balance sheets of McKinney & Silver (a Partnership)
as of December 31, 1996 and 1995, and the related statements of income,
partners' capital, and cash flows for the three years then ended (not presented
separately herein). These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require than we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present
fairly, in all material respects, the financial position of McKinney & Silver (a
Partnership) at December 31, 1996 and 1995, and the results of its operations
and its cash flows for the three years then ended in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
January 31, 1997
F-3
<PAGE> 35
CKS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
ASSETS 1997 1996
-------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,223 $19,385
Marketable securities 24,041 37,895
Accounts receivable, net of allowance of $1,442 and $792 in
1997 and 1996, respectively 50,049 22,651
Fees and expenditures in excess of billings 4,594 2,792
Prepaid expenses and other current assets 1,949 907
Deferred income taxes 1,400 1,038
-------- -------
Total current assets 100,256 84,668
Property and equipment, net 5,849 4,571
Deferred income taxes 10,140 300
Goodwill and other assets 30,228 5,937
-------- -------
Total assets $146,473 $95,476
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,161 $21,392
Accrued expenses 7,515 6,430
Billings in excess of fees and expenditures 2,417 3,257
Current portion of liabilities to related parties 2,284 1,955
Current portion of notes payable and capital lease obligations 765 433
Income taxes payable -- 426
-------- -------
Total current liabilities 51,142 33,893
Liabilities to related parties, less current portion -- 223
Notes payable and capital lease obligations, less current portion 739 502
-------- -------
Total liabilities 51,881 34,618
-------- -------
Stockholders' equity: -- --
Preferred stock; $0.001 par value; 5,000,000 shares -- --
authorized; none issued and outstanding
Common stock; $0.001 par value; 30,000,000 shares authorized;
14,865,000 and 14,229,000 shares issued and outstanding in
1997 and 1996, respectively 15 14
Additional paid-in capital 80,103 51,715
Unrealized gain (loss) on marketable securities 12 (65)
Notes receivable from stockholders (198) (292)
Cumulative translation adjustment (62) (6)
Retained earnings 14,722 9,492
-------- -------
Total stockholders' equity 94,592 60,858
-------- -------
Total liabilities and stockholders' equity $146,473 $95,476
======== =======
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE> 36
CKS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues $133,602 $ 88,248 $ 58,383
-------- -------- --------
Operating expenses:
Direct salaries and related expenses 34,714 22,962 15,440
Other direct operating expenses 55,175 36,355 24,820
General and administrative expenses 29,827 17,570 11,545
Merger costs 2,452 -- --
-------- -------- --------
Total operating expenses 122,168 76,887 51,805
-------- -------- --------
Operating income 11,434 11,361 6,578
Other income, net 1,549 2,114 296
-------- -------- --------
Income before income taxes 12,983 13,475 6,874
Income taxes 5,317 3,026 1,065
-------- -------- --------
Net income $ 7,666 $ 10,449 $ 5,809
======== ======== ========
Unaudited pro forma net income and
per share data:
Income before income taxes, as
reported $ 12,983 $ 13,475 $ 6,874
Pro forma income taxes 5,635 5,108 2,823
-------- -------- --------
Pro forma net income $ 7,348 $ 8,367 $ 4,051
======== ======== ========
Pro forma net income per share $ 0.46 $ 0.58 $ 0.35
======== ======== ========
Shares used in per share computation 15,590 14,435 11,653
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 37
CKS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Unrealized Notes
Common Stock Additional gain (loss) receivable Cumulative Total
------------------ paid-in on marketable from translation Retained Stockholders'
Shares Amount capital securities stockholders adjustment earnings equity
------ -------- ------- ------------ ------------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, November 30, 1994 10,545 $ 10 $ 948 $ -- $ (371) $ -- $ 2,192 $ 2,779
Issuance of Series A common
stock 739 1 1,923 -- -- -- -- 1,924
Repurchase of common stock (31) -- (23) -- 8 -- -- (15)
Issuance of common stock 68 -- 103 -- -- -- -- 103
Compensation related to stock
options -- -- 156 -- -- -- -- 156
Collections on stockholder
notes receivable -- -- -- -- 71 -- -- 71
Distributions to stockholders -- -- -- -- -- -- (4,477) (4,477)
Net income -- -- -- -- -- -- 5,809 5,809
------ -------- ------- -------- -------- -------- ------ ------
Balances, November 30, 1995 11,321 11 3,107 -- (292) -- 3,524 6,350
Issuance of common stock
warrants -- -- 100 -- -- -- -- 100
Issuance of common stock 2,991 3 48,060 -- -- -- -- 48,063
Compensation related to stock
options -- -- 130 -- -- -- -- 130
Tax benefit from disqualifying -- -- 926 -- -- -- -- 926
dispositions
Unrealized loss on marketable -- -- -- (65) -- -- -- (65)
securities
Distributions to stockholders -- -- (499) -- -- -- (4,481) (4,980)
Repurchase of common stock (83) -- (109) -- -- -- -- (109)
Translation adjustment -- -- -- -- -- (6) -- (6)
Net income -- -- -- -- -- -- 10,449 10,449
------ -------- ------- -------- -------- -------- ------ ------
Balances, November 30, 1996 14,229 14 51,715 (65) (292) (6) 9,492 60,858
Issuance of common stock 474 1 5,208 -- -- -- -- 5,209
Compensation related to stock
options -- -- 265 -- -- -- -- 265
Tax benefit from disqualifying
dispositions -- -- 3,343 -- -- -- -- 3,343
Unrealized gain on marketable -- -- -- 77 -- -- -- 77
securities
Distribution to stockholders -- -- -- -- -- -- (2,172) (2,172)
Deferred issuance of common stock
related to business
acquisitions -- -- 5,582 -- -- -- -- 5,582
Common stock issued for busines 168 -- 4,738 -- -- -- -- 4,738
acquisitions
Deferred tax asset recorded in -- -- 9,346 -- -- -- -- 9,346
connection with taxable
pooling of interests
Repurchase of common stock and (6) -- (94) -- 94 -- -- --
cancellation of note
receivable from stockholder
Change in subsidiaries' fiscal -- -- -- -- -- -- (264) (264)
year-ends
Translation adjustment -- -- -- -- -- (56) -- (56)
Net income -- -- -- -- -- -- 7,666 7,666
------ -------- ------- -------- -------- -------- ------- -------
Balances, November 30, 1997 14,865 $ 15 $80,103 $ 12 $ (198) $ (62) $14,722 $94,592
====== ======== ======= ======== ======== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 38
CKS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,666 $ 10,449 $ 5,809
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (856) (1,097) (476)
Compensation related to stock options 265 130 156
Tax benefit from disqualifying dispositions 3,343 926 --
Depreciation and amortization 3,331 1,181 1,000
Loss on disposition of property due to
acquisition 227 -- --
Changes in operating assets and liabilities:
Accounts receivable (19,103) (8,148) (1,392)
Fees and expenditures in excess of billings (323) (1,647) 354
Prepaid expenses and other current assets (447) 38 (943)
Accounts payable 12,833 12,195 (1,783)
Accrued expenses (516) 3,556 1,553
Billings in excess of fees and expenditures 47 246 (240)
Income taxes payable (847) (1,253) 1,125
-------- -------- --------
Net cash provided by operating activities 5,620 16,576 5,163
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,995) (2,011) (1,574)
Purchases of marketable securities (21,175) (39,710) --
Sales of marketable securities 34,934 1,750 --
Business acquired, net of cash received (13,740) 55 --
Other assets 70 (586) (6)
-------- -------- --------
Net cash used in investing activities (1,906) (40,502) (1,580)
-------- -------- --------
Cash flows from financing activities:
Net repayments on line of credit and note payable (1,414) (382) (676)
Collection (repayment) of stockholder notes -- (37) 71
receivable
Proceeds from sale of common stock and warrants 5,208 43,154 1,994
Repurchase of common stock -- (109) (15)
Distributions to stockholders (2,398) (4,635) (4,444)
Liabilities to related parties (2,013) 503 (10)
-------- -------- --------
Net cash (used in) provided
by financing activities (617) 38,494 (3,080)
-------- -------- --------
Net increase in cash and cash equivalents 3,097 14,568 503
Change in subsidiaries' fiscal year-ends (4,259) -- --
Cash and cash equivalents, beginning of year 19,385 4,817 4,314
-------- -------- --------
Cash and cash equivalents, end of year $ 18,223 $ 19,385 $ 4,817
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid:
Interest $ 187 $ 63 $ 91
======== ======== ========
Income taxes $ 1,386 $ 4,488 $ 647
======== ======== ========
Noncash investing and financing activities:
Issuance of common stock in business acquisition $ 6,030 $ 4,997 $ --
======== ======== ========
Exchange of note payable for common stock $ -- $ 457 $ --
======== ======== ========
Businesses acquired for liabilities to related
parties $ 2,146 $ -- $ --
======== ======== ========
Deferred tax asset recorded in connection with
taxable pooling of interests $ 9,346 $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 39
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
November 30, 1997, 1996, and 1995
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Principles of Combination
CKS Group, Inc. (CKS or the Company) is an international integrated
marketing services and technology company specializing in offering a wide
range of integrated marketing communication services and technology
solutions that help companies market their products, services, and
messages. The Company's services include strategic corporate and product
positioning, corporate identity and product branding, new media, systems
integration, environmental design, packaging, collateral systems,
advertising, direct marketing, consumer promotions, trade promotions, and
media placement services.
The Company was formed in January 1995 in a merger of three entities that
were under common control: CKS Partners, Inc.; CKS Interactive, Inc.; and
CKS Pictures, Inc. (collectively, the Former Affiliates). The accompanying
consolidated financial statements have been prepared on the basis that
these entities were combined at the beginning of their existence for
financial reporting purposes. The combined entities have been under common
control since inception and have been included in the consolidated
financial statements at historical cost, in a manner similar to a pooling
of interests, since their respective dates of inception. All transactions
and accounts between the combined entities have been eliminated in the
accompanying consolidated financial statements.
In accordance with the merger of the Former Affiliates, each entity's
capital stock was converted, using a predetermined conversion factor, to
give effect to the merger. All share and per share information has been
retroactively restated to give effect to the merger.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The accompanying consolidated financial statements have
been restated to reflect the effect of the mergers accounted for as
poolings of interests with McKinney & Silver (M&S) and SiteSpecific, Inc.
(SiteSpecific) discussed in Note 2.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments purchased with a
remaining maturity of 90 days or less to be cash equivalents.
The Company classifies its investments in certain debt and equity
securities as "available-for-sale." Such investments are recorded at fair
value, with unrealized gains and losses, net of taxes, reported as a
separate component of stockholders' equity. The cost of securities sold is
based upon the specific identification method.
F-8
<PAGE> 40
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments and Concentrations of Credit Risk
The carrying value of the Company's financial instruments, including
accounts receivable, approximates fair market value.
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist principally of marketable securities
and accounts receivable. The Company's services are provided to clients in
a variety of industries. The Company performs ongoing credit evaluations
of its clients, generally does not require collateral, and records
allowances for potential credit losses.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a
straight-line basis over estimated useful lives of three to seven years.
Leasehold improvements are amortized over the lesser of their useful lives
or the remaining term of the related lease.
Goodwill
Goodwill is amortized on a straight-line basis over 20 years. Accumulated
amortization amounted to $1,105,000 as of November 30, 1997.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
On December 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires
long-lived assets to be evaluated for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset may not
be recoverable. Recoverability of property and equipment is measured by
comparison of its carrying amount to future net cash flows the property
and equipment are expected to generate. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the property and equipment exceeds its fair
value. To date, the Company has made no adjustments to the carrying value
of its long-lived assets.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
F-9
<PAGE> 41
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Revenue Recognition
Revenues generally are derived from fixed fee arrangements and are
recognized on the percentage-of-completion method based on the ratio of
costs incurred to total estimated costs. Fees and expenditures in excess
of billings represent the costs incurred and anticipated profits earned on
projects in progress in excess of amounts billed and are recorded as an
asset. Billings in excess of fees and expenditures represent amounts
billed in excess of costs incurred and estimated profit earned and are
recorded as a liability. Such billings generally are at the beginning of
contract periods and are in accordance with contract provisions. To the
extent costs incurred and anticipated costs to complete projects in
progress exceed anticipated billings, a loss is accrued for the excess.
Commissions earned from advertising placed with media generally are
recorded at the time the advertising appears or is broadcast. Commissions
earned for production expenditures and fees derived from other services
are recognized upon performance of the services.
Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
As a partnership, M&S's earnings were taxed at the individual partner
level, therefore no provision for income taxes has been made in the
accompanying consolidated financial statements for income attributable to
M&S. The accompanying consolidated statements of income include a
provision for income taxes on an unaudited pro forma basis as if M&S had
been a C corporation fully subject to income taxes, for all periods
presented.
Net Income Per Share
Net income per share is computed using the weighted-average number of
shares outstanding of common stock, after giving effect to contingently
issuable shares under acquisition agreements, and dilutive common
equivalent shares from stock options using the treasury stock method. In
accordance with certain Securities and Exchange Commission (SEC) Staff
Accounting Bulletins, such computations include all common and common
equivalent shares issued within 12 months of the Company's initial public
offering (IPO) date as if they were outstanding for all prior periods
presented using the treasury stock method and the IPO price.
The Financial Accounting Standards Board recently issued SFAS No. 128,
Earnings Per Share. SFAS No. 128 requires the presentation of basic
earnings per share (EPS) and for companies with complex capital structures
or potentially dilutive securities, diluted EPS. SFAS No. 128 is effective
for annual and interim periods ending after December 15, 1997. The Company
expects that basic EPS will be higher than pro forma EPS as presented in
the accompanying consolidated financial statements and that diluted EPS
will not differ materially from EPS as presented in the accompanying
consolidated financial statements.
F-10
<PAGE> 42
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the
intrinsic value method.
Foreign Currency Translation
The functional currency for the Company's foreign subsidiary is the local
currency. Financial statements for the foreign subsidiary are translated
using the current exchange rate for the balance sheet and the average
exchange rate during the year for the statement of income. Translation
adjustments are included as a separate component of stockholders' equity.
(2) BUSINESS COMBINATIONS
Schell/Mullaney, Inc.
On August 1, 1996, the Company acquired Schell/Mullaney, Inc. (SMI), and
its results of operations have been included in the Company's consolidated
financial statements from that date. Upon the closing of the merger, the
shares of common stock of SMI that were issued and outstanding immediately
prior to the closing were converted into 183,066 shares of the Company's
common stock valued at $5,000,000. Due to the attainment of certain
financial performance goals by SMI during 1997, the Company will issue
approximately $4,500,000 in common stock to the former stockholders of
SMI. The former stockholders also have the right to receive up to an
additional $4,500,000 in common stock of the Company in 1998 upon the
attainment of certain financial performance goals. The number of
additional shares to be issued to the former stockholders of SMI will be
determined based on the price of the Company's common stock during a
period prior to the issuance dates of such shares. In the event additional
shares are issued to the former stockholders of SMI, they will be recorded
as additional purchase price. The acquisition was recorded as a purchase,
and, as a result, the Company initially recorded goodwill of $4,577,000.
The following summary, prepared on an unaudited pro forma basis, combines
the Company's consolidated results of operations for the years ended
November 30, 1996 and 1995, with SMI's results of operations for the years
ended November 30, 1996, and December 31, 1995, respectively, as if SMI
had been acquired as of the beginning of the periods presented (in
thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
------------------------
1996 1995
--------- -------
<S> <C> <C>
Revenues $92,536 $63,429
Pro forma net income 8,440 5,010
Pro forma net income per share 0.58 0.43
Shares used in pro forma per share
computation 14,557 11,785
</TABLE>
The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the periods presented.
In addition, they are not intended to be a projection of future results
and do not reflect any synergies that might be achieved from combined
operations.
F-11
<PAGE> 43
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 $5,146,000. The Company made guaranteed
payments to D&G consisting of $2,219,000 in cash and 41,259 shares of the
Company's common stock on April 18, 1997. In addition, D&G will be
entitled to receive an additional $1,003,000 in cash and a number of
shares of common stock of the Company with a value of $497,000 over the
next two fiscal years. D&G also has the right to receive additional
payments if the subsidiary attains certain earnings goals during the 1997,
1998, 1999, and 2000 fiscal years. D&G may receive $889,000 in cash and
shares of the Company's common stock with a value of $444,000 in each of
1998 and 1999 if the subsidiary meets its earnings goals for the 1997 and
1998 fiscal years. To the extent that the subsidiary exceeds its earnings
goals for the 1997, 1998, 1999, and 2000 fiscal years by more than 10%,
D&G will be entitled to receive cash and common stock of the Company with
a combined value of up to $1,000,000 per year for each of these four
years. D&G did not meet its earnings goals for the year ended November 30,
1997. The acquisition was recorded as a purchase, and, as a result, the
Company initially recorded goodwill of $8,333,000. In the event additional
consideration is issued to the former stockholders of D&G, it will be
recorded as additional purchase price.
The following summary, prepared on an unaudited pro forma basis, combines
the Company's consolidated results of operations for the year ended
November 30, 1996, with D&G's results of operations for the year ended
December 31, 1996, as if D&G had been acquired as of the beginning of the
period presented (in thousands, except per share data):
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Revenue $93,158
Pro forma net income $ 7,705
Pro forma net income per share $ 0.53
Shares used in pro forma per share
computation 14,513
</TABLE>
The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the periods presented.
In addition, they are not intended to be a projection of future results
and do not reflect any synergies that might be achieved from combined
operations.
