SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-21775
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THINK NEW IDEAS, INC.
(Name of small business issuer in its charter)
DELAWARE 95-4578104
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
45 WEST 36TH STREET, 12TH FLOOR, NEW YORK, NEW YORK 10018 (212) 629-6800
(Address and telephone number of principal executive offices)
-------------------------------
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, $0.0001 par value.
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 twelve (12) months (or for such
period that the Registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past ninety (90) days.
Yes /x/ No /_/
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. /_/
The Registrant's revenues for the fiscal year ended June 30, 1997 totaled
$17,436,847.
As of September 26, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant (assuming for this purpose that only directors
and officers of the Registrant are affiliates of the Registrant), based on the
average of the closing bid and asked prices on that date, was approximately
$24,607,482.
As of September 26, 1997, there were 6,611,667 shares of Common Stock
outstanding.
Documents incorporated by reference: Certain exhibits hereto have been
specifically incorporated by reference herein in Item 13 under Part III hereof.
Transitional Small Business Disclosure Format: Yes /_/ No /x/
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INDEX TO FORM 10-KSB
OF
THINK NEW IDEAS, INC.
PAGE
PART I
ITEM 1. DESCRIPTION OF BUSINESS.........................................2
ITEM 2. DESCRIPTION OF PROPERTY........................................12
ITEM 3. LEGAL PROCEEDINGS..............................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................14
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS.............................F-1
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES...........................24
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.....24
ITEM 10. EXECUTIVE COMPENSATION.........................................28
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................35
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................37
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...............................39
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The Business section and other parts hereof 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 sections entitled "Business-Factors Affecting
Operating Results and Market Price of Stock" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CORPORATE OVERVIEW
THINK New Ideas, Inc., a Delaware corporation (the "Company"), was
incorporated pursuant to the laws of the State of Delaware in January 1996 for
the purpose of creating a corporate structure to facilitate the combination,
operation, 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 common stock of the following entities: Internet One, Inc., a Colorado
corporation ("Internet One"), Creative Resources, Inc., a Georgia corporation
("Creative Resources"); Scott A. Mednick & Associates, Inc., a California
corporation ("The Mednick Group"); The Goodman Group, Inc., a New York
corporation ("Goodman Group"); On Ramp, Inc., a New York corporation ("On
Ramp"); NetCube Corporation, a Delaware corporation and NetCube Corporation, a
New Jersey corporation (collectively, "NetCube"), (collectively referred to as
the "Subsidiaries") in exchange for an aggregate of 723,167 shares of the
Company's common stock (the "Common Stock"). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
In August 1996, the Company entered into a strategic relationship with
Omnicom Group Inc., a publicly held company ("Omnicom"). Omnicom is the third
largest marketing and advertising company in the world. Pursuant to the
Company's agreement with Omnicom (the "Omnicom Agreement"), the Company received
net proceeds of $4,948,000 through the issuance of 938,667 shares of Common
Stock to Omnicom. In November 1996, four principal stockholders of the Company
transferred an aggregate of 124,667 shares of Common Stock to Omnicom for no
cash consideration (the "Omnicom Transaction"). Since June 1996, the Company and
Omnicom have engaged in joint marketing of their services to several Omnicom
clients and the Company believes that the relationship is providing access to a
substantial additional client base.
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In November 1996, the Company completed its initial public offering (the
"Initial Public Offering") pursuant to which the Company issued 2,150,000 shares
of Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources." In
connection with the Initial Public Offering, the Company effected two reverse
stock splits; accordingly, all share and per share data reflects the effects of
such splits. See "Note 7 to the Company's Consolidated Financial Statements."
Pursuant to the terms of a certain Asset Acquisition and Forbearance
Agreement dated as of May 31, 1997 (the "Ketchum Agreement"), the Company
acquired certain assets and operations of Fathom Advertising ("Fathom"), a full
service advertising agency, from Ketchum Communications, Inc. ("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 certain 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 Consolidated Financial Statements since June 1, 1997. Fathom's
single largest client is Oracle Corporation, a Delaware corporation ("Oracle"),
which accounts for virtually all of its revenue. Larry Kopald, the individual
who was responsible for the Oracle account while at Fathom, joined the Company
in connection with its acquisition of Fathom. See "Management" and "Executive
Compensation."
In June 1997, the Company made the decision to restructure its
operations in Boulder, Colorado and Edgewater, New Jersey. These operations had
been conducted through Internet One and NetCube, respectively. Internet One had
become a production facility for high level technology client services, but with
limited sales and marketing efforts. The Company determined it could effectively
consolidate the client relationships of its Boulder 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 have been included in the Company's Consolidated
Financial Statements for the fiscal year ended June 30, 1997. See the
Consolidated Financial Statements of the Company and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
BUSINESS
The Company's operations are conducted through several sectors of
business: Traditional, or "off-line" marketing and communications, Online
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marketing and communications, Marketing and Technology Consulting, and Internet
and Intranet systems development and integration. 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 Subsidiaries have been derived
on a project-by-project basis, which tends to cause fluctuations in revenues
between reporting periods. A substantial portion 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, 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
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.
Part of the Company's overall business strategy is to continue to
increase the percentage of revenue which 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 certain assets and operations of Fathom, the
Company has undertaken discussions with several companies engaged in businesses
that are complimentary 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).
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SERVICES AND PRODUCTS
The Company combines technological expertise in Internet and interactive
communications with extensive traditional marketing experience to provide
integrated solutions to leading corporate accounts. The Company's solutions
incorporate brand and corporate strategy and positioning, Website development,
maintenance, updating and hosting, corporate intranet solutions, sophisticated
content development capabilities, data access and profile-driven response
technologies, and advertising and media placement services. The Company has
developed several proprietary software applications (including WebMechanic,
E-Corp, ASAP, Comparabase) that it utilizes in delivering marketing solutions to
its clients. The Company focuses on assisting its clients in the following
areas:
POSITION AND BRAND PRODUCTS AND SERVICES. The Company utilizes its
experience in traditional advertising and marketing, as well as its
understanding of the capabilities of different and emerging media, to position
clients and market their products. The Company provides a range of services,
including brand positioning, developing corporate identity and print, television
and packaging design.
MARKET CLIENT PRODUCTS, SERVICES AND ENHANCE CORPORATE COMMUNICATION
USING INTERNET TECHNOLOGY. The Company combines traditional and interactive
media approaches to advertising and marketing in order to position its clients
and market their products and services on the Internet. This includes the
development of Websites that incorporate the latest in Internet technology. For
example, at the NEC Website a visitor can request a database-driven catalogue to
compare a number of NEC products and generate customized Webpages displaying a
comparative presentation of those NEC products in which that visitor has an
interest (http://www.nec.com). The Company's "smart Website" methodology helps
to track visitors as they are referred by online advertising and journey through
a Website, making suggestions via "dynamically generated content" targeted
toward an individual's browsing habits (http://www.avon.com), or category of
interest (www.as400.ibm.com). The Company's WebMechanic sitebuilding system
enables centralized corporations to empower their distributors, wholesalers,
retailers, etc. to created custom, personalized "satellite" Websites and edit
them at will with virtually no online experience (www.bigleaguers.com;
www.chrysler.com). The skillful application of these technologies enable a
business to enhance targeted communications directly with and between
wholesalers, retailers, manufacturers and customers.
IDENTIFY AND DEVELOP NEW LINES OF DISTRIBUTION. The Company is working
with its clients to develop new channels of distribution utilizing the Internet.
For example, Avon sought to utilize a marketing channel not currently addressed
by its traditional distribution system. The Company is assisting Avon in
establishing a Website from which it will market directly to customers over the
Internet and allow Avon representatives to receive product information and
communicate internally. The Website (http://www.avon.com) was introduced during
the fiscal year ended June 30, 1997. The Company has also created a Website that
enables Bloomingdale's to sell a variety of its merchandise online, allowing it
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to extend its distribution beyond its current retail store and catalog presence
(http://www.bloomingdales.com).
COMMUNICATE AND OPERATE MORE EFFECTIVELY INTERNALLY. The Company's
user-friendly interfaces and Internet tools, combined with training software and
methodology, enable it to develop and deploy sophisticated intranet solutions
for its clients. For example, the Company developed a password-protected
intranet to allow Anheuser Busch to deliver proprietary marketing information to
its distributors. This intranet allows Anheuser Busch, among other things, to
distribute information and engage in communication with its distributors quickly
and provides a means for distributors to order marketing materials easily
through a secure medium.
ACCESS DATA MORE EFFICIENTLY. The Company's proprietary technologies
allow users of both the World Wide Web and corporate intranets to easily access,
analyze and utilize data via an online environment. The Company's solutions
include such software components as WebMechanic, E-Corp, ASAP, and Comparabase.
The Company has integrated the learning derived from the NetCube technology into
a variety of software solutions, enhancing data retrieval and analysis.
WebMechanic and E-Corp enable the Company's clients to automate data publishing
and email on the Internet, via an "automated Website building" engine and
"automated email engine" that can be simply controlled by non-technical users.
ASAP, the Advanced Statistical Analysis Program, is a software application that
provides proprietary statistical analysis to the sponsor of a Website regarding
the number and nature of the visits to that Website. Comparabase is a searchable
comparative on-line database that enables consumers to select products from a
sizeable on-line catalogue and compare them to similar products by feature.
These proprietary tools allow the Company to: (i) craft on-line marketing
solutions that are responsive to user needs, allowing the user to more easily
access, compile and analyze data; and (ii) provide necessary tools to allow the
Website sponsor to assess the effectiveness of its marketing solutions.
CUSTOMERS
The following is a list of customers of the Company that represented
$50,000 or more of the combined revenues of the Company during the fiscal year
ended June 30, 1997.
CONSUMER GOODS SPORTS & ENTERTAINMENT TECHNOLOGY
Anheuser Busch Disney Art Classics Adlink
Avon Products, Inc. Home Box Office. Amgen, Inc.
Bandai Major League Baseball I-LINK
Bloomingdale's Players Association Inquiry.com
Busch Entertainment NFL Properties IBM
Coca-Cola Company Request Television Internet Shopping Network
Colorado Utility Turner Corp Logitech
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Crystal Geyser Water McAfee
Curtis Mathes Holding BUSINESS TO BUSINESS Mita
Nioxin Bankers Trust MSNBC
Pioneer Electronics Eagle River Interactive NEC USA
Reebok ING Barings NETCOM
Reebok International, Inc. Janus Funds Netscape
Rockport Security First Network Oracle
Rockport Foundation Security First Technology Securware, Inc.
Segasoft Sony Electronics
Tambrands Sprint TRAVEL & TRANSPORTATION
Toshiba VisionNet Continental Airlines
VF Corporation Wentworth Research Chrysler Motors
Western Digital Corp
During the fiscal year ended June 30, 1997, Chrysler Corporation
accounted for approximately 10% of the Company's combined revenue and Pioneer
Electronics accounted for approximately 13% of the Company's combined revenue.
No other customers accounted for more than 10% of the Company's combined
revenue.
COMPETITION
The market for the Company's services is highly competitive and is
characterized by pressures to incorporate new capabilities and accelerate job
completion schedules. The Company faces competition from a number of sources.
These sources include national and regional new media marketing companies and
national and local advertising agencies, many of which have started to develop
or acquire interactive media capabilities. New boutiques that either provide
integrated or specialized services (e.g., corporate identity and packaging,
advertising services or Website design) and are technologically proficient, have
emerged and are competing with the Company. Many of the Company's competitors or
potential competitors have longer operating histories, longer client
relationships and significantly greater financial, management, technology,
development, sales, marketing and other resources than the Company. The
Company's ability to maintain its existing clients and generate new clients
depends to a significant degree on the quality of its services and its
reputation among its clients and potential clients, as compared with the quality
of services provided by and the reputations of the Company's competitors. In the
event that the Company loses clients to competitors because of dissatisfaction
with the services performed or provided by the Company, or the reputation of the
Company is otherwise adversely impacted, the business, financial condition and
operating results of the Company could be materially adversely affected.
There are relatively low barriers to entry into the Company's business.
The Company expects that it will face additional competition from new entrants
into the market in the future. There can be no assurance that existing or future
competitors will not develop or offer marketing communication services and
products that provide significant performance, price, creative, technological or
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other advantages over those offered by the Company, which could have a material
adverse effect on the business, financial condition and operating results of the
Company.
The Company believes that the principal competitive factors in the
market for new media marketing services are creative content, quality of
service, breadth of services offered, technological and new media
sophistication, perceived value, responsiveness to clients' needs and timeliness
in delivering solutions. The Company believes that it generally competes
favorably with respect to each of these factors.
EMPLOYEES
As of September 26, 1997, the Company employed 149 full-time employees,
including 5 officers, 13 management personnel, 126 in operations, and 5 sales
and service representatives. The Company considers its relationship with its
employees satisfactory and is not a party to any collective bargaining
agreement.
GOVERNMENT REGULATION
The Company has no knowledge of any governmental regulations which
materially adversely affect its business operations.
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
The Company operates in a rapidly changing environment that involves a
number of uncertainties, some of which are beyond the Company's control. In
addition to the uncertainties described elsewhere in this report, these
uncertainties include:
DEPENDENCE ON KEY ACCOUNTS. The Company's four largest clients accounted
for thirty-eight percent (38%) of the Company's revenues for the fiscal year
ended June 30, 1997, with fluctuations in the amount of revenue contribution
from each such client from quarter to quarter. Pioneer Electronics and Chrysler
Corporation, the Company's two largest clients during the fiscal year ended June
30, 1997, accounted for approximately thirteen percent (13%) and ten percent
(10%) of the Company's revenues, respectively, during the period. Since 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
the Company's major clients do not remain a significant source of revenues, and
the Company is unable to replace these clients, there could be a direct and
immediate material adverse effect on the Company's business, financial condition
and operating results. The Company's typical project lasts from two to four
weeks in the case of smaller projects and up to five months in the case of
larger projects. 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
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use of the Company's services by a significant client would have a material
adverse effect on the Company's business, financial condition and operating
results.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND MARGINS; SEASONALITY OF
BUSINESS. The Company's operating results have fluctuated in the past and may
fluctuate in the future as a result of a variety of factors, including timing of
the completion, material reduction or cancellation of major projects or the loss
of a major client, timing of the receipt of new business, timing of the hiring
or loss of personnel, timing of the opening or closing of an office, the
relative mix of high margin creative projects as compared to lower margin
production projects, changes in the pricing strategies and business model of the
Company or its competitors, capital expenditures and other costs relating to the
expansion of operations, and other factors that are outside of the Company's
control. Operating results could also be materially adversely affected by
increased competition in the Company's markets. The Company'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. The
Company's revenues may be somewhat higher during certain quarters of the
Company's fiscal year reflecting the trends of its clients preparing marketing
campaigns for products launched in anticipation of fall trade shows and the
holiday season. The Company's revenues for the first fiscal quarter tend to be
somewhat lower 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.
MANAGEMENT OF GROWTH; RISKS ASSOCIATED WITH EXPANSION. The Company's
business has grown rapidly in recent periods. The growth of the Company's
business and expansion of its customer base have placed a significant strain on
the Company's management and operations. In the last year, the Company has
opened an office in Seattle, Washington; integrated several companies into one
corporate organization; and has increased the size of each of its divisions in
Los Angeles and New York. The Company's expansion has resulted, and is expected
in the future to result, in substantial growth in the number of its employees
and in increased responsibility for both existing and new management personnel
and strain on the Company's existing operational, financial and management
information systems. The Company's success depends to a significant extent on
the ability of its executive officers and other members of senior management to
operate effectively, both independently and as a group.
In addition, the Company plans to expand its offerings of integrated
marketing communication services and products. There can be no assurance that
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the Company will be successful in identifying new services or products that will
be attractive to clients or that such services or products will ultimately
generate revenues in excess of costs to implement them. 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. There also can be no assurance that the Company will be
able to sustain the rates of growth that it has experienced in the past. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEVELOPING MARKET FOR NEW MEDIA; NEW ENTRANTS; UNPROVEN ACCEPTANCE OF
THE COMPANY'S NEW MEDIA SOLUTIONS. The Company's future growth is dependent to a
significant extent upon its ability to increase the amount of revenue it derives
from providing marketing and advertising solutions to its customers through new
media, which the Company defines as media that delivers content to end users in
digital form, including the World Wide Web, the Internet, proprietary online
services, CD-ROMs and laptop PC presentations. The market for marketing and
advertising through new media has only recently begun to develop, is rapidly
evolving and is characterized by an increasing number of market entrants who
have introduced or developed products and services for communication and
commerce through new media. Demand and market acceptance for recently introduced
products and services are subject to a high level of uncertainty. There can be
no assurance that commerce and communication through new media will continue to
grow. The use of new media in marketing and advertising, particularly by those
individuals and enterprises that have historically relied upon traditional means
of marketing and advertising, generally requires the acceptance of a new way of
conducting business and exchanging information. In particular, enterprises that
have already invested substantial resources in other means of conducting
commerce and exchanging information may be particularly reluctant or slow to
adopt a new strategy that may make their existing resources and infrastructure
less useful.
In connection with the Company's new media services, the Company is
exploring new methods to derive revenue, so that a larger percentage of its
revenues is recurring. These methods include long-term service contracts,
ongoing content development contracts and technology consulting and maintenance
services. There is no assurance that the Company will be able to negotiate such
arrangements with clients.
RISKS ASSOCIATED WITH ACQUISITIONS. As part of its business strategy,
the Company expects to make acquisitions of companies that are in complementary
and/or supplementary to the Company. Any such future acquisitions would 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
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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. In June 1997, the Company acquired certain assets for consideration
consisting of 120,000 shares of Common Stock. The Company is also negotiating
with other potential acquisition targets. The Company expects that future
acquisitions, if any, could provide for consideration to be paid in cash, stock
or a combination of cash and stock. There can be no assurance that any potential
acquisition will be consummated. The Company has also closed the operations of
two (2) of the Subsidiaries. Therefore, there can be no assurance that the
Company's prior acquisitions or any other potential acquisitions will not have a
material adverse effect on the Company's business, financial condition and
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
UNCERTAIN ADOPTION OF INTERNET AS A MEDIUM OF COMMERCE AND
COMMUNICATIONS; DEPENDENCE ON THE INTERNET. The Company's ability to derive
revenues from new media solutions will depend in part upon a robust industry and
the infrastructure for providing Internet access and carrying Internet traffic.
