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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO_________.
COMMISSION FILE NUMBER: 0-27090
CKS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 77-0385435
- -------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10441 Bandley Drive
Cupertino, CA 95014 (408) 366-5100 95014
- --------------------------- --------------------- -----------------------
(Address of principal (Registrant's telephone (Zip Code)
executive offices) number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former Name, Former Address & Former Fiscal Year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
OUTSTANDING AT
CLASS MAY 31, 1998
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Common Stock - $0.001 par value 15,312,037
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<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of May 31, 1998 and
November 30, 1997
Condensed Consolidated Statements of Income - Three months and six
months ended May 31, 1998 and June 1, 1997
Condensed Consolidated Statements of Cash Flows - Six months ended
May 31, 1998 and June 1, 1997
Notes to Condensed Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
CKS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
May 31, November 30,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $21,625 $18,223
Marketable securities 17,263 24,041
Accounts receivable, net of allowances of $1,771
and $1,442 at May 31, 1998 and November 30,
1997, respectively.............................. 42,616 50,049
Fees and expenditures in excess of billings....... 7,406 4,594
Prepaid expenses and other current assets......... 2,749 1,949
Deferred income taxes............................. 1,514 1,400
----------- -----------
Total current assets......................... 93,173 100,256
Property and equipment, net.......................... 5,735 5,849
Deferred income taxes................................ 7,394 10,140
Goodwill and other assets............................ 35,100 30,228
----------- -----------
Total assets $141,402 $146,473
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $26,084 $38,161
Accrued expenses.................................. 8,343 7,515
Billings in excess of fees and expenditures....... 4,162 2,417
Current portion of liabilities to related parties. 309 2,284
Current portion of notes payable and capital
lease obligations............................... 373 765
Income taxes payable.............................. 1,647 --
----------- -----------
Total current liabilities 40,918 51,142
Notes payable and capital lease obligations, less
current portion................................. 765 739
----------- -----------
Total liabilities............................ 41,683 51,881
----------- -----------
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000
shares authorized; none issued and outstanding.. -- --
Common stock; $.001 par value; 30,000,000 shares
authorized; 15,312,000 and 14,865,000 issued
and outstanding at May 31, 1998 and
November 30, 1997, respectively................. 15 15
Additional paid-in capital........................ 81,305 80,103
Unrealized gain (loss) on marketable securities... (37) 12
Notes receivable from stockholders................ (198) (198)
Cumulative translation adjustment................. (99) (62)
Retained earnings................................. 18,733 14,722
----------- -----------
Total stockholders' equity................... 99,719 94,592
----------- -----------
Total liabilities and stockholders' equity. $141,402 $146,473
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
May 31, June 1, May 31, June 1,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues........................... $39,808 $35,911 $71,998 $60,230
---------- ---------- ---------- ----------
Operating expenses:
Direct salaries and related
expenses....................... 10,303 8,345 20,428 15,455
Other direct operating expenses.. 15,982 14,560 28,473 23,418
General and administrative
expenses....................... 7,774 7,514 15,039 12,869
Depreciation and amortization.... 972 851 1,909 1,414
Merger costs..................... -- -- -- 1,593
---------- ---------- ---------- ----------
Total operating expenses..... 35,031 31,270 65,849 54,749
---------- ---------- ---------- ----------
Operating income................... 4,777 4,641 6,149 5,481
Other income, net.................. 310 267 747 790
---------- ---------- ---------- ----------
Income before income taxes......... 5,087 4,908 6,896 6,271
Income taxes....................... 2,181 2,026 2,885 2,200
---------- ---------- ---------- ----------
Net income......................... $2,906 $2,882 $4,011 $4,071
========== ========== ========== ==========
Pro forma net income and per
share data: (1)
Income before income taxes,
as reported...................... 6,271
Pro forma income taxes............. 2,518
----------
Pro forma net income............... $3,753
==========
Basic net income per share......... $0.19 $0.20 $0.26
========== ========== ==========
Pro forma basic net income
per share........................ $0.26
==========
Shares used in basic per
share computation................ 15,286 14,511 15,303 14,379
========== ========== ========== ==========
Diluted net income per share....... $0.18 $0.18 $0.25
========== ========== ==========
Pro forma diluted net income
per share........................ $0.24
==========
Shares used in diluted per
share computation................ 16,402 15,620 16,231 15,510
========== ========== ========== ==========
</TABLE>
(1) Pro forma net income gives effect to pooling-of-interests combinations
between the Company and McKinney & Silver ("M&S") and the Company
and SiteSpecific, Inc. ("SiteSpecific") during fiscal 1997. M&S was a
general partnership and, as a result, M&S's historical results of
operations prior to acquisition by the Company, which have been
included with the Company's under the pooling-of-interests method, do
not include a provision for income taxes. Pro forma net income and
net income per share data include a tax provision as if M&S had been
a taxable "C" corporation for all periods.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION> Six Months Ended
----------------------
May 31, June 1,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $4,011 $4,071
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred taxes..................................... 2,632 (348)
Compensation related to stock options.............. 61 68
Tax benefit from disqualifying dispositions........ 60 1,158
Depreciation and amortization...................... 2,049 1,545
Loss on disposition of property due to acquisition. -- 227
Changes in operating assets and liabilities:
Accounts receivable............................. 7,396 (3,377)
Fees and expenditures in excess of billings..... (2,812) (2,632)
Prepaid expenses and other current assets....... (800) (1,671)
Accounts payable................................ (12,077) (5,632)
Accrued expenses................................ 828 (386)
Billings in excess of fees and expenditures..... 1,745 1,597
Income taxes payable............................ 1,647 688
---------- ----------
Net cash provided by (used in)
operating activities..................... 4,740 (4,692)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment................... (924) (797)
Purchases of marketable securities.................... (14,783) (10,221)
Sale of marketable securities......................... 21,524 24,073
Businesses acquired, net of cash received............. (6,240) (12,996)
Other assets.......................................... 90 135
---------- ----------
Net cash provided by (used in) investing
activities.............................. (333) 194
---------- ----------
Cash flows from financing activities:
Net repayments on line of credit and note payable..... (366) (1,619)
Proceeds from sale of common stock.................... 1,217 1,743
Liabilities to related parties........................ (1,856) (4,191)
---------- ----------
Net cash used in financing activities...... (1,005) (4,067)
---------- ----------
Net change in cash and cash equivalents.................. 3,402 (8,565)
Change in subsidiaries' fiscal year ends................. -- (4,259)
Cash and cash equivalents, beginning of period........... 18,223 19,385
---------- ----------
Cash and cash equivalents, end of period................. $21,625 $6,561
========== ==========
Supplementary disclosure of cash paid during the period:
Cash paid:
Interest........................................ $50 $46
========== ==========
Income taxes.................................... $128 $796
========== ==========
Noncash investing and financing activities:
Businesses acquired for payable to
related parties.............................. $ -- $2,652
========== ==========
Issuance of common stock in business
acquisitions................................. $200 $6,030
========== ==========
Deferred tax asset recorded in connection
with taxable pooling of interests............ $ -- $9,346
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
CKS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated financial statements and
related notes to condensed consolidated financial statements include the
accounts of CKS Group, Inc. (the "Company" or "CKS Group") and its
wholly-owned subsidiaries. Companies acquired in business combinations
accounted for under the purchase method have been included from their
respective acquisition dates. The condensed consolidated financial
statements also give retroactive effect to the acquisition of McKinney &
Silver ("M&S") and SiteSpecific, Inc. ("SiteSpecific") in business
combinations accounted for under the pooling-of-interests method for all
periods presented. Results of operations for the three month and six
month periods ended May 31, 1998, and June 1, 1997, are unaudited and
reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a
fair presentation of the Company's financial position and operating
results for the interim periods. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion and
analysis of financial condition and results of operations, contained in
the Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1997. The results of operations for the quarter ended May
31, 1998 are not necessarily indicative of the results expected for any
subsequent quarter or for the entire fiscal year ending November 29,
1998.