F-12
<PAGE> 44
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
CKS Holding Deutschland GmbH
On March 10, 1997, CKS acquired all of 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 stockholders
of CKS GmbH received $2,925,000 in cash and 86,603 shares of common stock
of CKS and will receive future guaranteed payments of $672,000 in cash and
CKS common stock in fiscal 1998. In addition, the stockholders of CKS GmbH
have the right to receive up to an additional $10,000,000 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 number
of additional shares of CKS common stock to be issued to former
stockholders of CKS GmbH, if any, will be determined based on price of CKS
common stock over a period prior to the issuance date of such shares. The
acquisition was recorded as a purchase and as a result the Company
initially recorded goodwill of $5,592,000. In the event additional
consideration is paid to the former stockholders of CKS GmbH, it will be
recorded as additional purchase price. Pro forma financial information
giving effect to the acquisition of CKS GmbH has not been presented as pro
forma results would not have differed materially from the Company's
consolidated results of operations.
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 $3,150,000 in cash and 40,206 shares of CKS common stock to
Gormley and an additional $1,500,000 in cash and CKS common stock payable
during fiscal 1998. In addition, Gormley will be entitled to receive
additional payments upon the attainment of certain performance goals over
the next four fiscal years. The acquisition was accounted for as a
purchase, and, as a result, the Company initially recorded goodwill of
$5,793,000. In the event additional consideration is paid to Gormley, it
will be recorded as additional purchase price. Pro forma financial
information giving effect to the acquisition of certain assets of Gormley
has not been presented because pro forma results would not have differed
materially from the Company's consolidated results of operations.
McKinney & Silver
On January 31, 1997, the Company issued 841,291 shares of its common stock
for all of the partnership units and residual partnership interests of
M&S. The merger has been accounted for as a pooling of interests, and,
accordingly, the Company's consolidated financial statements have been
restated for all periods prior to the merger to include the results of
operations, financial position, and cash flows of M&S. In M&S's historical
financial statements, certain direct operating expenses were offset
against revenues. Such amounts have been reclassified in the accompanying
consolidated financial statements to conform to CKS's presentation. The
effect of the reclassification was to increase both revenues and other
direct operating expenses by $13,614,000 and $9,593,000 during 1996 and
1995, respectively.
Prior to the combination, M&S's fiscal year ended on December 31. In
recording the business combination, M&S's financial statements as of and
for each of the years in the two-year period ended December 31, 1996, have
been combined with the Company's consolidated financial statements as of
and for each of the years in the two-year period ended November 30, 1996.
F-13
<PAGE> 45
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In 1997, M&S changed its fiscal year-end to the Sunday nearest November 30
to conform to CKS's fiscal year-end. M&S's unaudited results of operations
for the month ended December 31, 1996, included revenues of $2,230,000 and
net income of $248,000. An adjustment has been made to stockholders'
equity as of November 30, 1997, to eliminate the effect of including M&S's
unaudited results of operations for the month ended December 31, 1996, in
both the years ended November 30, 1997 and 1996.
In connection with the merger with M&S, the Company recorded a
nonrecurring charge for transaction related costs of $1,593,000 in the
first quarter of fiscal 1997, consisting primarily of fees for attorneys,
accountants, financial printing, and other related costs. In addition,
because the merger is a taxable transaction, in the first quarter of
fiscal 1997, CKS recorded a deferred tax asset and an increase to
stockholders' equity of approximately $9,346,000 for the difference
between the financial statement and tax carrying amounts of M&S's net
assets upon the closing of the transaction.
SiteSpecific, Inc.
On June 17, 1997, the Company issued 241,108 shares of its common stock
for all of the outstanding capital stock of SiteSpecific, and assumed
options to purchase 18,884 shares of common stock under an option plan.
The merger has been accounted for as a pooling of interests, and,
accordingly, the Company's consolidated financial statements have been
restated for all periods prior to the merger to include the results of
operations, financial position, and cash flows of SiteSpecific.
Prior to the combination, SiteSpecific's fiscal year ended on December 31.
In recording the business combination, SiteSpecific's financial statements
as of December 31, 1996, and for the year ended December 31, 1996, and
from inception to December 31, 1995, have been combined with the Company's
consolidated financial statements as of and for each of the years in the
two-year period ended November 30, 1996.
In 1997, SiteSpecific changed its fiscal year-end to the Sunday nearest
November 30 to conform to CKS's fiscal year-end. SiteSpecific's unaudited
results of operations for the month ended December 31, 1996, included
revenues of $302,000 and net income of $16,000. An adjustment has been
made to stockholders' equity as of November 30, 1997, to eliminate the
effect of including SiteSpecific's unaudited results of operations for the
month ended December 31, 1996, in both the years ended November 30, 1997
and 1996.
In connection with the merger with SiteSpecific, the Company recorded a
nonrecurring charge for transaction related costs of approximately
$859,000 in the third quarter of fiscal 1997, consisting primarily of fees
for attorneys, accountants, financial printing, and other related costs.
F-14
<PAGE> 46
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Revenues and net income for the individual entities as previously reported
were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
------------------------
1996 1995
--------- --------
<S> <C> <C>
Revenues:
CKS $ 56,951 $ 34,792
M&S 29,448 23,326
SiteSpecific 1,849 265
-------- --------
$ 88,248 $ 58,383
======== ========
Net income (loss):
CKS $ 5,679 $ 1,366
M&S 5,079 4,436
SiteSpecific (309) 7
-------- --------
$ 10,449 $ 5,809
======== ========
</TABLE>
(3) MARKETABLE SECURITIES
Marketable securities consisted of the following as of November 30, 1997
(in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Municipal obigations $24,029 $12 -- $24,041
======= ========== ========== =======
</TABLE>
Marketable securities consisted of the following as of November 30, 1996
(in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Municipal obligations $37,771 $ -- $ -- $37,771
Marketable equity equity
security 189 -- 65 124
------- ---------- ---------- -------
$37,960 $ -- $ 65 $37,895
======= ========== ========== =======
</TABLE>
F-15
<PAGE> 47
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The contractual maturities of available-for-sale debt securities,
regardless of their balance sheet classification as of November 30, 1997,
were as follows (in thousands):
<TABLE>
<CAPTION>
COST FAIR VALUE
------- ----------
<S> <C> <C>
Due within one year $11,329 $11,333
Due after one year through five years -- --
Due after five years through ten years 1,900 1,908
Due after ten years 10,800 10,800
------- -------
$24,029 $24,041
======= =======
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------
1997 1996
------- -------
<S> <C> <C>
Computer equipment and software $ 5,628 $ 3,375
Furniture and fixtures 2,702 2,459
Video production equipment 954 928
Leasehold improvements 2,386 1,430
------- -------
11,670 8,192
Less accumulated depreciation and
amortization 5,821 3,621
------- -------
$ 5,849 $ 4,571
======= =======
</TABLE>
(5) NOTES PAYABLE
During 1996, the Company entered into a $500,000 line of credit with a
bank bearing interest at the bank's prime rate plus 0.25% (8.75% as of
November 30, 1997). Borrowings are unsecured and the line of credit
expires on January 31, 1998. As of November 30, 1997, the Company has
no amounts outstanding under the line of credit.
In July 1995, the Company entered into a credit agreement with a bank for
$4,600,000, including a $3,000,000 line of credit, a $1,000,000 equipment
line of credit, and a $600,000 term loan to refinance existing debt. The
equipment line of credit and term loan expired during 1997. The $3,000,000
line of credit, bearing interest at the bank's prime rate (8.5% as of
November 30, 1997), expires on March 31, 1998. Borrowings are secured by
all assets of the Company. As of November 30, 1997, the Company has no
amounts outstanding under the line of credit.
F-16
<PAGE> 48
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes payable consisted of the following (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------
1997 1996
------ ------
<S> <C> <C>
$600,000 bank line of credit; prime rate plus 1.0%
(9.5% as of November 30, 1997); due March 1998 $ 500 $ --
Borrowings under term loan; prime rate plus 1.0%
(9.5% as of November 30, 1997); due March 2002 260 --
Borrowings under term loan; prime rate plus 1.5%; due
December 2000 -- 163
Borrowings under term loan; prime rate plus 0.75%;
due July 1997 -- 89
Purchase contracts, with interest at 5.7% to 14.0%;
expiring at various dates through December 1, 2000 240 190
Other 504 493
------ ------
1,504 935
Less current maturities 765 433
------ ------
$ 739 $ 502
====== ======
</TABLE>
Future maturities of notes payable are as follows: $765,000 in fiscal
1998; $211,000 in fiscal 1999; $178,000 in fiscal 2000; $125,000 in fiscal
2001; $104,000 in fiscal 2002; and $121,000 thereafter.
(6) RELATED PARTY TRANSACTIONS
In 1990, M&S redeemed the equity interest of the principal partner.
Consideration provided by the redemption agreement included a contingent
amount of 50% of the M&S adjusted income (as defined by the redemption
agreement), for the years 1991 through 1996, and 33-1/3% of such adjusted
income for the years 1997 through 2000. The redemption agreement also
provided for specific payout terms should the business be sold in years 1
through 10. As of November 30, 1996, the current portion of liabilities to
related parties included $1,804,000 related to this arrangement. This
amount was paid during the year ended November 30, 1997.
M&S reached an agreement with the estate of a deceased partner to redeem
all of her partnership shares for $457,000. The redemption agreement
provided for an initial $100,000 payment in December 1996 with the balance
payable in quarterly installments without interest over four years. The
balance was paid fully as of November 30, 1997.
F-17
<PAGE> 49
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) OPERATING LEASES
As of November 30, 1997, the Company maintains an executive office and two
operating offices in Northern California as well as operating offices in
Oregon, New York, Washington D.C., Georgia, North Carolina, Connecticut,
Germany, Austria, Switzerland, France and the United Kingdom. The Company
generally is responsible for maintaining public liability and property
damage insurance on the leased property and also is responsible for
certain operating expenses and property taxes. The facilities' leases
begin to expire in 1998, but contain renewal options to extend lease terms
for up to six years. The Company also leases office equipment under
various operating leases, which begin to expire in 1998.
Total rent expense for facilities and office equipment was approximately
$6,443,000, $4,427,000, and $2,935,000 for the years ended November 30,
1997, 1996, and 1995, respectively.
Future minimum operating lease payments for facilities and equipment are
as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
NOVEMBER 30,
------------------
<S> <C>
1998 $ 3,973
1999 3,506
2000 2,662
2001 1,356
2002 602
-------
$12,099
=======
</TABLE>
(8) STOCKHOLDERS' EQUITY
Stock Option Plans
As of November 30, 1997, the Company had five stock option plans, which
are described below:
1995 Series B Common Stock Plan
On April 28, 1995, the Company's Board of Directors approved the
1995 Series B Common Stock Plan (the Plan). Under the Plan, 750,000 shares
of Series B common stock have been reserved for issuance. Options granted
under the Plan may be either incentive stock options or nonstatutory stock
options, as designated by the Company's Board of Directors. The Plan
expires 10 years after adoption.
Series B common stock possessed the same rights and privileges as
common stock except that each share was entitled to one-tenth the
dividend, if declared, on common stock and one-tenth the voting privilege
and liquidation preference as a share of common stock. Series B common
stock converted automatically on a one-for-one basis into common stock
upon the closing of the Company's IPO.
F-18
<PAGE> 50
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Plan provides that (i) the exercise price per share of an
incentive stock option will be no less than the fair market value of the
Company's common stock at the date of grant; (ii) the option exercise
price per share for a nonstatutory stock option will be no less than 85%
of the fair market value; and (iii) the exercise price of an incentive
stock option for an optionee who possesses more than 10% of the total
combined voting power of all classes of stock shall be no less than 110%
of the fair market value; all as determined by the Company's Board of
Directors. Options generally vest 25% after one year and then ratably over
36 months thereafter.
1995 Stock Plan
In October 1995, the Company's Board of Directors approved the 1995
Stock Plan. Under the 1995 Stock Plan, options to purchase common stock
and rights to purchase common stock may be granted to eligible employees,
officers, and consultants of the Company. The Company's Board of
Directors, or a committee thereof, has the authority to select the persons
to whom awards are granted and determine the terms of each award. The
total number of shares reserved for issuance under the 1995 Stock Plan is
2,600,000. Options granted under the 1995 Stock Plan generally vest 25%
after one year and ratably over 36 months thereafter and are exercisable
for 10 years.
In November 1996, the Company's Board of Directors authorized the
repricing of outstanding options to purchase the Company's common stock
with exercise prices in excess of $20.00 per share to reduce their
exercise price to $20.00 per share.
1995 Director Option Plan
Under the 1995 Directors' Option Plan (the Directors' Option Plan),
a total of 100,000 shares are reserved for issuance. The Directors' Option
Plan provides that each nonemployee director will be granted an option to
purchase 20,000 shares of common stock on the date on which the optionee
first becomes a director of the Company. Thereafter each nonemployee
director will be granted an option to purchase 5,000 shares of common
stock on the first day of each year after adoption of the Directors'
Option Plan. Each option becomes exercisable as to 25% of the shares
subject to such option on each anniversary of its date of grant and are
exercisable for 10 years. The exercise price of all options granted under
the Directors' Option Plan will be equal to the fair market value of the
Company's common stock on the date of grant.
F-19
<PAGE> 51
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
1996 Supplemental Stock Plan
In April 1997, the Company's Board of Directors approved the 1996
Supplemental Stock Plan (the 1996 Stock Plan). Under the 1996 Stock Plan,
options to purchase common stock may be granted to eligible employees and
consultants of the Company. The total number of shares reserved for
issuance under the 1996 Stock Plan is 1,000,000. Options granted under the
1996 Stock Plan generally vest 25% after one year and then ratably over 36
months thereafter and are exercisable for 10 years.
SiteSpecific Option Plan
In connection with the SiteSpecific merger discussed in Note 2,
options granted pursuant to the SiteSpecific Option Plan were assumed by
the Company, thereby allowing participants to purchase CKS stock in
amounts and at prices adjusted to reflect the exchange ratio of the
merger.
1995 Employee Stock Purchase Plan
The Company's 1995 Employee Stock Purchase Plan (the Purchase Plan)
was approved by the Company's Board of Directors in October 1995 and
provides for the purchase of shares of the Company's common stock by
eligible employees. A total of 300,000 shares of common stock have been
reserved for issuance under the Purchase Plan. Eligible employees may
purchase common stock through payroll deductions, which may not exceed 15%
of an employee's compensation. Shares are purchased on the last day of
each purchase period. The price at which stock may be purchased under the
Purchase Plan is equal to 85% of the lower of the fair market value of the
Company's common stock at the beginning of a rolling two-year offering
period or the last day of each semiannual purchase period. During fiscal
1997 and 1996, shares totaling 128,549 and 100,708, respectively, were
issued under the Purchase Plan at average prices of $13.90 and $14.72 per
share, respectively.
Fair Value Disclosures
The Company uses the intrinsic value method in accounting for its plans.
Accordingly, no compensation cost has been recognized for its fixed stock
options. Had compensation cost for the Company's stock option plans been
determined consistent with SFAS No. 123, the Company's net income and net
income per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1997 1996
------- -------
<S> <C> <C>
Net income:
As reported $ 7,666 $10,449
Pro forma 73 8,247
Net income per share:
As reported 0.49 0.72
Pro forma 0.00 0.57
</TABLE>
F-20
<PAGE> 52
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants: 1997 -- zero dividend yield,
expected volatility of 80%, risk-free interest rate of 6.18%, and
weighted-average expected life of 3.5 years; 1996 -- zero dividend yield,
expected volatility of 80%, risk-free interest rate of 6.00%, and
weighted-average expected life of 3.5 years.
The fair value of purchase rights granted under the Purchase Plan is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions for grants: 1997 --
zero dividend yield, expected volatility of 80%, risk-free interest rate
of 6.77%, and weighted-average expected life of 1.15 years; 1996 -- zero
dividend yield, expected volatility of 80%, risk-free interest rate of
5.33%, and weighted-average expected life of 1.16 years. The
weighted-average fair value of purchase rights granted under the Purchase
Plan during 1997 and 1996 was $17.31 and $8.45 per share, respectively.
The effects of applying SFAS No. 123 in this pro form disclosure is not
indicative of the effects on reported results for future years. SFAS No.
123 has not been applied to awards prior to 1996 and additional awards in
future years are anticipated.
Stock Option Plan Activity
Activity related to the Company's fixed stock option plans is as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
at beginning
of year 1,529,856 $ 13.94 634,216 $ 2.30 -- $ --
Granted 1,537,556 25.65 1,949,700 23.65 648,022 2.29
Exercised (351,412) 8.49 (82,685) 1.24 -- --
Forfeited (452,812) 19.45 (971,375) 26.91 (13,806) 1.62
--------- --------- -------
Outstanding
at end
of year 2,263,188 21.58 1,529,856 13.94 634,216 2.30
========= ========= =======
Exercisable
at year-end 265,628 11.77 211,931 1.65 125,998 0.50
========= ========= =======
Weighted-average
fair value of
options granted 15.22 10.32
during the year
</TABLE>
F-21
<PAGE> 53
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes information about fixed stock options
outstanding as of November 30, 1997:
<TABLE>
<CAPTION>
UNEXERCISED
--------------------------------------- EXERCISABLE
WEIGHTED- -----------------------
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICES SHARES LIFE PRICE SHARES PRICE
- -------------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.50 - $12.56 346,855 7.83 years $ 4.48 137,749 $ 2.97
20.00 - 29.75 1,500,326 9.02 22.15 119,129 20.12
31.00 - 42.00 416,007 9.61 33.78 8,750 36.50
--------- -------
$0.50 - $42.00 2,263,188 8.95 21.58 265,628 11.77
========= =======
</TABLE>
(9) INCOME TAXES
Historical Income Taxes
The provision for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 1,562 $ 2,328 $ 1,201
State 818 942 340
Foreign 450 -- --
------- ------- -------
2,830 3,270 1,541
------- ------- -------
Deferred:
Federal (771) (937) (374)
State (85) (233) (102)
------- ------- -------
(856) (1,170) (476)
------- ------- -------
Charge in lieu of taxes attributable to
employee stock option plans 3,343 926 --
------- ------- -------
$ 5,317 $ 3,026 $ 1,065
======= ======= =======
</TABLE>
F-22
<PAGE> 54
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and liabilities are
presented below (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowances $ 533 $ 327
Depreciation 230 314
Federal benefit of state taxes -- 266
Basis of assets for tax purposes in excess
of book for taxable pooling 10,280 --
Deferred compensation 206 657
Benefit and other accruals 256 231
Other 313 163
-------- --------
Total deferred tax assets 11,818 1,958
-------- --------
Deferred tax liabilities:
Change from cash to accrual method of
accounting for income tax purposes (278) (620)
-------- --------
Total deferred tax liabilities (278) (620)
-------- --------
Net deferred tax assets $ 11,540 $ 1,338
======== ========
</TABLE>
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal tax statutory rate 35.0% 35.0% 34.0%
Partnership benefit (2.4) (12.7) (22.0)
State income taxes, net of federal benefit 6.6 3.8 3.5
Tax exempt income (3.1) (3.6) --
Merger costs 2.3 -- --
Other 2.7 -- --
------ ------ ------
41.1% 22.5% 15.5%
====== ====== ======
</TABLE>
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $750,000, which expire beginning in 2010 through
2012.