The Internet may not prove to be a viable commercial marketplace because of
inadequate development of the necessary infrastructure, such as a reliable
network backbone or timely development of complementary products, such as high
speed modems. Because global commerce and online exchange of information on the
Internet and other similar open wide area networks are new and evolving, it is
difficult to predict with any assurance whether the Internet will prove to be
and remain a viable commercial marketplace. Moreover, critical issues concerning
the commercial use of the Internet (including security, reliability, cost, ease
of use and access, and quality of service) remain unresolved and may impact the
growth of Internet use. There can be no assurance that the Internet will become
a viable commercial marketplace. If the necessary infrastructure or
complementary products are not developed, or if the Internet does not become a
viable commercial marketplace, the Company's business, operating results and
financial condition could be materially adversely affected.
PROJECT PROFIT EXPOSURES. The Company generates the substantial majority
of its revenues through project fees on a fixed fee for service basis. The
Company assumes greater financial risk on fixed-price type contracts than on
either time-and-material or cost-reimbursable contracts. Failure to anticipate
technical problems, estimate costs accurately or control costs during
performance of a fixed-price contract may reduce the Company's profit or cause a
loss. Although the majority of the Company's projects typically last four to six
weeks and therefore each individual short-term project creates less exposure
than a long-term fixed-price contract, in the event the Company does not
accurately anticipate the progress of a number of significant revenue-generating
projects it could have a material adverse effect on the Company's business,
operating results and financial condition.
CONFLICTS OF INTEREST. Conflicts of interest are inherent in certain
segments of the marketing communications industry, particularly in advertising.
The Company has in the past and 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 clients of the
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Company. In addition, the Company risks alienating or straining relationships
with existing clients each time the Company agrees to provide services to even
indirect competitors of existing Company clients. Conflicts of interest may
jeopardize the stability of revenues generated from existing clients and
preclude access to business prospects, either of which developments could have a
material adverse effect on the Company's business, financial condition and
operating results.
MARKET ACCEPTANCE OF THE COMPANY'S APPROACH; SERVICE DEVELOPMENT; RAPID
TECHNOLOGICAL CHANGE. The Company provides an integrated approach to meet the
marketing communications needs of its clients. To compete successfully against
specialized service providers, the Company believes that its products and
services in each marketing communication discipline will need to be competitive
with the services offered by the firms that specialize in each discipline. There
can be no assurance that the Company will be successful in providing competitive
solutions to clients in each of its integrated marketing communication services
and products. Failure to do so could result in the loss of existing customers or
the inability to attract and retain new customers, either of which developments
could have a material adverse effect on the Company's business, financial
condition and operating results.
SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS. The Company's revenues
and results of operations will be subject to fluctuations based upon the general
economic conditions. If there were to be a general economic downturn or a
recession in the United States, then the Company expects that business
enterprises, including its clients and potential clients, will substantially and
immediately reduce their advertising and marketing budgets. In the event of such
an economic downturn, there can be no assurance that the Company's business,
operating results and financial condition would not be materially and adversely
affected.
ITEM 2. DESCRIPTION OF PROPERTY
The Companies executive and administrative offices are located in New
York, New York. The Company also maintains offices in Los Angeles, California;
Atlanta, Georgia; Edgewater, New Jersey; and Seattle, Washington.
The New York facilities consist of approximately 20,000 square feet on
two floors in midtown Manhattan (the "Manhattan Space"). The Manhattan Space is
currently leased on a month-to-month basis for $145,000 per annum from October
1, 1996 to September 2001 and then for $155,000 per annum from October 1, 2001
to September 30, 2006.
The California facility consists of approximately 14,000 square feet of
space located in Los Angeles. Such space is currently leased by the Company for
a term of ten (10) years. The initial rent for the first three years of the
lease is approximately $27,524 per month. The rent for the following three years
is approximately $30,276 per month and approximately $34,405 per month for the
remaining term of the lease.
The Company operates a facility in New Jersey, which is currently
utilized to support the Company's accounting operations. Additionally, the
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Company operates facilities in Boulder, Colorado; Atlanta, Georgia; and Seattle,
Washington that are engaged in the Company Business sectors. These facilities
range in space from 2,500 square feet to 9,000 square feet. Each of these
facilities is leased, with monthly rents ranging from $750 to $10,000.
The Company believes that its existing facilities are adequate to meet
its current operating needs and that suitable additional space will be available
to the Company on favorable terms should the Company require additional space to
accommodate future operations or expansion. Further, in the event that any one
of the foregoing leases was not renewed, the Company believes that it would be
able to obtain suitable alternative space on terms comparable to those currently
afforded to the Company.
The Company owns no real estate and does not intend to invest in real
estate or interests in real estate, real estate mortgages, or securities of or
interests in persons primarily engaged in real estate activities for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings required to be
disclosed pursuant hereto.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the stockholders of the Company for
consideration during the fourth quarter of the fiscal year ended June 30, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
In November 1996, in connection with the Initial Public Offering, the
Company applied for and was granted inclusion of its securities for quotation on
the Nasdaq National Marketsm ("Nasdaq"). Consequently, the Common Stock
commenced on quotation on Nasdaq on November 26, 1996 under the symbol "THNK."
The following table sets forth, for the periods indicated, the reported
high and low bid and asked price quotations for the Common Stock for the period
from November 26, 1996 (when the Company's securities commenced quotation on
Nasdaq) through June 30, 1997 (the end of the Company's most recent fiscal
year). Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
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COMMON STOCK
----------------------------------------
BID ($) ASKED ($)
PERIOD OF QUOTATION HIGH LOW HIGH LOW
------------------- ---- --- ---- ---
Fiscal 1997:
- -------------
Second Quarter
(commencing November 26,
1996) 7.00 5.88 7.38 6.13
Third Quarter 6.00 3.75 6.25 4.13
Fourth Quarter 4.50 2.50 5.88 2.88
As of September 26, 1997, there were 47 holders of record of Common
Stock based upon information furnished by Continental Stock Transfer and Trust
Company, New York, New York, the transfer agent for the Company's securities.
The Company believes, based upon security positions listings, that there are
more than 300 beneficial owners of the Common Stock. The closing bid and asked
prices of the Company's securities as reported on Nasdaq on September 26, 1997
were: $10.63 and $10.75 per share of Common Stock, respectively. As of September
26, 1997, there were 6,611,667 shares of Common Stock outstanding.
The Company has never paid and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. The Company intends to
retain all earnings for use in the Company's business operations and in the
expansion of its business.
Pursuant to the terms the Ketchum Agreement, the Company issued an
aggregate of 120,000 shares of Common Stock to Ketchum, a wholly-owned
subsidiary of Omnicom pursuant to Section 4(2) of the Securities Act of 1933.
Further description of the transaction is provided under the sections entitled
"Business" and "Certain Relationships and Related Transactions."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 Consolidated Financial Statements and Notes thereto in Item 7
hereof. The Business section and other parts of this Report contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled
"Business--Factors Affecting Operating Results and Market Price of Stock"
commencing on page 2.
OVERVIEW
The Company was incorporated in the State of Delaware in January 1996
for the purpose of creating a corporate structure to facilitate the combination
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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 common stock of the Subsidiaries 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 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.
Pursuant to the terms of the Ketchum Agreement, effective as of 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)
for 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 Consolidated Financial Statements since June 1, 1997.
Fathom's single largest client is Oracle, which accounts for virtually all of
its revenue. Larry Kopald, the individual who was responsible for the Oracle
account while at Fathom, joined the Company in connection with its acquisition
of Fathom. See "Management" and "Executive Compensation."
In June 1997, the Company made the decision to restructure its
operations in Boulder, Colorado and Edgewater, New Jersey. These operations had
been conducted through Internet One and NetCube, respectively. Internet One had
become a production facility for high level technology client services, but with
limited sales and marketing efforts. The Company determined it could effectively
consolidate the client relationships of its Boulder 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 have been included in the Company's Consolidated
Financial Statements for the fiscal year ended June 30, 1997. See the
Consolidated Financial Statements of the Company.
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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
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.
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, 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
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).
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YEARS ENDED JUNE 30, 1997 AND 1996
REVENUES. The following table presents the Company's consolidated
revenues, by reference to line of business, for the fiscal years ended June 30,
1997 and 1996. The individual and combined historical revenues of the
Subsidiaries are not necessarily indicative of the future revenues that may be
expected.
YEAR ENDED JUNE 30,
------------------------------------------------------
($ IN THOUSANDS)
1997 1996
------------------------- ------------------------
$ % $ %
Traditional Marketing $ 7,685 44%
Marketing $7,084 72%
Interactive 56%
Marketing 9,752 2,739 28%
------ ------ ---
Total $17,437 100% $9,823 100%
======== ==== ======= ====
Revenues for the Traditional Marketing business, consisting primarily of
advertising, strategic marketing and corporate and brand positioning, increased
to $7,685,000 in fiscal 1997 from $7,084,000 in fiscal 1996 (9%). The increase
in revenues in fiscal 1997 primarily resulted from the Company's acquisition of
the assets and operations of Fathom.
Revenues for the Interactive Marketing business, consisting primarily of
Internet and intranet site development, systems and services, on-line system
licensing and site hosting and maintenance, increased to $9,752,000 in fiscal
1997 from $2,739,000 in fiscal 1996 (256%). The increase in revenues in fiscal
1997 is primarily due to the acquisition of On Ramp on June 30, 1996 (which had
revenues of $8,673,000 in fiscal 1997) and the result of increased demand for
Internet access and infrastructure. This increase was partially offset by a
decrease in revenues at NetCube and Internet One, as previously discussed.
DIRECT SALARIES AND RELATED EXPENSES. Direct salaries and related
expenses consist of wages, payroll taxes and employee benefits. Direct salaries
and related expenses increased to $10,029,000 in fiscal 1997 from $3,629,000 in
fiscal 1996 (176%). The increase in fiscal 1997 is primarily due to the
acquisition of On Ramp (which caused an increase of $3,862,000) and the hiring
of additional personnel necessary to build the infrastructure for future growth
of the Company.
OTHER DIRECT EXPENSES. Other direct expenses consist of contract labor,
materials and facility expenses associated with providing services to clients.
Other direct expenses increased to $4,692,000 in fiscal 1997 from $3,870,000 in
fiscal 1996 (21%). The increase in fiscal 1997 is primarily due to incremental
costs incurred by the Subsidiaries as a result of higher levels of operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist of marketing expenses and technology costs such
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as hardware and software purchases and leasing, as well as telecommunications
costs for Internet access. Additionally, this category includes occupancy costs,
insurance, consulting and professional fees, general office expenses and bad
debt expense. Selling, general and administrative expenses increased to
$6,842,000 in fiscal 1997 from $2,377,000 in fiscal 1996 (188%). The increase in
fiscal 1997 is primarily due to the acquisition of On Ramp (which caused an
increase of $2,918,000). The remainder is due to increased occupancy expenses
and administrative salaries, particularly at the corporate level, as the Company
continued to build its infrastructure to accommodate the Company's operational
growth, as well as non-cash consulting fees in the amount of $369,000 for the
value of Common Stock issued to a consultant and options issued to non-employee
directors. See "Executive Compensation" and "Certain Relationships and Related
Transactions."
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
to $1,619,000 in fiscal 1997 from $209,000 in fiscal 1996. The increase in
fiscal 1997 is primarily due to amortization of intangibles, primarily goodwill
acquired in connection with the acquisition of On Ramp (which caused an increase
of $1,325,000). The remaining increase in fiscal 1997 is primarily due to
increased depreciation and amortization associated with higher capital
expenditures. It was anticipated that depreciation and amortization expenses
would increase significantly in fiscal 1997 and 1998 as a result of the
amortization of goodwill and other intangible assets arising from the
acquisition of On Ramp.
RESTRUCTURING COSTS. The Company incurred restructuring costs in 1997 of
$1,732,000 due to its decision in June 1997 to cease operations in Boulder,
Colorado and Edgewater, New Jersey and to close the offices of its Internet One
and NetCube respectively located there, as previously discussed.
MERGER EXPENSES. Merger expenses consist of the nonrecurring costs
incurred by the Company in completing the acquisitions of the Subsidiaries on
June 30, 1996, including a finder's fee paid to an affiliate of the Company. See
"Certain Relationships and Related Transactions."
NET INTEREST INCOME. Interest income was $286,000 in fiscal 1997 due to
income earned on investment of the proceeds of the Initial Public Offering on
November 26, 1996. Interest expense decreased to $134,000 in fiscal 1997 from
$373,000 in fiscal 1996 (64%). The decrease in fiscal 1997 was primarily due to
savings resulting from the elimination of debt through the repayment and
conversion of amounts outstanding under certain convertible promissory notes.
See "Certain Relationships and Related Transactions."
TAXES ON INCOME. The Company had income tax expense of $246,000 in
fiscal 1997 and $141,000 in fiscal 1996. Income tax expense in fiscal 1997 is
the result of the Company establishing a valuation allowance on deferred tax
assets due to the uncertainty of their future realization and state tax
liabilities. In fiscal 1996, certain of the Subsidiaries were not subject to
taxation in fiscal 1996 (as such subsidiaries had elected Subchapter S
corporation status under applicable provisions of the Internal Revenue Code of
1986, as amended, and certain state statutes) and the remaining Subsidiaries
were subject to state income taxes based on their respective discreet
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<PAGE>
operations. Therefore, an effective tax rate on a consolidated historical basis
is not meaningful. The Company intends to file consolidated Federal tax returns
beginning with the June 30, 1997 tax year.
FOURTH QUARTER ADJUSTMENTS. In addition to the provisions made for
restructuring charges of $1,732,000, the Company made adjustments in the fourth
quarter of fiscal 1997 relating to excess costs on completed projects, which
increased the net loss by approximately $1,700,000.
NET LOSS. As a result of the above factors, the net loss per share
increased to $(1.63) in fiscal 1997 from a pro forma net loss per share of
$(.32) in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since their respective formations, the Subsidiaries have financed their
operations primarily through cash generated from operations, bank borrowings,
shareholder contributions and private financings.
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. The Company raised $270,000 in a private offering, pursuant to
which the Company issued three convertible 10% 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,
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. Of the funds received from this
private placement, $1,000,000 was loaned to On Ramp in order to complete a
transaction in which On Ramp redeemed outstanding shares of its common stock.
The remaining funds received from this private placement were used to provide
working capital for On Ramp and Internet One.
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 raised from
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 to cover
expenses and costs incurred in connection with the acquisitions of the
Subsidiaries and the Initial Public Offering.
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 from the Initial Public Offering of $11,973,000.
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At June 30, 1997, the Company had cash and cash equivalents of
approximately $3,451,000 and working capital of approximately $8,079,000,
primarily as a result of effecting the following transactions during the year
ended June 30, 1997: (i) the Omnicom Transaction and the receipt of net proceeds
therefrom of $4,948,000; (ii) the conversion of $27,000 in principal amount
under the 10% Notes and $162,000 in principal amount under the 12% Notes,
respectively, into 216,667 and 216,660 shares of Common Stock; (iii) the
repayment of the non-convertible portion of principal and interest under the 10%
Notes and the 12% Notes, aggregating $1,880,550 from the proceeds of the Omnicom
Transaction; (iv) the payment of a finder's fee in consideration for the
termination of a certain finder's agreement using proceeds from the Omnicom
transaction; (v) the renegotiation of the terms of a note payable to a related
party, providing for liquidation of $288,000 of such debt using proceeds from
the Omnicom Transaction and extending the maturity of the remaining balance of
$516,000 until March 1998; and (vi) the Initial Public Offering.
Net cash used in operating activities for fiscal 1997 of $7,849,000
resulted primarily from a net loss of $7,571,000 combined with an increase in
accounts and unbilled receivables of $4,336,000 and $2,200,000, respectively,
offset in part by non-cash charges for: (i) depreciation and amortization of
$1,619,000 (including amortization of intangibles of $1,297,000), and (ii)
restructuring costs of $1,732,000, combined with an increase in accounts payable
and accrued expenses of $1,843,000. 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 contracts. Accounts receivable increased primarily due to
the increased volume of work performed by On Ramp and an increase in the aging
of accounts receivable. Accounts receivable greater than sixty (60) days old
increased from $494,000 at June 30, 1996 to $1,582,000 at June 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 customers which the Company believes are credit-
worthy. Such amounts were either collected subsequent to June 30, 1997 or the
Company believes them to be collectible. The Company believes that the provision
for bad debts of approximately $614,000 recognized during the year ended June
30, 1997 is sufficient to adjust the carrying amount of its receivables at June
30, 1997 to an amount which approximates net realizable value. Accounts payable
and accrued expenses increased principally due to the inclusion of On Ramp in
fiscal 1997.
Net cash used in investing activities for fiscal 1997 of $2,898,000
resulted primarily from capital expenditures of $1,487,000 and purchase of
marketable securities of $1,322,000.
Net cash provided by financing activities for fiscal 1997 of $14,198,000
resulted primarily from net cash proceeds from the Initial Public Offering and
the Omnicom Transaction of $11,973,000 and $4,948,000, respectively, partially
offset by repayments on promissory notes and related party payables of
$1,881,000 and $500,000 respectively.
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The Company has entered into 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 $1,095,000 per year. See "Executive Compensation."
The Company anticipates significant changes in its operating cost
structure once the remaining subsidiaries have been completely integrated, and
administration and control of the Company's future operations have been
centralized. The Company believes that its 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.
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, the Company incurred during the year
ended June 30, 1997, and will incur over the next fiscal year, a non-cash charge
to operations of approximately $1,205,000 each year.
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, the Company incurred during the year ended June 30, 1997, a non-cash
charge to operations of approximately $18,000 and will incur over the next two
(2) fiscal years, a non-cash charge to operations of approximately $18,000 per
month.
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
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securities issuable under a certain consulting agreement between the Company and
Jason H. Pollak. See "Certain Relationships and Related Transactions."
INFLATION
While inflation has not had a material effect on the Company's
operations in the past, there can be no assurance that the Company will be able
to continue to offset the effects of inflation on the costs of its products or
services through price increases to its customers without experiencing a
reduction in the demand for its products; or that inflation will not have an
overall effect on the advertising, marketing, Internet and intranet and data
management market that would have a material affect on the Company.