2. Pro Forma Net Income and Pro Forma Net Income Per Share
Pro forma net income gives effect to the pooling-of-interests
combinations between the Company and M&S and the Company and
SiteSpecific during fiscal 1997. M&S was a general partnership and, as
a result, M&S' historical results of operations prior to the acquisition
by the Company, which have been included with the Company's historical
results of operations under the pooling-of-interests method, do not
include a provision for income taxes. Pro forma net income and net
income per share data include a tax provision as if M&S had been a
taxable "C" corporation for all periods.
On December 1, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share. In
accordance with SFAS No. 128, basic net income per share is computed
using the weighted average number of common shares outstanding during
the period. Diluted net income per share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the period, using the treasury stock method for
options and warrants after giving effect to contingently issuable shares
under acquisition agreements. The Company has restated net income per
share for all periods presented in accordance with SFAS No. 128.
Reconciliation of basic and diluted net income per share and pro
forma net income per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended May 31, 1998 Three Months Ended June 1, 1997
-------------------------------- --------------------------------
Net Income Shares EPS Net Income Shares EPS
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic net income per share $2,906 15,286 $0.19 $2,882 14,511 $0.20
Effect of dilutive shares:
Common equivalent shares -- 779 -- -- 670 --
Contingent shares -- 337 -- -- 439 --
---------- ---------- ---------- ----------
Diluted net income per share $2,906 16,402 $0.18 $2,882 15,620 $0.18
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended May 31, 1998 Six Months Ended June 1, 1997
-------------------------------- --------------------------------
Pro forma Pro forma
Net Income Shares EPS Net Income Shares EPS
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic net income per share $4,011 15,303 $0.26 $3,753 14,379 $0.26
Effect of dilutive shares:
Common equivalent shares -- 561 -- -- 756 --
Contingent shares -- 367 -- -- 375 --
---------- ---------- ---------- ----------
Diluted net income per share $4,011 16,231 $0.25 $3,753 15,510 $0.24
========== ========== ========== ==========
</TABLE>
3. Business Combinations
Donovan & Green, Inc.
On January 3, 1997, the Company acquired the assets and assumed
substantially all the liabilities of Donovan & Green, Inc. ("D&G"), and
its results of operations have been included in the Company's
consolidated financial statements from that date. The purchase
agreement provided for initial payments to D&G of $5.1 million in cash.
The acquisition was accounted for as a purchase and, as a result, the
Company initially recorded goodwill of approximately $8.3 million. The
Company also made guaranteed payments to D&G consisting of $3.3 million
in cash and Common Stock of CKS Group on April 18, 1997 and $1.0 million
in cash and Common Stock of CKS Group on April 15, 1998. In addition,
D&G will receive a guaranteed payment of $0.5 million in cash and Common
Stock of CKS Group on April 15, 1999. D&G will also have the right to
receive additional payments if the subsidiary attains certain earnings
goals during fiscal years 1998, 1999 and 2000. In the event additional
contingent consideration is paid to D&G, it will be recorded as
additional purchase price. Pro forma financial information giving
effect to the acquisition of the assets and certain liabilities of D&G
has not been presented because such pro forma results would not have
differed materially from the Company's actual results.
CKS Holding (Deutschland) GmbH
On March 10, 1997, the Company acquired all the capital stock of
CKS Holding (Deutschland) GmbH (formerly Elektronische Publikationen
GmbH), a German corporation ("CKS GmbH"), and its results of operations
have been included in the Company's consolidated financial statements
from that date. In consideration for the sale of their shares in CKS
GmbH, the former shareholders of CKS GmbH received $5.9 million in cash
and Common Stock of CKS Group. The acquisition of the capital stock of
CKS GmbH was treated as a purchase and, as a result, the Company
initially recorded goodwill of approximately $5.6 million. Also, under
the original purchase agreement, the Company was required to make a
guaranteed payment of $0.7 million in cash and Common Stock of CKS Group
in fiscal 1998. In addition, the former shareholders of CKS GmbH had
the right to receive up to an additional $10.0 million in cash and
additional shares of Common Stock of CKS Group during fiscal 1998, 1999
and 2000 upon attainment of certain earnings goals by CKS GmbH. On
April 27, 1998, the Company and the former shareholders of CKS GmbH
terminated the original purchase agreement with respect to the right of
the former shareholders of CKS GmbH to receive additional cash and
Common Stock of CKS Group in future years and negotiated the terms of a
new purchase agreement. Under the new purchase agreement, the Company
paid to the former shareholders of CKS GmbH $6.2 million in cash in
April 1998 and granted the former shareholders of CKS GmbH the right to
receive an additional cash payment on September 20, 1998 of up to
approximately $0.3 million if the subsidiary attains a certain earnings
goal during the six month period ending August 31, 1998. In the event
additional contingent consideration is paid to the former shareholders
of CKS GmbH, it will be recorded as additional purchase price. Pro
forma financial information giving effect to the acquisition of the
capital stock of CKS GmbH has not been presented because such pro forma
results would not have differed materially from the Company's actual
results.
