UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark one)
(X) Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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( ) Transition Report under Section 13 or 15(d) of the Exchange Act.
For the transition period from ______________ to
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Commission File Number: 000-21775
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THINK NEW IDEAS, INC.
(Exact name of small business issuer as specified in its charter)
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Delaware 95-4578104
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
--------------------------------------
45 West 36th Street, 12th Floor, New York, New York 10018
(Address of principal executive offices)
(212) 629-6800
(Issuer's telephone number)
--------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 13, 1997
- ----- --------------------------------
Common Stock, par value $.0001 6,941,471
per share shares
Transitional Small Business Disclosure Format (check one) Yes / / No /X/
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THINK NEW IDEAS, INC.
FORM 10-QSB
INDEX
Page
PART I - FINANCIAL INFORMATION................................................1
Item 1. Consolidated Financial Statements..................................1
Condensed Consolidated Balance Sheet as of September 30, 1997............1
Condensed Consolidated Statements of Operations for the three
month periods ended September 30, 1997 and 1996..........................2
Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 1997 and 1996.................................3
Notes to Condensed Consolidated Financial Statements.....................4
Item 2. Management's Discussion and Analysis or Plan of Operation..........7
PART II - OTHER INFORMATION..................................................15
Item 1. Legal Proceedings.................................................15
Item 2. Changes in Securities.............................................15
Item 3. Defaults Upon Senior Securities...................................15
Item 4. Submission of Matters to a Vote of Security Holders...............15
Item 5. Other Information and Subsequent Events...........................15
Item 6. Exhibits and Reports on Form 8-K..................................15
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30,
1997
-----------------
ASSETS
Current assets:
Cash and cash $ 5,585,966
equivalents
Marketable securities 250,283
Accounts receivable, net of allowance for doubtful
accounts of $614,137 15,729,275
Unbilled receivables 4,442,434
Prepaid expenses and other assets 2,074,557
-----------------
Total current assets 28,082,515
Property, plant and equipment, net 2,461,074
Software development costs 97,500
Goodwill, net of accumulated amortization of $1,553,813 1,199,187
Other assets 353,972
=================
Total assets $ 32,194,248
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 5,117,266
Accrued restructuring costs 501,746
Deferred revenue 11,889,139
Income taxes payable 40,571
Due to related party 1,906,512
Current portion of obligations under capital leases 156,867
-----------------
Total current liabilities 19,612,101
Obligations under capital leases 233,826
Note payable to related party 515,760
Other long-term liability --
-----------------
Total liabilities 20,361,687
-----------------
Commitments and contingencies Shareholders' equity:
Preferred stock, $.0001 par value; 5,000,000 shares
authorized; none issued and outstanding --
Common stock, $.0001 par value; 50,000,000 shares
authorized; 6,611,667 shares issued and outstanding 662
Additional paid in capital 19,447,542
Accumulated deficit (7,615,643)
-----------------
Total shareholders' equity 11,832,561
=================
Total liabilities and shareholders' equity $ 32,194,248
=================
See accompanying notes to condensed consolidated financial statements.
1
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1997 1996
--------------- --------------
Revenues $ 6,956,480 $ 4,238,968
Operating expenses:
Direct salaries and related expenses 3,440,264 1,770,617
Other direct expenses 1,565,687 1,172,999
Selling, general and administrative expenses 1,456,322 993,495
Depreciation and amortization 427,595 415,241
----------- -----------
Operating profit/(loss) 66,612 (113,384)
Interest income/(expense) and other net (1,197) (61,097)
----------- -----------
Profit/(loss) before provision for taxes 65,415 (174,481)
Provision for income taxes 4,580 26,774
=========== ===========
Net (loss) income $ 60,835 $ (201,255)
=========== ===========
Net income (loss) per share - primary $ 0.01 $ (0.06)
Weighted average shares outstanding 6,151,789 3,035,575
Net income per share - fully diluted $ 0.01 --
Weighted average shares outstanding 7,257,489 --
See accompanying notes to condensed consolidated financial statements.