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards
Board 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 Financial Accounting
Standards Board 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 Financial
Accounting Standards Board 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
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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 future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
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ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
THINK NEW IDEAS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet...................................................... F-3
Statements of Operations........................................... F-4
Statements of Shareholders' Equity ................................ F-5
Statements of Cash Flows........................................... F-6
Notes to Consolidated Financial Statements......................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of THINK New Ideas, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of THINK New Ideas,
Inc. and subsidiaries as of June 30, 1997 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
two years in the period ended June 30, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of THINK New Ideas,
Inc. and subsidiaries as of June 30, 1997 and the results of their operations
and their cash flows for each of the two years in the period ended June 30,
1997, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
New York, New York
September 19, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1997
-------------------
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $3,451,347
Marketable securities 1,321,722
Accounts receivable, net of allowance for doubtful accounts of $614,137 9,314,851
Unbilled receivables 2,497,389
Prepaid expenses and other current assets 535,307
-------------------
Total current assets 17,120,616
Property and equipment, net (Note 3) 2,285,620
Software development costs 131,253
Goodwill, net of accumulated amortization of $1,098,938 (Note 2) 1,502,562
Other assets 362,119
-------------------
Total assets $21,402,170
===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $4,848,932
Accrued restructuring costs (Note 10) 1,135,000
Deferred revenue 953,556
Income taxes payable (Note 5) 40,571
Due to related party (Note 2) 1,906,512
Current portion of obligations under capital leases (Note 6) 156,867
-------------------
Total current liabilities 9,041,438
Obligations under capital leases (Note 6) 264,372
Note payable to related party (Note 9) 515,760
Other long-term liability (Note 6) 206,250
-------------------
Total liabilities 10,027,820
-------------------
Commitments and contingencies (Note 6) Shareholders' equity (Note 7):
Preferred stock, $.0001 par value; 5,000,000 shares authorized; none
issued and outstanding -
Common stock, $.0001 par value; 50,000,000 shares authorized;
6,536,667 shares issued 654
Additional paid-in capital 19,050,174
Accumulated deficit (7,676,478)
-------------------
Total shareholders' equity 11,374,350
===================
Total liabilities and shareholders' equity $21,402,170
===================
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
--------------------------------------------
1997 1996
-------------------- ---------------------
<S> <C> <C>
Revenues $17,436,847 $9,822,983
Operating expenses:
Direct salaries and related expenses 10,029,004 3,628,643
Other direct expenses 4,691,563 3,869,634
Selling, general and administrative expenses 6,842,308 2,377,053
Depreciation and amortization 1,619,104 208,813
Restructuring costs (Note 10) 1,732,000 -
Merger expenses (Note 2) - 676,198
-------------------- ---------------------
Operating loss (7,477,132) (937,358)
Interest expense (134,489) (372,736)
Interest income 286,358 -
Other, net - 36,232
-------------------- ---------------------
Loss before taxes on income (7,325,263) (1,273,862)
Taxes on income (Note 5) 245,900 140,870
-------------------- ---------------------
Net loss $(7,571,163) $(1,414,732)
==================== =====================
Net loss per share $(1.63)
====================
Pro forma amounts (unaudited):
Historical loss before taxes on income $(1,273,862)
Compensation adjustment (227,000)
Merger expense adjustment 676,198
---------------------
Net loss $(824,664)
=====================
Net loss per share $(.32)
=====================
Weighted average common and common equivalent shares
outstanding 4,638,337 2,506,681
==================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained
COMMON STOCK Additional earnings
paid-in (accumulated
Shares capital deficit)
Amount
------------- ---------- -------------- -----------------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 491,595 $48 $83,837 $199,101
Issuance of common stock for 2,171,506 217 439 -
cash
Acquisition of On Ramp (Note 2) 231,572 24 1,088,363 -
Conversion of shareholders'
loans and interest - - 1,450,142 -
Distributions to shareholders - - (24,325) (153,510)
Capitalization of accumulated
deficit of subsidiaries upon
termination of S corporation - - (1,263,826) 1,263,826
elections
Net loss for the year - - - (1,414,732)
------------- ---------- -------------- -----------------
Balance at June 30, 1996 2,894,673 289 1,334,630 (105,315)
Issuance of common stock in
connection with private
placement (Note 7(b)) 938,667 94 4,947,968 -
Conversion of convertible debt
(Note 7(c)) 433,327 44 189,452 -
Issuance of common stock
pursuant to initial public
offering (Note 7(d)) 2,150,000 215 11,972,636 -
Issuance of common stock in
connection with acquisition
(Note 2) 120,000 12 442,488 -
Issuance of stock options to
non-employee directors
(Note 8(b)) - - 163,000 -
Net loss for the year - - - (7,571,163)
------------- ---------- -------------- -----------------
Balance at June 30, 1997 6,536,667 $654 $19,050,174 $(7,676,478)
============= ========== ============== =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year ended June 30,
----------------- ---- -----------------
1997 1996
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,571,163) $(1,414,732)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 322,085 208,813
Amortization of intangibles and deferred financing 1,297,019 163,000
costs
Deferred income taxes 140,000 (364,000)
Bad debt expense 428,137 113,655
Restructuring charges 1,732,000 -
Consulting fees 369,250 -
Changes in assets and liabilities, excluding effects of acquisitions:
Accounts receivable (4,335,664) (595,516)
Unbilled receivables (2,200,486) 494,912
Due from shareholders - 89,400
Accounts payable and accrued expenses 1,842,772 702,400
Deferred revenue 500,597 (272,882)
Other assets and liabilities (373,492) 146,328
----------------- -----------------
Net cash used in operating activities (7,848,945) (728,622)
----------------- -----------------
Cash flows from investing activities:
Additions to software development costs (518,315) (167,436)
Purchases of property and equipment (1,487,435) (171,900)
Purchases of marketable securities (1,321,722) -
Advances to and acquisition of On Ramp, net of cash - (1,691,739)
acquired (Note 2)
----------------- -----------------
Net cash used in investing activities (3,327,472) (2,031,075)
----------------- -----------------
Cash flows from financing activities:
Proceeds from issuance (repayment) of promissory notes (1,880,505) 2,070,000
Deferred financing costs - (217,500)
Increase in notes payable to related parties - 827,326
Deferred offering costs (272,240) (217,528)
Borrowings (repayment) on operating lines of credit (70,000) 70,000
Proceeds from private placement 4,948,062 -
Issuance of common stock - 656
Proceeds from initial public offering 11,972,851 -
Proceeds from (payments on) amounts due to related party (500,000) 500,000
Distributions to shareholders - (177,835)
----------------- -----------------
Net cash provided by financing activities 14,198,168 2,855,119
----------------- -----------------
Net increase in cash and cash equivalents 3,021,751 95,422
Cash and cash equivalents, beginning of year 429,596 334,174
----------------- -----------------
Cash and cash equivalents, end of year $3,451,347 $ 429,596
================= =================
Supplemental cash flow information: Cash paid during the year for:
Income taxes $153,010 $139,967
Interest 180,949 8,091
Noncash investing and financing activities:
Loans and accrued interest payable to shareholders
converted to additional paid-in capital - 1,450,142
Issuance of common stock for acquisitions (Note 2) 442,500 1,088,387
Conversion of convertible promissory notes into
common stock (Notes 4 and 7(c)) 189,496 -
Purchases of equipment by capital leases (Notes 3 421,439 -
and 6(a))
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of THINK New
Ideas, Inc. ("THINK" or the "Company") and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company was incorporated in January 1996. On June 30, 1996, the
Company acquired the companies discussed in Note 2 in business combinations.
Certain of the business combinations were accounted for using the pooling of
interests method. The consolidated financial statements give retroactive effect
to those acquisitions. One business combination was accounted for using the
purchase method, and the accounts of this business have been reflected in the
consolidated financial statements from the date of acquisition.
The Company provides marketing and communications services to clients
seeking to market their products and services and convey messages and images to
the public. The Company provides traditional services, such as advertising,
graphic design and artwork, and "new media" services. New media services include
developing Internet web sites and related analytical tools.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated balance sheets and consolidated
statements of cash flows, the Company considers all highly liquid investments
having original maturities of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities are stated at fair market value which approximates
cost and classified as available for sale in accordance with Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", and consist of investments in corporate commercial
paper maturing through December 1997.
F-7
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method and includes the amortization of capital lease assets.
The estimated useful lives of property and equipment are as follows:
Years
---------------
Equipment 3 to 5
Furniture and fixtures 5 to 7
Leasehold improvements are amortized over the term of the lease or the
useful life, if shorter.
SOFTWARE DEVELOPMENT COSTS
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed," software development costs incurred by the
Company subsequent to establishing technological feasibility of the resulting
product or enhancement and, until the product is available for general release
to customers, are capitalized and carried at the lower of unamortized cost or
net realizable value. Net realizable value is determined based on estimates of
future revenues to be derived from sale of the software product reduced by costs
of completing and disposing of that product. Amortization of the costs
capitalized began in 1997 and is based on current and anticipated future
revenues for each product or enhancement with an annual minimum equal to
straight-line amortization over the remaining estimated economic life of the
product or enhancement.
LONG-LIVED ASSETS
Long-lived assets, such as goodwill and property and equipment, are
evaluated for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value. No
impairment losses have been necessary through June 30, 1997.
F-8
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
GOODWILL
Goodwill represents the excess of the cost over the fair value of the
identifiable assets acquired in a business combination and is being amortized
using the straight-line method over a period of two years unless future events
or changes in circumstances indicate that an impairment has occurred. No
impairment losses have been necessary through June 30, 1997.
REVENUE RECOGNITION
Revenues from the design and development of Internet web sites and
traditional marketing services are recognized using the percentage-of-completion
method based on the ratio of costs incurred to total estimated costs. Unbilled
receivables represent costs incurred and anticipated profits earned on projects
in progress in excess of amounts billed, and are recorded as assets. Deferred
revenue includes amounts billed in excess of costs incurred and estimated
profits earned, and are recorded as liabilities. To the extent costs incurred
and anticipated costs to complete projects in progress exceed anticipated
billings, a loss is recognized for the excess.
Payments received for subsequent maintenance of Internet web sites are
deferred and recognized over the period during which the maintenance is
supplied.
TAXES ON INCOME
Certain of the Company's subsidiaries had elected S corporation status
under applicable provisions of the Internal Revenue Code and certain state
statutes and, accordingly, were not subject to income taxes. The S corporation
status of these subsidiaries terminated on June 30, 1996 as a result of their
acquisition by the Company.
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the
recognition of deferred tax assets and liabilities for the expected future
income tax consequences of events that have been recognized in a company's
financial statements or tax return. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts for income tax
purposes using enacted tax rates in effect in the years in which the temporary
differences are expected to reverse.
F-9
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PRO FORMA DATA (UNAUDITED)
Concurrent with the business combinations consummated on June 30, 1996,
the Company entered into employment agreements with certain of its officers (as
discussed further in Note 6(c)). Pro forma adjustments for the year ended June
30, 1996 have been presented to exclude the costs of effecting the business
combination transactions accounted for using the pooling-of-interests method and
reflect these employment agreements as if they had been in effect throughout
1996.
The pro forma data for 1996 do not reflect a benefit for income taxes
because none would have been recognized if the business combinations accounted
for using the pooling of interests method had occurred and the Company and all
of its subsidiaries had been taxed as C corporations since July 1, 1993.
LOSS PER SHARE
Loss per share is computed based on historical net loss for the year ended
June 30, 1997 and pro forma net loss for the year ended June 30, 1996 using the
weighted average number of shares of common stock and common stock equivalents
outstanding (which excludes 825,000 shares held in escrow (see Note 7(d)) as
adjusted for the effects of applying Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") No. 83, using the treasury stock method. Pursuant to
SAB No. 83, common stock issued by the Company at prices less than the initial
public offering price during the twelve months preceding the initial filing of a
registration statement, together with the number of shares of common stock
subject to options and convertible debt issued during such period having
exercise or conversion prices below the initial public offering price have been
treated as outstanding for all periods presented. As a result, 4,638,337 and
2,506,681 shares were used in the calculations for the years ended June 30, 1997
and 1996, respectively. Similarly, historical and pro forma net loss used in the
calculations were adjusted by approximately $10,000 and $19,000 for the years
ended June 30, 1997 and 1996, respectively, to exclude the related amount of
interest expense on convertible debt issued (see Note 4).
F-10
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LOSS PER SHARE (CONTINUED)
Supplemental pro forma loss per share was $(1.58) and $(.22) for the years
ended June 30, 1997 and 1996, respectively, and was computed by dividing
supplemental historical and pro forma net loss (each as adjusted as described in
the preceding paragraph, further adjusted by approximately $95,000 and $224,000
for the years ended June 30, 1997 and 1996, respectively, the amount of interest
expense on debt repaid with the proceeds of the August 1996 private placement
(see Note 7(b)), by the weighted average number of shares that would have been
treated as outstanding (4,713,660 and 2,617,878 for the years ended June 30,
1997 and 1996, respectively) had the portion of the proceeds from the shares
sold in August 1996 to fund debt repayments been used to repay debt on the dates
it was issued, rather than for the assumed purchase of treasury stock.
Historical loss per share data for the year ended June 30, 1996 is not
considered meaningful and, therefore, is not presented.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet for cash
equivalents, accounts and unbilled receivables, and accounts and notes payable
approximate fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amounts reported for the nonconvertible
portions of the convertible promissory notes approximate fair value. The fair
values of the convertible portions of the convertible promissory notes were
estimated based on the estimated fair value of the common stock into which the
notes were convertible. Based on the price per share for which the Company's
common stock was sold in a private placement in August 1996 (see Note 4), the
estimated aggregate fair value of the convertible portions of the convertible
promissory notes approximated $2,037,000 at June 30, 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-11
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CONCENTRATION OF CREDIT RISK, MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
Financial instruments which potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, marketable
securities and accounts and unbilled receivables. Cash and cash equivalents and
marketable securities consist of deposits and money market funds placed with
various high credit quality financial institutions.
The Company generates revenue principally from customers located in North
America, many of which are large multi-national organizations. During 1997, two
customers accounted for 10% and 13%, respectively, of total revenues. One of
these customers accounted for 18% of total revenues in 1996. Concentrations of
credit risk with respect to receivables are limited due to the geographically
diverse customer base. The Company maintains an allowance for uncollectible
receivables based upon expected collectibility of accounts receivable. At June
30, 1997, one customer accounted for approximately 10% of accounts and unbilled
receivables, collectively.
STOCK-BASED COMPENSATION
The Company accounts for its stock option awards under the intrinsic value
based method of accounting, prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic value
based method, compensation cost is the excess, if any, of the quoted market
price of the stock at grant date or other measurement date over the amount an
employee must pay to acquire the stock. The Company makes pro forma disclosures
of net income and earnings per share as if the fair value based method of
accounting had been applied as required by SFAS No. 123, "Accounting for
Stock-Based Compensation."
RECLASSIFICATIONS
Certain amounts as previously reported have been reclassified to conform
to current year classifications.
NEW ACCOUNTING PRONOUNCEMENTS
(A) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". SFAS No. 128 specifies the computation, presentation
and disclosure
F-12
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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.
(B) REPORTING COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes
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.
(C) REPORTING SEGMENTS OF AN ENTERPRISE
In June 1997, the Financial Accounting Standards Board 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.
F-13
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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 future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
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 shareholder of the
Company, in exchange for 120,000 shares of the Company's 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 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 the seller
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 over two years.
On June 30, 1996, the Company acquired all of the issued and outstanding
shares of common stock of the following entities in exchange for 491,595 shares
of the Company's common stock:
<TABLE>
<CAPTION>
Number of shares
Entity/Date Operations Commenced issued to effect
acquisition
- ------------------------------------------------------------------------ -------------------
<S> <C>
The Mednick Group ("Mednick")/October 1982 208,084
Creative Resources Agency, Inc. ("Creative Resources")/November 1994 3,970
The S.D. Goodman Group ("Goodman")/July 1993 49,623
Internet One, Inc. ("Internet One")/November 1993 34,736
NetCube, Inc. ("NetCube")/February 1978 195,182
</TABLE>
F-14
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 2 - BUSINESS ACQUISITIONS (CONTINUED)
Mednick, Creative Resources and Goodman provide a wide variety of
marketing-related services. NetCube and Internet One are principally providers
of new media services. The acquisition of each of these companies has been
accounted for using the pooling of interests method of accounting, and
accordingly, the accompanying consolidated financial statements give retroactive
effect to these acquisitions, as if the companies had always operated as a
single entity. In connection with these acquisitions, approximately $676,000 of
transaction costs and expenses were incurred and have been charged to expense
during 1996.
Separate results of operations for the combining entities for the year
ended June 30, 1996 are as follows:
Revenues:
Mednick $6,150,950
Creative Resources 371,298
Goodman 561,203
Internet One 1,338,246
NetCube 1,401,286
THINK -
------------------
Combined $9,822,983
==================
Net income (loss):
Mednick $263,428
Creative Resources 74,000
Goodman 133,010
Internet One 2,974
NetCube (1,032,583)
THINK (855,561)
------------------
Combined $(1,414,732)
==================
On June 30, 1996, the Company also acquired all of the outstanding shares
of common stock of On Ramp, Inc. ("On Ramp"), a provider of new media services,
in exchange for 231,572 shares of the Company's common stock. The acquisition
has been accounted for using the purchase method of accounting, and accordingly,
the accounts of On Ramp have been reflected in the consolidated financial
statements from the date of acquisition. The purchase price of $1,338,000 (which
includes transaction costs of approximately $250,000) has been allocated to the
assets purchased and the liabilities assumed based upon their estimated fair
F-15
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 2 - BUSINESS ACQUISITIONS (CONTINUED)
values at the date of acquisition. The excess of the purchase price over the
carrying values of the net assets acquired was approximately $2,310,000 and has
been allocated as follows:
Goodwill $2,159,000
Purchased software and other intangible assets 251,000
Deferred income taxes (100,000)
--------------------
$2,310,000
====================
Prior to the acquisition, the Company had loaned $1,494,000 to On Ramp.
The following table presents summarized consolidated unaudited pro forma
results of operations for 1997 and 1996 as if the above purchase acquisitions
had occurred at the beginning of each year. The table presents first the
Company's historical 1997 and 1996 operating results, as adjusted for the
effects of the Fathom acquisition in 1997 and both Fathom and On Ramp in 1996.