Gormley & Partners, Inc.
On March 12, 1997, the Company acquired certain assets of Gormley
& Partners, Inc. ("Gormley"), and its results of operations have been
included in the Company's consolidated financial statements from that
date. The purchase agreement provided for an initial payment of
approximately $3.2 million in cash and 40,206 shares of Common Stock of
CKS Group. The acquisition was accounted for as a purchase and, as a
result, the Company initially recorded goodwill of approximately $5.8
million. The Company made guaranteed payments to Gormley consisting of
$1.5 million in cash and Common Stock of CKS Group on April 15, 1998.
In addition, Gormley will be entitled to receive additional payments if
it attains certain earnings goals over the next three fiscal years. In
the event additional contingent consideration is paid to Gormley, it
will be recorded as additional purchase price. Pro forma financial
information giving effect to the acquisition of certain assets of
Gormley has not been presented because such pro forma results would not
have differed materially from the Company's actual results.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This section contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking
statements as a result of a number of factors, including those set forth
under "Factors Affecting Operating Results And Market Price Of Stock."
Readers are also encouraged to refer to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1997 for further
discussion of the Company's business and the risks and opportunities
attendant thereto.
Introduction
In reviewing the Company's consolidated financial statements and
the discussion of the Consolidated Results of Operations that appears
below, the following should be taken into consideration. During fiscal
1997, the Company acquired M&S and SiteSpecific in business combinations
accounted for under the pooling-of-interests method of accounting.
Prior to acquisition by the Company, M&S and SiteSpecific prepared their
financial statements on a calendar year basis. Under generally accepted
accounting principles ("GAAP"), after the Company acquired M&S and
SiteSpecific, the Company restated its financial results to include the
financial results of M&S and SiteSpecific for all periods presented.
The accompanying Condensed Consolidated Statements of Income for the
three and six month periods ended May 31, 1998 have been presented to
separately identify the costs associated with the depreciation of fixed
assets and the amortization of intangible assets. Depreciation and
amortization expense amounts in the following Selected Quarterly
Financial Data presents fiscal 1997 Selected Quarterly Financial Data in
conformity with the presentation used for the fiscal 1998 periods
presented.
<PAGE>
Selected Quarterly Financial Data
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
March 2, June 1, Aug. 31, Nov. 30, March 1, May 31,
1997 1997 1997 1997 1998 1998
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................... $24,319 $35,911 $39,750 $33,622 $32,190 $39,808
---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Direct salaries and related
expenses....................... 7,110 8,345 8,870 10,389 10,125 10,303
Other direct operating expenses.. 8,858 14,560 16,820 13,714 12,491 15,982
General and administrative
expenses....................... 5,355 7,514 7,880 7,205 7,265 7,774
Depreciation and amortization.... 563 851 812 870 937 972
Merger costs..................... 1,593 -- 859 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses..... 23,479 31,270 35,241 32,178 30,818 35,031
---------- ---------- ---------- ---------- ---------- ----------
Operating income................... 840 4,641 4,509 1,444 1,372 4,777
Other income, net.................. 523 267 198 561 437 310
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes......... 1,363 4,908 4,707 2,005 1,809 5,087
Income taxes....................... 174 2,026 2,327 790 704 2,181
---------- ---------- ---------- ---------- ---------- ----------
Net income......................... $1,189 $2,882 $2,380 $1,215 $1,105 $2,906
========== ========== ========== ========== ========== ==========
Pro forma net income and per
share data: (1)
Income before income taxes,
as reported...................... $1,363
Pro forma income taxes............. 492
----------
Pro forma net income............... $871
==========
Basic net income per share $0.20 $0.16 $0.08 $0.07 $0.19
========== ========== ========== ========== ==========
Pro forma basic net income
per share........................ $0.06
==========
Shares used in basic per
share computation................ 14,112 14,511 14,732 15,202 15,311 15,286
========== ========== ========== ========== ========== ==========
Diluted net income per share $0.18 $0.15 $0.07 $0.07 $0.18
========== ========== ========== ========== ==========
Pro forma diluted net income
per share........................ $0.06
==========
Shares used in diluted per
share computation................ 15,215 15,620 16,072 16,442 16,001 16,402
========== ========== ========== ========== ========== ==========
EBITDA (2) $1,425 $5,501 $5,266 $2,428 $2,319 $5,615
========== ========== ========== ========== ========== ==========
</TABLE>
(1) Pro forma net income gives effect to pooling-of-interests
combinations between the Company and McKinney & Silver ("M&S") and
the Company and SiteSpecific, Inc. ("SiteSpecific") during fiscal
1997. M&S was a general partnership and, as a result, M&S's
historical results of operations prior to acquisition by the Company,
which have been included with the Company's under the pooling-of-
interests method, do not include a provision for income taxes. Pro
forma net income and net income per share data include a tax
provision as if M&S had been a taxable "C" corporation for all
periods.
(2) Represents earnings before interest expense, income taxes,
depreciation, amortization and other noncash charges ("EBITDA").
Although EBITDA should not be used as an alternative to operating
income or net cash provided by (used in) operating activities,
investing activities, or financing activities, each as measured under
generally accepted accounting principles, and although EBITDA may not
be comparable to other similarly titled information for other
companies, the Company's management believes that EBITDA is an
additional meaningful measure of performance and liquidity.
<PAGE>
Consolidated Results of Operations
Three Months Ended May 31, 1998 and June 1, 1997
Revenues
The Company generates a significant portion of its revenues
through project fees on a fixed fee for service basis and contract based
retainer fees. Revenues increased to $39.8 million in the quarter ended
May 31, 1998 from $35.9 million in the same quarter of fiscal 1997,
representing an increase of approximately 10.9%. This increase in
revenues was due to an increase in the number and value of projects
undertaken for existing clients of the Company and the establishment of
new client relationships. Revenues from new media projects increased to
$10.0 million in the quarter ended May 31, 1998 from $9.3 million in the
same quarter of fiscal 1997, representing an increase of approximately
7.5%. New media revenues represented approximately 25% of revenues for
the quarter ended May 31, 1998, compared to approximately 26% for the
quarter ended June 1, 1997 (after giving effect to the restatement to
include the operating results of M&S and SiteSpecific). In the
Company's quarterly report on Form 10-Q for the quarter ended June 1,
1997, the Company reported that revenues from new media projects were
approximately 24% of total revenues for the quarter ended June 1, 1997,
without giving effect to the restatement to include SiteSpecific.