2
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1997 1996
--------------- --------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 60,835 $ (201,255)
Adjustments to reconcile net income (loss) to
net cash provided by
(used in) operating activities:
Depreciation and amortization 84,364 62,918
Amortization of intangibles and deferred
financing costs 343,231 351,723
Deferred income taxes -- (12,000)
Bad debt expense -- 41,664
Consulting fees 38,000 --
Changes in assets and liabilities:
Accounts receivable (6,414,424) (447,084)
Unbilled receivables (1,945,045) (895,647)
Accounts payable and accrued expenses (407,932) (89,374)
Deferred revenue 10,935,583 (168,000)
Other assets and liabilities (1,273,438) (333,087)
--------------- --------------
Net cash provided by (used in) operating
activities 1,421,174 (1,690,142)
--------------- --------------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to software development costs -- (94,057)
Purchases of marketable securities (3,262,464) --
Sales of marketable securities 4,221,140 --
Purchases of property and equipment (214,685) (156,108)
--------------- --------------
Net cash provided by (used in) investing 743,991 (250,165)
activities
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of promissory notes -- (1,880,505)
Deferred offering costs -- (289,276)
Distributions to shareholders -- (80,000)
Proceeds from private placement -- 4,948,062
Repayments on operating lines of credit -- (70,000)
Principal payments on long-term capital leases (30,546) --
--------------- --------------
Net cash (used in) provided by financing
activities (30,546) 2,628,281
--------------- --------------
Net increase in cash and cash equivalents 2,134,619 687,974
Cash and cash equivalents, beginning of period 3,451,347 429,596
=============== ==============
Cash and cash equivalents, end of period $ 5,585,966 $ 1,117,570
=============== ==============
Supplemental Cash Flow Information:
Cash paid during the period
Income taxes $ 9,880 $ 90,000
Interest 4,917 116,891
Noncash investing and financing activities:
Conversion of convertible promissory notes -- 189,495
into Common Stock
Issuance of Common Stock to settle long-term 206,250 --
liability
See accompanying notes to condensed consolidated financial statements.
3
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Financial Statements
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB and Regulation S-B
(including Item 310(b) thereof) and do not include all of the information and
note disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of management, such condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial position at September 30, 1997 and the results of operations for the
three month periods ending September 30, 1997 and 1996. The results of
operations for the three month period ended September 30, 1997 may not be
indicative of the results that may be expected for the fiscal year ending June
30, 1998. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
and the notes thereto for the fiscal year ended June 30, 1997.
Certain amounts for the three months ended September 30, 1996 have been
reclassified to conform to the presentation of the three months ended September
30, 1997.
Note 2 - Business Acquisitions
On May 31, 1997, the Company acquired certain assets and operations of
Fathom Advertising Agency, Inc. ("Fathom"), a provider of traditional full
service advertising services, from Ketchum Communications, Inc. ("Ketchum"), a
wholly-owned subsidiary of Omnicom Group Inc. ("Omnicom"), a principal
shareholder of the Company, in exchange for 120,000 shares of the Company's
common stock (the "Common Stock"). Fathom had revenues of approximately
$1,800,000 for the year ended December 31, 1996, which were derived primarily
from one customer. The acquisition has been accounted for using the purchase
method of accounting and, accordingly, the results of operations of Fathom have
been reflected in the consolidated financial statements of the Company from the
date of acquisition. In connection with the acquisition, the Company is to
return the excess of media accounts receivable purchased ($3,012,592) over
accounts payable assumed ($1,106,080) to Ketchum in the amount of $1,906,512, as
collected. The purchase price of $442,500, which equals the excess over the
carrying values of the net assets acquired, is being amortized by the Company
over two years.
Note 3 - Private Placement
In August 1996, the Company issued shares of Common Stock to Omnicom in a
private placement. As a result, the Company issued an aggregate of 938,667
shares of Common Stock in exchange for net proceeds (after transaction costs of
approximately $50,000) of $4,948,000. Additionally, certain of the Company's
principal shareholders gave Omnicom an additional 124,667 shares of Common Stock
owned by them for no additional consideration.
4
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 4 - Convertible Promissory Note Conversions and Extinguishments
In March 1996, the Company borrowed $270,000 pursuant to the terms of
three separate 10% convertible promissory notes. Two of the notes, having
original principal balances of $225,000 and $20,000, were payable to Benchmark
Equity Group, Inc. (`Benchmark"), which is controlled by Frank DeLape, a former
director and a principal shareholder of the Company and to Mr. DeLape
individually. Amounts outstanding under each of the promissory notes were
payable upon the earlier of September 30, 1996 or a debt or equity financing
resulting in proceeds to the Company of $2,000,000 or more. Such notes were
repaid and an aggregate of $27,000 in principal thereof was converted into
216,667 shares of Common Stock in August, 1996.