Below those amounts are the pro forma 1996 operating results reflected in the
consolidated statements of operations, as further adjusted to give effect to the
On Ramp acquisition. These pro forma results are provided for comparative
purposes only and do not purport to be indicative of the results which would
have been obtained if the acquisition had been effected on those dates or of
future results of operations of the consolidated entities.
June 30,
------------------------------------------
1997 1996
------------------ ------------------
Revenues $19,342,847 $13,293,348
Historical net loss (8,707,633) (3,588,682)
Loss per share (1.84) --
Pro forma net loss (3,139,484)
Pro forma net loss per share (1.09)
Transaction costs and expenses relating to the On Ramp acquisition
referred to above include $500,000 in finder's fees to Benchmark Equity Group
("Benchmark"), a shareholder of the Company.
F-16
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Equipment $3,065,576
Furniture and fixtures 660,137
Leasehold improvements 1,127,519
---------------------
4,853,232
Less: Accumulated depreciation and amortization 2,567,612
---------------------
Property and equipment, net $2,285,620
=====================
Included in equipment is $465,855 of equipment with accumulated
amortization of $16,796 under capital leases.
NOTE 4 - CONVERTIBLE PROMISSORY NOTES
In March 1996, the Company borrowed $270,000 pursuant to the terms of
three separate convertible promissory notes. Two of the notes, having original
principal balances of $225,000 and $20,000, were payable to an entity controlled
by a shareholder of the Company and to a shareholder, respectively. Each of the
notes bore interest at 10% and were due upon the earlier of September 30, 1996
or the Company raising $2,000,000 through a debt or equity financing. At the
option of the note holders, up to an aggregate of $27,000 in principal was
convertible into 216,667 shares of the Company's common stock.
In April 1996, the Company raised $1,582,500, net of placement fees of
$217,500, 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 the Company raising $3,000,000 through a debt or equity
financing. The notes were secured by the pledge of all of the outstanding shares
of common stock of On Ramp. At the option of the note holders, up to an
aggregate of $162,495 in principal was convertible into 216,660 shares of the
Company's common stock.
As discussed more fully in Note 7(c), the convertible promissory notes
were converted into common stock or repaid with proceeds obtained from the sale
of the Company's common stock.
F-17
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 5 - INCOME TAXES
Taxes on income consist of the following:
1997 1996
--------------- ---------------
Current:
Federal $ - $382,735
State 105,900 122,135
--------------- ---------------
105,900 504,870
--------------- ---------------
Deferred:
Federal 120,000 (311,000)
State 20,000 (53,000)
--------------- ---------------
140,000 (364,000)
=============== ===============
Taxes on income $245,900 $140,870
=============== ===============
The difference between the Federal statutory tax rate and the effective
tax rate resulted from the following:
1997 1996
--------------- ---------------
Federal statutory tax rate (34.0)% (34.0)%
Subsidiaries not subject to income taxes - 5.7
Merger expenses and other permanent
differences - 28.3
State income taxes, net of Federal tax 1.4 6.3
benefit
Change in valuation allowance 39.4 7.1
Other items, net (3.4) (2.3)
=============== ===============
Effective tax rate 3.4% 11.1%
=============== ===============
F-18
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 5 - INCOME TAXES (CONTINUED)
Temporary differences which gave rise to the deferred tax assets
(liabilities) consisted of the following at June 30, 1997:
Current:
Accounts receivable $(95,250)
Allowance for doubtful accounts 253,655
Accounts payable 176,250
Other 21,600
---------------------
Total current 356,255
---------------------
Noncurrent:
Property and equipment 98,830
Software development costs and other (17,000)
intangibles
Net operating loss carryforwards 3,223,600
---------------------
Total noncurrent 3,305,430
---------------------
Deferred tax asset valuation allowance (3,366,685)
---------------------
Net deferred tax asset $ -
=====================
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
These factors include the lack of significant history of profits, the fact that
the market in which the Company competes is intensely competitive and
characterized by rapidly changing technology, and the lack of carryback capacity
to realize these assets.
At June 30, 1997, the Company had Federal net operating loss carryforwards
of approximately $7,500,000. The net operating loss carryforwards will expire at
various dates beginning 2011, if not utilized. Utilization of the net operating
losses may be subject to a substantial annual limitation due to the ownership
change limitations provided by the Internal Revenue Code of 1986 and similar
state provisions. The annual limitation may result in the expiration of net
operating losses before utilization.
F-19
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 6 - COMMITMENTS AND CONTINGENCIES
(A) LEASES
Future minimum payments, by year and in the aggregate, under operating and
capital leases with initial or remaining terms of one year or more consisted of
the following at June 30, 1997:
<TABLE>
<CAPTION>
Operating Capital Total
leases leases
--------------- ------------ ---------------
<S> <C> <C> <C>
1998 $635,100 $208,424 $843,524
1999 631,080 208,424 839,504
2000 625,282 16,800 642,082
2001 658,704 16,800 675,504
2002 673,716 8,392 682,108
Thereafter 3,306,960 - 3,306,960
=============== ------------ ===============
Total minimum lease payments $6,530,842 458,840 $6,989,682
=============== ===============
Amount representing interest 37,601
------------
Present value of net minimum
lease payments 421,239
Less: Current portion 156,867
============
$264,372
============
</TABLE>
Total rent expense under operating leases amounted to $654,268 and
$572,248 for the years ended June 30, 1997 and 1996, respectively.
At June 30, 1997, the Company has a commitment to a landlord of $400,000
for a standby letter of credit in connection with one of its operating leases.
Such commitment expires on November 30, 1997, but is renewable on an annual
basis at the landlord's option.
(B) CONSULTING AGREEMENTS
On June 30, 1997, the Company entered into a one year consulting agreement
with an individual whereby the Company will 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 can be terminated with or without cause by the
Company upon thirty 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. The fair value of the shares and
options will be charged to operations on the date of issuance and grant,
respectively. At June 30, 1997, the Company has
F-20
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
(B) CONSULTING AGREEMENTS (CONTINUED)
charged approximately $206,000 to operations and, accordingly, classified the
liability for the issuance of 50,000 shares as noncurrent.
In March 1996, the Company entered into a two year consulting agreement
with Benchmark. Under the agreement, the Company is required to pay Benchmark
$35,000 at signing and a monthly fee of $7,000. The Company paid $84,000 and
$56,000 for the years ended June 30, 1997 and 1996, respectively, to Benchmark
in connection with the agreement.
(C) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
officers. The agreements have terms from three to five years and include, among
other things, noncompete agreements and salary and benefits continuation. On May
31, 1997, the Company entered into an employment agreement with the former
president of Fathom (see Note 2). The agreement, which is for two years,
provides for, among other things, salaries of $300,000 and $350,000,
respectively, options, which vest evenly over four years and are subject to
accelerated vesting during the first two years based on certain profitability
milestones, to purchase 250,000 shares of the Company's common stock, at an
exercise price of $3.69 per share (the market price on the date of grant), and
bonuses based on certain profitability and other milestones. Future minimum
salaries under the agreements as of June 30, 1997 are as follows:
Year ended June 30,
--------------------
1998 $1,095,000
1999 1,020,000
2000 475,000
2001 475,000
F-21
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 7 - SHAREHOLDERS' EQUITY
(A) STOCK SPLITS
In June 1996, the Company effected a 6.855-for-one stock split. In
September 1996, the Company effected a .496-for-one reverse stock split. In
November 1996, the Company effected a two-for-three reverse stock split. All
applicable share and per share data have been retroactively restated to reflect
the stock splits.
(B) PRIVATE PLACEMENT
In August 1996, the Company sold equity securities in a private placement.
In November 1996, the agreement pursuant to which the securities were sold was
amended. As a result, the Company issued an aggregate of 938,667 shares of its
common stock in exchange for net proceeds (after transaction costs of
approximately $50,000) of $4,948,000. Additionally, certain of the Company's
shareholders gave the purchaser an additional 124,667 shares of the Company's
common stock held by them for no consideration.
(C) DEBT CONVERSIONS AND EXTINGUISHMENTS
In August 1996, the holders of the convertible promissory notes discussed
in Note 4 converted such notes, aggregating $189,496, into 433,327 shares of
common stock. In addition, a portion of the proceeds of the private placement
discussed above was used to extinguish the remaining $1,880,505 of such notes.
(D) INITIAL PUBLIC OFFERING
On November 26, 1996, the Company completed its initial public offering of
2,150,000 shares of its common stock at a price of $7.00 per share (the
"Offering") which resulted in the Company receiving net proceeds of $11,972,851.
In connection with the Offering, the Company issued the underwriters of
the Offering warrants to purchase up to 215,000 shares of common stock. Such
warrants are exercisable during the four-year period commencing one year after
the Offering at an exercise price of $9.80 per share, subject to adjustment in
certain events to protect against dilution, and are not transferable for a
period of one year after the date of the Offering. In addition, the warrant
agreement contains "cashless exercise" provisions, as defined.
F-22
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 7 - SHAREHOLDERS' EQUITY (CONTINUED)
(D) INITIAL PUBLIC OFFERING (CONTINUED)
Also in connection with the Offering, the Company's founding shareholders,
together with the shareholders who acquired shares in connection with the
business acquisitions discussed in Note 2, contributed, on a pro rata basis,
825,000 shares of the Company's common stock held by them into an escrow
account. The shares are to be released to the shareholders from the escrow
account upon the Company achieving certain net income targets, as defined in the
escrow agreement, or the closing price of the Company's common stock averages in
excess of $20.00 per share for forty consecutive business days during the
three-year period subsequent to the Offering. The value of the shares released,
as determined by the market price of the shares on the date of the release, will
be recognized as compensation expense in future periods.
NOTE 8 - EMPLOYEE RETIREMENT PLANS
(A) 401(K) PLANS
Certain of THINK's subsidiaries sponsor defined contribution retirement
plans (the "Plans") which cover all employees meeting minimum service
requirements. The Plans qualify as deferred salary arrangements under Section
401(k) of the Internal Revenue Code. The subsidiaries' contributions to the
plans are based on percentages of the employees' contributions. Employer
contributions to the Plans during the years ended June 30, 1997 and 1996 were
approximately $52,000 and $35,000, respectively.
(B) STOCK COMPENSATION PLAN
In July 1996, the Board of Directors adopted and the Company's
shareholders approved the 1996 Stock Option Plan (the "1996 Plan") , which was
subsequently amended and restated in November 1996. The 1996 Plan provided for
the grant of options which qualify as incentive stock options ("Incentive
Options") under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), to officers and employees of the Company and options which do not
so qualify ("Non-Qualified Options") to officers, directors, employees and
consultants of the
F-23
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 8 - EMPLOYEE RETIREMENT PLANS (CONTINUED)
(B) STOCK COMPENSATION PLAN (CONTINUED)
Company. A total of 966,667 shares of common stock was reserved for issuance
under the 1996 Plan (subject to adjustment in the event of the Company's
declaration of stock dividends, stock splits, reclassifications and the
occurrence of other similar events). Options to purchase 966,667 shares of
common stock at an exercise price per share of $7.50 (the estimated fair value
of the shares on the date of grant) were granted to certain employees in
November 1996. The options granted were to vest in increments of one-fourth at
the end of each year over a four year period from the date of grant and expire
after ten years.
Pursuant to a resolution of the Board of Directors, the Company terminated
the 1996 Plan and established the THINK New Ideas, Inc. 1997 Stock Option Plan
(the "1997 Plan") which provides for the granting of options, which qualify as
Incentive Options under Section 422 of the Code, to officers and employees of
the Company and Non-Qualified Options to officers, directors, employees and
consultants of the Company. The Board of Directors deemed it advisable and in
the best interest of the Company and its shareholders to terminate the 1996 Plan
and to establish the 1997 Plan. All of the persons entitled to participate in
the 1996 Plan were given the opportunity to participate in the 1997 Plan and
received options to purchase the same number of shares, with the same terms as
the 1996 Plan options, of the common stock they were entitled to purchase under
the 1996 Plan at a price per share equal to $4.05 (the market price on the date
of grant). Under the 1997 Plan, the Company may grant options to purchase up to
2,000,000 shares of common stock. As of June 30, 1997, there were outstanding
options exercisable to purchase up to 1,137,796 shares of common stock.
During the fiscal year ended June 30, 1997, the Board of Directors granted
options to purchase 20,000 shares at an exercise price ranging from $3.69 to
$4.46 (based on the closing bid price of the Common Stock) of common stock to
each of seven directors, of which four are non-employee directors and,
accordingly, the Company has recognized $163,000 of expense, which equals the
fair value of the options granted based on a Black-Scholes model, upon granting
the options. Such options become exercisable over a period of four years.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
F-24
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 8 - EMPLOYEE RETIREMENT PLANS (CONTINUED)
(B) STOCK COMPENSATION PLAN (CONTINUED)
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997; risk-free interest rates of 5.53% to 6.51%; volatility
factor of the expected market price of the Company's common stock of 35%; and a
weighted average expected life of the option of 10 years.
Under the accounting provisions of SFAS No. 123, the Company's net loss
and loss per share would have been increased to the pro forma amounts indicated
below:
Year ended
June 30, 1997
---------------------
Net loss:
As reported $(7,571,163)
Pro forma (8,129,163)
Net loss per common share:
As reported $(1.63)
Pro forma (1.75)
A summary of the status of the Company's fixed stock option plans as of
and for the year ended June 30, 1997 is presented below:
June 30, 1997
----------------------------------------
Weighted average
Shares exercise price
-------------------- -------------------
Outstanding at beginning of year - $ -
Granted 2,104,463 5.59
Exercised - -
Forfeited/cancelled (966,667) 7.50
--------------------
Outstanding at end of year 1,137,796 3.97
====================
Options exercisable at year-end -
====================
Weighted average fair value of 1.69
options granted during the year
F-25
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 8 - EMPLOYEE RETIREMENT PLANS (CONTINUED)
(B) STOCK COMPENSATION PLAN (CONTINUED)
The following table summarizes information about stock options outstanding
at June 30, 1997.
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------ -------------------------
Weighted
Number average Weighted Weighted
Exercise price outstanding remaining average Number average
contractual exercise exercisable exercise
life price price
- ------------------- ----------- ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
$3.69 250,000 9.9 years $3.69 - $3.69
4.05 887,796 9.6 4.05 - 4.05
----------- ----------
1,137,796 9.7 3.96 - 3.96
=========== ==========
</TABLE>
NOTE 9 - RELATED PARTY TRANSACTIONS
At June 30, 1997, the Company owed $515,760 to the father of the former
shareholder of NetCube. Upon completion of the Offering (see Note 7(d)), the
Company repaid approximately $288,000 of an outstanding unsecured promissory
note bearing interest at 10%. On October 1, 1996, the Company amended the terms
of the promissory note whereby the note is convertible, at the payee's option
through March 31, 1998, into shares of the Company's common stock at $7.00 per
share (the initial public offering price), is unsecured and bears interest at
8%. Interest expense incurred by the Company related to the promissory note
totaled approximately $58,000 and $58,000 for the years ended June 30, 1997 and
1996, respectively.
NOTE 10 - RESTRUCTURING COSTS
In June 1997, the Company implemented a plan for NetCube and Internet One
which was designed to close the operations of these subsidiaries and dispose of
related assets due to continued decline in the 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").
F-26
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 10 - RESTRUCTURING COSTS (CONTINUED)
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 June 30, 1997 no amounts were 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 681,000
costs
Disposal of fixed assets and other assets 369,000
Other 85,000
======================
$1,732,000
======================
Aggregate revenues and operating losses for NetCube and Internet One for
1997 and 1996 were as follows:
1997 1996
-------------------- -------------------
Revenues $1,253,000 $2,740,000
Operating loss (1,746,000) (1,073,000)
NOTE 11 - FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
In addition to the provisions made for the restructuring charges of
$1,732,000, the Company made adjustments in the fourth quarter of Fiscal 1997
relating to excess costs on completed jobs, which increased the net loss by
approximately $1,700,000.
F-27
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There were no changes in or disagreements with the Company's
independent accountants with respect to accounting and financial disclosures
during the fiscal year ended June 30, 1997.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The names and ages of all directors and executive officers of the
Company are as follows:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Scott Mednick 41 Chief Executive Officer and Chairman of the
Board
Ronald Bloom 45 President, Chief Operating Officer and
Director
Melvin Epstein 50 Chief Financial Officer and Secretary
Adam Curry 33 Chief Technology Officer and Director
Larry Kopald 43 Chief Creative Officer and Director
James Grannan 34 Executive Vice President
Susan Goodman 42 Executive Vice President
James Carlisle 50 Executive Vice President
Richard Char 38 Director
Marc Canter 40 Director
Barry Wagner 57 Director
MANAGEMENT BIOGRAPHIES
SCOTT MEDNICK has been Chairman of the Board of Directors and Chief Executive
Officer of the Company since its inception in January 1996. Mr. Mednick founded
The Mednick Group a Subsidiary primarily engaged in the provision of strategic
marketing and corporate and brand positioning, in 1985. Mr. Mednick is an
officer and director of The Mednick Group. Mr. Mednick holds a B.F.A. Degree
from the Rhode Island School of Design and a M.A. from the University of Santa
Monica.
RONALD BLOOM has been a Director and the President and Chief Operating Officer
of the Company since June 1996. From 1995 to 1996, Mr. Bloom was Chief Operating
Officer and General Manager of On Ramp, a Subsidiary primarily engaged in the
provision of Internet and intranet systems and services and presently serves as
its Vice President and Secretary. Prior to joining On Ramp, Mr. Bloom founded
24
<PAGE>
and served as the President of Ron Bloom Productions, a production company and
consulting firm founded by Mr. Bloom from 1989 to 1994.
MELVIN EPSTEIN has been the Chief Financial Officer of the Company since
November 1996. From 1994 to August 1996, Mr. Epstein was Managing Director of TN
Services, a unit of True North Communications, an advertising agency. Prior to
joining TN Services, Mr. Epstein was the Chief Financial Officer of Backer
Spielvogel Bates, a subsidiary of Saatchi & Saatchi, P.L.C., from 1987 to 1994.
Mr. Epstein holds a B.S. in Accounting from Queens College.