SiteSpecific historically had only new media revenues, so the effect of
the restatement to include the operating results of SiteSpecific was to
increase new media revenues as a percentage of total revenues for the
quarter ended June 1, 1997 from approximately 24% to approximately 26%.
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 23.5% to $10.3 million in the
quarter ended May 31, 1998 from $8.3 million during the same quarter of
fiscal 1997, representing 25.9% and 23.2% of revenues in the second
quarter of fiscal 1998 and fiscal 1997, respectively. The increase in
absolute dollars was primarily attributable to an increase in salaries
and related expenses necessary to support the Company's growth. The
increase in these expenses as a percentage of revenues during the three
month period ended May 31,1998 is primarily due to an increase in
account management staffing and engineering group payroll costs
necessary to support the increasingly technical nature of the Company's
new media projects.
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 9.8% to
$16.0 million in the quarter ended May 31, 1998 from $14.6 million in
the same quarter of fiscal 1997, representing 40.1% and 40.5% of
revenues in the second quarter of fiscal 1998 and fiscal 1997,
respectively. The increase in absolute dollars was primarily
attributable to increases in freelance and facilities costs necessary to
support the higher level of revenues. As a percentage of revenues,
other direct operating expenses remained relatively unchanged.
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 3.5% to $7.8 million in the quarter ended May
31, 1998 from $7.5 million in the same quarter of fiscal 1997,
representing 19.5% and 20.9% of revenues in the second quarter of fiscal
1998 and fiscal 1997, respectively. This period over period increase in
absolute dollars was primarily attributable to increases in
administrative expenses necessary to support the Company's growth. As a
percentage of revenues, general and administrative expenses decreased as
a result of a more rapid increase in revenues than in general and
administrative expenses.
Depreciation and Amortization
Depreciation and amortization expenses include depreciation of
fixed assets and amortization of goodwill and other intangible assets.
Depreciation and amortization expenses increased approximately 14.2% to
$1.0 million in the quarter ended May 31, 1998, from $0.9 million in the
same quarter of fiscal 1997, representing approximately 2.4% of revenues
for both the second quarter of fiscal 1998 and fiscal 1997. The
increase in absolute dollars was primarily attributable to the
amortization of additional goodwill resulting from the earnout and
buyout payments made to Schell/Mullaney, Inc. ("Schell/Mullaney") and
CKS GmbH during fiscal 1998, respectively. As a percentage of revenues,
depreciation and amortization expenses remained relatively unchanged.
Other Income, Net
Other income, net consists primarily of interest earned on the
Company's holdings in cash, cash equivalents and marketable securities,
offset by interest expense incurred due to the amortization of imputed
interest on guaranteed cash payments related to subsidiary acquisitions
and interest expense related to debt recorded by the Company's
subsidiaries. Other income, net remained relatively unchanged at $0.3
million for the quarters ended May 31, 1998 and June 1, 1997.
Income Taxes
Combined actual federal and state income tax rates were 42.9% in
the quarter ended May 31, 1998 and 41.3% in the quarter ended June 1,
1997. The effective tax rate was higher during the three month period
ended May 31, 1998 primarily due to an increase in profitability in
higher tax rate jurisdictions.
Six Months Ended May 31, 1998 and June 1, 1997
Revenues
The Company generates a significant portion of its revenues
through project fees on a fixed fee for service basis and contract based
retainer fees. Revenues increased to $72.0 million during the six month
period ended May 31, 1998 from $60.2 million in the same period of
fiscal 1997, representing an increase of approximately 19.5%. This
increase in revenues was due to an increase in the number and value of
projects undertaken for existing clients of the Company, the
establishment of new client relationships, and the inclusion of D&G, CKS
GmbH and Gormley revenues in the Company's consolidated results for the
full six month period ended May 31, 1998. Revenues from new media
projects increased to $17.9 million for the six months ended May 31,
1998 from $16.0 million in the same period of fiscal 1997, representing
an increase of approximately 11.9%. New media revenues represented
approximately 25% of revenues for the six month period ended May 31,
1998, compared to approximately 27% for the six month period ended June
1, 1997 (after giving effect to the restatement to include the operating
results of M&S and SiteSpecific). In the Company's quarterly report on
Form 10-Q for the quarter ended June 1, 1997, the Company reported that
revenues from new media projects were approximately 24% of total
revenues for the six month period ended June 1, 1997, without giving
effect to the restatement to include SiteSpecific. SiteSpecific
historically had only new media revenues, so the effect of the
restatement to include the operating results of SiteSpecific was to
increase new media revenues as a percentage of total revenues for the
six month period ended June 1, 1997 from approximately 24% to
approximately 27%.
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 32.2% to $20.4 million during
the six month period ended May 31, 1998, from $15.5 million during the
same period of fiscal 1997, representing 28.4% and 25.7% of revenues for
the six month periods ended May 31, 1998 and June 1, 1997, respectively.
The increase in absolute dollars was primarily attributable to an
increase in salaries and related expenses necessary to support the
Company's growth. The increase in these expenses as a percentage of
revenues during the six month period ended May 31, 1998 reflects an
increase in account management staffing and engineering group payroll
costs necessary to support the increasingly technical nature of the
Company's new media projects.
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 21.6%
to $28.5 million during the six month period ended May 31, 1998 from
$23.4 million in the same period of fiscal 1997, representing 39.5% and
38.9% of revenues for the six month periods ended May 31, 1998 and June
1, 1997, respectively. The increase in absolute dollars was primarily
attributable to increases in freelance and facilities costs necessary to
support the higher level of revenues. The increase in other direct
operating expenses as a percentage of revenues reflects an increase in
freelance and facilities costs, partially offset by a decrease in
production costs.
General and Administrative Expenses
General and administrative expenses include headquarters expenses,
insurance, personnel costs for finance and administration, accounting
and legal fees, bad debt expense, management information systems
expenses, and employee benefits. General and administrative expenses
increased approximately 16.9% to $15.0 million during the six month
period ended May 31, 1998 from $12.9 million in the same period of
fiscal 1997, representing 20.9% and 21.4% of revenues for the six month
periods ended May 31, 1998 and June 1, 1997, respectively. The
increase in absolute dollars was primarily attributable to increases
in administrative and general office expenses necessary to support the
Company's growth and an increase in bad debt reserve necessary to
support the growth in total revenues and accounts receivable. The
decrease in general and administrative expenses as a percentage of
revenues reflects a more rapid increase in revenues than in general
and administrative expenses.