In April 1996, the Company raised $1,583,000, net of placement fees of
$218,000, through a private placement of 12% convertible promissory notes. The
principal balance, together with accrued interest, was due upon the earlier of
April 30, 1997 or a debt or equity financing resulting in proceeds to the
Company of $3,000,000 or more. Such notes were repaid and an aggregate of
$162,000 in principal thereof was converted into 216,660 shares of the Common
Stock in August, 1996.
In August 1997, the Company conducted the private placement described in
Note 3 above, a portion of the proceeds of which was used to extinguish the
unconverted principal and interest of $1,881,000 under the convertible
promissory notes.
Note 5 - Restructuring Costs
In June 1997, the Company implemented a plan for two of its subsidiaries,
NetCube Corporation ("NetCube") and Internet One, Inc. ("Internet One") to close
the operations of these subsidiaries and dispose of related assets due to
continued decline in such entities' performance. The cost of this plan was
accounted for in accordance with the guidance set forth in Emerging Issues Task
Force Issue 94-3 "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring)" ("EITF 94-3").
The pretax costs of approximately $1,732,000 which were incurred as a part
of this plan represent employee termination and severance costs, the write-down
of capitalized software costs and other related costs that were incurred as a
direct result of the plan. As of September 30, 1997, approximately $634,000 was
paid under this arrangement. The components of the restructuring costs are as
follows:
Write-down of capitalized software costs $597,000
Severance benefits and employee termination costs 681,000
Disposal of fixed assets and other assets 369,000
Other 85,000
===================
$1,732,000
===================
5
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 5 - Restructuring Costs (Continued)
Aggregate revenues and operating losses for NetCube and Internet One for
fiscal 1997 and 1996 were as follows:
1997 1996
----------------- -----------------
Revenues $1,253,000 $2,740,000
Operating loss (1,746,000) (1,073,000)
Note 6 - Consulting Agreement
On June 30, 1997, the Company entered into a one year consulting agreement
with an individual whereby the Company agreed to issue up to an aggregate of
200,000 shares of Common Stock and options to acquire up to 150,000 shares of
Common Stock. The agreement, which may be terminated by the Company at any time
upon delivery of thirty (30) days notice, provides for the issuance of 50,000
shares within 15 days of signing for services rendered prior to such issuance
and the issuance of 12,500 shares of Common Stock and options to purchase 12,500
shares of Common Stock at the end of each month of the agreement. The fair value
of the shares of Common Stock and options will be charged to operations on the
date of issuance and grant, respectively. For the period ended September 30,
1997, the Company charged approximately $122,000 to operations.
Note 7 - Subsequent Events
On November 3, 1997, the Company entered into an agreement and plan of
merger (the "BBG Agreement") with BBG New Media, Inc., a Massachusetts
corporation ("BBG"), which provides interactive marketing services, in exchange
for: (i) the issuance of 303,334 shares of Common Stock and $175,000 in cash;
and (ii) the subsequent issuance of shares of Common Stock based upon a
percentage of sales growth of BBG during the period from November 1, 1998
through October 31, 1999. The acquisition will be accounted for using the
purchase method of accounting and, accordingly, the results of operations of BBG
will be reflected in the Company's financial statements from the effective date
of the merger.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of the Company's consolidated
financial condition and results of operations should be read in conjunction with
the Company's Condensed Consolidated Financial Statements and Notes thereto.
This document may 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
section entitled "Business--Factors Affecting Operating Results and Market Price
of Stock" included in the Company's Form 10-KSB for the year ended June 30, 1997
filed with the Securities and Exchange Commission in October 1997.
Corporate Background
The Company was incorporated in the State of Delaware in January 1996 for
the purpose of creating a corporate structure to facilitate the combination and
integration of specialized businesses operating in the areas of advertising,
marketing, Internet and Intranet services and data management.
On June 30, 1996, the Company completed the acquisition of all of the
outstanding shares of capital stock of Scott A. Mednick & Associates, Inc.
("Mednick"), On Ramp, Inc. ("On Ramp"), Internet One, NetCube, Creative
Resources, Inc. ("Creative Resources") and the S.D. Goodman Group, Inc.