ADAM CURRY has been a Director and the Chief Technical Officer of the Company
since June 1996. Mr. Curry founded and has been Chairman of the Board of
Directors of On Ramp since 1994 and its President since March 1996. From 1987 to
1992, Mr. Curry served as an On-Air Personality for MTV Networks in New York.
JAMES GRANNAN has been Executive Vice President of the Company since June 1996.
Mr. Grannan founded Creative Resources, a Subsidiary primarily engaged in the
provision of strategic marketing and corporate and brand positioning services,
in 1994. Mr. Grannan was Creative Manager for the Coca-Cola Company from 1992 to
1994 and Promotional Packaging and Design Manager for the Coca- Cola Company
from 1988 to 1992. Mr. Grannan holds a B.A. Degree in Advertising Design from
the Atlanta College of Art.
SUSAN GOODMAN has been Executive Vice President of the Company since June 1996.
Ms. Goodman founded the Goodman Group, a Subsidiary primarily engaged in the
provision of strategic marketing and corporate and brand positioning services,
in 1993. Previously she was Director of Client Services at Chiat Day Direct
Marketing from February 1992 through July 1992. Ms. Goodman serves on the
Operating Committee of the Direct Marketing Association's Business to Business
Council. Ms. Goodman has a B.A. in history from Tufts University and received
her M.B.A. in Marketing, Finance and Strategic Planning from Northwestern
University's Kellogg School of Management.
JAMES CARLISLE has been Executive Vice President of the Company since June 1996.
Dr. Carlisle founded NetCube Corporation, a Subsidiary primarily engaged in the
provision of database and information management and utilization services, in
1978. Dr. Carlisle received his Ph.D. and M.Phil. from Yale University's School
of Organization and Management and a B.S. in Engineering with Honors from
Princeton University.
BARRY WAGNER has been a Director of the Company since September 1996. Mr. Wagner
has been an employee of Omnicom since 1974, and currently serves as Secretary
and General Counsel of Omnicom. Mr. Wagner also serves as Secretary and Chief
Legal Officer of BBDO Worldwide Inc. and is Senior Vice President and Chief
Legal Officer of BBDO New York, both of which are part of Omnicom. Prior to
joining Omnicom, Mr. Wagner was an attorney with the National Broadcasting
Company and the Federal Reserve Bank of New York. Mr. Wagner is a graduate of
Hamilton College and Harvard Law School.
25
<PAGE>
RICHARD CHAR has been a director of the Company since August 1997. Mr Char is
the managing director and head of Technology Investment Banking at Cowen &
Company. Prior to joining Cowen & Company, Mr. Char was an attorney for Wilson
Sonsini Goodrich & Rosati for thirteen years. Mr. Char holds a B.A. from harvard
university and an M.B.A. from Stanford University.
MARC CANTER has been a director of the Company since August 1997. Mr. Canter has
been the Chairman of Canter Technology since founding the company in 1992. Prior
to forming Canter Technology, Mr. Canter was the founder and chairman of
MacroMind, which merged into MacroMedia, until he retired in 1991. Mr. Canter
holds a B.F.A. from Oberlin Conservatory of Music.
LARRY KOPALD, a director has been the Chief Creative Officer of the Company and
the President of the Company's Los Angeles office since May 1997 and a Director
of the Company since September 1997. Prior to joining the Company, Mr. Kopald
was the Executive Creative Officer of Fathom, a division of Ketchum
Communications, Inc. from 1995 to 1997. Prior to joining Fathom, Mr. Kopald was
the Executive Creative Director/Executive Vice President of Foote, Coyne &
Belding from 1987 to 1994. In 1994, Mr. Kopald founded The Kopald Group, a
consulting firm specializing in strategic and creative issues. Mr. Kopald holds
a B.S. in Pre-Med. from Drake and a Masters degree in Journalism form
Northwestern University.
ANGEL MARTINEZ, formerly a director of the Company, resigned from his position
on the Board of Directors in February 1997.
MICHAEL RIBERO, formerly a director of the Company, resigned from his position
on the Board of Directors in August 1997.
FRANK DELAPE, formerly a director of the Company, resigned from his position on
the Board of Directors in September 1997.
All officers of the Company are elected to serve in such capacities
until the next annual meeting of the Board of Directors of the Company and until
their successors are duly elected and qualified.
The Board of Directors met in excess of five (5) times during the fiscal
year ended June 30, 1997. Two former directors attended fewer than seventy-five
percent (75%) of the total number of meetings held by the Board of Directors.
There are no material proceedings to which any director, officer or
affiliate of the Company, any owner of record or beneficially of more than five
percent (5%) of any class of voting securities of the Company, or any associate
of any such director, officer, affiliate of the Company or security holder is a
party adverse to the Company.
26
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee, an Executive
Committee and a Compensation Committee, as more fully described below.
AUDIT COMMITTEE. The Company's audit committee (the "Audit Committee")
is responsible for making recommendations to the Board of Directors concerning
the selection and engagement of the Company's independent certified public
accountants and for reviewing the scope of the annual audit, audit fees, and
results of the audit. The Audit Committee also reviews and discusses with
management and the Board of Directors such matters as accounting policies and
internal accounting controls, and procedures for preparation of financial
statements. Prior to his resignation, Mr. Ribero served on the Audit Committee.
Currently, Messrs. Char and Wagner serve as members of the Audit Committee. The
Audit Committee held no meetings during the fiscal year ended June 30, 1997.
EXECUTIVE COMMITTEE. The Company's executive committee (the "Executive
Committee") has the rights, privileges, duties and responsibilities to exercise
the full power and authority of the Board of Directors in the management of the
business of the Company, to the extent not assigned to other committees of the
Board of Directors and to the extent permitted by Delaware law, the Articles of
Incorporation and the Bylaws of the Company. Currently, Messrs. Mednick, Bloom
and Wagner serve as members of the Executive Committee. The Executive Committee
was formed in June 1997 and held one meeting during the fiscal year ended June
30, 1997. The Company has no nominating committee, but the Executive Committee
currently serves the function that a nominating committee would be created to
serve.
COMPENSATION COMMITTEE. The Company's compensation committee (the
"Compensation Committee") approves the compensation for executive employees of
the Company. The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of all officers of the Company, reviews
general policy matters relating to compensation and benefits of employees of the
Company and administers the Company's 1997 Stock Option Plan. Prior to their
resignations, Messrs. Ribero and Martinez served on the Compensation Committee.
Currently, Messrs. Char and Canter serve as members of the Compensation
Committee. The Compensation Committee held one meeting during the fiscal year
ended June 30, 1997.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Commission and NASDAQ. Officers, directors
and greater than ten percent stockholders are required by regulation to furnish
the Company with copies of all Section 16(a) forms that they file.
27
<PAGE>
Based solely upon a review of Forms 3, Forms 4 and Forms 5 furnished to
the Company pursuant to Rule 16a-3 under the Exchange Act, it is the Company's
belief that, other than as set forth below, any such forms required to be filed
pursuant to Section 16(a) of the Exchange Act were filed, as necessary, by the
officers, directors and securityholders required to file the same but some were
filed late as set forth below.
Based on the Company's knowledge, Messrs. Mednick, Bloom, Curry,
Epstein, Wagner, DeLape, Ribero and Martinez were required to file Forms 5. Each
of Messrs. Mednick, Bloom, Curry, Epstein, DeLape and Wagner were required to
file a Form 5 for the fiscal year ended June 30, 1997, and filed such form late.
Messrs. Ribero and Martinez did not file Forms 5. Each such person received
during the fiscal year ended June 30, 1997, an option to acquire 20,000 shares
of Common Stock, which transaction would have been the subject of such Form 5.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate cash compensation awarded
to, earned by or paid for services rendered to the Company during the last two
fiscal years by each person serving as the Company's Chief Executive Officer and
the five most highly compensated executive offices serving at June 30, 1997
whose compensation was in excess of $100,000 (the "Named Executive Officers").
28
<PAGE>
<TABLE>
<CAPTION>
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ ------------------- -------
SECURITIES
RESTRICTED UNDERLYING
NAME AND OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($) SARS(#) PAYOUTS($) COMPENSATION($)
POSITION ---- --------- -------- --------------- --------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Scott A. Mednick1 1997 225,000 28,782 -- -- 20,0002 -- 9,60010
Chairman and CEO 1996 225,000 11,376 20,000 -- -- -- 9,60010
Ronald E. Bloom3 1997 125,000 69,6964 -- -- 20,0002 -- 9,60010
President 1996 106,250 58,234 -- -- -- -- 9,60010
Adam C. Curry5 1997 125,000 81,4804 -- -- 20,0002 -- 9,60010
Chief Technology 1996 125,000 2,684 -- -- -- -- 9,60010
Officer
Melvin Epstein6 1997 156,923 -- -- -- 133,3332 -- --
Chief Financial 1996 -- -- -- -- -- -- --
Officer
Susan Goodman7 1997 195,000 46,825 -- -- 36,6672 -- --
Executive Vice 1996 138,000 -- -- -- -- -- 130,0008
President
Larry Kopald9 1997 300,000 -- -- -- 250,0002 -- 9,60010
President, The 1996 -- -- -- -- -- -- --
Mednick Group
</TABLE>
- --------------------------
1 Mr. Mednick commenced his employment with the Company in March 1996 and
was appointed Chairman and Chief Executive Officer in March 1996.
29
<PAGE>
2 Represents shares of Common Stock issuable upon exercise of options
granted to the noted officer pursuant to the 1997 Stock Option Plan at
an exercise price of $4.05 per share (representing the fair market value
of the Common Stock at the time of grant as determined in accordance
with the provisions of such plan).
3 Mr. Bloom commenced his employment with the Company in June 1996 and was
appointed President in July 1996.
4 Represents a bonus as determined by the Compensation Committee of the
Board of Directors.
5 Mr. Curry commenced his employment with the Company in June 1996 and was
appointed Chief Technology Officer in June 1996.
6 Mr. Epstein commenced his employment with the Company in August 1996.
7 Ms. Goodman commenced her employment with the Company in June 1996.
8 Represents distributions to the noted executive as the former sole
stockholder of the S.D. Goodman Group, lnc., a Subsidiary and previously
a Subchapter S corporation.
9 Mr. Kopald commenced his employment with the Company effective as of May
31, 1997; consequently, prior to the end of fiscal 1997, Mr. Kopald
received approximately $25,000 of the salary noted above.
10 Represents car allowances provided to the noted individuals.
STOCK OPTION PLANS
In July 1996, the Board of Directors adopted and the Company's
stockholders approved the 1996 Stock Option Plan (the "1996 Plan"), which was
subsequently amended and restated in November 1996. The 1996 Plan provided for
the grant of options which qualify as incentive stock options ("Incentive
Options") under Section 422 of the Internal Revenue Code of 1986, as amend (the
"Code"), to officer and employees of the Company and options which do not so
qualify ("Non-Qualified Options") to officers, directors, employees and
consultants of the Company (including Subsidiaries). A total of 966,667 shares
of Common Stock was reserved for issuance under the 1996 Plan (subject to
adjustment in the event of the Company's declaration of stock dividends, stock
splits, reclassifications and the occurrence of other similar events). Options
to purchase 966,667 shares of Common Stock at an exercise price per share of
$7.50 were granted by the Company in November 1996. The Options granted were to
vest in increments of one-fourth at the end of each year over a four year period
from the date of grant.
Pursuant to a resolution of the Board of Directors, the Company
terminated the 1996 Plan and established the THINK New Ideas, Inc. 1997 Stock
Option Plan (the "1997 Plan") which provides for the grant of options which
quality as Incentive Options under Section 422 of the Code, to officers and
employees of the Company (and the Subsidiaries) and Non-Qualified Options to
officers, directors, employees and consultants of the Company (and the
Subsidiaries). The Board of Directors deemed it advisable and in the best
interests of the Company and its shareholders to terminate the 1996 Plan and to
establish the 1997 Plan and has, by resolution, directed that adoption of the
1997 Plan be presented to the shareholders of the Company for approval and
ratification at the Annual Meeting (currently scheduled to take place on
December 11, 1997). All of the persons entitled to participate in the 1996 Plan
were given the opportunity to participate in the 1997 Plan and received options
to purchase the same number of shares of Common Stock they were entitled to
purchase under the 1996 Plan at an price per share equal to $4.05, the market
price as established pursuant to the 1997 Plan on the date of grant. Under the
1997 Plan, the Company may grant options to purchase up to 1,250,000 shares of
Common Stock. In July 1997, the Executive Committee authorized an amendment to
the 1997 Plan to increase the number of shares reserved for issuance from
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<PAGE>
1,250,000 shares of common stock to 2,000,000 shares of common stock. As of June
30, 1997, there were options to purchase 1,137,796 shares of Common Stock
outstanding under the 1997 Plan.
An aggregate of 68 persons are eligible to participate in the 1997 Plan.
Such persons include 4 executive officers and/or directors who are also
employees of the Company and 64 other employees of the Company who are eligible
to receive Incentive Options under the 1997 Plan, all of which persons (in
addition to 4 non-employee directors) are eligible to receive Non-Qualified
Options under the 1997 Plan.
In addition to the foregoing, during the fiscal year ended June 30,
1997, the Board of Directors granted options to purchase 20,000 shares of Common
Stock to each of Scott A. Mednick, Ronald Bloom, Adam Curry, Frank DeLape, Barry
Wagner, Michael Ribero and Angel Martinez. Consultants engaged by the Company
from time to time are also expected to be eligible to receive Non-Qualified
Options under the 1997 Plan.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
NUMBER OF SECURITIES PERCENT OF TOTAL 1EXERCISE
UNDERLYING OPTIONS/SARS GRANTED TO OR BASE
NAME OPTIONS/SARS GRANTED (#) EMPLOYEES IN FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- --------------- ------------------------ ------------------------ ------------ ---------------
<S> <C> <C> <C> <C>
Scott Mednick 20,000 1.76 4.05 2002
Ronald Bloom 20,000 1.76 4.46 2002
Adam Curry 20,000 1.76 4.05 2002
Melvin Epstein 133,333 11.72 4.05 2002
Susan Goodman 36,667 3.22 4.05 2002
Larry Kopald 250,000 21.97 3.69 2002
</TABLE>
- --------------------------
1 Based upon the closing bid price of the Company's Common Stock on the day
prior to the grant date as quoted by the Nasdaq National Market Systemsm.
31
<PAGE>
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
There were no options exercised during fiscal 1997 by the Named
Executive Officers. The following table sets forth certain information with
respect to unexercised options held by such persons at the end of fiscal 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN THE
ACQUIRED VALUE OPTIONS/SARS AT FY-END MONEY OPTIONS/SARS AT FY-END
ON (#) ($)1
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Scott Mednick None None None 20,000 None $1,600
Ronald Bloom None None None 20,000 None $1,600
Adam Curry None None None 20,000 None $1,600
Melvin Epstein None None None 133,333 None $10,667
Susan Goodman None None None 36,667 None $2,933
Larry Kopald None None None 250,000 None $20,000
</TABLE>
32
<PAGE>
- --------------------------
1 The calculations of the value of unexercised options are based on the
difference between the closing bid price quoted by the Nasdaq National
Market System of the Common Stock on June 30, 1997, and the exercise
price of each option, multiplied by the number of shares covered by the
option.
EMPLOYMENT AGREEMENTS
In June 1996, the Company entered into an employment agreement with each
of Scott Mednick, Ronald Bloom, Adam Curry and James Carlisle, each of which
provides for an initial term of three years, subject to automatic extension for
a period of two years in the absence of notice to the contrary at the option of
the Company. Mr. Mednick's employment agreement provides that he is entitled to
receive an annual salary of $225,000. Pursuant to the terms of their respective
employment agreements, as amended, each of Messrs. Bloom, Curry and Carlisle
receives an annual salary of $125,000. Each of Messrs. Mednick, Bloom, Curry and
Carlisle are entitled to receive bonuses as determined by the Board of
Directors. The Compensation Committee has granted bonuses to each of Messrs.
Mednick, Bloom and Curry in the aggregate amounts, respectively, of $28,782;
$69,696 and $81,480.
The Company also entered into an employment agreement with James Grannan
which provided for a term of one year, subject to renewal for a period of one
year at the discretion of the Company. On July 31, 1997, Mr. Grannan's
employment agreement was renewed for a period of one year. Pursuant to the terms
of such agreement, Mr. Grannan receives an annual salary of $125,000 and bonuses
as determined by the Board of Directors. In connection with the recent renewal,
Mr. Grannan was granted a $15,000 bonus.
The Company is also a party to an employment agreement with Susan
Goodman, entered into in June 1996, which provides for an initial term of three
years. Pursuant to the terms of the employment agreement, Ms. Goodman is
entitled to receive an annual salary of $195,000 and bonuses thereafter as
determined by the Board of Directors. In addition, Ms. Goodman has received
bonuses pursuant to the terms of her employment agreement with the Company.
The Company also entered into an employment letter with Mel Epstein,
which provides for a term of one year, subject to renewal for periods of one
year at the discretion of the Company. Pursuant to the terms of such agreement,
Mr. Epstein receives an annual salary of $180,000.
In April 1997, the Company and David Hieb, formerly the owner of
Internet One, entered into an agreement pursuant to which Mr. Hieb's employment
with the Company was terminated in exchange for the payment to Mr. Hieb of
$40,000 and acceleration of the vesting of options previously granted to him
under the 1997 Plan to acquire 10,470 shares of Common Stock.
In May 1997, in connection with the Company's acquisition of certain
assets of Ketchum, the Company reached an agreement with Larry Kopald, pursuant
33
<PAGE>
to which Mr. Kopald is entitled to receive an annual salary of $300,000 the
first year of his employment and $350,000 the second year of his employment. In
addition, Mr. Kopald is entitled to receive bonuses of up to $150,000 in the
first year of his employment and up to $100,000 in the second year of his
employment based upon Oracle entering into advertising services agreements. Mr.
Kopald is also entitled to receive bonuses of up to ten percent (10%) of profits
on billings on the Oracle account in excess of $16 million dollars in the first
year of his employment agreement and up to ten percent (10%) of profits on
billings on the Oracle account in excess of $20 million dollars in the second
year of his employment, and options exercisable to purchase up to 250,000 shares
of Common Stock in equal increments over a period of four years at an exercise
price of $3.69 per share, the market price of the Common Stock at the date of
grant.