Depreciation and Amortization
Depreciation and amortization expenses include depreciation of
fixed assets and amortization of goodwill and other intangible assets.
Depreciation and amortization expenses increased approximately 35.0% to
$1.9 million during the six month period ended May 31, 1998 from $1.4
million in the same period of fiscal 1997, representing approximately
2.7% and 2.3% of revenues for the six month period ended May 31, 1998
and June 1, 1997, respectively. The increase in depreciation and
amortization was primarily attributable to goodwill amortization related
to the Company's acquisitions and amortization of additional goodwill
resulting from earnout and buyout payments made to Schell/Mullaney and
CKS GmbH during fiscal 1998, respectively.
Merger Costs
In connection with the acquisition of M&S, the Company recorded a
nonrecurring charge for transaction related costs of approximately $1.6
million for the six month period ended June 1, 1997. The costs
consisted primarily of investment banking, accounting, consulting and
legal fees, financial printing and other related costs.
Other Income, Net
Other income, net consists primarily of interest earned on the
Company's holdings in cash, cash equivalents and marketable securities,
offset by interest expense incurred due to the amortization of imputed
interest on guaranteed cash payments related to subsidiary acquisitions
and interest expense related to debt recorded by the Company's
subsidiaries. Other income, net decreased to approximately $0.7 million
during the six month period ended May 31, 1998, from $0.8 million for
the six month period ended June 1, 1997.
Pro Forma Consolidated Financial Data
The following summary of consolidated pro forma income statement
data gives effect to the pooling-of-interests business combinations
between the Company, M&S and SiteSpecific. The data excludes
approximately $1.6 million in nonrecurring charges for merger costs, net
of taxes, recorded by the Company during the six months ended June 1,
1997 and includes a tax provision as if M&S has been a taxable C
corporation for all periods.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
May 31, June 1, May 31, June 1,
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues........................... $39,808 $35,911 $71,998 $60,230
Net income......................... $2,906 $2,882 $4,011 $4,748
Pro forma basic net income
per share........................ $0.19 $0.20 $0.26 $0.33
Shares used in basic per
share computation................ 15,286 14,511 15,303 14,379
Pro forma diluted net income
per share........................ $0.18 $0.18 $0.25 $0.31
Shares used in diluted per
share computation................ 16,402 15,620 16,231 15,510
EBITDA (1) $5,615 $5,501 $7,934 $8,519
</TABLE>
(1) Represents earnings before interest expense, income taxes,
depreciation, amortization and other noncash charges ("EBITDA").
Although EBITDA should not be used as an alternative to operating
income or net cash provided by (used in) operating activities,
investing activities, or financing activities, each as measured under
generally accepted accounting principles, and although EBITDA may not
be comparable to other similarly titled information for other
companies, the Company's management believes that EBITDA is an
additional meaningful measure of performance and liquidity.
Income Taxes
Combined actual federal and state income tax rates were 41.8% for
the six month period ended May 31, 1998 and 35.1% for the six month
period ended June 1, 1997. These rates do not include a provision for
income taxes for M&S prior to January 31, 1997, which was a general
partnership prior to its acquisition by CKS Group. Combined pro forma
federal and state income tax rates were 41.8% for the six months ended
May 31, 1998 and 40.2% for the six months ended June 1, 1997. Pro forma
tax rates include a tax provision to reflect M&S income as if M&S had
been a taxable "C" corporation for all periods presented. The effective
tax rate was higher during the six month period ended May 31, 1998,
primarily due to an increase in profitability in higher tax rate
jurisdictions and the decrease in tax exempt interest as a percentage of
total revenues.
Liquidity and Capital Resources
Since inception, the Company has financed its operations and
investments in property and equipment through cash generated from
operations, bank borrowing, equity financing and capital lease financing
arrangements. At May 31, 1998, the Company owed approximately $1.1
million in bank borrowings and capital lease financing arrangements.
Cash, cash equivalents and marketable securities, consisting
primarily of high-quality municipal bonds and tax-advantaged money
market instruments, totaled $38.9 million and $42.3 million at May 31,
1998 and November 30, 1997, respectively. The decrease in cash, cash
equivalents and marketable securities during this period was primarily
due to approximately $8.0 million used to fund buyout and guaranteed
payments related to subsidiary acquisitions, $0.4 million used to repay
debt and approximately $0.9 million used for capital expenditures,
partially offset by $1.2 million in proceeds from the sale of Common
Stock and $4.7 million provided by operating activities.
Net cash provided by operating activities was approximately $4.7
million in the six month period ended May 31, 1998, reflecting $4.0
million in net income and $0.7 million provided by working capital
fluctuations.
Net cash used in investing activities was approximately $0.3
million in the six month period ended May 31, 1998, and included
approximately $6.7 million of proceeds from the sale of marketable
securities in excess of marketable securities purchased, offset by
approximately $6.2 million paid to the former shareholders of CKS GmbH
under a renegotiated purchase agreement and $0.9 million used for
capital expenditures.
Net cash used for financing activities was approximately $1.0
million in the six month period ended May 31, 1998, reflecting $1.8
million in guaranteed payments to subsidiaries and $0.4 million in
repayment of debt, partially offset by $1.2 million in proceeds from the
sale of Common Stock through the Company's Employee Stock Purchase Plan
and the exercise of employee 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 sheets as of December 31, 1996.
Subsequent to November 30, 1996, M&S and SiteSpecific changed their
fiscal year ends to conform to the Company's fiscal year end. The net
decrease in cash and cash equivalents for the three month period ended
March 2, 1997 has been adjusted to eliminate the effect of including
M&S's and SiteSpecific's net income and cash flows for the month ended
December 31, 1996. The cash adjustment amounted to $4.3 million,
primarily as a result of a substantial payment received by M&S in
December 1996 from a client for media placement, for which related costs
were not paid until January 1997. This adjustment is reflected in the
Company's Condensed Consolidated Statements of Cash Flows under the line
item "Change in subsidiaries' fiscal year ends".
As of May 31, 1998, the Company and its subsidiaries had $3.9
million in credit facilities available under revolving lines of credit.