F-23
<PAGE> 55
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited Pro Forma Income Taxes
The pro forma provision for income taxes reflects the income tax expense that
would have been reported if M&S (a partnership for income tax reporting
purposes) had been a C corporation for each of the years in the three-year
period ended November 30, 1997. The components of pro forma income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-----------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 1,771 $ 4,008 $ 2,612
State 927 1,344 687
Foreign 450 -- --
------- ------- -------
Total current 3,148 5,352 3,299
------- ------- -------
Deferred:
Federal (771) (937) (374)
State (85) (233) (102)
------- ------- -------
Total deferred (856) (1,170) (476)
------- ------- -------
Charge in lieu of taxes
attributable to employee
stock option plans 3,343 926 --
------- ------- -------
Total pro forma
provision for income
taxes $ 5,635 $ 5,108 $ 2,823
======= ======= =======
</TABLE>
The Company's pro forma effective rate differs from statutory federal
income tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-----------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Federal tax statutory rate 35.0% 35.0% 34.0%
State tax expenses, net of
federal benefit 7.1 6.4 5.7
Tax exempt income (3.1) (3.6) --
Merger costs 2.3 -- --
Other 2.1 0.1 1.4
------- ------- -------
Pro forma income tax expense 43.4% 37.9% 41.1%
======= ======= =======
</TABLE>
F-24
<PAGE> 56
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On an unaudited pro forma basis, the tax effects of temporary differences
that give rise to the significant portions of the unaudited pro forma
deferred tax assets and liabilities do not differ significantly from the
historical amounts presented above as of November 30, 1997 and 1996.
Because the merger with M&S was a taxable transaction, during the first
quarter of fiscal 1997, CKS recorded a deferred tax asset and an increase
in stockholders' equity of approximately $9,346,000 for the difference
between the financial statement and tax carrying amounts of M&S's net
assets upon the closing of the transaction.
(10) SIGNIFICANT CUSTOMERS
During the years ended November 30, 1997 and 1996, professional fees from
an automotive manufacturer amounted to approximately $19,442,000 and
$12,429,000, respectively, representing approximately 15% and 14%,
respectively, of total revenues. During the year ended November 30, 1995,
professional fees from a cruise ship operator, the automotive
manufacturer, and a major telecommunications company amounted to
approximately $7,608,000, $8,222,000, and $6,730,000, respectively,
representing approximately 13%, 14%, and 12%, respectively, of total
revenues.
The cruise ship operator owed the Company a total of approximately
$6,036,000 and $6,741,000 as of November 30, 1997 and 1996, respectively.
The automotive manufacturer owed the Company approximately $15,344,000 as
of November 30, 1997.
F-25
<PAGE> 57
CKS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) SUMMARY OF QUARTERLY RESULTS OF OPERATIONS -- UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 2, JUNE 1, AUGUST 31, NOVEMBER 30,
1997 1997 1997 1997
------- ------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues $24,319 $35,911 $39,750 $33,622
Operating expenses:
Direct salaries and related expenses 7,110 8,345 8,870 10,389
Other direct operating expenses 9,157 14,886 17,122 14,010
General and administrative expenses 5,619 8,039 8,390 7,779
Merger costs 1,593 -- 859 --
------- ------- ------- -------
Total operating expenses 23,479 31,270 35,241 32,178
------- ------- ------- -------
Operating income 840 4,641 4,509 $ 1,444
Other income, net 523 267 198 561
------- ------- ------- -------
Income before income taxes 1,363 4,908 4,707 2,005
Income taxes 174 2,026 2,327 790
------- ------- ------- -------
Net income $ 1,189 $ 2,882 $ 2,380 $ 1,215
======= ======= ======= =======
Unaudited pro forma net income and per share data:
Income before income taxes, as reported $ 1,363 $ 4,908 $ 4,707 $ 2,005
Pro forma income taxes 492 2,026 2,327 790
------- ------- ------- -------
Pro forma net income $ 871 $ 2,882 $ 2,380 $ 1,215
======= ======= ======= =======
Pro forma net income per share $ 0.06 $ 0.19 $ 0.15 $ 0.07
======= ======= ======= =======
Shares used in per share computation 15,123 15,164 15,633 16,441
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
FEBRUARY 29, MAY 31, AUGUST 31, NOVEMBER 30,
1996 1996 1996 1996
------------ ------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $14,086 $23,244 $24,682 $26,236
Operating expenses:
Direct salaries and related expenses 4,400 5,349 6,009 7,204
Other direct operating expenses 5,395 10,525 10,922 9,513
General and administrative expenses 3,048 4,147 4,605 5,770
------- ------- ------- -------
Total operating expenses 12,483 20,021 21,536 22,487
------- ------- ------- -------
Operating income 1,243 3,223 3,146 $ 3,749
Other income, net 338 582 445 749
------- ------- ------- -------
Income before income taxes 1,581 3,805 3,591 4,498
Income taxes 349 886 819 972
------- ------- ------- -------
Net income $ 1,232 $ 2,919 $ 2,772 $ 3,526
======= ======= ======= =======
Unaudited pro forma net income and per share data:
Income before income taxes, as reported $ 1,581 $ 3,805 $ 3,591 $ 4,498
Pro forma income taxes 595 1,451 1,366 1,696
------- ------- ------- -------
Pro forma net income $ 986 $ 2,354 $ 2,225 $ 2,802
======= ======= ======= =======
Pro forma net income per share $ 0.07 $ 0.16 $ 0.15 $ 0.19
======= ======= ======= =======
Shares used in per share computation 14,040 14,459 14,569 14,715
======= ======= ======= =======
</TABLE>
F-26
<PAGE> 58
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors and Stockholders
CKS Group, Inc.:
Under date of December 15, 1997, we reported on the consolidated balance sheets
of CKS Group, Inc. and subsidiaries as of November 30, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended November 30, 1997, which
report appears in the November 30, 1997 annual report on Form 10-K of CKS Group,
Inc. In connection with our audits of the aforementioned financial statements,
we also audited the related financial statement schedule included herein. This
financial statement schedule is the responsibility of CKS Group, Inc.'s
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinon, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
San Jose, California
December 15, 1997
S-1
<PAGE> 59
SCHEDULE II
CKS GROUP INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
ACCOUNT DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- --------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended November 30, 1995
Allowance for doubtful accounts....... $ 84 $ 869 $ (85) $ 868
Year ended November 30, 1996
Allowance for doubtful accounts....... $ 868 $ 743 $ (819) $ 792
Year ended November 30, 1997
Allowance for doubtful accounts....... $ 792 $ 1,258 $ (608) $ 1,442
</TABLE>
S-2
<PAGE> 60
CKS GROUP, INC.
FORM 10-K REPORT FOR FISCAL YEAR ENDED NOVEMBER 30, 1997
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT TITLE NUMBER
- ------- --------------------------------------------------------------- ----------
<S> <C> <C>
3.1(1) Certificate of Incorporation of the Registrant.
3.2(1) Bylaws of the Registrant.
10.1(1) Form of Indemnification Agreement entered into between
Registrant and its officers and directors.
10.2(1) The Registrant's 1995 Series B Common Stock Plan, as amended.
10.3(1) The Registrant's 1995 Stock Plan.
10.4(1) The Registrant's 1995 Employee Stock Purchase Plan.
10.5(1) The Registrant's 1995 Director Stock Option Plan.
10.6(1) Amended and Restated Purchase Agreement dated as of
October 17, 1996 by and among the Registrant, The Interpublic
Group of Companies, Inc. and certain stockholders of the
Registrant.
10.7(1) Shareholder Rights Agreement dated as of January 13, 1995 by and
among the Registrant, The Interpublic Group of Companies, Inc.
and certain stockholders of the Registrant.
10.8(1) Lease Agreement dated as of March 8, 1995 between Registrant and
Devcon Associates XVI for Registrant's headquarters facility at
10441 Bandley, Cupertino, CA.
10.9(2) Lease Agreement dated June 11, 1996 between Registrant and
Devcon Associates XVI for Registrant's facility at 10381
Bandley, Cupertino, CA.
10.10(2) Industrial Lease Agreement dated March 27, 1995 between CKS
Partners, Inc. and Lazaneo Partners, L.P. for Registrant's
facility located at 10260 Bandley, Cupertino, CA.
10.11(2) Industrial Lease Agreement dated November 16, 1995 between CKS
Partners, Inc. and The Leonard Company for Registrant's facility
located at 20615 Lazaneo Drive, Cupertino, CA.
10.12(2) Office Lease Agreement dated February 29, 1996, between
Registrant and Shorenstein Realty Investors, L.P. for
Registrant's facility located at 345 Spear Street, San
Francisco, CA.
10.13(1) Exchange Agreement, dated as of December 1, 1994 among
Registrant and certain stockholders of CKS Partners, Inc., CKS
Pictures, Inc. and CKS Interactive, Inc.
10.14(1) Stock Purchase Agreement among the Registrant, The Interpublic
Group of Companies, Inc. and certain stockholders of the
Registrant dated October 16, 1995.
10.15(1) Letter agreement dated October 14, 1995 between the Registrant
and The Interpublic Group of Companies, Inc. ("IPG") regarding
Shelf Registration Statement to be filed to enable IPG to sell
shares of Common Stock of Registrant.
10.16(3)* Agreement and Plan of Reorganization, dated as of June 7,
1996, by and among Registrant, Schell/Mullaney, Inc., a New
York corporation, Michael Schell, Brian Mullaney and First
Interstate Bank of California.
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT TITLE NUMBER
- ------- --------------------------------------------------------------- ----------
<S> <C> <C>
10.17(4) Asset Purchase Agreement, dated as of October 4, 1996, by and
among Registrant, Donovan & Green, Inc., a New York corporation
("Donovan & Green"), DG Acquisition, Inc., a Delaware
corporation ("Sub"), Nancye L. Green and Michael
Donovan.
10.18(4) Amendment No. 1 to Asset Purchase Agreement, dated
December 30, 1996, by and among Registrant, Donovan & Green,
Sub, Nancye L. Green and Michael Donovan.
10.19(5) Acquisition Agreement dated January 31, 1996, by and among
Registrant, Raleigh Acquisition, Inc., a Delaware Corporation,
the current and former partners of McKinney & Silver, a North
Carolina partnership, Robert C. Doherty, Donald D. Maurer and
Chemical Trust Company of California.
10.20(6) Share Acquisition Agreement, dated as of January 8, 1997, by
and among Registrant, EPG Elektronische Publikationen GmbH
("EPG"), Ria 96 Vermogensverwaltungs GmbH ("Sub") and the
shareholders of EPG.
10.21(6) Amendment No. 1 to Share Acquisition Agreement, dated
March 10, 1997, by and among Registrant, EPG, Sub and the
shareholders of EPG.
10.22 Employment Agreement dated February 1, 1997 between Registrant
and Robert T.Clarkson.
10.23 Employment Agreement dated September 25,1997 between
Registrant and Carlton H. Baab
10.24 Employment Agreement dated November 28, 1997 between Registrant
and Richard Villante.
10.25 The Company's 1997 Employee Stock Purchase Plan
11.1 Statement Regarding Computation of Earnings Per Share.
23.1 Consent of KPMG Peat Marwick LLP, independent auditors.
23.2 Consent of Ernst & Young LLP, independent auditors
27.1 Financial Data Schedule
</TABLE>
- ----------
(1) Previously filed as exhibits to Registrant's Registration Statement on
Form S-1 (File No. 33-98312), filed with Securities Exchange Commission
on October 19, 1995.
(2) Previously filed as an exhibit to Registrant's annual report on
Form 10-K for the fiscal year ended November 30, 1996.
(3) Previously filed as an exhibit to Registrant's report on Form 8-K dated
June 7, 1996.
(4) Previously filed as exhibits to Registrant's report on
Form 8-K dated January 3, 1997.
(5) Previously filed as exhibit to Registrant's report on Form 8-K dated
January 31, 1997.
(6) Previously filed as exhibit to Registrant's report on Form 8-K dated
March 10, 1997.
(*) Confidential treatment requested.
<PAGE> 1
EMPLOYMENT AGREEMENT
CKS Group, Inc., a Delaware corporation (hereafter referred to as the
"Employer", the "Company", or "CKS") and Robert T. Clarkson (hereafter referred
to as "Employee") (jointly referred to hereafter as the "parties") wish to enter
into an agreement ("Agreement") pursuant to which CKS will employ the Employee.
Accordingly, in consideration for the benefits and promises set forth herein,
the parties agree as follows:
1. Employment.
1.1 Position. Employee agrees to serve as the Employer's
Executive Vice President of Business Development ("EVP") reporting to the Chief
Executive Officer ("CEO") of CKS with the specific objectives of:
(a) managing the location, evaluation, selection,
negotiation and completion of acquisitions of other businesses that will
contribute to the expansion of the Company's business;
(b) coordinating with the CEO, Chief Financial Officer and
other members of the senior executive team to develop and implement a plan for
such acquisitions that is consistent with the overall objectives of CKS;
(c) assisting in facilitating the transition or
assimilation of businesses acquired through the performance of his duties
hereunder;
(d) participating as a member of the senior executive
management team in developing strategy, annual operating plans and the like;
(e) being available on a consultative basis to other
members of the management team with respect to legal matters, it being
understood that Employee's responsibilities will not as a routine matter include
those associated with the position of general counsel;
(f) hiring, firing, promoting, demoting and disciplining
subordinate personnel whose duties relate to the acquisition of other
businesses, consistent with the Company's human resources policies and
procedures, and other policies;
(g) making regular reports required of other CKS corporate
officers on the Employer's operations to the CEO and to the Board of Directors
of the Company (the "Board"), as well as making other special reports as
required by the CEO and/or the Board;
(h) training such persons as may be designated by the CEO
with respect to any or all aspects of the Employer's operations.
<PAGE> 2
1.2 Time and Effort.
1.2.1 Devotion of energy to the Company. Except as provided in
section 1.2.2 below, during his employment, Employee shall devote his full
energies, interest, abilities, and productive time to the performance of this
Agreement and shall not, without the prior written consent of the Board, render
to others services of any kind for compensation, or engage in any other business
activity that would materially interfere with the performance of his duties
under this Agreement.
1.2.2 Permitted Outside Activities. Notwithstanding section 1.2.1
above, and subject to section 4.2 below, the Employee may, during the term of
this Agreement:
(i) serve on the Board of Directors of two companies
which have been clients of Employee while
Employee was a member of Wilson Sonsini Goodrich
& Rosati ("WSGR");
(ii) provide consulting services on an occasional
basis to up to two other companies which have
been clients of Employee at WSGR;
(iii) provide other services to WSGR as may be
reasonably necessary to facilitate an orderly
transition of clients from Employee to other
attorneys at WSGR; and
(iv) participate in such civic, educational and
religious organizations as do not materially
interfere with the performance of his duties.
The Employee shall provide the Company with the name, address and telephone
number of each company upon whose board of directors he serves or to whom he
provides consulting services in accordance with the provisions of this section.
Except as set forth herein, the Employee shall not accept outside employment or
board of director membership without the prior written consent of the Company.
1.3 Employment for Unspecified Term. This Agreement provides for
employment for an unspecified term, commencing as of the date of this Agreement
and continuing until terminated by either party, as specified in Section 3
below.
1.4 Potential Future Responsibilities. Employee and the Company
contemplate, without any binding obligation, that within 12-18 months Employee
may assume different or additional responsibilities, such as heading an
operating unit of CKS. Employee and the CEO of the Company shall consider the
appropriateness of Employee assuming such new or additional responsibilities at
the time of each annual review as contemplated by section 2.3.1 below.
-2-
<PAGE> 3
2. Compensation and Benefits.
2.1 Basic Salary. Employer shall pay a basic salary to Employee
at the rate of $220,000.00 per year, payable in equal bi-weekly installments in
accordance with Employer's regular payroll practices except as otherwise agreed
in writing between Employer and Employee, provided that no salary shall be due
or payable during any period of unpaid leave, in accordance with Employer's
regular policies as they may exist or be changed from time to time. The
compensation package shall be subject to periodic review, and any modifications
thereto must be in writing signed by the parties to this Agreement.