The Company's employment agreements provide for termination by the
Company upon death or disability of the individual and may be terminated with or
without cause (as defined therein). Such agreements also provide for severance
payments upon termination without cause based upon a multiple of the monthly
salaries provided for therein (for up to twelve months following the number of
months otherwise remaining under such agreements). In addition, all of the
foregoing employment agreements contain non-competition and confidentiality
provisions that extend beyond the respective terms of such agreements for
periods of up to one year.
CONSULTING AND OTHER ARRANGEMENTS
In March 1996, the Company entered into consulting agreements with
Benchmark Equity Group, Inc. ("Benchmark") pursuant to which the Company paid
Benchmark $500,000 in finders fees and pays $7,000 per month in consulting fees.
As of the date hereof, only one of such agreements (the $7,000 per month
agreement) remains in effect and is scheduled to expire in March 1998. Frank
DeLape, a stockholder and former director of the Company, is a principal and
director of Benchmark.
In June 1997, the Company entered into a consulting agreement with Jason
H. Pollak, pursuant to which Mr. Pollak agreed to render to the Company for a
period of one year certain consulting services, including, among other things,
providing merger and acquisition and investor and public relations services. In
exchange therefor, the Company issued, in July 1997, 50,000 shares of Common
Stock and agreed to issue an aggregate of 150,000 shares of Common Stock and
options to acquire up to 150,000 additional shares of Common Stock. The
securities subject to the consulting agreement are issuable in equal monthly
installments and the option exercise prices are based upon the closing bid price
of the Common Stock in each month that the corresponding options are issued.
REMUNERATION OF DIRECTORS
Employee directors of the Company receive no compensation for acting as
directors or attending meetings of the Board of Directors. Non-employee
34
<PAGE>
directors receive $1,000 per year for each year such director serves on the
Board of Directors and $2,500 per meeting attended. In addition, all directors
are eligible to receive options under the 1997 Plan. All directors are entitled
to reimbursement of reasonable expenses related to attending meetings of the
directors. In addition, each director received an option to purchase an
aggregate of 20,000 shares of Common Stock. See the charts set forth
hereinabove.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of the date hereof, certain
information with respect to stock ownership of: (i) all persons known by the
Company to be beneficial owners of five percent or more of outstanding Common
Stock; (ii) each of the Company's directors and executive officers; and (iii)
all directors and executive officers as a group (7 persons). Unless otherwise
indicated, the beneficial owners have sole voting and investment power over the
shares of Common Stock listed below.
<TABLE>
<CAPTION>
NUMBER OF SHARES % OF OUTSTANDING
NAME AND ADDRESS OF COMMON STOCK SHARES OF COMMON
OF BENEFICIAL OWNER1 BENEFICIALLY OWNED STOCK BENEFICIALLY OWNED
- -------------------- ------------------ ------------------------
<S> <C> <C>
Frank M. DeLape 898,898(2) 13.6%
16406 Brook Forest Drive
Houston, Texas 77059
Benchmark Equity Group, Inc. 682,231(3) 10.3%
700 Gemini
Houston, Texas 77058
Ronald Bloom 895,933(4) 13.6%
45 West 36th Street
New York, New York 10018
Scott A. Mednick 650,467(4) 9.8%
8000 Sunset Boulevard, Penthouse
East
Los Angeles, California 90046
Adam Curry 198,225(4) 3.0%
30 Glen Road
Verona, New Jersey 07044
Melvin Epstein 133,333(4) 2.0%
45 West 36th Street
New York. New York 10018
James Carlisle 261,849(4) 4.0%
45 Allison Road
Alpine, New Jersey 07620
35
<PAGE>
Susan Goodman 86,290(4) 1.3%
45 West 36th Street
New York. New York 10018
Omnicom Group Inc. 1,183,333(5) 17.9%
437 Madison Avenue
New York, New York 10022
Barry Wagner 20,000 *
437 Madison Avenue, 9th Floor
New York, New York 10022
All Directors and Executive 2,246,097(4) 34.0%
Officers as a Group (7 persons)
</TABLE>
- -------------------
* Denotes less than one percent.
1 Unless otherwise noted, all of such shares of Common Stock listed above
are owned of record by each individual named as beneficial owner and
each such individual has solo voting and dispositive power with respect
to the shares of Common Stock owned. The percentage of ownership is
determined by assuming that any options or convertible securities held
by the noted securityholder which are exercisable within 60 days from
the date hereof have been exercised or converted, as the case may be.
2 Includes 682,231 shares and 180,000 shares of Common Stock beneficially
owned by Benchmark Equity Group, Inc. and Trident II, L.L.C.,
respectively. Also includes options to acquire 20,000 shares of Common
Stock granted to Frank DeLape as a director of the Company prior to his
resignation. Mr. DeLape is an officer, director and principal
stockholder of Benchmark Equity Group, Inc., a principal stockholder of
the Company, and is an officer, director and principal of Oak Tree
Capital, Inc., which is the manager and a member of Trident II, L.L.C.
Mr. DeLape may be deemed to be beneficial owner of all such shares.
Excludes 97,461 shares held by Christopher Efird, a principal of
Benchmark Equity Group, Inc., and a former director of the Company.
3 Excludes 180,000 shares of Common Stock owned by Trident II, L.L.C.,
16,667 shares of Common Stock owned by Frank DeLape and 20,000 shares of
Common Stock issuable upon exercise of options granted to Mr. DeLape.
4 Includes shares of Common Stock issuable upon exercise of options
granted to the noted securityholder.
5 Includes 120,000 shares issued to Omnicom in connection with the
Company's acquisition of the assets and operations of Fathom from
Ketchum, the wholly-owned subsidiary of Omnicom.
There are no agreements or other arrangements or understandings known to
the Company concerning the voting of the Common Stock or otherwise concerning
control of the Company which are not disclosed herein. There are no pre-emptive
rights applicable to the Company's securities.
36
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1996, Scott Mednick, Ronald Bloom, Benchmark and Christopher
Efird, as the founding stockholders of the Company, acquired an aggregate of
2,171,506 shares of Common Stock in exchange for payment of an aggregate of $656
therefor.
In connection with the Company's acquisition of The Mednick Group in
June 1996, the Company issued to Scott Mednick, as the sole stockholder of The
Mednick Group, an aggregate of 208,084 shares of Common Stock. Mr. Mednick is a
founding stockholder, an officer and a director of the Company.
In March 1996, the Company obtained a loan in the aggregate principal
amount of $270,000 from three separate lenders, including Trident II, L.L.C. and
Frank M. DeLape. In exchange for extension of the loan, the Company issued
the10% Notes, including one in the principal amount of $225,000 to Trident II,
L.L.C. and one in the principal amount of $20,000 to Mr. DeLape. Mr. DeLape, a
founder of the Company and a former director, is an officer, director and
principal of Benchmark and of Oak Tree Capital, Inc., which is the manager and a
member of Trident II, L.L.C. In August 1996, an aggregate of $27,000 in
principal amount of the foregoing 10% Notes was converted by the holders thereof
into an aggregate of 216,667 shares of Common Stock. In July 1996, Trident II,
L.L.C. loaned the Company an additional $75,000 evidenced by a separate
non-convertible promissory note. Principal and interest outstanding under the
10% Notes and the $75,000 non-convertible promissory note were repaid out of the
proceeds of the Omnicom Transaction in August 1996, as more fully described
elsewhere herein.
Also in March 1996, the Company entered into consulting agreements with
Benchmark pursuant to which the Company paid Benchmark $500,000 in finders fees
and pays $7,000 per month in consulting fees. As of the date hereof, only one of
such agreements (the $7,000 per month agreement) remains in effect and is
scheduled to expire in March 1998. Frank DeLape, a stockholder and former
director of the Company, is a principal and director of Benchmark.
In April 1996, upon release of an escrow account established to
facilitate the following loan transaction, the Company loaned an aggregate of
$1,000,000 to On Ramp in connection with the redemption by On Ramp of 100 shares
of its common stock (which shares of common stock represented 66% of the issued
and outstanding capital stock of On Ramp). Such redemption was the result of an
agreement previously reached among the former stockholders of On Ramp arising
out of fundamental differences among such individuals relating to the operation
and business strategy of On Ramp. In addition, pursuant to the terms of a
certain loan agreement between the Company and On Ramp, the Company agreed to
make available to On Ramp an additional $600,000, of which $494,000 has been
borrowed by On Ramp as of the date hereof. Such loans are evidenced by
promissory notes executed on behalf of On Ramp in favor of the Company in the
principal amounts of $1,000,000 and $600,000, respectively (the "On Ramp
37
<PAGE>
Notes"). Amounts outstanding under the On Ramp Notes accrue interest at the rate
of 12% per annum. Payment of principal and interest on the On Ramp Notes was due
on August 16, 1996, subject to a six-month cure period. Repayment of amounts
outstanding under the On Ramp Notes were secured by the pledge in favor of the
Company of 26 shares of common stock of On Ramp by Adam Curry (who, as a result
of the foregoing redemption, became the sole stockholder of On Ramp).
Subsequently, in connection with the Company's acquisition of On Ramp, the
Company acquired all of the issued and outstanding capital stock of On Ramp,
including the shares of common stock subject to the On Ramp Pledge Agreement.
In May 1996, pursuant to the terms of a certain loan agreement between
the Company and Internet One, the Company agreed to make available to Internet
One up to $70,000, of which $50,000 has been borrowed by Internet One as of the
date hereof. Such loan is evidenced by a promissory note executed by Internet
One in favor of the Company in the principal amount of $70,000 (the "Internet
One Note"). Amounts outstanding under the Internet One Note accrue interest at
the rate of 12% per annum. Payment of principal and interest on the Internet One
Note is due on September 30, 1996. Repayment of amounts outstanding under the
Internet One Note was secured by the pledge in favor of the Company (the
"Internet One Pledge Agreement") of 132,000 shares of common stock of Internet
One (which shares of common stock represent 33% of the issued and outstanding
capital stock of Internet One) by David R. Hieb. Subsequently, in connection
with the Company's acquisition of Internet One, the Company acquired all of the
outstanding shares of capital stock of Internet One, including the shares of
common stock subject to the Internet One Pledge Agreement.
Historically, Dr. Carlisle and his father, Dan Carlisle, extended credit
to NetCube. In connection with the Company's acquisition of NetCube in June
1996, Dr. Carlisle agreed to forgive an aggregate of approximately $1,220,000 in
debt owed to him by NetCube. In addition, the Company agreed to issue three
promissory notes providing for repayment of amounts owed to each of Dr. Carlisle
and Dan Carlisle. Each of such promissory notes accrued interest at the rate of
8% per annum and was convertible into shares of Common Stock prior to expiration
thereof at the rate of $7.50 per share. The principal amount of the promissory
note issued to Dr. Carlisle was $132,000 and the principal amounts of the two
promissory notes issued to Dan Carlisle were $288,000 and $515,760,
respectively. The $132,000 promissory note issued to Dr. Carlisle and the
$288,000 promissory note issued to Dan Carlisle were repaid prior to the Initial
Public Offering. The $515,760 convertible promissory note issued to Dan Carlisle
is payable on March 31, 1998 (or earlier, upon the Company's receipt of
$3,000,000 from a private offering of securities, the sale of 50% of the assets
of the Company or another public offering).
Pursuant to the terms of the Omnicom Agreement: (a) Omnicom purchased
938,667 shares of Common Stock from the Company in exchange for net proceeds of
$4,948,000; (b) the Company appointed Barry Wagner to represent Omnicom on the
Board of Directors; (c) Omnicom agreed not to increase its ownership interest in
the Company absent the approval of the Board of Directors; and (d) Omnicom
38
<PAGE>
granted the Company a right of first refusal to purchase the shares of Common
Stock owned by Omnicom.
In November 1996, four principal stockholders of the Company transferred
an aggregate of 124,667 shares of Common Stock to Omnicom for no cash
consideration. In connection therewith, Omnicom consented to a stock split by
the Company and related amendments to the Omnicom Agreement and the Company
agreed to decrease the number of shares available under the 1996 Plan.
The Company entered into the Omnicom Transaction to establish a
strategic relationship which management of the Company believes could provide
access to a substantial additional client base, although there can be no
assurance that such result will occur. Since June 1996, Omnicom and the Company
have engaged in the joint marketing of their services to several Omnicom
clients. There can be no assurance that such joint marketing will continue, nor
can there be any assurance with respect to the effect of such marketing on the
Company's operations.
In May 1997, the Company entered into the Ketchum Agreement, pursuant to
which the Company acquired certain assets and operations of Fathom from Ketchum,
a wholly-owned subsidiary of Omnicom, in exchange for the issuance of 120,000
shares of Common Stock.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
EXHIBIT
NUMBER TITLE OF EXHIBIT
2.1* Asset Purchase and Forbearance Agreement, dated May 31,
1997, by and between THINK New Ideas, Inc. and Ketchum
Communications, Inc.
3.1 Articles of Incorporation of THINK NEW IDEAS, Inc.,
(Delaware) (Registrant) filed with the Securities and
Exchange Commission on September 26, 1996 as an exhibit to
the Company's Registration Statement on Form SB-2 (File
No. 333-12795) and incorporated herein by reference.
3.2 Agreement and Plan of Merger by and among THINK NEW IDEAS,
Inc., On Ramp, Inc. and Adam Curry filed with the
Securities and Exchange Commission on September 26, 1996
as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 333-12795) and incorporated herein by
reference.
39
<PAGE>
3.3 Agreement and Plan of Merger by and among THINK NEW IDEAS,
Inc., NetCube Corporation and James Carlisle, Ph.D. filed
with the Securities and Exchange Commission on September
26, 1996 as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 333-12795) and
incorporated herein by reference.
3.4 Agreement and Plan of Merger by and among THINK NEW IDEAS,
Inc., Creative Resources, Inc. and James Grannan filed
with the Securities and Exchange Commission on September
26, 1996 as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 333-12795) and
incorporated herein by reference.
3.5 Agreement and Plan of Merger by and among THINK NEW IDEAS,
Inc., The S.D. Goodman Group, Inc. and Susan Goodman filed
with the Securities and Exchange Commission on September
26, 1996 as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 333-12795) and
incorporated herein by reference.
3.6 Agreement and Plan of Merger by and among THINK NEW IDEAS,
Inc., Internet One, Inc. and David and Dana Hieb filed
with the Securities and Exchange Commission on September
26, 1996 as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 333-12795) and
incorporated herein by reference.
3.7 Agreement and Plan of Merger by and among THINK NEW IDEAS,
Inc., Scott Mednick & Associates, Inc. and Scott Mednick
filed with the Securities and Exchange Commission on
September 26, 1996 as an exhibit to the Company's
Registration Statement on Form SB-2 (File No. 333-12795)
and
incorporated herein by reference.
3.8 Bylaws of THINK New Ideas, Inc. filed with the Securities
and Exchange Commission on September 26, 1996 as an
exhibit to the Company's Registration Statement on Form
SB-2 (File No. 333-12795) and incorporated herein by
reference.
4.1 Specimen Common Stock Certificate filed with the
Securities and Exchange Commission on September 26, 1996
as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 333-12795) and incorporated herein by
reference.
4.2 Form of Warrant Agreement among the Company, Commonwealth
Associates and Continental Stock Transfer and Trust
40
<PAGE>
Company filed with the Securities and Exchange Commission
on September 26, 1996 as an exhibit to the Company's
Registration Statement on Form SB-2 (File No. 333-12795)
and incorporated herein by reference.
4.3 THINK New Ideas, Inc. 1996 Stock Option Plan, filed with
the Securities and Exchange Commission on September 26,
1996 as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 333-12795) and incorporated herein
by reference.
4.4* THINK New Ideas, Inc. 1997 Stock Option Plan.
10.1 Employment Agreement between THINK New Ideas, Inc. and
Scott Mednick, filed with the Securities and Exchange
Commission as an exhibit to the Company's Registration
Statement on Form SB-2, dated September 26, 1996 (File No.
333-12795), and incorporated herein by reference.
10.2 Employment Agreement between THINK New Ideas, Inc. and Ron
Bloom, filed with the Securities and Exchange Commission
as an exhibit to the Company's Registration Statement on
Form SB-2, dated September 26, 1996 (File No. 333-12795),
and incorporated herein by reference.
10.3 Employment Agreement between THINK New Ideas, Inc. and
Adam Curry, filed with the Securities and Exchange
Commission as an exhibit to the Company's Registration
Statement on Form SB-2, dated September 26, 1996 (File No.
333-12795), and incorporated herein by reference.
10.4 Employment Agreement between THINK New Ideas, Inc. and
Susan Goodman, filed with the Securities and Exchange
Commission as an exhibit to the Company's Registration
Statement on Form SB-2, dated September 26, 1996 (File No.
333-12795), and incorporated herein by reference.
10.5 Employment Agreement between THINK New Ideas, Inc. and
James Carlisle, filed with the Securities and Exchange
Commission as an exhibit to the Company's Registration
Statement on Form SB-2, dated September 26, 1996 (File No.
333-12795), and incorporated herein by reference.
10.6 Employment Agreement between THINK New Ideas, Inc. and
James Grannan, filed with the Securities and Exchange
Commission as an exhibit to the Company's Registration
Statement on Form SB-2, dated September 26, 1996 (File No.
333-12795), and incorporated herein by reference.
41
<PAGE>
10.7 Employment Agreement between THINK New Ideas, Inc. and Mel
Epstein.
10.8* Employment Letter between THINK New Ideas, Inc. and Larry
Kopald.
10.9 Consulting Agreement, dated June 30, 1997, between THINK
New Ideas, Inc. and Jason H. Pollak, filed with the
Securities and Exchange Commission as an exhibit to the
Company's Registration Statement on Form S-8 filed with
the Commission on July 17, 1997 (File No.333-31511) and
incorporated herein by reference.
10.10* Letter Amendment to Employment Agreement of James Grannan.
10.11* Termination Agreement between THINK New Ideas, Inc. and
David Hieb.
11* Statement regarding earnings per share.
12.1 Quarterly Report on Form 10-QSB for quarter ended December
31, 1997 filed with the Securities and Exchange Commission
on February 15, 1997 and incorporated herein by reference.
12.2 Quarterly Report on Form 10-QSB for quarter ended March
31, 1997 filed with the Securities and Exchange Commission
on April 15, 1997 and incorporated herein by reference.