("Goodman") in exchange for an aggregate of 723,167 shares of Common Stock. The
Company's acquisition of On Ramp was accounted for using the purchase method of
accounting. Each of the Company's other acquisitions was accounted for using the
pooling of interests method. Accordingly, the results of operations for each of
the Company's subsidiaries (other than On Ramp) have been included in the
Company's financial statements since the earlier of July 1, 1993 or each of such
subsidiary's inception. The results of operations of On Ramp have been included
in the Company's financial statements since July 1, 1996.
On May 31, 1997, the Company acquired certain assets and operations of
Fathom, a full service advertising agency, from Ketchum, a wholly-owned
subsidiary of Omnicom, in exchange for the issuance of an aggregate of 120,000
shares of Common Stock. The Company's acquisition of the assets and operations
of Fathom was accounted for using the purchase method of accounting.
Accordingly, the results of operations of Fathom have been included in the
Company's financial statements since June 1, 1997. Fathom's single largest
client accounts for virtually all of its revenue. See Note 2 to the Condensed
Consolidated Financial Statements included elsewhere herein. Larry Kopald, the
individual who was responsible for the this principal client account while at
Fathom, joined the Company as an officer and employee of the Company in
connection with its acquisition of Fathom.
In June 1997, the Company made the decision to restructure the operations
of Internet One in Boulder, Colorado and NetCube in Edgewater, New Jersey.
Internet One had become a production facility for high level technology client
7
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services, but with limited sales and marketing efforts. The Company determined
it could effectively consolidate the client relationships of its Boulder,
Colorado office into its New York and Los Angeles facilities with minimal
impact, and therefore, the facility was closed and all of the employees of
Internet One were terminated. NetCube had developed proprietary data mining and
analysis software for large data base and data warehousing applications. The
Company determined that the marketing of "shrink-wrapped" software was not its
core competency and would both confuse the Company's focus and involve too great
an investment for the anticipated return. The Company has hired several key
developers from NetCube for its New York interactive group, ceasing the ongoing
marketing and helpdesk development at its New Jersey facility. This has resulted
in the termination of the remaining employees of NetCube. The Company is
currently discussing the sale of the remaining assets of NetCube, primarily the
software code, with several different companies. Total estimated costs
associated with the above in the amount of approximately $1,732,000 were
included in the Company's financial statements for the fiscal year ended June
30, 1997. As of September 30, 1997, approximately $634,000 was paid under this
arrangement. See Note 5 to the Condensed Consolidated Financial Statements of
the Company included elsewhere herein.
On November 3, 1997, the Company entered into the BBG Agreement, pursuant
to which the Company acquired BBG in exchange for: (i) the issuance of 303,334
shares of Common Stock and $175,000 in cash; and (ii) the subsequent issuance of
shares of Common Stock based upon a percentage of sales growth of BBG during the
period from November 1, 1998 through October 31, 1999. The acquisition will be
accounted for using the purchase method of accounting and, accordingly, the
results of operations of BBG will be reflected in the Company's financial
statements from the effective date of the merger. See Note 7 to the Condensed
Consolidated Financial Statements included elsewhere herein.
Overview of Operations and Revenue
The Company generates revenue from both traditional marketing and Internet
and interactive media services including Website development and hosting,
corporate internal communications solutions, database marketing, corporate
identity and product branding and packaging, advertising and media placement
services, and interface solutions that provide high-speed access via the
Internet to off-line databases. Historically, revenues from these services by
the Company have been derived on a project-by-project basis, which tends to
cause fluctuations in revenues between reporting periods. Substantial portions
of those revenues have been fixed fees for services to be delivered. While the
Company has recently entered into a number of contracts for ongoing maintenance,
content updates, server hosting and software licensing and subscription
services, which will create recurring revenue streams for the life of their
respective contracts (typically twelve (12) months), it is anticipated that
project revenue will continue to be a significant component of total revenues
and therefore revenue may continue to fluctuate significantly from quarter to
quarter.
The Company generally provides Website design and development and
traditional marketing services under contracts that vary in duration from two to
four weeks in the case of smaller projects and up to five months in the case of
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larger projects. In connection with Website design and development, the Company
typically enters into twelve-month arrangements providing for maintenance,
content updates of Websites and software licensing and hosting of a client
Website on the Company's servers. Revenues from contracted services are
generally recognized using the percentage of completion method based upon the
ratio of costs incurred to total estimated costs of the project. Revenues from
hosting, maintenance and updates are recognized as the services are provided.