2.2 Stock Options. On December 6, 1996, the Company granted to
Employee a nonstatutory option to purchase 150,000 shares of CKS Common Stock,
which option is evidenced by the stock option agreement attached hereto as
Exhibit A (the "Option Agreement"). In subsequent years (for example, the year
ending in May 1998), depending upon Employee's performance as evaluated by the
Employer and subject to applicable legal requirements, the Company may grant to
the Employee additional options in a manner consistent with the Employee's
status within the Company and the Company's treatment of other executives.
2.3 Bonus. Employee shall be eligible for bonus compensation as
follows:
2.3.1 Personal Bonus. Employee shall be eligible for an
annual personal bonus of up to 50% of his basic salary, in addition to any
amounts that may be payable to Employee under Section 2.3.2 below, which annual
personal bonus shall depend upon (a) his performance and (b) the availability of
funds for the payment of such a bonus, as determined by the Board. The CEO shall
evaluate the Employee's performance no later than January 31, 1998 and annually
thereafter.
2.3.1.1 Determination of Amount of Personal Bonus. Within
90 days following the commencement of the Employee's employment with the
Company, Employee and the CEO will make a good faith effort to define objective
criteria by which Employee's performance shall be evaluated for purposes of
determining Employee's eligibility for a personal bonus. If the Employee and the
Company are able to define such criteria, the Employee's personal bonus, if any,
shall be calculated pursuant to those criteria. Employee and the Company
acknowledge that definition of such criteria may prove to be impractical,
however, in which case the evaluation of Employee's performance and the
determination of the amount of personal bonus, if any, to be paid the Employee
hereunder shall be at the sole discretion of the CEO and the Board.
2.3.2 Executive Compensation Plan. Employee shall be
eligible to participate in the 1997 Executive Compensation Plan (and similar
executive compensation plans adopted in subsequent years) in accordance with the
terms and conditions of such plans.
-3-
<PAGE> 4
2.4 Employee Benefits.
2.4.1 Fringe Benefits. During his employment, Employee
shall be entitled to life insurance in accordance with Employer's regular
practice, and medical, dental and disability insurance in accordance with
Employer's group insurance plans as they exist from time to time.
2.4.1.1 Effect of disability upon fringe benefits. If
Employee becomes disabled and unable to perform his duties and the Company's
disability insurance policy does not include provisions entitling Employee and
Employee's dependents to continued coverage under the Company's medical and
dental plans (at no cost to Employee or Employee's dependents) for so long as
such disability continues, then the Company shall continue to include Employee
and Employee's dependents on the Company's medical and dental insurance plans
(as they may exist from time to time) at the Company's expense for so long as
such disability continues.
2.4.2 Automobile. During the term of this Agreement,
Employer will provide Employee a monthly automobile allowance for the
acquisition, insurance and maintenance of a vehicle for CKS business use in an
amount equal to the greater of (a) $700 per month or (b) the amount provided to
Chief Financial Officer of the Company.
2.4.3 Vacation And Holidays. Employee shall be entitled to
annual vacation which will accrue at the rate of fifteen (15) working days per
year or such greater amount as is consistent with Employer's executive vacation
practices, subject, however, to the accrual maximums now or hereafter described
in Employer's policies for the accrual of unused vacation, but in no event shall
the accrual maximum for Employee be less than fifteen (15) working days per
year. Employee shall also be entitled to holiday pay for all holidays recognized
by Employer in accordance with the Employer's regular practices.
2.5 Business Expenses. During Employee's employment, Employer
shall reimburse Employee for reasonable out-of-pocket expenses incurred in
connection with Employer's business, including travel and entertainment
expenses, food and lodging while away from home and cellular telephone expenses,
subject to such policies as Employer may from time to time establish for its
employees.
2.6 Withholding. All amounts to be paid by CKS to the Employee
are subject to applicable withholding for taxes, if any. Employer may withhold
from any and all payments, compensation or other remuneration paid to Employee
such amounts as Employer believes it is required to withhold under any federal,
state, local or foreign law, rule or regulation.
2.7 California Bar Association. For so long as Employee continues
to be employed by the Company, the Company will pay all dues and other fees
required for Employee to remain a member in good standing of the California Bar
Association and will also reimburse Employee for expenses incurred in completing
the minimum amount of continuing legal education to enable Employee to remain in
good standing of the California Bar Association.
-4-
<PAGE> 5
3. Termination.
3.1 Termination By Employer For Cause.
3.1.1 Definition of "for cause." As used in section 3.1
and its subparts, the term "for cause" means:
3.1.1.1 Violation of anti-discrimination policy. Any
violation by Employee of Employer's written policies (as they may exist from
time to time) prohibiting discrimination or harassment on the grounds of race,
sex, age or any other legally prohibited basis, provided that, for any violation
by the Employee of such policies occurring after a Change of Control (as defined
in section 3.5), (a) the Employer notifies the Employee of the facts allegedly
constituting the violation within 60 days after it acquires knowledge of such
facts, (b) the Employer affords the Employee 30 days within which to cease the
alleged violation and (c) the Employee fails to cease the alleged violation
within such 30 days.
3.1.1.2 Violation of law. Any violation by Employee of any
local, state, or federal law the violation of which is punishable other than as
an infraction.
3.1.1.3 Misconduct or dishonesty. The commission by
Employee of any material act of misconduct or dishonesty, or any material
failure to comply with the terms of the Proprietary Information Agreement
described in Section 4, below;
3.1.1.4 Material failure to achieve goals. Any material
failure to achieve goals agreed upon in writing by Employee and Employer;
provided, however, that notice of the Employer's intention to terminate
Employee's employment on the grounds of failure to achieve goals shall be given
within the fiscal quarter immediately following that in which such goals were
not achieved.
3.1.1.5 Insubordination or refusal to perform duties or
insubordination. Any insubordination or refusal by the Employee to perform the
duties described in this Agreement, provided that a Change of Control (as
defined in section 3.5) has not occurred.
3.1.2 Compensation due to Employee upon Termination by Employer
for Cause. Except as contemplated by 3.5.3 following a Change of Control, in the
event Employer terminates Employee's employment for cause, as defined in section
3.1.1, then Employee shall be entitled only to his basic salary and bonuses
earned up to and including the date on which CKS notifies him of his termination
for cause; provided, however, that if the cause for which Employee is terminated
is as defined in Section 3.1.1.4, Employer shall continue to include the
Employee and the Employee's dependents as beneficiaries of its group medical,
dental, disability and life insurance for 12 months and shall reimburse the
Employee for the cost of continuing such benefits for an additional 18 months
thereafter pursuant to the Consolidated Omnibus Budget Reconciliation Act
("COBRA") if the Employee elects to continue such benefits at the time of his
termination and executes a Severance and General Release in the form attached
hereto as Exhibit B.
-5-
<PAGE> 6
3.2 Termination By Employer Without Cause. In the event that,
without a Change of Control (as defined in section 3.5 below), the Employer
terminates the Employee's employment without cause, Employee shall be entitled
to severance compensation consisting of:
(i) continuation of Employee's basic salary (as set
forth in Section 2.1 and as it may be increased
from time to time) for twelve months following
the date on which the Employer notifies the
Employee of his termination;
(ii) bonus and incentive compensation equal to total
bonus and incentive compensation received (or
earned, but not yet received) by Employee during
the twelve months preceding the date on which the
Employer notifies the Employee of his
termination;
(iii) reimbursement by the Employer of the cost of
continuing Employee's (and Employee's
dependents') medical, disability, dental, life
and similar benefits for 12 months pursuant to
the Consolidated Omnibus Budget Reconciliation
Act ("COBRA"), if the Employee elects to continue
such benefits at the time of his termination;
(iv) continuation of his car allowance for twelve
months following the date on which the Employer
notifies the Employee of his termination; and
(v) an additional twelve months vesting on all
options held by Employee.
provided that the Employee executes a Severance and General Release Agreement in
the form attached hereto as Exhibit B.
3.2.1 Effect of Employee's subsequent employment. Employee
shall have no obligation to mitigate damages or payments due under this
paragraph; but if Employee obtains full time employment prior to the first
anniversary of the date on which his employment with CKS terminates, any income
earned by the Employee during such twelve months from Employee's new employer
shall be offset against the Company's payment obligations pursuant to section
3.2 above.
3.3 Termination By Employee for Good Reason.
3.3.1 Definition of "for good reason." As used in section
3.3 and its subparts, the term "for good reason" means any circumstances
resulting in the Employee no longer reporting to Mark D. Kvamme as CEO of CKS,
provided that the Employee terminates his employment within 120 days after the
date on which the Employee first reports to someone other than Mr. Kvamme.
-6-
<PAGE> 7
3.3.2 Compensation due to Employee Upon Termination by
Employee for Good Reason. In the event that the Employee terminates his
employment for good reason, as defined in section 3.1.1, the Employee shall be
entitled to severance compensation consisting of:
(i) continuation of Employee's basic salary (as set
forth in Section 2.1 and as it may be increased
from time to time) for twelve months following
the date on which the Employee notifies the
Company of his termination;
(ii) bonus and incentive compensation equal to total
bonus and incentive compensation received (or
earned, but not yet received) by Employee during
the twelve months preceding the date on which the
Employee notifies the Company of his termination;
(iii) reimbursement by the Employer of the cost of
continuing Employee's (and Employee's
dependents') medical, disability, dental, life
and similar benefits for 12 months pursuant to
the Consolidated Omnibus Budget Reconciliation
Act ("COBRA"), if the Employee elects to continue
such benefits at the time of his termination;
(iv) continuation of car allowance for twelve months
following the date on which the Employee notifies
the Company of his termination; and
(v) an additional twelve months vesting on all
options held by Employee.
provided that the Employee executes a Severance and General Release Agreement in
the form attached hereto as Exhibit B.
3.3.3 Effect of Employee's subsequent employment. Employee
shall have no obligation to mitigate damages or payments due under this
paragraph; but if Employee obtains full time employment prior to the first
anniversary of the date on which his employment with CKS terminates, any income
earned by the Employee during such twelve months from Employee's new employer
shall be offset against the Company's payment obligations pursuant to section
3.3.2 above.
3.4 Termination by Employee Without Cause. Employee shall have
the right to terminate his employment without cause by notifying the Company 30
days in advance of the date on which his employment is to terminate. Should
Employee elect to terminate employment without cause (and without Good Reason):
(i) Employee shall not be entitled to severance
compensation of any kind;
-7-
<PAGE> 8
(ii) Employee shall not be entitled to exercise stock
options except for vested shares (which shall be
exercisable in accordance with the Option
Agreement); and
(iii) Employee shall forfeit any and all right to any
bonus compensation pursuant to Section 2.3 during
the year in which employment is terminated;
provided, however, that if Employee elects to
terminate employment under this section within
the 90 days prior to the end of the Employer's
fiscal year, Employee shall receive a pro rata
share of the bonus which would be provided to
Employee under the 1977 Executive Compensation
Plan (or any similar compensation plan in
subsequent years) in accordance with the terms
and conditions of such plan; provided, however,
that if Employee has earned bonus compensation
for the prior fiscal year, but such bonus has not
yet been paid to Employee, Employee shall be
entitled to such bonus compensation.
3.5 Involuntary or Constructive Termination Following a Change of
Control.
3.5.1 Definition of "Constructive Termination." As used in
section 3.5 and its subparts, "Constructive Termination" shall mean:
(a) without the Employee's express written consent, (i)
a significant reduction of the Employee's duties, position or responsibilities
relative to the Employee's duties, position or responsibilities in effect
immediately prior to such reduction, or (ii) the removal of the Employee from
such position, duties and responsibilities, unless the Employee is provided with
a comparable position, duties and responsibilities;
(b) a substantial reduction, without the Employee's
express written consent, of the facilities and perquisites (including office
space and location) available to the Employee immediately prior to such
reduction;
(c) a reduction by the Company of the Employee's base
salary or bonuses paid in comparison with the prior year;
(d) a material reduction by the Company in the kind or
level of employee benefits to which the Employee is entitled, with the result
that the Employee's overall benefits package is significantly reduced;
(e) any reduction, after a Change of Control, in the
disability benefits available to Employee prior to the Change of Control;
(f) the relocation of the Employee to a facility or a
location more than twenty (20) miles from his current location without the
Employee's express written consent, or
-8-
<PAGE> 9
(g) the failure of the Company to obtain the assumption
of this Agreement by any successors contemplated in Section 6.10 below;
(h) an increase of 10% or more in the number of days
which the Employee travels outside of Santa Clara, San Mateo, San Francisco,
Santa Cruz, Contra Costa or Alameda Counties, in comparison with the number of
such days in the 12 months preceding the Change of Control (or, if Employee has
not been employed for 12 months at the time of the Change of Control, the number
of days determined by dividing the days Employee did travel by the number of
days Employee was employed, and multiplying the result by 365);
provided that, with respect to subparagraphs (b), (d) and (e)
above, (i) the Employee notifies the Company of the facts allegedly constituting
his Constructive Termination and his intention to terminate his employment
within 30 days after he acquires knowledge of such facts, (ii) the Employee
affords the Company 30 days within which to remedy the alleged Constructive
Termination and (iii) the Company fails to remedy the alleged Constructive
Termination within such 30 days.
3.5.2 "Change of Control." As used in section 3.5 and its
subparts, "Change of Control" shall mean:
(a) the approval by shareholders of the Company of a
merger or consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the approval by
the shareholders of the Company of a plan of complete liquidation of the Company
or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets.
(b) Any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, but
excluding officers of CKS and the Director of the Interpublic Group) becoming
the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing 50% or more of the total
voting power represented by the Company's then outstanding voting securities;
(c) A change in the composition of the Board of
Directors of the Company occurring within a two-year period, as a result of
which fewer than a majority of the directors are Incumbent directors. "Incumbent
Directors" shall mean directors who either (i) are directors of the Company as
of the date hereof, or (ii) are appointed, or nominated for election to the
Board of Directors of the Company with the affirmative votes of at least a
majority of the Incumbent Directors at the time of such election or nomination
in connection with an actual or threatened proxy contest relating to the
election of directors of the Company.
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<PAGE> 10
3.5.3 Acceleration of Vesting Following Change of
Control. On the effectiveness of any Change of Control, the vesting of all
options granted to Employee by the Company shall be accelerated so that, as to
each such option, one half of the shares subject to such option which were not
otherwise vested at the effective time of the Change of Control shall become
vested at such effective time, and the remaining unvested shares shall continue
to vest thereafter at the same rate (number of shares per month) as was in
effect prior to the Change of Control.
3.5.4 Compensation due to Employee Upon Involuntary or
Constructive Termination Following a Change in Control. If, following a Change
of Control as defined above, the Employee's employment is terminated
involuntarily (for any reason) or by Constructive Termination, the Employer
shall
(i) pay to Employee in a single lump sum an amount
equal to (A) 12 months basic salary (at the rate
in effect prior to the Change of Control or the
date of termination, whichever is greater), plus
(B) the total amount paid to or earned by
Employee as incentive compensation or bonus
payments during the twelve months preceding the
Change of Control or date of termination,
whichever is greater,
(ii) reimburse Employee for the cost of continuing
Employee's (and Employee's dependents') medical,
disability, dental, life and similar benefits for
12 months pursuant to the Consolidated Omnibus
Budget Reconciliation Act ("COBRA"), if the
Employee elects to continue such benefits at the
time of his termination;
(iii) continue for a period of twelve months to provide
the car allowance, professional association dues
and continuing legal education benefits enjoyed
by Employee immediately prior to the Change of
Control, and
(iv) accelerate the vesting of all then unvested
options held by the Employee at the date of
termination such that those shares shall vest
immediately and Employee shall have two years
following the date of such termination in which
to exercise all options held by Employee at the
date of such termination;
provided that the Employee executes a Severance and General Release Agreement in
the form attached hereto as Exhibit B. In the event a Change of Control occurs
before Employee has been employed for twelve (12) months, Employee shall for
purposes of clause (i) above be deemed to have earned the maximum bonus for
which he is eligible during the twelve (12) months preceding Change in Control.
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<PAGE> 11
3.5.5 Effect of Employee's subsequent employment. Employee
shall have no obligation to mitigate damages or payments due under this
paragraph, nor shall any amounts earned by Employee be offset against the
amounts payable to Employee under Section 3.5 and its subsections.
3.6 Termination By Death or Permanent Disability.
3.6.1 Definition of "Permanent Disability." For the
purpose of section 3.7 and its subparts, the term "Permanent Disability" means
the Employee's inability to perform his duties hereunder (with or without
reasonable accommodation) for 120 or more working days during any twelve-month
period.
3.6.2 Effect of Death or Permanent Disability of Employee.
The Employee's employment will terminate automatically upon the death or
Permanent Disability of Employee, in which case Employee or his estate will be
entitled only to compensation earned through the date of such death or Permanent
Disability; provided, however, that, in the event of a Permanent Disability,
Employer will continue to include Employee and Employee's dependents on the
Company's medical and dental insurance plans (as they may exist from time to
time) for so long as such disability continues at the Company's expense.
3.7 Effect of Dispute Regarding Nature of Termination. In
the event that the parties disagree on the nature of the termination of the
Employee's employment (such as whether a termination was for cause or not) and
submit such dispute to arbitration, the effective date of the termination of the
Employee's employment shall be determined as if no dispute arose. In the event
that the parties disagree on whether a Constructive Termination or Change in
Control has occurred and submit such dispute to arbitration, the Employee shall
be deemed to have terminated his employment without cause in the event if the
arbitrator determines that a Constructive Termination or Change in Control did
not occur.