23.1* Consent of BDO Seidman, LLP
27* Financial Data Schedule.
* Denotes documents filed herewith. Other documents are incorporated herein by
reference as noted above.
(B) REPORTS ON FORM 8-K.
There were no Current Reports on Form 8-K filed by the Company during
the last quarter of the fiscal year ended June 30, 1997.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized.
THINK NEW IDEAS, INC.
Dated: October 1, 1997 By: /S/ SCOTT A. MEDNICK
---------------------------------------------
Scott A. Mednick, Chairman and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ Scott A. Mednick Chief Executive Officer, Chairman October 1, 1997
- ------------------------ of the Board and Director
Scott A. Mednick
/s/ Ronald Bloom President and Director October 1, 1997
- ------------------------
Ronald Bloom
Chief Technology Officer and October __, 1997
- ------------------------
Adam Curry Director
/s/ Melvin Epstein Chief Financial Officer October 1, 1997
- ------------------------
Melvin Epstein
/s/ Barry Wagner Director October 1, 1997
- ------------------------
Barry Wagner
Director October __, 1997
- ------------------------
Richard Char
/s/ Marc Canter Director October 1, 1997
- ------------------------
Marc Canter
/s/ Larry Kopald Director October 1, 1997
- ------------------------
Larry Kopald
- -------------------------------------------------------------------------------
ASSET PURCHASE AND FORBEARANCE AGREEMENT
by and among
KETCHUM COMMUNICATIONS, INC.
and
THINK NEW IDEAS, INC.
- -------------------------------------------------------------------------------
Dated as of May 31, 1997
<PAGE>
ASSET PURCHASE AND FORBEARANCE AGREEMENT
----------------------------------------
ASSET PURCHASE AND FORBEARANCE AGREEMENT (the "AGREEMENT") dated as of
the close of business on May 31, 1997 (the "EFFECTIVE DATE") by and among
KETCHUM COMMUNICATIONS, INC., a Pennsylvania corporation (the "COMPANY") and
THINK NEW IDEAS, INC., a Delaware corporation (the "PURCHASER").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company wishes to sell, and the Purchaser wishes to
purchase, certain of the assets of the Company relating to its advertising
business in Los Angeles, California being conducted under the Fathom tradename
(the "BUSINESS"), subject to certain of the Company's liabilities, upon the
terms and subject to the conditions of this Agreement; and
WHEREAS, the Purchaser is desirous of servicing the Oracle account (the
"ACCOUNT") now being serviced by the Business and the Company is agreeable to
permit the Purchaser to service the Account, upon the terms and subject to the
conditions of this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties do hereby
agree as follows:
ARTICLE I
---------
SALE AND PURCHASE OF ASSETS AND FORBEARANCE AGREEMENT
-----------------------------------------------------
SECTION 1.1 ASSETS TRANSFERRED. The Company hereby sells, transfers,
conveys, assigns and delivers to the Purchaser, and the Purchaser hereby
purchases, all right, title and interest of the Company in and to the following
assets of the Business (the "ASSETS"), free and clear of all liens and
encumbrances:
(i) all job orders and work-in-process relating to the Account;
(ii) the accounts receivable of the Business relating to the Account
reflected on the Closing Date Balance Sheet (as defined in Section
1.2);
(iii) all contracts, agreements and commitments of the Business
relating to the Account; and
(iv) the books, files and records of the Business relating to the
Account.
<PAGE>
Except as set forth above, the Company is not transferring, and the Purchaser is
not acquiring, any other assets of the Company.
SECTION 1.2 ASSUMED LIABILITIES. Within 30 days after the Closing, the
Purchaser shall deliver to the Company an unaudited balance sheet of the
Business as at the Effective Date (the "CLOSING DATE BALANCE Sheet"), setting
forth the Assets to be acquired and the liabilities to be assumed by the Company
(the "ASSUMED LIABILITIES"). The Closing Date Balance Sheet shall be prepared in
accordance with generally accepted accounting principles consistently applied.
In consideration of the sale, transfer, conveyance, assignment and delivery of
the Assets pursuant to this Agreement, the Purchaser hereby assumes and agrees
to pay, perform and discharge when due the Assumed Liabilities.
SECTION 1.3 FORBEARANCE AGREEMENT. The Company agrees that as of the
Effective Date, the Business will cease to render services to the Account and
hereby acknowledges the right of the Purchaser or one of its subsidiaries to
commence rendering services to the Account. In connection therewith and in
consideration of the delivery to it at the Closing (as defined in Section l.5
below) of 120,000 shares of common stock, par value $.0001 per share of the
Purchaser (the "ISSUED STOCK"), the Company hereby agrees (i) to waive any and
all rights that it may have to render services to the Account on and after the
Effective Date, (ii) to receive any compensation in respect of any notice period
under the terms of its agency-client agreement with the Account and (iii) not to
commence any proceeding, assert any claim, pursue any legal action or seek
recovery of any kind whatsoever against the Purchaser and any of its
subsidiaries with respect to or in anyway relating to the Account as of the
Effective Date.
SECTION 1.4 CLOSING. The Closing under this Agreement (the "CLOSING")
shall be deemed to have taken place at the close of business on May 31, 1997, at
the offices of Davis & Gilbert, 1740 Broadway, New York, New York 10019. Such
date is herein referred to as the "CLOSING DATE".
SECTION 1.5 FURTHER ASSURANCE; POST CLOSING COOPERATION. All
transactions at the Closing shall be deemed to have taken place simultaneously.
The Company will, from time to time, at the request of the Purchaser, whether at
or after the Closing Date, execute and deliver such instruments of conveyance
and assignment, as the Purchaser or its counsel may reasonably require for the
effective conveyance and transfer of the Assets to the Purchaser, and the
Company will assist the Purchaser in the collections and reduction to possession
of the Assets. Following the Closing, each party will afford the other party,
its counsel and its accountants, during normal business hours, reasonable access
to the books, records and other data relating to the Business in its possession
with respect to periods prior to the Closing and the right to make copies and
extracts therefrom, to the extent that such access may be reasonably required by
the requesting party in connection with (i) the preparation of tax returns, (ii)
the determination or enforcement of rights and obligations under this Agreement,
(iii) compliance with the requirements of any Governmental or Regulatory
2
<PAGE>
Authority (as defined in Section 2.3.1), (iv) the determination or enforcement
of the rights and obligations of any Indemnified Party (as defined in Section
5.5) or (v) in connection with any actual or threatened action or proceeding.
ARTICLE II
----------
REPRESENTATIONS OF THE COMPANY
------------------------------
The Company represents, warrants and agrees to and with the Purchaser
as follows:
SECTION 2.1 EXISTENCE AND GOOD STANDING. The Company is a corporation
duly organized and validly existing under the laws of the State of Pennsylvania,
with full corporate power and authority to own its property and to carry on its
business all as and in the places where such properties are now owned or
operated or such business is now being conducted.
SECTION 2.2 EXECUTION AND VALIDITY OF AGREEMENT. The Company has the
full corporate power and authority to enter into this Agreement and to perform
its obligations hereunder. The execution and delivery of this Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby have been duly authorized by all required corporate action on behalf of
the Company. This Agreement has been duly and validly executed and delivered by
the Company and, assuming due authorization, execution and delivery by the
Purchaser, constitute the legal, valid and binding obligation of the Company,
enforceable against it in accordance with its terms.
SECTION 2.3 NON-CONTRAVENTION; APPROVALS AND CONSENTS.
2.3.1 NON-CONTRAVENTION. The execution, delivery and
performance by the Company of its obligations hereunder and the consummation of
the transactions contemplated hereby, do not (a) violate, conflict with or
result in the breach of any provision of the Articles of Incorporation or
By-laws of the Company, or (b) result in the violation by the Company of any
statute, law, rule, regulation or ordinance (collectively, "LAWS"), or any
judgment, decree, order, writ, permit or license (collectively, "ORDERS"), of
any court, tribunal, arbitrator, authority, agency, commission, official or
other instrumentality of the United States, any foreign country or any domestic
or foreign state, county, city or other political subdivision (a "GOVERNMENTAL
OR REGULATORY AUTHORITY"), applicable to the Company or any of the Assets or (c)
conflict with, result in a violation or breach of, constitute (with or without
notice or lapse of time or both) a default under, or require the Company to
obtain any consent, approval or action of, make any filing with or give any
notice to, or result in or give to any Person (as defined in Section 6.3 below)
any right of payment or reimbursement, termination, cancellation, modification
or acceleration of, or result in the creation or imposition of any lien upon any
of the Assets, under any of the terms, conditions or provisions of any note,
bond, mortgage, security agreement, indenture, license, franchise, permit,
3
<PAGE>
concession, contract, lease or other instrument, obligation or agreement of any
kind (collectively, "INSTRUMENTS") to which the Company is a party or by which
the Company or any of its assets or properties is bound.
2.3.2 APPROVALS AND CONSENTS. No consent, approval or action
of, filing with or notice to any Governmental or Regulatory Authority or other
public or private third party is necessary or required under any of the terms,
conditions or provisions of any Law or Order of any Governmental or Regulatory
Authority or any Instrument to which the Company is a party or its assets
(including without limitation, the Assets) or properties is bound for the
execution and delivery of this Agreement by the Company, the performance by the
Company of its obligations hereunder or the consummation of the transactions
contemplated hereby.
SECTION 2.4 LITIGATION. There is no action, suit, proceeding at law or
in equity by any Person, or any arbitration or any administrative or other
proceeding by or before (or to the best knowledge, information and belief of the
Company, any investigation by) any Governmental or Regulatory Authority, pending
or, to the best knowledge, information and belief of the Company, threatened,
against the Company with respect to the Assets, this Agreement or the
transactions contemplated hereby.
SECTION 2.5 EMPLOYEES. SCHEDULE A to this Agreement is a list setting
forth the names and positions of all employees of the Business, together with a
statement of the current annual salary, the bonus compensation paid with respect
to calendar year 1996, and the material fringe benefits of such employees not
generally available to all employees of the Business. None of such employees has
an employment agreement with the Company.
SECTION 2.6 CLOSING DATE BALANCE SHEET. The Assumed Liabilities as
reflected on the Closing Date Balance Sheet shall be equal to the Assets
reflected on the Closing Date Balance Sheet.
ARTICLE III
-----------
REPRESENTATIONS OF THE PURCHASER
--------------------------------
The Purchaser, represents, warrants and agrees to and with the Company
as follows:
SECTION 3.1 EXISTENCE AND GOOD STANDING. The Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, with full corporate power and authority to own its property
and to carry on its business all as and in the places where such properties are
now owned or operated or such business is now being conducted.
SECTION 3.2 EXECUTION AND VALIDITY OF AGREEMENT. The Purchaser has the
full corporate power and authority to enter into this Agreement and to perform
its obligations hereunder. The execution and delivery of this Agreement by the
4
<PAGE>
Purchaser and the consummation of the transactions contemplated hereby have been
duly authorized by all required corporate action on behalf of the Purchaser.
This Agreement has been duly and validly executed and delivered by the Purchaser
and, assuming due authorization, execution and delivery by the Company,
constitutes the legal, valid and binding obligation of the Purchaser,
enforceable against the Purchaser in accordance with its terms.
SECTION 3.3 NON-CONTRAVENTION; APPROVALS AND CONSENTS.
----------- -----------------------------------------
3.3.1 NON-CONTRAVENTION. The execution, delivery and
performance by the Purchaser of its obligations hereunder and the consummation
of the transactions contemplated hereby, do not (a) violate, conflict with or
result in the breach of any provision of the certificate of incorporation or
by-laws of the Purchaser, or (b) result in the violation by the Purchaser of any
Laws or Orders of any Governmental or Regulatory Authority, applicable to the
Purchaser or any of its assets or properties, or (c) conflict with, result in a
violation or breach of, constitute (with or without notice or lapse of time or
both) a default under, or require the Purchaser to obtain any consent, approval
or action of, make any filing with or give any notice to, or result in or give
to any Person any right of payment or reimbursement, termination, cancellation,
modification or acceleration of, or result in the creation or imposition of any
lien upon any of the assets or properties of the Purchaser, under any of the
terms, conditions or provisions of any Instruments to which the Purchaser is a
party or by which the Purchaser or any of its assets or properties are bound.
3.3.2 APPROVALS AND CONSENTS. No consent, approval or action
of, filing with or notice to any Governmental or Regulatory Authority or other
public or private third party is necessary or required under any of the terms,
conditions or provisions of any Law or Order of any Governmental or Regulatory
Authority or any Instrument to which the Purchaser is a party or by which the
Purchaser or any of its assets or properties is bound for the execution and
delivery of this Agreement by the Purchaser, the performance by the Purchaser of
its obligations hereunder or the consummation of the transactions contemplated
hereby.
SECTION 3.4 LITIGATION. There is no action, suit, proceeding at law or
in equity by any Person, or any arbitration or other proceeding by or before (or
to the best knowledge, information and belief of the Purchaser, any
investigation by) any Governmental or Regulatory Authority, pending or, to the
best knowledge, information and belief of the Purchaser, threatened against the
Purchaser with respect to this Agreement or the transactions contemplated
hereby.
SECTION 3.5 ISSUED STOCK. The shares of Issued Stock delivered at the
Closing to the Company pursuant to this Agreement are validly issued and
outstanding, fully paid and non-assessable, free and clear of all claims, liens
and encumbrances other than restrictions on resale arising by virtue of any
Federal or state securities laws of the United States, and are not subject to
any preemptive rights of shareholders of the Purchaser.
5
<PAGE>
SECTION 3.6 FINANCIAL STATEMENTS AND NO MATERIAL CHANGES. The Purchaser
has previously furnished to the Company a true and complete copy of its
Quarterly Report on Form 10-Q for the three and six months ended December 31,
1996 and March 31, 1997, respectively. Since March 31, 1997, there has been no
material adverse change in the assets or liabilities, or in the business or
condition, financial or otherwise, or the results of consolidated operations, of
the Purchaser and its subsidiaries. As of the dates of filing with the
Securities and Exchange Commission ("SEC"), such Forms 10-Q did not contain any
untrue statement of a material fact, or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading.
ARTICLE IV
OTHER AGREEMENTS
SECTION 4.1 PRIVATE PLACEMENT. The Issued Stock is being issued on the
date hereof without registration under the Securities Act of 1933, as amended
(the "SECURITIES ACT") based upon the "private offering exemption" in reliance
on the agreements set forth in Sections 4.2 and 4.3 below.
SECTION 4.2 INVESTMENT REPRESENTATIONS. The Company represents that it
is acquiring the Issued Stock for its own account for investment and not with a
view to the sale or distribution thereof or with any present intention of
selling or distributing the Issued Stock, except in conformity with the
Securities Act. The Company understands and agrees that it must bear the
economic risk of its investment in the Issued Stock for an indefinite period of
time because, among other things, the Issued Stock has not been the subject of
registration under the Securities Act or under the securities laws of any state
and, therefore, cannot be resold or otherwise disposed of except (i) pursuant to
an effective registration statement under the Securities Act, (ii) pursuant to
Rule 144 or any successor rule under the Securities Act, (iii) pursuant to a
no-action letter issued by the SEC to the effect that the proposed transfer may
be made without registration under the Securities Act, or (iv) upon the
Purchaser's receipt of an opinion of counsel of the Company reasonably
acceptable to the Purchaser and/or its counsel to the effect that the proposed
transfer is exempt from registration or qualification under the Securities Act
and relevant state securities laws.
SECTION 4.3 INVESTMENT LEGEND AND STOP TRANSFER NOTATION. Each
certificate representing shares of Issued Stock shall (unless otherwise
permitted or unless the shares evidenced by such certificate shall have been
registered under the Securities Act) be stamped or otherwise imprinted with a
legend in the following form (in addition to any legend required under
applicable state securities laws):
6
<PAGE>
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), or any state securities laws and may not be
sold except pursuant to an effective registration statement
under the Securities Act and pursuant to registration or
qualification under any applicable state securities laws or
upon the receipt by the Corporation of an opinion of counsel
reasonably acceptable to the Corporation to the effect that
the proposed transfer is exempt from registration or
qualification under the Securities Act and relevant state
securities laws."
The Purchaser shall have the right to place a "stop transfer" notation on the
transfer records of the Purchaser's transfer agent to implement the provisions
of this Section 4.3.
SECTION 4.4 AGREEMENTS REGARDING EMPLOYEES AFTER CLOSING
----------- --------------------------------------------
4.4.1 AFFECTED EMPLOYEES. The Purchaser shall offer employment
to all employees of the Company listed on SCHEDULE A hereto effective as of the
Effective Date (including those employees who are on vacation, temporary
lay-off, leave of absence, sick leave or short- or long-term disability). Such
personnel who accept such employment (the "AFFECTED EMPLOYEES") will be employed
on substantially equivalent terms (including, without limitation, salaries and
wages) under which such personnel were employed by the Company immediately prior
to the Closing Date, but nothing contained in this Section 4.4.1 shall be deemed
to create an employment contract between the Purchaser and/or any of its
subsidiaries and any such Affected Employee. From and after the Closing Date the
Affected Employees will be eligible to participate in the health, welfare and
other employee plans and benefits as provided by the Purchaser and its
subsidiaries to its employees, which plans and benefits may be different than
that provided by the Company. With respect to any welfare benefits plans (within
the meaning of Section 3(1) of ERISA) maintained by the Purchaser or one of its
subsidiaries in which an Affected Employee may participate on or after the
Closing Date, the Purchaser shall (i) cause to be waived any pre-existing
condition limitations, (ii) give effect, in determining any deductible and
maximum out-of-pocket limitations, to claims incurred and amounts paid by, and
amounts reimbursed to, such employees with respect to similar types of plans
maintained by the Business prior to the Closing Date and (iii) permit those
Affected Employees who are eligible as of the Closing Date to participate in the
Company's applicable welfare plans to participate immediately in any applicable
welfare plan of the Purchaser (or one of its subsidiaries). Employees of the
Company that become employees of the Purchaser or one of its subsidiaries shall
be subject to all rules, regulations, requirements and policies applicable to
all new hires of the Purchaser (subject to the provisions of Section 4.4.2
below), and any such employees who may be subsequently terminated will be
entitled to severance benefits in accordance with the policy of the Purchaser as
then applicable.