Business Strategy
Part of the Company's overall business strategy is to continue to increase
the percentage of revenue that is recurring and to continue to increase the
number of services provided to a particular client. The Company is implementing
this strategy by increasing its over-all marketing and cross-marketing efforts.
Another part of the Company's business strategy is to grow through the
acquisition and integration of synergistically compatible businesses. The
Company believes that there will be a consolidation among technology-based
marketing solution providers and that this consolidation will continue to create
opportunities for the Company to expand through acquisitions and joint ventures.
In addition to its acquisition of the assets and operations of Fathom and its
acquisition of and merger with BBG, the Company has undertaken discussions with
several companies engaged in businesses that are complementary or supplementary
to those of the Company. The Company's acquisition strategies include acquiring
companies that will be integrated into the Company's existing infrastructure,
enabling the Company to acquire access to additional product or service
offerings, experienced management that can contribute to building the business
in a profitable manner, and potentially, provide international expansion
(through the acquisition of companies outside of the United States).
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Revenues
Consolidated revenues increased to $6,956,000 for the three months ended
September 30, 1997 from $4,239,000 for the three months ended September 30, 1996
(64%). Revenues for interactive services increased to $3,065,000 during the
three months ended September 30, 1997 from $2,455,000 during the three months
ended September 30, 1996 (25%). Revenues for traditional strategic marketing
operations increased to $3,891,000 during the three months ended September 30,
1997 from $1,822,000 during the three months ended September 30, 1996 (114%)
primarily as a result of the inclusion of revenues from Fathom for the first
full quarter as well as new clients and increased revenue from additional
services provided to existing clients.
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OPERATING EXPENSES
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
to $3,440,000 during the three months ended September 30, 1997 from $1,771,000
during the three months ended September 30, 1996 (94%) principally as a result
of the Company's investment in additional marketing and creative employees since
the three months ended September 30, 1996 to meet its higher level of operations
and its expected growth from existing outstanding project proposals.
Additionally, approximately $409,000 of the increase resulted from the inclusion
of the operations of Fathom (acquired in May 1997) for the three months ended
September 30, 1997.
Other Direct Expenses
Other direct expenses include materials, contract freelance talent
(independent consultants and contractors), facilities and equipment expenses.
Other direct expenses increased to $1,566,000 during the three months ended
September 30, 1997 from $1,173,000 during the three months ended September 30,
1996 (34%). The increase was primarily related to increased costs associated
with the Company's higher level of revenues.
Selling, General And Administrative Expenses
Selling, 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. Selling, general and administrative expenses increased to
$1,456,000 during the three months ended September 30, 1997 from $993,000 during
the three months ended September 30, fiscal 1996 (47%), primarily due to the
formation and continued expansion of the Company's corporate infrastructure for
both internal growth and growth through acquisition.
Depreciation and Amortization
Depreciation and amortization increased to $428,000 during the three
months ended September 30, 1997 from $415,000 during the three months ended
September 30, 1996. Depreciation and amortization includes $300,000 and $50,000
for the amortization of goodwill and other intangibles relating to the purchase
method of accounting required for the Company's acquisitions of On Ramp in June
1996 and Fathom in May 1997, respectively.
Interest Income/Expense and Other Net
The $1,200 in net other income reflected in the three months ended
September 30, 1997 compares favorably to the net other expense of $61,100
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reflected in the three months ended September 30, 1996 primarily due to the
effect of the investment of the cash proceeds from the Company's initial public
offering in November 1996 (the "Initial Public Offering").
Pre-Tax Profit/Loss
The Company had a pre-tax profit of $65,000 in the three months ended
September 30, 1997 compared to a pre-tax loss of $174,000 in the three months
ended September 30, 1996. This represents the Company's first profitable fiscal
quarter since the Initial Public Offering.
Income Taxes
The Company had an income tax expense of $5,000, primarily relating to
state taxes, in the three months ended September 30, 1997 compared to an income
tax expense of $27,000 in the three months ended September 30, 1996. The
decrease is a result of accumulated net operating loss carryforwards the Company
is able to apply against pre-tax profit. The Company will file a consolidated
federal tax return beginning with the year ending June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since their respective formations, the Company's subsidiaries (the
"Subsidiaries") have financed their operations primarily through cash generated
from operations, bank borrowings, shareholder contributions and private
financings. Since the Initial Public Offering in November 1996, the Company has
financed its operations with the proceeds of such offering and cash generated by
operations.