4. Trade Secrets and Confidential Information.
4.1 Proprietary Information. Employee recognizes that as
an executive of the Employer, Employee occupies a position of trust with respect
to much business information of a secret or confidential nature which is the
property of the Employer and which will be imparted to Employee from time to
time in the course of Employee's duties. Employee therefore agrees that Employee
shall not, at any time, whether in the course of his employment or thereafter,
use or disclose directly or indirectly to any person outside the Employer any of
such information, except as required in the ordinary course of Employee's duties
under this Agreement. Concurrently with the execution of this Agreement,
Employee shall sign the Proprietary Information Agreement attached hereto as
Exhibit C (the "Proprietary Information Agreement").
4.2 Non-Competition with Employer. During his employment, and so
long as this contract remains in effect and any payments or benefits are
provided to the Employee, the Employee shall not, directly or indirectly,
promote, participate, or engage in any activity or other business
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<PAGE> 12
competitive with Employer's business, or any of its affiliates, and shall not
solicit the Company's employees or customers, or the employees or customers of
any of Employer's affiliates, nor shall Employee engage in any act or conduct
which creates, or appears to create, a conflict of interest with Employer,
except as may be approved in writing by the CEO; provided, however, that this
section 4.2 shall not apply if Employee is terminated involuntarily or by
constructive termination following a Change of Control.
5. Miscellaneous.
5.1 Notice. All notices, requests and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed given (a) upon receipt, if given by personal delivery; (b) upon delivery,
if given by electronic facsimile, with proof of receipt; and (c) upon the third
business day following mailing, if mailed by deposit in the United States mail,
with certification and postal charges prepaid, addressed as follows (or such
other address as either party may provide to the other from time to time).
If to Employer:
CKS Group, Inc.
1044 Bandley Drive
Cupertino, CA 95014
Attn: President and Chief Executive Officer
Fax: (408) 366-5120
If to Employee:
Robert T. Clarkson
2744 Doverton Square
Mountain View, CA 94040
Fax: (415) 988-9268
5.2 Delegation of Duties. Employee may not delegate the services
and obligations he is required to perform under this Agreement. Any attempt by
Employee to delegate his duties hereunder shall be null and void.
5.3 Amendment. This Agreement may be modified or amended only by
and to the extent of the written agreement of Employer and Employee.
5.4 Previous Agreements. This Agreement, together with the
Proprietary Information Agreement and the Stock Option Agreement, contains the
entire agreement between the parties and supersedes all prior oral and written
agreements, understandings, commitments, and practices between the parties,
including all prior employment or consulting agreements, whether or not fully
performed before the date of this Agreement.
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<PAGE> 13
5.5 Governing Law. Except as provided by section 5.8 below, this
Agreement shall be governed by and construed in accordance with the internal
laws of the State of California.
5.6 Section Headings. The various section headings are inserted
for convenience of reference only and shall not affect the meaning or
interpretation of this Agreement or any section thereof.
5.7 Severability. If provision of this Agreement is held by a
court of competent jurisdiction to be invalid, illegal or unenforceable, such
provision will be deemed amended to the minimum extent necessary to conform to
applicable law so as to be valid, legal and enforceable; if such provision
cannot be amended as provided above, it will be stricken and the remainder of
this Agreement will remain in full force and effect.
5.8 Arbitration. It is further understood and agreed that if, at
any time, a violation of any term of this Agreement is asserted by any party
hereto, that party shall have the right to seek specific performance of that
term and/or any other necessary and proper relief, including but not limited to
damages, before an arbitrator as set forth below. Each party will pay its own
costs and attorneys fees. The Company shall pay the costs of the arbitrators.
The parties agree that if they have any dispute as to the terms of or
obligations created by this Agreement, or should either party to this Agreement
have any dispute as to Employee's termination or compensation, or should
Employee allege that Employer or any of its employees, managers, officers,
directors or other representatives has violated any of Employee's rights under
state or federal civil rights laws including, but not limited to, the California
Fair Employment and Housing Act (Cal. Gov. Code Sections 12900, et seq.), the
Civil Rights Act of 1964 (42 U.S.C. Sections 2000e, et seq.), the Equal Pay Act
of 1963 (29 U.S.C. Sections 206(d)), the Americans With Disabilities Act of 1990
(42 U.S.C. Sections 12101, et seq., or California Labor Code Section 1102.1,
they will submit any such dispute to final and binding arbitration before a
neutral arbitrator selected from the roster of Judicial Arbitration and
Mediation Services, or before any other neutral, and pursuant to any other such
procedures, as the parties may agree upon. To be timely, any such dispute must
be referred to arbitration within twelve (12) months of the incident or
complaint giving rise to the dispute; disputes not referred to arbitration
within such twelve (12) twelve month period shall be deemed waived, and the
arbitrator shall deny any untimely claims. THE PARTIES EXPRESSLY AGREE THAT SUCH
ARBITRATION SHALL BE THE EXCLUSIVE, FINAL AND BINDING REMEDY FOR ANY DISPUTE
INVOLVING OR RELATED TO AN ALLEGED BREACH OF THIS AGREEMENT, EMPLOYMENT
TERMINATION, COMPENSATION, THE VIOLATION OF MR. CLARKSON'S CIVIL RIGHTS, OR ANY
OTHER MATTER ARISING OUT OF OR RELATED TO MR. CLARKSON'S EMPLOYMENT, AND HEREBY
EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR MAY HAVE TO A COURT TRIAL OR A JURY TRIAL
OF ANY SUCH DISPUTE. In making an award, the arbitrator shall have no power to
add to, delete from or modify this Agreement, or to enforce purported unwritten
agreements or prior agreements, or to construe implied terms or covenants into
the Agreement, the parties being in agreement that no such oral or implied terms
or covenants or unwritten agreements or prior agreements are intended by them to
remain enforceable, to the extent they may ever have been so. In reaching his or
her decision, the arbitrator shall adhere to the relevant law and applicable
precedent and shall have no power to vary therefrom. In
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<PAGE> 14
construing this Agreement, its language shall be given a fair and reasonable
construction in accordance with the intention of the parties, and without regard
to, or the aid of, Section 1654 of the California Civil Code. At the time of
issuing a decision, the arbitrator shall (in the decision or separately) make
specific findings of fact and shall set forth such facts as support the
decision, as well as his conclusions of law, and the reasons and bases for his
opinion, and such a decision incorporating these elements shall be a condition
precedent to its enforcement. The decision of the arbitrator shall be final and
binding; provided, however, that in the event the arbitrator exceeds the powers
or jurisdiction here conferred, or fails to issue a decision in conformance
herewith, it is specifically agreed that the aggrieved party may petition a
court of competent jurisdiction to correct or vacate such award, and that the
arbitrator's act of exceeding his or her powers shall be grounds for granting
such relief. It is further agreed by the parties that venue for any arbitration
proceedings shall be Santa Clara County, California. This arbitration clause is
entered pursuant to, and shall be governed by, the Federal Arbitration Act (9
U.S.C. Section 1, et seq.), but in all other respects this agreement shall be
governed by the provisions of California law. If any one or more provisions of
this arbitration clause shall for any reason be held invalid or unenforceable,
it is the specific intent of the parties that such provisions shall be modified
to the minimum extent necessary to make it or its application valid and
enforceable.
5.9 Waiver. Waiver of any default or breach of this Agreement or
of any warranty, representation, covenant or obligation contained herein shall
not be construed as a waiver of any subsequent breach.
5.10 Successors.
(a) Company's Successors. Any successor of the Company
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets shall assume the Company's obligations under
this Agreement and agree expressly to perform the Company's obligations under
this Agreement in the same manner and to the same extent as the Company would be
required to perform such obligations in the absence of a succession. For all
purposes under this Agreement, the term "Company" shall include any successor to
the Company's business and/or assets which executes and delivers the assumption
agreement described in this subsection (a) or which becomes bound by the terms
of this Agreement by operation of law.
(b) Employee's Successors. Except as otherwise provided in
this Agreement, the terms of this Agreement and all rights of the Employee
hereunder shall inure to the benefit of, and be enforceable by, the Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
5.11 Notice of Termination. Any termination of this Agreement by
the Company for cause or by the Employee with cause or without cause or
following a Change in Control or Constructive Termination shall be communicated
by a notice of termination to the other party hereto given in accordance with
this Section 5.11. Such notice shall indicate the specific termination provision
in this Agreement relied upon, shall set forth in reasonable detail the facts
and
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<PAGE> 15
circumstances claimed to provide a basis for termination under the provision so
indicated, and shall specify an effective date of termination which shall be no
more than 30 days after the giving of such notice.
IN WITNESS WHEREOF, the parties have executed this Agreement in one or
more counterparts which, taken together, shall constitute one agreement.
EMPLOYER:
CKS GROUP, INC.
By:/s/ Mark D. Kvamme
-----------------------------------------
Mark D. Kvamme
President and Chief Executive Officer
Date: February 1, 1997
---------------------------------------
EMPLOYEE:
/s/ Robert T. Clarkson
--------------------------------------------
Robert T. Clarkson
Date: February 1, 1997
---------------------------------------
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<PAGE> 1
EMPLOYMENT AGREEMENT
CKS Group, Inc., a Delaware corporation (hereafter referred to as the
"Employer", the "Company", or "CKS") and Carlton H. Baab (hereafter referred to
as "Employee") (jointly referred to hereafter as the "parties") wish to enter
into an agreement ("Agreement") pursuant to which CKS will continue to employ
the Employee. Accordingly, in consideration for the benefits and promises set
forth herein, the parties agree as follows:
1. Employment.
1.1 Position. Employee agrees to serve as the Employer's
Executive Vice President of Finance and Chief Financial Officer ("CFO")
reporting to the Chief Executive Officer ("CEO") of CKS with the specific
objectives of:
(a) managing all the financial and accounting operations
of the business, including but not limited to the treasury, financial planning
and analysis and accounting operations functions;
(b) managing the investor relations function and serving
as the key contact for investor relations with the sell and buy side analyst
communities;
(c) assisting in the development and implementation of the
Company's acquisition strategy;
(d) participating as a member of the senior executive
management team in developing strategy, annual operating plans and the like;
(e) hiring, firing, promoting, demoting and disciplining
subordinate personnel whose duties relate to the finance, accounting and
treasury functions, consistent with the Company's human resources policies and
procedures, and other policies;
(f) making regular reports required of other CKS corporate
officers on the Employer's operations to the CEO and to the Board of Directors
of the Company (the "Board"), as well as making other special reports as
required by the CEO and/or the Board;
(g) training such persons as may be designated by the CEO
with respect to any or all aspects of the Employer's operations.
1.2 Time and Effort. During his employment, Employee shall devote
his full energies, interest, abilities, and productive time to the performance
of this Agreement and shall not, without the prior written consent of the Board,
render to others services of any kind for compensation, or engage in any other
business activity that would materially interfere with the performance of his
duties under this Agreement. Notwithstanding this section 1.2 and subject to
<PAGE> 2
section 4.2 below, the Employee may, during the term of this Agreement,
participate in such civic, educational and religious organizations as do not
materially interfere with the performance of his duties. The Employee shall not
accept outside employment or board of director membership without the prior
written consent of the Company.
1.3 Employment for Unspecified Term. This Agreement provides for
employment for an unspecified term, commencing as of the date of this Agreement
and continuing until terminated by either party, as specified in Section 3
below.
2. Compensation and Benefits.
2.1 Basic Salary. Employer shall pay a basic salary to Employee
at the rate of $225,000.00 per year, payable in equal bi-weekly installments in
accordance with Employer's regular payroll practices except as otherwise agreed
in writing between Employer and Employee, provided that no salary shall be due
or payable during any period of unpaid leave, in accordance with Employer's
regular policies as they may exist or be changed from time to time. The
compensation package shall be subject to periodic review, and any modifications
thereto must be in writing signed by the parties to this Agreement.
2.2 Stock Options. The Company has previously granted to Employee
options to purchase common stock of the Company as follows:
<TABLE>
<CAPTION>
Date of Grant Number of Shares Exercise Price Per Share
- ------------- ---------------- ------------------------
<S> <C> <C>
7/28/95 40,000 $ 1.00
6/1/96 40,000* 32.00
12/17/96 17,500 26.00
</TABLE>
*Repriced to $20.00 per share on November 18, 1996
The option agreements evidencing such grants are referred to in this Agreement
as the Option Agreements.
In subsequent years, depending upon Employee's performance as evaluated by the
Employer and subject to applicable legal requirements, the Company may grant to
the Employee additional options in a manner consistent with the Employee's
status within the Company and the Company's treatment of other executives.
2.3 Bonus. Employee shall be eligible for bonus compensation as follows:
2.3.1 Personal Bonus. Employee shall be eligible for an
annual personal bonus of up to 50% of his basic salary, in addition to any
amounts that may be payable to Employee
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<PAGE> 3
under Section 2.3.2 below, which annual personal bonus shall depend upon (a) his
performance and (b) the availability of funds for the payment of such a bonus,
as determined by the Board. The CEO shall evaluate the Employee's performance
annually.
2.3.1.1 Determination of Amount of Personal Bonus. Within
90 days following the date of this Agreement, Employee and the CEO will make a
good faith effort to define objective criteria by which Employee's performance
shall be evaluated for purposes of determining Employee's eligibility for a
personal bonus. If the Employee and the Company are able to define such
criteria, the Employee's personal bonus, if any, shall be calculated pursuant to
those criteria. Employee and the Company acknowledge that definition of such
criteria may prove to be impractical, however, in which case the evaluation of
Employee's performance and the determination of the amount of personal bonus, if
any, to be paid the Employee hereunder shall be at the sole discretion of the
CEO and the Board.
2.3.2 Executive Compensation Plan. Employee shall be
eligible to participate in the 1997 Executive Compensation Plan (and similar
executive compensation plans adopted in subsequent years) in accordance with the
terms and conditions of such plans.
2.4 Employee Benefits.
2.4.1 Fringe Benefits. During his employment, Employee
shall be entitled to life insurance in accordance with Employer's regular
practice, and medical, dental and disability insurance in accordance with
Employer's group insurance plans as they exist from time to time.
2.4.1.1 Effect of disability upon fringe benefits. If
Employee becomes disabled and unable to perform his duties and the Company's
disability insurance policy does not include provisions entitling Employee and
Employee's dependents to continued coverage under the Company's medical and
dental plans (at no cost to Employee or Employee's dependents) for so long as
such disability continues, then the Company shall continue to include Employee
and Employee's dependents on the Company's medical and dental insurance plans
(as they may exist from time to time) at the Company's expense for so long as
such disability continues.
2.4.2 Automobile. During the term of this Agreement,
Employer will provide Employee a monthly automobile allowance for the
acquisition, insurance and maintenance of a vehicle for CKS business use in an
amount equal to $1,000 per month (or such greater amount as Employer may
determine).
2.4.3 Vacation And Holidays. Employee shall be entitled to
annual vacation which will accrue at the rate of fifteen (15) working days per
year or such greater amount as is consistent with Employer's executive vacation
practices, subject, however, to the accrual maximums now or hereafter described
in Employer's policies for the accrual of unused vacation, but in no event shall
the accrual maximum for Employee be less than fifteen (15) working days per
year. Employee shall also be entitled to holiday pay for all holidays recognized
by Employer in accordance with the Employer's regular practices.
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<PAGE> 4
2.5 Business Expenses. During Employee's employment, Employer
shall reimburse Employee for reasonable out-of-pocket expenses incurred in
connection with Employer's business, including travel and entertainment
expenses, food and lodging while away from home and cellular telephone expenses,
subject to such policies as Employer may from time to time establish for its
employees.
2.6 Withholding. All amounts to be paid by CKS to the Employee
are subject to applicable withholding for taxes, if any. Employer may withhold
from any and all payments, compensation or other remuneration paid to Employee
such amounts as Employer believes it is required to withhold under any federal,
state, local or foreign law, rule or regulation.
3. Termination.
3.1 Termination By Employer For Cause.
3.1.1 Definition of "for cause." As used in section 3.1
and its subparts, the term "for cause" means:
3.1.1.1 Violation of anti-discrimination policy. Any
violation by Employee of Employer's written policies (as they may exist from
time to time) prohibiting discrimination or harassment on the grounds of race,
sex, age or any other legally prohibited basis, provided that, for any violation
by the Employee of such policies occurring after a Change of Control (as defined
in section 3.5), (a) the Employer notifies the Employee of the facts allegedly
constituting the violation within 60 days after it acquires knowledge of such
facts, (b) the Employer affords the Employee 30 days within which to cease the
alleged violation and (c) the Employee fails to cease the alleged violation
within such 30 days.
3.1.1.2 Violation of law. Any violation by Employee of any
local, state, or federal law the violation of which is punishable other than as
an infraction.
3.1.1.3 Misconduct or dishonesty. The commission by
Employee of any material act of misconduct or dishonesty, or any material
failure to comply with the terms of the Proprietary Information Agreement
described in Section 4, below;
3.1.1.4 Material failure to achieve goals. Any material
failure to achieve goals agreed upon in writing by Employee and Employer;
provided, however, that notice of the Employer's intention to terminate
Employee's employment on the grounds of failure to achieve goals shall be given
within the fiscal quarter immediately following that in which such goals were
not achieved.
3.1.1.5 Insubordination or refusal to perform duties or
insubordination. Any insubordination or refusal by the Employee to perform the
duties described in this Agreement, provided that a Change of Control (as
defined in section 3.5) has not occurred.
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<PAGE> 5
3.1.2 Compensation due to Employee upon Termination by
Employer for Cause. Except as contemplated by 3.5.3 following a Change of
Control, in the event Employer terminates Employee's employment for cause, as
defined in section 3.1.1, then Employee shall be entitled only to his basic
salary and bonuses earned up to and including the date on which CKS notifies him
of his termination for cause; provided, however, that if the cause for which
Employee is terminated is as defined in Section 3.1.1.4, Employer shall continue
to include the Employee and the Employee's dependents as beneficiaries of its
group medical, dental, disability and life insurance for 12 months and shall
reimburse the Employee for the cost of continuing such benefits for an
additional 18 months thereafter pursuant to the Consolidated Omnibus Budget
Reconciliation Act ("COBRA") if the Employee elects to continue such benefits at
the time of his termination and executes a Severance and General Release in the
form attached hereto as Exhibit B.