The credit facilities were secured by all the assets of the Company and
bear interest at rates of prime to prime plus 1%. At May 31, 1998,
there was $0.5 million of indebtedness outstanding under these credit
facilities. These credit agreements, which are scheduled to expire between
July 31, 1998 and September 30, 1998, require compliance with various
financial covenants and restrictions, including maintenance of minimum levels
of net worth and profitability, and restrict the Company's ability to pay
dividends or to effect mergers or acquisitions without the bank's consent.
The Company believes that its cash, cash equivalents and
marketable securities, together with existing credit facilities and cash
flows from operations, if any, will be sufficient to meet the Company's
cash requirements for at least the next twelve months.* The Company may
need to raise additional funds through public or private debt or equity
financing in order to take advantage of opportunities that may become
available to the Company, including expansion and acquisition of
businesses, products or technologies, or to otherwise respond to
competitive pressures. There can be no assurance that the Company will
be able to raise capital on favorable terms or at all.
Factors Affecting Operating Results and Market Price of Stock
The Company's operating results and the market price of the
Company's Common Stock may be affected by numerous factors, many of
which are beyond the Company's control. In addition to the factors
described below, the Company encourages review of the more extensive
discussion set forth in the section entitled "Business -- Factors
Affecting Operating Results and Market Price of Stock" in the Company's
Annual Report on Form 10-K for the fiscal year ended November 30, 1997.
The Company's five largest clients accounted for 37% and 39% of
the Company's revenues for the fiscal years ended November 30, 1997 and
November 30, 1996, respectively, with the fluctuations in the amount of
revenue contribution from each such client from quarter to quarter.
Since many of the Company's clients generally retain the Company on a
project by project basis, a client from whom the Company generates
substantial revenue in one period may not be a substantial source of
revenue in a subsequent period. To the extent that any of the Company's
major clients do not remain a significant source of revenues, there
could be a direct and immediate material adverse effect on the Company's
business, financial condition and operating results. Historically, the
Company's typical project has lasted only four to six weeks, and once a
project is completed there can be no assurance that a client will engage
the Company for further services. In addition, the Company's clients
may unilaterally reduce their use of the Company's services or terminate
existing projects without penalty. The termination of the Company's
business relationship with any of its significant clients or a material
reduction in the use of the Company's services by a significant client
would have a material adverse effect on the Company's business,
financial condition and operating results.
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 fiscal 1997, for example, the Company's
largest client, Audi of America, significantly reduced its marketing
spending after completing a major product launch. The Company's
revenues for the first fiscal quarter tend to be somewhat lower than for
the preceding fourth quarter because many clients have expended most of
their marketing budgets prior to the end of the calendar year and do not
release funds from the next calendar year's marketing budget until mid
to late January. The Company expects this seasonality to continue in
the future. As a result of the foregoing and other factors, the Company
anticipates that it may experience material and adverse fluctuations in
future operating results on a quarterly or annual basis. Therefore, the
Company believes that period to period comparisons of its revenues and
operating results are not necessarily meaningful and that such
comparisons cannot be relied upon as indicators of future performance.
The Company's future growth is dependent to a significant extent
upon its ability to increase the amount of revenue it derives from
providing marketing and advertising solutions to its customers through
new media, which the Company defines as media that delivers content to
end users in digital form, including the World Wide Web, the Internet,
proprietary online services, CD-ROMs, laptop PC presentations and
interactive kiosks. The market for marketing and advertising through new
media is rapidly evolving and is characterized by an increasing number
of market entrants who have introduced or developed products and
services for communication and commerce through new media. Demand and
market acceptance for recently introduced products and services are
subject to a high level of uncertainty. There can be no assurance that
communication and commerce through new media will continue to grow. The
Company believes that its focus on and expertise in new media-based
marketing services has been an important factor in attracting new
clients. To the extent that the Company's leadership in providing new
media solutions erodes as established advertising agencies and other
competitors expand their new media capabilities, the Company's
competitive position and operating results may be materially adversely
affected.
The Company's business has grown significantly 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
products or services 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.
As part of its business strategy, the Company has made and expects
to make acquisitions of, or significant investments in, businesses that
offer complementary marketing communication services, products and
technologies. The Company's past and any future acquisitions or
investments are and will be accompanied by the risks commonly
encountered in acquisitions of businesses. Such risks include, among
other things, the difficulty of assimilating the operations and
personnel of the acquired businesses, the potential disruption of the
Company's ongoing business, the inability of management to maximize the
financial and strategic position of the Company through the successful
incorporation of acquired personnel and clients, the maintenance of
uniform standards, controls, procedures and policies and the impairment
of relationships with employees and clients as a result of any
integration of new management personnel. The future performance of
businesses acquired by the Company and which may be acquired by the
Company in the future is often highly dependent on the continued
employment and the performance of one or more key officers or employees
of such businesses. To the extent that such key officers or employees
terminate their employment with the Company, or fail to operate
effectively, either independently or together with other officers and
personnel of the Company, the Company's business, financial condition
and operating results may be materially adversely affected.
The Company regularly engages in discussions related to potential
acquisitions. The Company expects that future acquisitions, if any,
could provide for consideration to be paid in cash, stock or a
combination of cash and stock. The number of shares, which may be
issued in future acquisitions, will depend on the market price of the
Company's Common Stock and a variety of other factors and, as a result,
future acquisitions may have a significant dilutive impact on the
Company's existing stockholders. Any acquisitions accounted for as
purchase business combinations may increase the amount of goodwill
recorded as an asset on the Company's balance sheet and, accordingly,
may increase the amount of goodwill that must be amortized against
operating results in the future. In addition, the Company periodically
reviews the goodwill related to its acquisitions. If the Company were
to determine that the goodwill associated with one or more of its
acquisitions were to become impaired, the Company would be required to
record the extent of such impairment as an expense in its statement of
operations for the period in which such impairment occurred. Recording
an expense for such impairment would likely have a material adverse
effect on the Company's operating results for the quarter in which such
expense was recorded. No assurance can be given that any potential
acquisition will be consummated. There can also be no assurance that
the Company's prior acquisitions or any other potential acquisitions
will not have a material adverse effect on the Company's business,
financial condition and operating results.