During 1996, the Company entered into a series of transactions in order to
fund the operations of the Subsidiaries and to prepare itself for the Initial
Public Offering. In March 1996, the Company raised $270,000 in a private
offering, pursuant to which the Company issued three 10% convertible promissory
notes (the "10% Notes"). Proceeds of the private placement were used to cover
costs related to the Company's acquisitions of the Subsidiaries and the Initial
Public Offering. The Company raised an additional $1,800,000 in another private
offering in April 1996, pursuant to which the Company issued several 12%
convertible promissory notes (the "12% Notes"). Proceeds received by the
Company, after deducting placement fees and other expenses, totaled $1,582,500.
An aggregate of $1,000,000 of the proceeds received from this private placement
was loaned to On Ramp in order to complete a transaction in which On Ramp
redeemed outstanding shares of its capital stock. The remaining proceeds
received from this private placement were used to provide working capital for On
Ramp and Internet One. See Note 4 to the Condensed Consolidated Financial
Statements included elsewhere herein.
In August 1996, the Company received net proceeds of $4,948,000 through
the issuance of 938,667 shares of Common Stock to Omnicom. Proceeds from this
transaction (the "Omnicom Transaction") were used by the Company to retire the
nonconvertible portion of the outstanding principal and accrued interest under
the 10% Notes and 12% Notes (aggregating $1,880,505), to repay certain other
debt and outstanding obligations, to fund the operations of the Subsidiaries and
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to cover expenses and costs incurred in connection with the acquisitions of the
Subsidiaries and the Initial Public Offering. See Note 3 to the Condensed
Consolidated Financial Statements included elsewhere herein.
In November 1996, the Company completed its Initial Public Offering, which
has provided significant working capital to the Company and its Subsidiaries.
The Company issued 2,150,000 shares of Common Stock and received net proceeds of
$11,973,000.
At September 30, 1997, the Company had cash and cash equivalents of
approximately $5,586,000 and working capital of approximately $8,470,000,
primarily as a result of receipts of the proceeds of the Initial Public Offering
and receipt of payments for services rendered to clients.
Net cash provided by operating activities for the three months ended
September 30, 1997 of $1,421,000 resulted primarily from net income of $61,000,
offset by noncash charges for: (i) depreciation and amortization of $428,000
(including amortization of intangibles of $343,000), and (ii) consulting fees of
$38,000, combined with an increase in deferred revenue of $10,936,000, offset by
a decrease in accounts receivables and unbilled receivables of $6,414,000 and
$1,945,000, respectively, and an increase in accounts payable and accrued
expenses of $408,000. The increase in unbilled receivables is principally due to
two Website development projects undertaken by On Ramp for which significant
work has been performed in advance of the dates billings are permitted under the
applicable contracts. Accounts receivable increased primarily due to
pass-through costs billed to clients associated with the operation of Fathom,
which was acquired in May 1997, and increased volume of work performed by On
Ramp. Accounts receivable greater than sixty (60) days old increased from
$1,582,000 at June 30, 1997 to $3,578,000 at September 30, 1997. The increase in
such receivables is primarily due to certain receivables arising from ongoing
strategic marketing and branding assignments undertaken for certain significant
long-standing clients whom the Company believes to be credit-worthy. Such
amounts were either collected subsequent to September 30, 1997 or the Company
believes them to be collectible in the near future. The Company believes that
its reserve for bad debts of approximately $614,000 is sufficient to adjust the
carrying amount of its receivables at September 30, 1997 to an amount which
approximates net realizable value. Accounts payable and accrued expenses
increased principally due to pass-through costs associated with Fathom which was
acquired in May 1997.
Net cash provided by investing activities for the period ended September
30, 1997 of $744,000 resulted primarily from net sales of marketable securities
of $959,000, offset in part by capital expenditures of $215,000.
Net cash used in financing activities for the period ended September 30,
1997 of $31,000 resulted from principal payments on long-term capital leases.
The Company is a party to employment agreements ranging in term from one
year to three years (exclusive of extensions) with several of its executive
officers pursuant to which the Company is obligated to pay such individuals up
to an aggregate of $1,950,000 per year.