3.2 Termination By Employer Without Cause. In the event that,
without a Change of Control (as defined in section 3.5 below), the Employer
terminates the Employee's employment without cause, Employee shall be entitled
to severance compensation consisting of:
(i) continuation of Employee's basic salary (as set
forth in Section 2.1 and as it may be increased
from time to time) for twelve months following
the date on which the Employer notifies the
Employee of his termination;
(ii) bonus and incentive compensation equal to total
bonus and incentive compensation received (or
earned, but not yet received) by Employee during
the twelve months preceding the date on which the
Employer notifies the Employee of his
termination;
(iii) reimbursement by the Employer of the cost of
continuing Employee's (and Employee's
dependents') medical, disability, dental, life
and similar benefits for 12 months pursuant to
the Consolidated Omnibus Budget Reconciliation
Act ("COBRA"), if the Employee elects to continue
such benefits at the time of his termination;
(iv) continuation of his car allowance for twelve
months following the date on which the Employer
notifies the Employee of his termination; and
(v) an additional twelve months vesting on all
options held by Employee.
provided that the Employee executes a Severance and General Release Agreement in
the form attached hereto as Exhibit B.
3.2.1 Effect of Employee's subsequent employment. Employee
shall have no obligation to mitigate damages or payments due under this
paragraph; but if Employee obtains
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<PAGE> 6
full time employment prior to the first anniversary of the date on which his
employment with CKS terminates, any income earned by the Employee during such
twelve months from Employee's new employer shall be offset against the Company's
payment obligations pursuant to section 3.2 above.
3.3 Termination By Employee for Good Reason.
3.3.1 Definition of "for good reason." As used in section
3.3 and its subparts, the term "for good reason" means any circumstances
resulting in the Employee no longer reporting to Mark D. Kvamme as CEO of CKS,
provided that the Employee terminates his employment within 120 days after the
date on which the Employee first reports to someone other than Mr. Kvamme.
3.3.2 Compensation due to Employee Upon Termination by
Employee for Good Reason. In the event that the Employee terminates his
employment for good reason, as defined in section 3.1.1, the Employee shall be
entitled to severance compensation consisting of:
(i) continuation of Employee's basic salary (as set
forth in Section 2.1 and as it may be increased
from time to time) for twelve months following
the date on which the Employee notifies the
Company of his termination;
(ii) bonus and incentive compensation equal to total
bonus and incentive compensation received (or
earned, but not yet received) by Employee during
the twelve months preceding the date on which the
Employee notifies the Company of his termination;
(iii) reimbursement by the Employer of the cost of
continuing Employee's (and Employee's
dependents') medical, disability, dental, life
and similar benefits for 12 months pursuant to
the Consolidated Omnibus Budget Reconciliation
Act ("COBRA"), if the Employee elects to continue
such benefits at the time of his termination;
(iv) continuation of car allowance for twelve months
following the date on which the Employee notifies
the Company of his termination; and
(v) an additional twelve months vesting on all
options held by Employee.
provided that the Employee executes a Severance and General Release Agreement in
the form attached hereto as Exhibit B.
3.3.3 Effect of Employee's subsequent employment. Employee
shall have no obligation to mitigate damages or payments due under this
paragraph; but if Employee obtains full time employment prior to the first
anniversary of the date on which his employment with CKS
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<PAGE> 7
terminates, any income earned by the Employee during such twelve months from
Employee's new employer shall be offset against the Company's payment
obligations pursuant to section 3.3.2 above.
3.4 Termination by Employee Without Cause. Employee shall have
the right to terminate his employment without cause by notifying the Company 30
days in advance of the date on which his employment is to terminate. Should
Employee elect to terminate employment without cause (and without Good Reason):
(i) Employee shall not be entitled to severance
compensation of any kind;
(ii) Employee shall not be entitled to exercise stock
options except for vested shares (which shall be
exercisable in accordance with the Option
Agreements); and
(iii) Employee shall forfeit any and all right to any
bonus compensation pursuant to Section 2.3
during the year in which employment is
terminated; provided, however, that if Employee
elects to terminate employment under this
section within the 90 days prior to the end of
the Employer's fiscal year, Employee shall
receive a pro rata share of the bonus which
would be provided to Employee under the 1977
Executive Compensation Plan (or any similar
compensation plan in subsequent years) in
accordance with the terms and conditions of such
plan; provided, however, that if Employee has
earned bonus compensation for the prior fiscal
year, but such bonus has not yet been paid to
Employee, Employee shall be entitled to such
bonus compensation.
3.5 Involuntary or Constructive Termination Following a Change
of Control.
3.5.1 Definition of "Constructive Termination." As used in
section 3.5 and its subparts, "Constructive Termination" shall mean:
(a) without the Employee's express written consent, (i)
a significant reduction of the Employee's duties, position or responsibilities
relative to the Employee's duties, position or responsibilities in effect
immediately prior to such reduction, or (ii) the removal of the Employee from
such position, duties and responsibilities, unless the Employee is provided with
a comparable position, duties and responsibilities;
(b) a substantial reduction, without the Employee's
express written consent, of the facilities and perquisites (including office
space and location) available to the Employee immediately prior to such
reduction;
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<PAGE> 8
(c) a reduction by the Company of the Employee's base
salary or bonuses paid in comparison with the prior year;
(d) a material reduction by the Company in the kind or
level of employee benefits to which the Employee is entitled, with the result
that the Employee's overall benefits package is significantly reduced;
(e) any reduction, after a Change of Control, in the
disability benefits available to Employee prior to the Change of Control;
(f) the relocation of the Employee to a facility or a
location more than twenty (20) miles from his current location without the
Employee's express written consent, or
(g) the failure of the Company to obtain the assumption of
this Agreement by any successors contemplated in Section 6.10 below;
(h) an increase of 10% or more in the number of days which
the Employee travels outside of Santa Clara, San Mateo, San Francisco, Santa
Cruz, Contra Costa or Alameda Counties, in comparison with the number of such
days in the 12 months preceding the Change of Control (or, if Employee has not
been employed for 12 months at the time of the Change of Control, the number of
days determined by dividing the days Employee did travel by the number of days
Employee was employed, and multiplying the result by 365);
provided that, with respect to subparagraphs (b), (d) and (e)
above, (i) the Employee notifies the Company of the facts allegedly constituting
his Constructive Termination and his intention to terminate his employment
within 30 days after he acquires knowledge of such facts, (ii) the Employee
affords the Company 30 days within which to remedy the alleged Constructive
Termination and (iii) the Company fails to remedy the alleged Constructive
Termination within such 30 days.
3.5.2 "Change of Control." As used in section 3.5 and its
subparts, "Change of Control" shall mean:
(a) the approval by shareholders of the Company of a
merger or consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the approval by
the shareholders of the Company of a plan of complete liquidation of the Company
or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets.
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<PAGE> 9
(b) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended, but excluding
officers of CKS and the Director of the Interpublic Group) becoming the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing 50% or more of the total
voting power represented by the Company's then outstanding voting securities;
(c) A change in the composition of the Board of Directors
of the Company occurring within a two-year period, as a result of which fewer
than a majority of the directors are Incumbent directors. "Incumbent Directors"
shall mean directors who either (i) are directors of the Company as of the date
hereof, or (ii) are appointed, or nominated for election to the Board of
Directors of the Company with the affirmative votes of at least a majority of
the Incumbent Directors at the time of such election or nomination in connection
with an actual or threatened proxy contest relating to the election of directors
of the Company.
3.5.3 Acceleration of Vesting Following Change of Control. On
the effectiveness of any Change of Control, the vesting of all options granted
to Employee by the Company shall be accelerated so that, as to each such option,
one half of the shares subject to such option which were not otherwise vested at
the effective time of the Change of Control shall become vested at such
effective time, and the remaining unvested shares shall continue to vest
thereafter at the same rate (number of shares per month) as was in effect prior
to the Change of Control.
3.5.4 Compensation due to Employee Upon Involuntary or
Constructive Termination Following a Change in Control. If, following a Change
of Control as defined above, the Employee's employment is terminated
involuntarily (for any reason) or by Constructive Termination, the Employer
shall
(i) pay to Employee in a single lump sum an amount
equal to (A) 12 months basic salary (at the rate
in effect prior to the Change of Control or the
date of termination, whichever is greater), plus
(B) the total amount paid to or earned by
Employee as incentive compensation or bonus
payments during the twelve months preceding the
Change of Control or date of termination,
whichever is greater,
(ii) reimburse Employee for the cost of continuing
Employee's (and Employee's dependents') medical,
disability, dental, life and similar benefits for
12 months pursuant to the Consolidated Omnibus
Budget Reconciliation Act ("COBRA"), if the
Employee elects to continue such benefits at the
time of his termination;
(iii) continue for a period of twelve months to provide
the car allowance, professional association dues
and continuing legal education benefits enjoyed
by Employee immediately prior to the Change of
Control, and
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(iv) accelerate the vesting of all then unvested
options held by the Employee at the date of
termination such that those shares shall vest
immediately;
provided that the Employee executes a Severance and General Release Agreement in
the form attached hereto as Exhibit B.
3.5.5 Effect of Employee's subsequent employment. Employee shall
have no obligation to mitigate damages or payments due under this paragraph, nor
shall any amounts earned by Employee be offset against the amounts payable to
Employee under Section 3.5 and its subsections.
3.6 Termination By Death or Permanent Disability.
3.6.1 Definition of "Permanent Disability." For the purpose of
section 3.7 and its subparts, the term "Permanent Disability" means the
Employee's inability to perform his duties hereunder (with or without reasonable
accommodation) for 120 or more working days during any twelve-month period.
3.6.2 Effect of Death or Permanent Disability of Employee. The
Employee's employment will terminate automatically upon the death or Permanent
Disability of Employee, in which case Employee or his estate will be entitled
only to compensation earned through the date of such death or Permanent
Disability; provided, however, that, in the event of a Permanent Disability,
Employer will continue to include Employee and Employee's dependents on the
Company's medical and dental insurance plans (as they may exist from time to
time) for so long as such disability continues at the Company's expense.
3.7 Effect of Dispute Regarding Nature of Termination. In the event
that the parties disagree on the nature of the termination of the Employee's
employment (such as whether a termination was for cause or not) and submit such
dispute to arbitration, the effective date of the termination of the Employee's
employment shall be determined as if no dispute arose. In the event that the
parties disagree on whether a Constructive Termination or Change in Control has
occurred and submit such dispute to arbitration, the Employee shall be deemed to
have terminated his employment without cause in the event if the arbitrator
determines that a Constructive Termination or Change in Control did not occur.
4. Trade Secrets and Confidential Information.
4.1 Proprietary Information. Employee recognizes that as an
executive of the Employer, Employee occupies a position of trust with respect to
much business information of a secret or confidential nature which is the
property of the Employer and which will be imparted to Employee from time to
time in the course of Employee's duties. Employee therefore agrees that Employee
shall not, at any time, whether in the course of his employment or thereafter,
use or disclose directly or indirectly to any person outside the Employer any of
such information, except as
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required in the ordinary course of Employee's duties under this Agreement.
Concurrently with the execution of this Agreement, Employee shall sign the
Proprietary Information Agreement attached hereto as Exhibit C (the "Proprietary
Information Agreement").
4.2 Non-Competition with Employer. During his employment, and so
long as this contract remains in effect and any payments or benefits are
provided to the Employee, the Employee shall not, directly or indirectly,
promote, participate, or engage in any activity or other business competitive
with Employer's business, or any of its affiliates, and shall not solicit the
Company's employees or customers, or the employees or customers of any of
Employer's affiliates, nor shall Employee engage in any act or conduct which
creates, or appears to create, a conflict of interest with Employer, except as
may be approved in writing by the CEO; provided, however, that this section 4.2
shall not apply if Employee is terminated involuntarily or by constructive
termination following a Change of Control.
5. Miscellaneous.
5.1 Notice. All notices, requests and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed given (a) upon receipt, if given by personal delivery; (b) upon delivery,
if given by electronic facsimile, with proof of receipt; and (c) upon the third
business day following mailing, if mailed by deposit in the United States mail,
with certification and postal charges prepaid, addressed as follows (or such
other address as either party may provide to the other from time to time).
If to Employer:
CKS Group, Inc.
1044 Bandley Drive
Cupertino, CA 95014
Attn: President and Chief Executive Officer
Fax: (408) 366-5120
If to Employee:
Carlton H. Baab
15165 El Camino Grande
Saratoga, CA 95070
5.2 Delegation of Duties. Employee may not delegate the services
and obligations he is required to perform under this Agreement. Any attempt by
Employee to delegate his duties hereunder shall be null and void.
5.3 Amendment. This Agreement may be modified or amended only by
and to the extent of the written agreement of Employer and Employee.
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5.4 Previous Agreements. This Agreement, together with the
Proprietary Information Agreement and the Stock Option Agreements, contains the
entire agreement between the parties and supersedes all prior oral and written
agreements, understandings, commitments, and practices between the parties,
including all prior employment or consulting agreements, whether or not fully
performed before the date of this Agreement.
5.5 Governing Law. Except as provided by section 5.8 below, this
Agreement shall be governed by and construed in accordance with the internal
laws of the State of California.
5.6 Section Headings. The various section headings are inserted
for convenience of reference only and shall not affect the meaning or
interpretation of this Agreement or any section thereof.
5.7 Severability. If provision of this Agreement is held by a
court of competent jurisdiction to be invalid, illegal or unenforceable, such
provision will be deemed amended to the minimum extent necessary to conform to
applicable law so as to be valid, legal and enforceable; if such provision
cannot be amended as provided above, it will be stricken and the remainder of
this Agreement will remain in full force and effect.
5.8 Arbitration. It is further understood and agreed that if, at
any time, a violation of any term of this Agreement is asserted by any party
hereto, that party shall have the right to seek specific performance of that
term and/or any other necessary and proper relief, including but not limited to
damages, before an arbitrator as set forth below. Each party will pay its own
costs and attorneys fees. The Company shall pay the costs of the arbitrators.
The parties agree that if they have any dispute as to the terms of or
obligations created by this Agreement, or should either party to this Agreement
have any dispute as to Employee's termination or compensation, or should
Employee allege that Employer or any of its employees, managers, officers,
directors or other representatives has violated any of Employee's rights under
state or federal civil rights laws including, but not limited to, the California
Fair Employment and Housing Act (Cal. Gov. Code Sections 12900, et seq.), the
Civil Rights Act of 1964 (42 U.S.C. Sections 2000e, et seq.), the Equal Pay Act
of 1963 (29 U.S.C. Sections 206(d)), the Americans With Disabilities Act of 1990
(42 U.S.C. Sections 12101, et seq., or California Labor Code Section 1102.1,
they will submit any such dispute to final and binding arbitration before a
neutral arbitrator selected from the roster of Judicial Arbitration and
Mediation Services, or before any other neutral, and pursuant to any other such
procedures, as the parties may agree upon. To be timely, any such dispute must
be referred to arbitration within twelve (12) months of the incident or
complaint giving rise to the dispute; disputes not referred to arbitration
within such twelve (12) twelve month period shall be deemed waived, and the
arbitrator shall deny any untimely claims. THE PARTIES EXPRESSLY AGREE THAT SUCH
ARBITRATION SHALL BE THE EXCLUSIVE, FINAL AND BINDING REMEDY FOR ANY DISPUTE
INVOLVING OR RELATED TO AN ALLEGED BREACH OF THIS AGREEMENT, EMPLOYMENT
TERMINATION, COMPENSATION, THE VIOLATION OF MR. BAAB'S CIVIL RIGHTS, OR ANY
OTHER MATTER ARISING OUT OF OR RELATED TO MR. BAAB'S EMPLOYMENT, AND HEREBY
EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR MAY HAVE TO A COURT TRIAL OR A JURY TRIAL
OF ANY SUCH DISPUTE. In making an award, the
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<PAGE> 13
arbitrator shall have no power to add to, delete from or modify this Agreement,
or to enforce purported unwritten agreements or prior agreements, or to construe
implied terms or covenants into the Agreement, the parties being in agreement
that no such oral or implied terms or covenants or unwritten agreements or prior
agreements are intended by them to remain enforceable, to the extent they may
ever have been so. In reaching his or her decision, the arbitrator shall adhere
to the relevant law and applicable precedent and shall have no power to vary
therefrom. In construing this Agreement, its language shall be given a fair and
reasonable construction in accordance with the intention of the parties, and
without regard to, or the aid of, Section 1654 of the California Civil Code. At
the time of issuing a decision, the arbitrator shall (in the decision or
separately) make specific findings of fact and shall set forth such facts as
support the decision, as well as his conclusions of law, and the reasons and
bases for his opinion, and such a decision incorporating these elements shall be
a condition precedent to its enforcement. The decision of the arbitrator shall
be final and binding; provided, however, that in the event the arbitrator
exceeds the powers or jurisdiction here conferred, or fails to issue a decision
in conformance herewith, it is specifically agreed that the aggrieved party may
petition a court of competent jurisdiction to correct or vacate such award, and
that the arbitrator's act of exceeding his or her powers shall be grounds for
granting such relief. It is further agreed by the parties that venue for any
arbitration proceedings shall be Santa Clara County, California. This
arbitration clause is entered pursuant to, and shall be governed by, the Federal
Arbitration Act (9 U.S.C. Section 1, et seq.), but in all other respects this
agreement shall be governed by the provisions of California law. If any one or
more provisions of this arbitration clause shall for any reason be held invalid
or unenforceable, it is the specific intent of the parties that such provisions
shall be modified to the minimum extent necessary to make it or its application
valid and enforceable.