The Company generates a significant portion of its revenues
through project fees on a fixed fee for service basis. The Company
assumes greater financial risk on fixed-price type contracts than on
either time-and-material or cost-reimbursable contracts. Failure to
anticipate technical problems, estimate costs accurately or control
costs during performance of a fixed-price contract may reduce the
Company's profit or cause the Company to incur a loss. Although many of
the Company's projects last four to six weeks and therefore each
individual short-term project creates less exposure than a long-term
fixed-price contract, in the event the Company does not accurately
anticipate the progress of a number of significant revenue-generating
projects, a material adverse effect on the Company's business, financial
condition and operating results could result. As the complexity of new
media projects has increased, however, the duration and size of some of
these fixed price agreements has increased, thereby increasing the
Company's risk of loss on such projects.
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.
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 less than two years, computer systems and/or
software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements in order to avoid serious malfunctions.
Significant uncertainty exists concerning both the ability to accomplish
complete compliance and the potential effects associated with such
compliance. Although the Company believes that the software and
computer systems designed by it, as well as the software that it has
obtained from vendors which it uses in its daily operations and
production activities, 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, its vendors or the Internet infrastructure could result in a
material adverse effect on the Company's business, financial condition
and operating results.
Volatility of Company's Common Stock
The trading price of the Company's Common Stock has been, and in
the future is expected to be, subject to extreme fluctuations in
response to both business-related issues, such as quarterly variations
in operating results, the timing of commencement or completion of client
projects, reductions or increases in client spending on marketing
communications services, announcements of new services or business
acquisitions by the Company or its competitors, and the gain or loss of
client accounts, and stock market related influences, such as changes in
estimates of securities analysts, the presence or absence of short-
selling of the Company's Common Stock, and events affecting other
companies that the market deems to be comparable to or to impact the
Company or its business. In addition, the stock market has from time to
time experienced extreme price and volume fluctuations that have
particularly affected the market price of many technology-oriented
companies and that often have been unrelated or disproportionate to the
operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Company's
Common Stock. The trading prices of many high technology and Internet-
related companies' stocks are at or near their historical highs and
reflect price/earning ratios substantially above historical norms.
There can be no assurance that the trading price of the Company's Common
Stock will remain at or near its current level. The following table
reflects the high and low per share sale prices for the Company's Common
Stock for the six fiscal quarters ending May 31, 1998:
<TABLE>
<CAPTION>
High Low
---------- ----------
<S> <C> <C>
First Quarter, Fiscal 1997......... $36.25 $20.63
Second Quarter, Fiscal 1997........ $34.25 $20.25
Third Quarter, Fiscal 1997......... $44.75 $29.00
Fourth Quarter, Fiscal 1997........ $46.25 $11.38
First Quarter, Fiscal 1998......... $20.00 $12.25
Second Quarter, Fiscal 1998........ $27.50 $17.56
</TABLE>
- -----------------
* 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"
in the Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1997 for a discussion of factors that could affect future
performance.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
On April 15, 1998, the Company issued 37,325 shares of its Common
Stock to Donovan & Green and Gormley pursuant to the acquisition agreements
with such entities. The Company did not employ an underwriter or placement
agent in connection with this transaction. The Common Stock was issued
without registration under the Securities Act of 1933 (the "Securities Act")
in reliance on Section 4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Securities Holders.
At the Company's Annual Meeting of Shareholders held on April 22,
1998, the following individuals were elected to the Board of Directors:
Nominee In Favor Withheld
- ---------------- ----------- -----------
Mark D. Kvamme 12,425,199 29,169
Pierre R. Lamond 12,424,599 29,769
The following proposals were approved at the Company's Annual Meeting:
1) Proposal to ratify and approve the Company's 1997 Employee
Stock Purchase Plan and the reservation of 300,000 shares of
Common Stock for issuance thereunder plus annual increases
equal to the lesser of ( i ) 1.75% of the outstanding shares of
Common Stock of the Company, ( ii ) 500,000 shares, and ( iii )
any lesser amount determined by the Board of Directors.
Broker
In Favor Against Abstain Non-Vote
----------- ----------- ----------- -----------
9,828,447 13,311 8,554 2,604,056
2) Proposal to ratify and approve an amendment to the Company's 1995
Director Option Plan increasing the number of shares of Common Stock
reserved for issuance thereunder by 100,000 shares.
Broker
In Favor Against Abstain Non-Vote
----------- ----------- ----------- -----------
8,795,923 938,314 116,075 2,604,056
3) Proposal to ratify the appointment of KPMG Peat Marwick LLP as
the independent auditors of the Company for the fiscal year
ending November 29, 1998.
Broker
In Favor Against Abstain Non-Vote
----------- ----------- ----------- -----------
12,445,688 2,675 6,005 0
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
Exhibit No. Description
- ----------- ----------------------------------------------------------------
10.26 Agreement dated April 27, 1998, by and among CKS Group, Inc.,
CKS Group (Europe) GmbH, CKS Holding Deutschland GmbH and the
former shareholders of CKS Holding Deutschland GmbH (f.k.a
Elektronische Publikationen GmbH).
27.1 Financial Data Schedule
b. Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CKS GROUP, INC.
(Registrant)
Date: July 30, 1998 By: /s/ MARK D. KVAMME
----------------------------------
Mark D. Kvamme, Chairman and Chief
Executive Officer (Principal
Executive Officer)
Date: July 30, 1998 By: /s/ CARLTON H. BAAB
----------------------------------
Carlton H. Baab, Executive Vice
President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- ----------------------------------------------------------------
10.26 Agreement dated April 27, 1998, by and among CKS Group, Inc.,
CKS Group (Europe) GmbH, CKS Holding Deutschland GmbH and the
former shareholders of CKS Holding Deutschland GmbH (f.k.a
Elektronische Publikationen GmbH).
27.1 Financial Data Schedule
Agreement
by and among
CKS Group, Inc. ("Parent"),
CKS Group (Europe) GmbH ("Sub"),
CKS Holding Deutschland GmbH (the "Company"), and
Messrs. Michael Poliza, Michael Rene Schopf, Peter Wernstedt, Detlef Schmuck,
Roland Tetzlaff, Peter Rohwer, Hans Hermann Munchmeyer, Hannover Finanz GmbH
Beteiligungen und Kapitalanlagen and Commerz Unternehmensbeteiligungs-AG
(such individuals and entities being hereinafter referred to collectively as
the "Company Shareholders", and each of them individually, as a
"Company Shareholder")
Preamble
The above parties hereto are parties to a certain Share Acquisition
agreement dated January 8, 1997 as amended by a further agreement
captioned "Amendment No. 1 to the Share Acquisition Agreement" of
March 10, 1997, such Share Acquisition Agreement so amended
hereinafter being referred to as the "Original Agreement". The
parties now agree to modify their legal relationships as established
by the Original Agreement as follows:
Contractual Agreements
1. Termination of Obligations Under Original Agreement.
Any obligations of the parties under the Original Agreement
shall lapse to the extent such obligations have not been
fulfilled prior to the execution hereof (hereinafter the
"Amendment Date") and except as set forth in Clauses 2 et seqq.
below. The termination of obligations hereunder shall be
effective as of the Amendment Date and shall include any and all
covenants and guarantees undertaken by the parties in the
Original Agreement.