12
<PAGE>
Management of the Company anticipates that the Company will continue to
experience significant changes in its operating cost structure as the
Subsidiaries continue to be integrated, and administration and control of the
Company's future operations become more centralized. Management believes that
the Company's existing cash balances and the cash generated from continuing
operations will be sufficient to fund its operations, the anticipated
expenditures required for product development, its organizational infrastructure
(including additional personnel and upgraded telecommunications and computer
systems) and general corporate needs for the next twelve (12) months. However,
there can be no assurance that the Company will not be required to seek
additional sources of financing within the foreseeable future. The failure to
raise the funds necessary to finance the Company's future cash requirements
would adversely affect the Company's ability to pursue its operational
strategies.
In connection with the acquisition of On Ramp, the Company recorded
goodwill and other intangible assets in the aggregate amount of $2,410,000,
substantially all of which is being amortized using the straight-line method
over a period of two years. As a result, during the first fiscal quarter of 1997
and over the next several fiscal quarters, the Company has incurred and will
incur non-cash charges to operations aggregating for each full fiscal year
approximately $1,205,000.
In connection with the acquisition of the assets and operations of Fathom,
the Company recorded goodwill in the amount of $442,500, which is being
amortized using the straight-line method over a period of two (2) years. As a
result, during the three months ended September 30, 1997, the Company incurred a
non-cash charge to operations of approximately $55,000 and will incur over the
next eight (8) fiscal quarters non-cash charges to operations aggregating
approximately $54,000 per quarter.
In connection with the Initial Public Offering, certain stockholders of
the Company agreed to place their shares of Common Stock in an escrow to be
released upon the Company's attainment of certain performance goals (the "Escrow
Shares"). In the event of the release of the Escrow Shares, the Company will
recognize during the period in which the earnings thresholds are probable of
being met or such stock levels achieved, a substantial noncash charge to
earnings equal to the fair market value of such shares on the date of their
release, which would have the effect of significantly increasing the Company's
loss or reducing or eliminating earnings, if any, at such time. The recognition
of such compensation expense may have a depressive effect on the market price of
the Company's securities. Notwithstanding the foregoing discussion, there can be
no assurance that the Company will attain the targets which would enable the
Escrow Shares to be released from escrow. Similar accounting treatment is
expected to be applied with respect to the issuance in subsequent periods of the
shares of Common Stock and options under a certain consulting agreement between
the Company and Jason H. Pollak. See Note 6 to the Condensed Consolidated
Financial Statements included elsewhere herein.
13
<PAGE>
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128
specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS No. 128 is effective for periods ending after
December 15, 1997. The adoption of this statement is not expected to have a
material effect on the consolidated financial statements.
Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), which established standards for reporting and display
of comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS No. 130 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Because of the recent issuance of this standard, management has
been unable to fully evaluate the impact, if any, the standard may have on
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of this standard.
Reporting Segments of an Enterprise
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"), which supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No.
131 establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of this standard,
management has been unable to fully evaluate the impact, if any, it may have on
14
<PAGE>
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of this standard.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any pending or ongoing litigation required
to be disclosed pursuant to this item.
ITEM 2. CHANGES IN SECURITIES
There have been no changes in the securities of the Company required to be
disclosed pursuant to this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There have been no material defaults with respect to any indebtedness of
the Company required to be disclosed pursuant to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of security holders during
the period ended September 30, 1997.
ITEM 5. OTHER INFORMATION AND SUBSEQUENT EVENTS
On November 3, 1997, the Company entered into the BBG Agreement, pursuant
to which the Company acquired BBG in exchange for: (i) the issuance of 303,334
shares of Common Stock and $175,000 in cash; and (ii) the subsequent issuance of
shares of Common Stock based upon a percentage of sales growth of BBG during the
period from November 1, 1998 through October 31, 1999. The acquisition will be
accounted for using the purchase method of accounting and, accordingly, the
results of operations of BBG will be reflected in the Company's financial
statements from the effective date of the merger.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. There are no exhibits incorporated herein by reference.
(b)REPORTS ON FORM 8-K. There were no Current Reports on Form 8-K filed by the
Company during the period ended September 30, 1997.
15
<PAGE>
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, as
amended, the Issuer has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
November 14, 1997 THINK New Ideas, Inc.
By: /s/ Scott A. Mednick
-----------------------------------
Scott A. Mednick
Chief Executive Officer
By: /s/ Melvin Epstein
-----------------------------------
Melvin Epstein
Chief Financial Officer
16
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<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,585,966
<SECURITIES> 250,283
<RECEIVABLES> 16,343,412
<ALLOWANCES> 614,137
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<PP&E> 2,461,074
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0
0
<COMMON> 662
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