5.9 Waiver. Waiver of any default or breach of this Agreement or
of any warranty, representation, covenant or obligation contained herein shall
not be construed as a waiver of any subsequent breach.
5.10 Successors.
(a) Company's Successors. Any successor of the Company
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets shall assume the Company's obligations under
this Agreement and agree expressly to perform the Company's obligations under
this Agreement in the same manner and to the same extent as the Company would be
required to perform such obligations in the absence of a succession. For all
purposes under this Agreement, the term "Company" shall include any successor to
the Company's business and/or assets which executes and delivers the assumption
agreement described in this subsection (a) or which becomes bound by the terms
of this Agreement by operation of law.
(b) Employee's Successors. Except as otherwise provided in
this Agreement, the terms of this Agreement and all rights of the Employee
hereunder shall inure to the benefit of, and be enforceable by, the Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
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<PAGE> 14
5.11 Notice of Termination. Any termination of this Agreement by
the Company for cause or by the Employee with cause or without cause or
following a Change in Control or Constructive Termination shall be communicated
by a notice of termination to the other party hereto given in accordance with
this Section 5.11. Such notice shall indicate the specific termination provision
in this Agreement relied upon, shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination under the provision
so indicated, and shall specify an effective date of termination which shall be
no more than 30 days after the giving of such notice.
5.12 Conflict with Option Agreements. To the extent that the
provisions of this Agreement conflict with the provisions of any of the Option
Agreements (or any agreement evidencing any option granted in the future to
Employee), the terms of this Agreement shall control, and this Agreement shall
be deemed to be an amendment to any such Option Agreement (or subsequent
agreement evidencing any option granted in the future to Employee) to the extent
of such conflict, so as to make the provisions of any such Option Agreement or
other agreement consistent with this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement in one or
more counterparts which, taken together, shall constitute one agreement.
EMPLOYER:
CKS GROUP, INC.
By:/s/ Mark D. Kvamme
-----------------------------------------
Mark D. Kvamme
President and Chief Executive Officer
Date: September 25, 1997
---------------------------------------
EMPLOYEE:
/s/Carlton H. Baab
--------------------------------------------
Carlton H. Baab
Date: September 25, 1997
---------------------------------------
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AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
WHEREAS, CKS Group, Inc., a California corporation (hereinafter
referred to as the "Employer" or "CKS Group") and Richard Villante ("Employee")
(jointly referred to hereafter as the "parties") wish to enter into an
employment agreement ("Agreement");
WHEREAS, CKS Group and Employee entered into an Employment
Agreement in March 1997 and desire to amend and restate such Employment
Agreement in its entirety;
NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL BENEFITS TO EACH
OF THE PARTIES, THEY HEREBY AGREE AS FOLLOWS:
1. Employment.
1.1 Position. Employee agrees to serve as the Employer's
President of "Company to be named" ("President"), reporting to Mark D. Kvamme,
Chairman and Chief Executive Officer ("C.E.O.") of CKS Group, Inc. Employee
shall manage the day-to-day operations of the "Company to be named" Company
(hereinafter referred to as the "Company"), with the specific objectives of:
(a) maintaining and extending terms of existing and
acquired contracts, including identification of merger and acquisition
opportunities;
(b) keeping all CKS Group, Inc. executive officers
informed of all material facts and developments concerning the Company's
operations;
(c) hiring, firing, promoting, demoting and
discipline of non-managerial operations personnel, consistent with CKS Group,
Inc.'s human resources policies and procedures, and other policies of the
Company;
(d) making regular reports on the Company's
operations to the C.E.O. and to the Board of Directors of CKS Group, Inc. (the
"Board"), as well as making other special reports as required by the C.E.O.
and/or the Board;
(e) training such persons as may be designated by
the C.E.O. with respect to any or all aspects of the Company's operations
including a successor President;
(f) in the case of Employee's departure from
employment with the Company, working with other executive officers of the
Company in order to ensure a smooth transition to a successor President for the
Company; and
<PAGE> 2
(g) responding as required for participating in the
acquisition of new entities and in the supervision of those newly acquired
entities as is designated by the C.E.O.
1.2 Time and Effort
(a) Subject to Paragraph 1.2(b) and 1.2(c) below,
during his employment, Employee shall devote his full energies, interest,
abilities, and productive time to the performance of this Agreement and shall
not, without the C.E.O.'s prior written consent, render to others services of
any kind for compensation, or engage in any other business activity that would
materially interfere with the performance of his duties under this Agreement.
(b) Current Outside Employment. The parties hereby
agree that, during the term of this Agreement, Employee may hold the position of
director at the Cabrini Medical Foundation. As stated in Paragraph 1.2(a) above,
Employee shall not accept outside employment or board of director membership
other than as provided in this paragraph without the prior written consent of
the CKS Group, Inc. Board of Directors, with the exception of the foundation
referenced in this paragraph.
(c) Current Outside Investments. The parties hereby
acknowledge that Employee has engaged in stock purchases and other investments
prior to the date of execution of this Agreement in companies which compete with
CKS Group, Inc. and its affiliates. Effective on the date of execution of this
Agreement, Employee shall not invest in or purchase shares in any advertising or
marketing company, not including CKS Group, Inc. or its affiliates, which
performs work substantially similar to that engaged in by CKS Group, Inc. or its
affiliates, without the prior written authorization of the CKS Group, Inc. Board
of Directors. This includes investments made directly by the Employee or
investments made by the Employee through an investment advisor, investment
counselor, or person with similar title and responsibilities. This does not
include any holdings in a mutual fund or similar investment which includes
shares of advertising and marketing companies within its investment portfolio,
or acquisition of additional shares in companies in which Employee has invested
as of the date of execution of this Agreement by way of stock splits or stock
repurchase plans.
(d) Disclosure of Information. Employee recognizes
that as an executive of the Employer, Employee occupies a position of trust with
respect to much business information of a secret or confidential nature which is
the property of the Employer and which will be imparted to Employee from time to
time in the course of Employee's duties. Employee therefore agrees that Employee
shall not, at any time, whether in the course of his employment or thereafter,
use or disclose directly or indirectly to any person outside the Employer any of
such information, except as required in the ordinary course of Employee's duties
under this Agreement.
1.3 Duration of Employment. This Agreement provides for
employment for a five (5) year term, commencing on a date mutually agreed to by
employee and employer an in no event
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later than May 12, 1997, (the "Start Date") and continuing until terminated by
either party, as specified in Section 3 below.
1.4 Location of Corporate Offices. The Company's corporate
headquarters shall be located in New York city, New York. Employee's
recommendation for the corporate office space must be approved by Mark D. Kvamme
in advance of its establishment.
1.5 Financial Advisor. Employee shall be permitted to hire a
financial consultant who shall provide financial advice and assistance to the
Company and who will jointly report to Employee and the Chief Financial Officer
(C.F.O.) of CKS Group, Inc. The C.F.O. of CKS Group, Inc. will supervise this
financial consultant on a day-to-day basis. Employee's final selection of a
financial consultant must be approved by Mark D. Kvamme and the C.F.O. of CKS
Group, Inc.
1.6 First Year Expectations. Employee's primary responsibility
shall be the acquisition and management of Company subsidiaries. It is expected
during the first 12 months of Employee's employment that Employee shall identify
and evaluate appropriate acquisition targets for consideration by the Company
and CKS Group, Inc. Employee's performance shall be evaluated on the basis of
Employee's acquisition efforts and the financial performance of the acquired
entities, based upon individual financial goals set at or near the time of
acquisition.
2. Compensation and Benefits.
2.1 Basic Salary. Beginning on the Start Date, Employer shall pay
a basic salary to Employee at the rate of $250,000.00 per year, payable in equal
bi-weekly installments in accordance with Employer's regular payroll practices
except as otherwise agreed between Employer and Employee, provided that no
salary shall be due or payable during any period of unpaid leave, in accord with
Employer's regular policies as they may exist or be changed from time to time.
The compensation package shall be subject to periodic review, and any
modifications thereto must be in a writing signed by the parties to this
Agreement.
2.1.1 Initial Stock Options. Subject to the provisions of Section
3 of this Agreement, after the Start Date Employee shall receive an option on
75,000 shares of CKS Group, Inc. Common Stock, which shall vest in accordance
with the terms and conditions of the CKS Group, Inc. 1995 Stock Option Plan, and
subject to any legal or other requirements imposed by law, the corporation's
governing documents, or any relevant stock subscription agreements or rules of
the corporation.
2.2 Bonus. Employee shall be entitled to bonus compensation,
based upon Employee's performance, as follows:
(a) Personal Incentive. Employee's performance will
be formally evaluated on or about the expiration of one year following the Start
Date. As a result of said
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performance evaluation, Employee will be granted a bonus of additional options
on shares of CKS Group, Inc. Common Stock, depending upon Employee's performance
as evaluated by the C.E.O. The criterion for said performance evaluation will be
established within the first 30 days of Employee's employment through subsequent
negotiations between Employee and Employer; provided, however, such agreement
shall be reduced to writing and signed by the parties hereto. This option shall
be offered in accordance with and subject to the terms and conditions of the CKS
Group, Inc. 1995 Stock Option Plan and any legal or other requirements imposed
by law, the corporation's governing documents, or any relevant stock
subscription agreements or rules of the corporation. In subsequent years, and
depending upon Employee's performance as evaluated by the Employer and subject
to the same legal requirements, Employee will be eligible for the options
provided to Employer's other executives pursuant to the 1995 Executive
Compensation Plan.
(b) Objective Bonus. It is expected that the
newly-created Company will achieve specified gross revenue goals at 15% pretax
operating profit under current accounting practices, or as those practices are
changed by Employer from time to time. If these gross revenue and profitability
goals are met or exceeded by the end of any relevant fiscal year, then
additional bonus amounts will be allocated to the Company Management Team bonus
pool. The gross revenue goals and bonus pool allocation procedure will be agreed
within 30 days after the Start Date; provided, however, such agreement shall be
reduced to writing and signed by the parties hereto. This section is not
intended to create any third party beneficiaries to this Agreement.
2.3 Employee Benefits.
(a) Fringe Benefits. During his employment,
Employee shall be entitled to receive the Employee benefits described below (so
long as, and to the extent that, Employer continues to provide these benefits),
including life insurance with an indemnity amount in accordance with Employer's
regular practice, and medical, dental, vision and disability insurance in
accordance with Employer's plans as they exist or are modified from time to
time.
(b) Automobile. Beginning on the Start Date and
continuing for the duration of the term of this Agreement, Employer will provide
Employee a monthly automobile subsidy for the acquisition, insurance and
maintenance of a vehicle for Company business use of $833.00 per month, payable
in equal installments in accordance with the Employer's regular payroll
practices.
(c) Parking Allowance. Beginning on the Start Date
and continuing for the duration of the term of this Agreement, Employer shall
reimburse Employee for reasonable monthly expenses incurred in order to obtain
parking at the location of Employee's office, not to exceed $300.00 per month.
(d) Vacation. Employee shall also be entitled to
annual vacation which will accrue at the rate of the greater of either twenty
(20) days per annum, or such greater amount as is consistent with Employer's
executive vacation practices, subject, however, to the accrual maximums
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now or hereafter set by Employer's policies for the accrual of unused vacation,
but in no event shall the accrual maximum for Employee be less than twenty (20)
days. Employee shall also be entitled to holiday pay for all holidays recognized
by Employer.
2.4 Business Expenses. During Employee's employment, Employer
shall reimburse Employee for reasonable out-of-pocket expenses incurred in
connection with Employer's business, including travel and entertainment
expenses, food, and lodging while away from home, subject to such policies as
Employer may from time to time establish for its employees.
2.5 Club Membership. Upon approval of the C.E.O., during
Employee's employment, Employer shall reimburse Employee for reasonable
out-of-pocket expenses, up to $5,000.00, incurred in connection with Employee's
membership at appropriate club(s) and/or organization(s).
2.6 Withholding. All amounts indicated above are before any
required withholding for taxes. Employer may withhold from any and all payments,
compensation or other remuneration paid to Employee such amounts as Employer
believes it is required to withhold under any federal, state, local or foreign
law, rule or regulation.
3. Termination.
3.1 Termination Reasons. This Agreement may be terminated at-will
by either party with or without cause or notice. Terms and conditions of
employment with the Company may be modified at the sole discretion of the
Company with or without cause or notice. Examples of the types of terms and
conditions of employment which are within the sole discretion of the Company
include, but are not limited to, promotion, demotion, transfers, compensation,
benefits, discipline, layoff or recall, job duties and responsibilities,
production standards, alteration or cessation of operations, and any other terms
and conditions that the Company determines to be necessary for the safe,
efficient and economic operation of its business.
3.2 Severance Benefits. If this Agreement is terminated by either
party for any or no reason, and Employee executes a severance agreement and
release of claims in a form to be specified by the CKS Group, Inc. Board of
Directors, such as that set forth in Exhibit A of this Agreement, Employee will
receive the severance benefits in an amount equal to six (6) months salary as
defined in section 2.1 above.
(a) Except as provided in this section, employee
shall not be entitled to compensation of any kind, and Employee shall forfeit
any and all right to stock options not yet accrued and any bonus compensation
during the year in which employment is terminated.
(b) The parties hereto may elect to continue
Employee's employment as a consultant or other employment relationship during
the severance period, in which case the terms
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<PAGE> 6
and conditions of employment, including but not limited to those contained in
Sections 4 and 5 of this Agreement, will still apply.
3.3 Termination By Death or Disability. This Agreement will
terminate automatically upon the death or permanent disability of Employee which
cannot be reasonably accommodated by Employer, in which case Employee or his
estate will be entitled only to compensation earned through the date of such
death or permanent disability, and Employee shall forfeit any and all right to
stock options not yet accrued and any bonus compensation during the year in
which employment is terminated.
4. Trade Secrets and Confidential Information.
4.1 Confidential Information. Employee hereby acknowledges that
in order to perform Employee's duties as an employee of Employer, Employee has
received, and will in the future be given access to, certain confidential,
secret and proprietary information in the form of records, data, specifications,
formulas, technology, inventions, devices, products, methods, know-how,
processes, financial data, customer and/or vendor information and practices,
customer lists, marketing methods, cost information, employee information and
trade secrets (collectively, "Confidential Information") developed and owned by
Employer concerning the business, products and/or services of Employer.
4.2 Non-Disclosure. Except as otherwise specifically provided
herein, Employee will not, directly or indirectly, disclose, or cause or permit
to be disclosed, to any person or to any entity whatsoever any Confidential
Information acquired pursuant to Employee's employment with Employer (whether
acquired prior to or subsequent to the execution of this Agreement).
4.3 Permitted Disclosure. Employee may disclose the Confidential
Information only to the extent reasonably necessary and required in the
discharge of Employee's duties as an employee of Employer.
4.4 Duplication. Employee shall not, without the prior written
consent of the C.E.O., duplicate or cause or permit to be duplicated, any
material (including, without limitation, written, typed, or printed material, or
material embodied in other forms including embodiment on computer discs and
tapes) included in the Confidential Information covered hereby.
4.5 Restricted Use. Except as specifically provided herein,
Employee will not, directly or indirectly, use, or permit to be used for his
personal benefit, at any time or in any manner whatsoever, any Confidential
Information acquired pursuant to Employee's employment with Employer, or
pursuant to Employee's capacity as consultant under Section 3. Employee shall
not at any time or in any manner, unless required by Employee's job
responsibilities or by law, publish, disclose or use for Employee's own benefit
(or authorize anyone else to publish, disclose or make use of), any Confidential
Information unless and until such Confidential Information shall cease to be
secret as evidenced by general public knowledge.
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4.6 Return of Information. Employee will immediately, upon the
request of Employer, return to Employer all originals, copies or other summaries
of any Confidential Information, or other information, received under this
Agreement or otherwise. Employee will not retain, or cause or permit to be
retained, any copies or other embodiments of the materials so returned.
4.7 Non-Competition with Employer. During his employment, or
during Employee's performance of any services as a consultant under Section 3.2,
above, and so long as this contract remains in effect and any payments are being
made to the Employee, Employee shall not, directly or indirectly, promote,
participate, or engage in any activity or other business competitive with
Employer's business, or any of its affiliates, and shall not solicit Employer's
employees or customers, or the employees or customers of any of Employer's
affiliates, nor shall Employee engage in any act or conduct which creates, or
appears to create, a conflict of interest with Employer.
5. Covenants. Employee covenants and agrees that unless approved
in advance expressly in writing by the C.E.O. or the Board, during the term of
his employment and/or during the term of any subsequent consulting arrangement
with the Employer, he will refrain from:
(a) Any direct or indirect communication in which
Employee expressly or impliedly makes any statement or conveys any information
derogatory of CKS Group, Inc. or its affiliates, successors or assigns.
(b) Any direct or indirect communication with
anyone for the purpose of, or on the subject of, procuring, assisting, defeating
or identifying any possible transaction in which a substantial amount of the
assets of CKS Group, Inc. or its affiliates, successors or assigns might be
acquired.
(c) Any direct or indirect communication with, or
disclosure to, anyone of the interest, if any, of CKS Group, Inc. or its
affiliates, successors or assigns in pursuing discussions regarding a potential
acquisition of other businesses or enterprises, or of the terms, conditions or
other facts with respect to any such possible acquisition or financing, except
as is required by Employee's job responsibilities as described in Section 1.1.
(d) Any direct or indirect communication with any
investment banker, or other potential acquisition or financing intermediary
regarding CKS Group, Inc., or its affiliates, successors or assigns, except as
is required in the ordinary course and scope of Employee's duties.