2. Non-compete to Continue.
The obligations of the Company Shareholders under Section 5.2 of
the Original Agreement (Covenant Not to Compete or Solicit)
shall continue to be effective beyond the Amendment Date
pursuant to the terms of such Section 5.2.
2a. Guarantees as to Taxes and Social Security Dues.
The guarantees of the Company Shareholders as to taxes and
social security dues as provided in the Original Agreement shall
continue to be effective beyond the Amendment Date pursuant to
the terms of Section 7.1 of the Original Agreement.
2b. Confidentiality.
Section 5.4 of the Original Agreement shall continue to be in effect.
3. Fixed Payment of DM11,109,600.
Sub shall pay to the Company Shareholders DM 11,109,600 in cash
by transfer to a bank account to be indicated to Sub by Dr.
Peter Versteegen (hereinafter the "Versteegen Account"), such
payment to be received on the Versteegen Account no later than
on the third business day following the execution hereof.
4. Contingent Payment of DM 540,000.
In addition, Sub shall, on September 20, 1998, pay to the
Versteegen Account in cash another DM 540,000 less the amount by
which the total Pretax Income for the period starting March 1,
1998 and ending August 31, 1998 shall be less than DM2,132,000,
provided that
(i) Pretax Income shall have the meaning ascribed to such
term in the Original Agreement,
(ii) Pretax Income, absent agreement between Parent and Hans
Hermann Munchmeyer as to the amount of Pretax Income
before September 16, 1998, shall be determined under the
procedure set forth in Section 1.8(b) of the Original
Agreement provided that Hans Hermann Munchmeyer shall be
deemed the Shareholder Representative as such term is used
in such section.
5. Details as to Payments.
Any payments to be made hereunder shall be made net of any fees
or any other charges by any bank involved in such payments. Any
payments to be made hereunder shall bear interest from the date
on which such payments are supposed to be received at a rate of
8% on the amount outstanding from time to time.
6. Agreement Contingent on Aspri Sale.
The parties shall cause Prisma Holding GmbH and CKS Holding
Deutschland GmbH to enter into a notarized agreement as to the
sale by Prisma Holding GmbH to CKS Holding Deutschland GmbH of
all of the shares in Aspri Trading GmbH at a purchase price of
DM 540,000 in cash, which agreement shall substantially be in
the form of Exhibit 1.
7. Purchase of Aspri Services.
The parties shall cause Prisma Holding GmbH and Aspri Trading
GmbH to enter into a contract under which Prisma Holding GmbH
shall agree to purchase (and/or cause its subsidiaries to
purchase) MIS and database services from Aspri Trading GmbH for
a period running two years from the Assignment Date as in the
sale agreement as in clause 6 above provided that (i) the value
of the services so to be purchased by Prisma Holding GmbH (or
caused to be purchased by its subsidiaries) shall be at least
DM 1,300,000 in the first year thereafter and at least
DM 1,000,000 in the second year thereafter and (ii) such
contract to be entered into between Prisma Holding GmbH and
Aspri Trading GmbH shall substantially be in the form set forth
in Exhibit 2.
8. Restatement of Solo Agreement.
The parties shall cause the Service Agreement dated March 10,
1997 between CKS Realtime Sales- and Marketing-Services GmbH
(formerly "UpToDate Service- und Vertriebsgesellschaft mbH") and
e.com Trade Services GmbH (formerly "UTD Software-Logistics
GmbH") to be amended to read as set forth in Exhibit 3 hereto.
9. Loan to Solo.
The Company Shareholders shall cause Prisma Holding GmbH to
grant a credit facility to e.com Trade Services GmbH pursuant to
the terms of the Loan Agreement attached hereto as Exhibit 4 and
not to amend or terminate such without the consent of the
Company (subject to the automatic expiry of the Loan Agreement
under its clause 4).
10. Guarantee by Parent to Continue.
The Company herewith guarantees all obligations of Sub pursuant
to this Agreement provided that the Company Shareholders shall
not be required to take legal action against Sub before
enforcing their claim under this guarantee.
11. General Provisions of Original Agreement to Continue.
Article IX of the Original Agreement (General Provisions) shall
apply to this Agreement provided that
(i) communications directed to the Company Shareholders shall
be sent to Hans Hermann Munchmeyer, Stubbenhuk 7, 20459
Hamburg, Germany, telephone no. 370354-0, facsimile no.
370354-10 with a copy to Bruckhaus Westrick Heller Lober,
Alsterarkaden 27, 20354 Hamburg, Germany, Attention: Dr.
Peter Versteegen, telephone no. 36 90 6-206, facsimile no.
36 90 6-155, and
(ii) this Agreement has been executed in two originals and each
party shall receive a simple copy thereof.
12. Prisma Successors.
This Agreement shall be binding on all successors of Prisma
including any entity which purchases all or a majority of
Prisma's assets, including the shares or assets of any of
Prisma's subsidiaries.
Hamburg, this 27th day of April 1998
Read, approved and signed:
/s/ Robert T. Clarkson /s/ Peter Versteegen
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-29-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 21,625
<SECURITIES> 17,263
<RECEIVABLES> 44,387
<ALLOWANCES> 1,771
<INVENTORY> 0
<CURRENT-ASSETS> 93,173
<PP&E> 5,735
<DEPRECIATION> 0
<TOTAL-ASSETS> 141,402
<CURRENT-LIABILITIES> 40,918
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0
0
<COMMON> 15
<OTHER-SE> 99,704
<TOTAL-LIABILITY-AND-EQUITY> 141,402
<SALES> 71,998
<TOTAL-REVENUES> 71,998
<CGS> 0
<TOTAL-COSTS> 65,849
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 6,896
<INCOME-TAX> 2,885
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<EPS-PRIMARY> $0.26
<EPS-DILUTED> $0.25
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