(e) Any direct or indirect communication with
anyone other than authorized personnel or representatives of CKS Group, Inc.,
including, but not limited to, competitors of CKS Group, Inc. or its affiliates,
regarding the financial condition, business strategies, or plans of CKS Group,
Inc., its affiliates, successors or assigns, except as required to carry out
non-material operations of CKS Group, Inc. or its affiliates.
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<PAGE> 8
(f) Any direct or indirect disclosure of any
information regarding the business or operations of CKS Group, Inc. or its
affiliates, successors or assigns, including but not limited to confidential
financial, customer, or personnel information, except as expressly permitted by
the C.E.O. and to the extent such disclosure can be made without violating the
trade secret/proprietary information agreement above.
6. Miscellaneous.
6.1 Notice. All notices, requests and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed given (a) upon receipt, if given by personal delivery; (b) upon delivery,
if given by electronic facsimile; and (c) upon the third business day following
mailing, if mailed by deposit in the United States mail, with certification and
postal charges prepaid, addressed as follows:
If to Employer:
CKS Group, Inc.
10441 Bandley Drive
Cupertino, CA 95014
Attn: Chairman and Chief Executive Officer
Tel: (408) 366-5100
Fax: (408) 366-5120
If to Employee:
Richard Villante
c/o Neil Prupis, Esq.
Lampf, Lipkind, Prupis, Petigrow & LaBue
80 Main Street
W. Orange, NJ 97052
Tel: (201) 325-2100
6.2 Delegation of Duties. Employee may not delegate the services
and obligations he is required to perform under this Agreement. Any attempt by
Employee to delegate his duties hereunder shall be null and void.
6.3 Amendment. This Agreement may be modified or amended only by
and to the extent that such modification or amendments is reduced to a written
agreement executed by
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<PAGE> 9
Employer and Employee, and references this Agreement and identifies itself as a
modification or amendment to this Agreement.
6.4 Previous Agreements. This Agreement contains the entire
agreement between the parties and supersedes all prior oral and written
agreements, understandings, commitments, and practices between the parties,
including all prior employment or consulting agreements, whether or not fully
performed before the date of this Agreement.
6.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of California.
6.6 Section Headings. The various section headings are inserted
for convenience of reference only and shall not affect the meaning or
interpretation of this Agreement or any section thereof.
6.7 Severability. If provision of this Agreement is held by a
court of competent jurisdiction to be invalid, illegal or unenforceable, such
provision will be deemed amended to the minimum extent necessary to conform to
applicable law so as to be valid, legal and enforceable; if such provision
cannot be amended as provided above, it will be stricken and the remainder of
this Agreement will remain in full force and effect.
6.8 Arbitration. It is further understood and agreed that if, at
any time, a violation of any term of this Agreement is asserted by any party
hereto, that party shall have the right to seek specific performance of that
term and/or any other necessary and proper relief, including but not limited to
damages, before an arbitrator as set forth below, and the prevailing party shall
be entitled to recover its reasonable costs and attorneys' fees. The prevailing
party in said litigation shall be the same party who would be entitled to an
award of costs and attorneys' fees in civil litigation. The parties agree that
if they have any dispute as to the terms of or obligations created by this
Agreement, or should either party to this Agreement have any dispute as to
Employee's termination or compensation, or should Employee allege that Employer
or any of its employees, managers, officers, directors or other representatives
has violated any of Employee's rights under state or federal civil rights laws
including, but not limited to, the California Fair Employment and Housing Act
(Cal. Gov. Code Sections 12900, et seq.), the Civil Rights Act of 1964 (42
U.S.C. Sections 2000e, et seq.), the Equal Pay Act of 1963 (29 U.S.C. Sections
206(d)), the Americans With Disabilities Act of 1990 (42 U.S.C. Sections 12101,
et seq.), or California Labor Code Section 1102.1, they will submit any such
dispute to final and binding arbitration pursuant to the Commercial Arbitration
Rules of the American Arbitration Association before a neutral arbitrator
selected from the list of Commercial Arbitrators maintained by that Association,
or before any other neutral, and pursuant to any other such procedures, as the
parties may agree upon. To be timely, any such dispute must be referred to
arbitration within twelve (12) months of the incident or complaint giving rise
to the dispute; disputes not referred to arbitration within such twelve (12)
month period shall be deemed waived, and the arbitrator shall deny any untimely
claims. THE PARTIES EXPRESSLY AGREE THAT SUCH ARBITRATION SHALL BE THE
EXCLUSIVE, FINAL AND BINDING
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<PAGE> 10
REMEDY FOR ANY DISPUTE INVOLVING OR RELATED TO AN ALLEGED BREACH OF THIS
AGREEMENT, EMPLOYMENT TERMINATION, COMPENSATION, THE VIOLATION OF MR. VILLANTE'S
CIVIL RIGHTS, OR ANY OTHER MATTER ARISING OUT OF OR RELATED TO MR. VILLANTE'S
EMPLOYMENT, AND HEREBY EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR MAY HAVE TO A
COURT TRIAL OR A JURY TRIAL OF ANY SUCH DISPUTE. In making an award, the
arbitrator shall have no power to add to, delete from or modify this Agreement,
or to enforce purported unwritten agreements or prior agreements, or to construe
implied terms or covenants into the Agreement, the parties being in agreement
that no such oral or implied terms or covenants or unwritten agreements or prior
agreements are intended by them to remain enforceable, to the extent they may
ever have been so. In reaching his or her decision, the arbitrator shall adhere
to the relevant law and applicable precedent, and shall have no power to vary
therefrom. In construing this Agreement, its language shall be given a fair and
reasonable construction in accordance with the intention of the parties, and
without regard to, or the aid of, section 1654 of the California Civil Code. At
the time of issuing a decision, the arbitrator shall (in the decision or
separately) make specific findings of fact and shall set forth such facts as
support the decision, as well as his conclusions of law, and the reasons and
bases for his opinion, and such a decision incorporating these elements shall be
a condition precedent to its enforcement. The decision of the arbitrator shall
be final and binding, provided, however, that in the event the arbitrator
exceeds the powers or jurisdiction here conferred, or fails to issue a decision
in conformance herewith, it is specifically agreed that the aggrieved party may
petition a court of competent jurisdiction to correct or vacate such award, and
that the arbitrator's act of exceeding his or her powers shall be grounds for
granting such relief. It is further agreed by the parties that venue for any
arbitration proceedings shall be Santa Clara County, California. This
arbitration clause is entered pursuant to, and shall be governed by, the Federal
Arbitration Act (9 U.S.C. Section 1, et seq.), but in all other respects this
agreement shall be governed by the provisions of California law. If any one or
more provisions of this arbitration clause shall for any reason be held invalid
or unenforceable, it is the specific intent of the parties that such provisions
shall be modified to the minimum extent necessary to make it or its application
valid and enforceable.
6.9 Termination of Prior Agreement. CKS Group and Employee agree
that this Agreement sets forth the sole and entire agreement on the subject
matter among CKS Group and Employee. Upon execution of this Agreement by CKS
Group and Employee, all prior Employment Agreements between CKS Group and
Employee shall be terminated in their entirety and superseded and governed by
this Agreement.
6.10 Waiver. Waiver of any default or breach of this Agreement or
of any warranty, representation, covenant or obligation contained herein shall
not be construed as a waiver of any subsequent breach.
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<PAGE> 11
6.11 As used through this Agreement, "the "Employer" shall
include CKS Group, Inc., a Delaware corporation (including its subsidiaries,
affiliated companies, officers, directors, managers, employees, agents,
attorneys, consultants, advisors, representatives, successors and assigns).
IN WITNESS WHEREOF, the parties have executed this Agreement in one or
more counterparts which, taken together, shall constitute one agreement.
EMPLOYER:
"Company to be Named" (the "Company")
by: CKS GROUP, INC.
Date: November 28, 1997 By: /s/ Mark D. Kvamme
----------------------------------------
Mark D. Kvamme
Chairman and Chief Executive Officer
CKS GROUP, INC.
Date: November 28, 1997 By: /s/ Mark D. Kvamme
----------------------------------------
Mark D. Kvamme
Chairman and Chief Executive Officer
EMPLOYEE:
Date: November 28, 1997 By: /s/ Richard Villante
----------------------------------------
Richard Villante
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<PAGE> 1
CKS GROUP, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean CKS Group, Inc., a Delaware corporation,
and any Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
earnings and commissions, exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which has
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
Period.
(i) "Exercise Date" shall mean the last day of each Offering
Period.
(j) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
<PAGE> 2
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day on the date of such determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable, or;
(2) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(k) "Offering Period" shall mean a period of approximately six
(6) months during which an option granted pursuant to the Plan may be exercised,
commencing on the first Trading Day on or after April 1 and terminating on the
last Trading Day in the period ending the following September 30, or commencing
on the first Trading Day on or after October 1 and terminating on the last
Trading Day in the period ending the following March 31. The first Offering
Period under the Plan shall commence with the first Trading Day on or after May
1, 1998 and on the last Trading Day on or before September 30, 1998. The
duration of Offering Periods may be changed pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
(m) "Purchase Price" shall mean an amount equal to 85% of the
Fair Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(n) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(o) "Subsidiary" shall mean a corporation, domestic or foreign,
of which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(p) "Trading Day" shall mean a day on which national stock
exchanges and the Nasdaq System are open for trading.
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<PAGE> 3
3. Eligibility.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding,
no Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive
Offering Periods with a new Offering Period commencing on the first Trading Day
on or after April 1 and October 1 each year, or on such other date as the Board
shall determine, and continuing thereafter until terminated in accordance with
Section 20 hereof. The first Offering Period under the Plan shall commence with
the first Trading Day on or after May 1, 1998. The Board shall have the power to
change the duration of Offering Periods (including the commencement dates
thereof) with respect to future offerings without stockholder approval if such
change is announced at least five (5) days prior to the scheduled beginning of
the first Offering Period to be affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding fifteen percent (15%) of
the Compensation which he or she receives on each pay day during the Offering
Period.
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<PAGE> 4
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to zero percent (0%) at any
time during an Offering Period. Payroll deductions shall recommence at the rate
provided in such participant's subscription agreement at the beginning of the
first Offering Period which is scheduled to end in the following calendar year,
unless terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or
at the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Offering Period more than 900
shares (subject to any adjustment pursuant to Section 19), and provided further
that such purchase shall be subject to the limitations set forth in Sections
3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8
hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The
Option shall expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the
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<PAGE> 5
Exercise Date, and the maximum number of full shares subject to option shall be
purchased for such participant at the applicable Purchase Price with the
accumulated payroll deductions in his or her account. No fractional shares shall
be purchased; any payroll deductions accumulated in a participant's account
which are not sufficient to purchase a full share shall be retained in the
participant's account for the subsequent Offering Period, subject to earlier
withdrawal by the participant as provided in Section 10 hereof. Any other monies
left over in a participant's account after the Exercise Date shall be returned
to the participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
deductions credited to his or her account shall be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not
have any effect upon his or her eligibility to participate in any similar plan
which may hereafter be adopted by the Company or in succeeding Offering Periods
which commence after the termination of the Offering Period from which the
participant withdraws.
11. Termination of Employment. Upon a participant's ceasing to be an
Employee for any reason, he or she shall be deemed to have elected to withdraw
from the Plan and the payroll deductions credited to such participant's account
during the Offering Period but not yet used to exercise the option shall be
returned to such participant or, in the case of his or her death, to the person
or persons entitled thereto under Section 15 hereof, and such participant's
option shall be automatically terminated. The preceding sentence
notwithstanding, a participant who receives payment in lieu of notice of
termination of employment shall be treated as continuing to be an Employee for
the participant's customary number of hours per week of employment during the
period in which the participant is subject to such payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
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<PAGE> 6
13. Stock.
(a) The maximum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be three hundred
thousand (300,000) shares, subject to adjustment upon changes in capitalization
of the Company as provided in Section 19 hereof. If, on a given Exercise Date,
the number of shares with respect to which options are to be exercised exceeds
the number of shares then available under the Plan, the Company shall make a pro
rata allocation of the shares remaining available for purchase in as uniform a
manner as shall be practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall
be registered in the name of the participant or in the name of the participant
and his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to an
Exercise Date on which the option is exercised but prior to delivery to such
participant of such shares and cash. In addition, a participant may file a
written designation of a beneficiary who is to receive any cash from the
participant's account under the Plan in the event of such participant's death
prior to exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
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<PAGE> 7
16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the stockholders of the Company, the Reserves, the maximum number of shares each
participant may purchase per Offering Period (pursuant to Section 7), as well as
the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
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<PAGE> 8
(c) Merger or Asset Sale. In the event of a proposed sale of all
or substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, the Offering Period
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date"). The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and for
any reason terminate or amend the Plan. Except as provided in Section 19 hereof,
no such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Plan is in the best
interests of the Company and its stockholders. Except as provided in Section 19
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Section 423 of the Code (or any other applicable law, regulation or
stock exchange rule), the Company shall obtain shareholder approval in such a
manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
21. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
-8-
<PAGE> 9
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without any
present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
-9-
<PAGE> 1
EXHIBIT 11.1
CKS GROUP, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Pro forma net income* ................................ $ 7,348 $ 8,367 $ 4,051
------- ------- -------
Weighted average number of common shares outstanding . 14,715 13,858 11,067
Number of common shares contingently issuable pursuant 146 -- --
to the acquisition agreements
Number of common stock equivalents as a result of .... 729 577 198
stock options outstanding using the treasury stock
method
Staff Accounting Bulletin No. 83 equivalent shares ... -- -- 388
------- ------- -------
Shares used in per share computation ................. 15,590 14,435 11,653
------- ------- -------
Net income per share ................................. $ 0.46 $ 0.58 $ 0.35
======= ======= =======
</TABLE>
- ----------
* Pro forma net income gives effect to the pooling-of-interests combination
between the Company, SiteSpecific, Inc. ("SiteSpecific"), and McKinney & Silver
("M&S"). M&S was a general partnership and, as a result, M&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.
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Pro forma net income** ............................... $ 9,202 $ 7,816 $ 4,051
------- ------- -------
Weighted average number of common shares outstanding 14,715 13,858 11,067
Number of common shares contingently issuable pursuant 146 -- --
to the acquisition agreements
Number of common stock equivalents as a result of .... 729 577 198
stock options outstanding using the treasury stock
method
Staff Accounting Bulletin No. 83 equivalent shares.... -- -- 388
------- ------- -------
Shares used in per share computation.................. 15,590 14,435 11,653
------- ------- -------
Net income per share ................................. $ 0.58 $ 0.54 $ 0.35
======= ======= =======
</TABLE>
------
The pro forma consolidated statements of income give effect to the pooling of
interests business combinations between the Company, SiteSpecific, and M&S.
The statement excludes the $2.5 million in nonrecurring charges 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. The pro forma consolidated statements
of income give effect to the implementation of a management bonus plan for the
former partners of M&S as if such plan had been in effect as of the beginning
of the periods presented. The effect of such pro forma adjustments was to
increase direct salaries and related expenses by $889,000 during fiscal 1996.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
CKS Group, Inc.
We consent to the incorporation by reference in the registration
statements (Nos. 333-3412, 333-18085, 333-22953, 333-23783, 333-24763,
333-25447, 333-27331, 333-38825 and 333-41109) on Forms S-8 and S-3 of CKS
Group, Inc. of our reports dated December 15, 1997, relating to the consolidated
balance sheets of CKS Group, Inc. and subsidiaries as of November 30, 1997 and
1996, and related consolidated statements of income, stockholders' equity, and
cash flows for each of the years in the three-year period ended November 30,
1997, and the related schedule, which reports appear in the November 30, 1997,
annual report on Form 10-K of CKS Group, Inc.
/s/ KPMG PEAT MARWICK LLP
San Jose, California
February 27, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
CKS Group, Inc.
We consent to the incorporation by reference in the registration
statements (Nos. 333-3412, 333-18085, 333-22953, 333-23783, 333-24763,
333-25447, 333-27331, 333-38825 and 333-41109) on Forms S-8 and S-3 of CKS
Group, Inc. of our report dated January 31, 1997, relating to the balance sheets
of McKinney & Silver as of December 31, 1996 and 1995, and the related
consolidated statements of income, partners' capital, and cash flow for the
three years then ended, which report appears in the November 30, 1997, annual
report on Form 10-K of CKS Group, Inc.
/S/ ERNST & YOUNG LLP
Raleigh, North Carolina
February 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> NOV-30-1996 NOV-30-1997
<PERIOD-START> DEC-01-1995 DEC-01-1996
<PERIOD-END> NOV-30-1996 NOV-30-1997
<CASH> 19,385 18,223
<SECURITIES> 37,895 24,041
<RECEIVABLES> 23,443 51,491
<ALLOWANCES> 792 1,442
<INVENTORY> 0 0
<CURRENT-ASSETS> 84,668 100,256
<PP&E> 8,192 11,670
<DEPRECIATION> 3,621 5,821
<TOTAL-ASSETS> 95,478 146,473
<CURRENT-LIABILITIES> 33,893 51,142
<BONDS> 0 0
0 0
0 0
<COMMON> 51,729 80,118
<OTHER-SE> 9,129 14,474
<TOTAL-LIABILITY-AND-EQUITY> 95,476 146,473
<SALES> 88,248 133,602
<TOTAL-REVENUES> 88,248 133,602
<CGS> 0 0
<TOTAL-COSTS> 76,887 122,168
<OTHER-EXPENSES> (2,114) (1,549)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 13,475 12,983
<INCOME-TAX> 3,026 5,317
<INCOME-CONTINUING> 10,449 7,666
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,449 7,666
<EPS-PRIMARY> 0.58 0.46
<EPS-DILUTED> 0.58 0.46
</TABLE>