7
<PAGE>
4.4.2 SERVICE CREDIT. The Purchaser shall recognize under its
employee benefit plans, programs, arrangements and policies in which an Affected
Employee will participate the service credited to the Affected Employee as of
the Closing Date to the extent recognized under the Company's plans or
continuity of service rules for purposes of any waiting period, eligibility
conditions and benefits.
SECTION 4.5 SUCCESSOR EMPLOYER. The Purchaser agrees that it shall
elect treatment as a "successor employer" for withholding tax purposes with
respect to the 1997 calendar year.
ARTICLE V
---------
SURVIVAL; INDEMNITY
-------------------
SECTION 5.1 SURVIVAL. Notwithstanding any right of any party hereto
fully to investigate the affairs of any other party, and notwithstanding any
knowledge of facts determined or determinable pursuant to such investigation or
right of investigation, each party hereto shall have the right to rely fully
upon the representations, warranties, covenants and agreements of the other
parties contained in this Agreement. The respective representations, warranties,
covenants and agreements of the Company and the Purchaser contained in this
Agreement shall survive the Closing.
SECTION 5.2 OBLIGATION OF THE COMPANY TO INDEMNIFY. The Company hereby
agrees, to indemnify and hold harmless the Purchaser from all losses, damages
and expenses (including reasonable attorneys' fees) that may be imposed on or
incurred by the Purchaser as a consequence of or in connection with (i) any
inaccuracy or breach of any representation or warranty contained in Article II
hereof; and (ii) any breach of or failure by the Company to comply with or
perform any of its agreements contained in this Agreement.
SECTION 5.3 OBLIGATION OF THE PURCHASER TO INDEMNIFY. The Purchaser
hereby agrees to indemnify and hold harmless the Company from any and all
losses, damages and expenses (including reasonable attorneys' fees) that may be
imposed on or incurred by the Company as a consequence of or in connection with
(i) any inaccuracy or breach of any representation or warranty contained in
Article III hereof and (ii) any breach of or failure by the Purchaser to comply
with or perform any of its agreements contained in this Agreement.
SECTION 5.4 INDEMNIFICATION AS A SOLE REMEDY. The liability of each of
the parties hereto with respect to any matter set forth in Sections 5.2 or 5.3,
as the case may be, shall be the sole remedy of the parties hereto and no party
will have any claim, right or remedy under this Agreement except for
indemnification as provided in this Article V.
SECTION 5.5 THIRD-PARTY CLAIMS. If any claim for indemnification
hereunder arises out of a claim against a party entitled to indemnification
under Sections 5.2 or 5.3 above (the "INDEMNIFIED PARTY") by a third party (a
8
<PAGE>
"THIRD PARTY CLAIM"), the Indemnified Party will promptly notify the party
against which the claim for indemnification is made (the "INDEMNIFYING PARTY"),
and the Indemnifying Party shall have the right, at its own expense, to
compromise, settle or defend, at its own expense, the Third-Party Claim. The
Indemnified Party shall have the right to employ separate counsel to represent
it, if in the Indemnified Party's reasonable judgment, it is advisable for the
Indemnified Party to be represented by separate counsel, and in that event, the
fees and expenses of such separate counsel shall be paid by the Indemnified
Party. The Indemnified Party shall have the right to control the defense of any
Third-Party Claim if it notifies the Indemnifying Party that it is assuming the
defense of such claim and that the Indemnifying Party is relieved of its
obligations to the Indemnified Party with respect to such Third-Party Claim,
whereupon the Indemnifying Party shall be relieved of its obligations under this
Article V with respect to such Third-Party Claim and any alleged breach of a
representation or warranty relating to such Third-Party Claim. Except as
provided in the preceding sentence, if the Indemnifying Party does not elect to
compromise, settle or defend the Third-Party Claim, it shall be bound by the
results obtained by the Indemnified Party with respect to such Third-Party
Claim. Each of the parties hereto agrees to render to each other such assistance
as may reasonably be requested in order to insure the proper and adequate
defense of any Third-Party Claim.
ARTICLE VI
----------
MISCELLANEOUS
-------------
SECTION 6.1 EXPENSES. The parties hereto shall pay all of their own
expenses relating to the transactions contemplated by this Agreement, including,
without limitation, the fees and expenses of their respective counsel.
SECTION 6.2 GOVERNING LAW. The interpretation and construction of this
Agreement, and all matters relating hereto, shall be governed by the laws of the
State of New York without reference to its conflict of laws provisions.
SECTION 6.3 "PERSON" DEFINED. "PERSON" shall mean and include an
individual, a partnership, a joint venture, a corporation, a limited liability
company, a trust, an unincorporated organization and a government or other
department or agency thereof.
SECTION 6.4 CAPTIONS. The Article and Section captions used herein are
for reference purposes only, and shall not in any way affect the meaning or
interpretation of this Agreement.
SECTION 6.5 NOTICES. Unless otherwise provided herein, any notice,
request, instruction or other document to be given hereunder by any party to any
other party shall be in writing and shall be deemed to have been given (a) upon
personal delivery, if delivered by hand, (b) three days after the date of
deposit in the mails, postage prepaid, if mailed by certified or registered
mail, or (c) the next business day if sent by facsimile transmission (if receipt
9
<PAGE>
is electronically confirmed) or by a prepaid overnight courier service, and in
each case at the respective addresses or numbers set forth below or such other
address or number as such party may have fixed by notice:
If to the Company, addressed to:
Diversified Agency Services Group
Division of Omnicom Group Inc.
437 Madison Avenue
New York, New York 10022
Attention: Chief Financial Officer
Fax: (212) 415-3530
with a copy to:
Davis & Gilbert
1740 Broadway
New York, New York 10019
Attention: Michael D. Ditzian, Esq.
Fax: (212) 468-4888
If to the Purchaser, addressed to:
Think New Ideas Inc.
45 West 36th Street
New York, NY 10036
Attention: Chief Financial Officer
Fax: (212) 302-6024
with a copy to:
DeMartino Finkelstein Rosen & Virga
Suite 400
1818 N Street, N.W.
Washington, D.C. 20036-2492
Attention: Ralph V. DeMartino, Esq.
Fax: (202) 659- 1290
SECTION 6.6 PARTIES IN INTEREST. This Agreement may not be transferred,
assigned, pledged or hypothecated by any party hereto, other than by operation
10
<PAGE>
of law, without the prior written consent of the other party hereto. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective heirs, executors, administrators, successors and
permitted assigns.
SECTION 6.7 SEVERABILITY. In the event any provision of this Agreement
is found to be void and unenforceable by a court of competent jurisdiction, the
remaining provisions of this Agreement shall nevertheless be binding upon the
parties with the same effect as though the void or unenforceable part had been
severed and deleted.
SECTION 6.8 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one instrument.
SECTION 6.9 ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto with respect to the subject matter contained
herein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such subject matter.
SECTION 6.10 AMENDMENTS. This Agreement may not be amended,
supplemented or modified orally, but only by an agreement in writing signed by
the Purchaser and the Company.
SECTION 6.11 THIRD PARTY BENEFICIARIES. Each party hereto intends that
this Agreement shall not benefit or create any right or cause of action in or on
behalf of any Person other than the parties hereto and their respective
successors and assigns as permitted under Section 6.6.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as
of the close of business on May 31, 1997.
KETCHUM COMMUNICATIONS, INC.
/s/ Barry J. Wagner
------------------------------
By: Name: Barry J. Wagner
Title: Secretary
THINK NEW IDEAS, INC.
/s/ Scott A. Mednick
-------------------------------
By: Name: Scott A. Mednick
Title: Chief Executive Officer
<PAGE>
EXHIBIT A
Transfers To New Agency
-----------------------
Fringe 1996
Name Benefits* Bonus Annual
Salary
- -------------------------------------------------------------------------
Permanent & Transferring to Think
1. Julianna Baughman $ 49,236
2. Greg Bergan 131,256
3. Allison Bruder 60,000
4. Andrea Calhoun 44,000
5. Jill Evans 26,000
6. Kim Gilchrist 55,000
7. Michelle Harrington 20,800
8. Lisa Hedenberg 85,000
9. Monika Hummer 32,000
10. Larry Kopald 10,000 200,000 330,000
10. Heather Lewis 40,000
11. Gordon Melcher 97,200
12. Paul Ratsky 4,500 80,000
13. Carrie Sedor 48,000
14. Venita Smith 44,136
15. Tom Somerset 10,000 20,000 185,000
16. Amy Wagoner 10,000 145,000
*Company car or car allowance
<PAGE>
EXHIBIT A (Con't)
I. These employees have been with Fathom on a part-time basis but will be
full-time permanent employees at Fathom/Think. The annual salaries indicated are
the planned full-time salaries.
Temporary To Permanent
1. Rachel Gould 26,000/yr
3. Christine Nefler 40,000/yr
4. Hakan Nilsson 30,000/yr
II. The following are employees who will transfer to Fathom/Think and retain
their "freelance" status working 8 hour days (except where indicated) for an
extended amount of time (TBD).
TEMPORARY TO TEMPORARY
1. Suzanne Gersbach 20.00/hour
2. Kim Amory 35.00/hour
3. Jeff Smith** 25.00/hour
4. Barrett Sherwood 20.00/hour
5. Paul Jeung 35.00/hour
6. Crystal Williams 35.00/hour
7. Keli Pharoah** 65.00/hour
** 3 days/week for 1-3 months
III. The following are former Fathom/Ketchum employees who will work at
Fathom/Think for a limited amount of time.
SHORT TERM FREELANCE ON FATHOM/THINK PAYROLL
1. Ceebs Bailey (6 mos.) $500/day
2. Jill Mathews (3 mos.) 550/day
3. Jim Dearing (1 mo.) 650/day
================================================================================
THINK NEW IDEAS, INC.
1997 STOCK OPTION PLAN
==============================================================================
<PAGE>
THINK NEW IDEAS, INC.
1997 STOCK OPTION PLAN
ARTICLE I
---------
ESTABLISHMENT AND PURPOSE
-------------------------
Section 1.1. THINK New Ideas, Inc., a Delaware corporation (the
"Company"), hereby establishes a stock option plan to be named the THINK New
Ideas, Inc. 1997 Stock Option Plan (the "Plan").
Section 1.2. The purpose of this Plan is to induce persons who are
officers, directors, employees and consultants of the Company (or any of its
subsidiaries) who are in a position to contribute materially to the Company's
prosperity to remain with the Company, to offer said persons incentives and
rewards in recognition of their contributions to the Company's progress, and to
encourage said persons to continue to promote the best interests of the Company.
This Plan provides for the grant of options to purchase shares of common stock
of the Company, par value $.0001 per share (the "Common Stock") which qualify as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), to persons who are employees, as
well as options which do not so qualify ("Non-Qualified Options") to be issued
to persons, including those who are not employees. Incentive Options and
Non-Qualified Options may be collectively referred to hereinafter as the
"Options" as the context may require. Persons granted Options hereunder may be
referred to hereinafter as the "Optionees."
Section 1.3. All Options granted on or after the date that this Plan has
been approved and adopted by the Company's board of directors (the "Board of
Directors") shall be governed by the terms and conditions of this Plan unless
the terms of any such Option specifically indicate that it is not to be so
governed.
Section 1.4. Any Option granted hereunder which is intended to qualify as
an Incentive Option which, for any reason whatsoever, fails to so qualify, shall
be deemed to be a Non-Qualified Option granted hereunder.
ARTICLE II
----------
ADMINISTRATION
--------------
Section 2.1. All determinations hereunder concerning the selection of
persons eligible to receive awards under this Plan and determinations with
respect to the timing, pricing and amount of an award hereunder (other than
pursuant to a non-discretionary formula hereinafter set forth, shall be made by
an administrator (the "Administrator"). The Administrator shall be either: (a)
the Board of Directors, or (b) in the discretion of the Board of Directors, a
committee of not less than two members of the Board of Directors (the
"Committee"), each of whom is a "Non-Employee" Director as such term is defined
in Rule 16b-3 (as such rule may be amended from time to time, "Rule 16b-3")
2
<PAGE>
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In
the event this Plan is administered by the Committee, the Committee shall select
one of its members to serve as the chairman thereof and shall hold its meetings
at such times and places as it may determine. In such case, a majority of the
total number of members of the Committee shall be necessary to constitute a
quorum; and (i) the affirmative act of a majority of the members present at any
meeting at which a quorum is present, or (ii) the approval in writing by a
majority of the members of the Committee, shall be necessary to constitute
action by the Committee.
Section 2.2. The provisions hereof relating to Incentive Options are
intended to comply in every respect with Section 422 of the Code ("Section 422")
and the regulations promulgated thereunder. In the event that any future statute
or regulation shall modify Section 422, this Plan shall be deemed to incorporate
by reference such modification. Any agreement relating to the grant of any
Incentive Option hereunder, which Option is outstanding and unexercised at the
time that any modifying statute or regulation becomes effective, shall also be
deemed to incorporate by reference such modification and no notice of such
modification need be given to the Optionee. Any agreement relating to an
Incentive Option granted hereunder shall provide that the Optionee hold the
stock received upon exercise of such Incentive Option for a minimum of two years
from the date of grant of the Incentive Option and one year from the date of
exercise of such Incentive Option, absent the written approval, consent or
waiver of the Administrator.
Section 2.3. If any provision of this Plan is determined to disqualify the
shares of Common Stock purchasable upon exercise of an Incentive Option granted
hereunder from the special tax treatment provided by Section 422, such provision
shall be deemed to incorporate by reference the modification required to qualify
such shares of Common Stock for said tax treatment.
Section 2.4. The Company shall grant Options hereunder in accordance with
determinations made by the Administrator pursuant to the provisions hereof. All
Options granted pursuant hereto shall be clearly identified as Incentive Options
or Non-Qualified Options. The Administrator may from time to time adopt (and
thereafter amend or rescind) such rules and regulations for carrying out this
Plan and take such action in the administration of this Plan, not inconsistent
with the provisions hereof, as it shall deem proper. The Board of Directors or,
subject to the supervision of the Board of Directors, the Committee, as the
Administrator, shall have plenary discretion, subject to the express provisions
of this Plan, to determine which officers, directors, employees and consultants
shall be granted Options, the number of shares subject to each Option, the time
or times when an Option may be exercised (whether in whole or in installments),
the terms and provisions of the respective agreements relating to the grant of
Options (which need not be identical), including such terms and provisions which
may be amended from time to time as shall be required, in the judgment of the
Administrator, to conform to any change in any law or regulation applicable
hereto, and to make all other determinations deemed necessary or advisable for
the administration of this Plan. The interpretation and construction of any
provision of this Plan by the Administrator (unless otherwise determined by the
Board of Directors) shall be final, conclusive and binding upon all persons.
3
<PAGE>
Section 2.5. No member of the Administrator shall be liable for any action
or determination made in good faith with respect to administration of this Plan
or the Options granted hereunder. Members of the Board of Directors and/or the
Committee, as the Administrator, shall be indemnified by the Company, pursuant
to the Company's bylaws, for any expenses, judgments or other costs incurred as
a result of a lawsuit filed against such member claiming any rights or remedies
arising out of such member's participation in the administration of this Plan.
ARTICLE III
-----------
TOTAL NUMBER OF SHARES TO BE OPTIONED
-------------------------------------
Section 3.1. There shall be reserved for issuance or transfer upon
exercise of the Options granted from time to time hereunder an aggregate of
1,250,000 shares of Common Stock (subject to adjustment as provided in Article
VIII hereof). The shares of Common Stock issued upon exercise of any Option
granted hereunder may be shares of Common Stock previously issued and reacquired
by the Company at any time or authorized but unissued shares of Common Stock, as
the Board of Directors from time to time may determine.
Section 3.2. In the event that any Options outstanding under this Plan for
any reason expire or are terminated without having been exercised in full, the
unpurchased shares of Common Stock subject to such Option and any such
surrendered shares of Common Stock may again be available for transfer
hereunder.
Section 3.3. No Options shall be granted pursuant hereto to any Optionee
after the tenth anniversary of the earlier of: (a) the date that this Plan is
adopted by the Board of Directors, or (b) the date that this Plan is approved by
the stockholders of the Company.
ARTICLE IV
----------
ELIGIBILITY
-----------
Section 4.1. Non-Qualified Options may be granted hereunder to officers,
directors, employees and consultants of the Company (or any of its subsidiaries)
selected by the Administrator, and Incentive Options may be granted hereunder
4
<PAGE>
only to employees (including officers and directors who are employees) of the
Company (or any of its subsidiaries) selected by the Administrator. For purposes
of determining who is an employee with respect to eligibility for Incentive
Options, the provisions of Section 422 of the Code shall govern. The
Administrator may determine (in its sole discretion) that any person who would
otherwise be eligible to be granted Options shall, nonetheless, be ineligible to
receive any award under this Plan.
Section 4.2. The Administrator shall (in its discretion) determine the
persons to be granted Options, the time or times at which Options shall be
granted, the number of shares of Common Stock subject to each Option, the terms
of a vesting or forfeiture schedule, if any, the type of Option issued, the
period during which such Options may be exercised, the manner in which Options
may be exercised and all other terms and conditions of the Options; PROVIDED,
HOWEVER, no Option shall be granted which has terms or conditions inconsistent
with those stated in Articles V and VI hereof. Relevant factors in making such
determinations may include the value of the services rendered by the respective
Optionee, his or her present and potential contributions to the Company, and
such other factors which are deemed relevant by the Administrator in
accomplishing the purpose of this Plan.
ARTICLE V
---------
TERMS AND CONDITIONS OF OPTIONS
-------------------------------
Section 5.1. Each Option granted under this Plan shall be evidenced by a
stock option certificate and agreement (the "Option Agreement") in a form
consistent with this Plan, provided that the following terms and conditions
shall apply:
(a) The price at which each share of Common Stock covered by an
Option may be purchased shall be set forth in the Option Agreement and shall be
determined by the Administrator, provided that the option price for any
Incentive Option shall not be less than the "fair market value" of the shares of
Common Stock at the time of grant determined. Notwithstanding the foregoing, if
an Incentive Option to purchase shares of Common Stock is granted hereunder to
an Optionee who, on the date of the grant, directly or indirectly owns more than
ten percent (10%) of the voting power of all classes of capital stock of the
Company (or its parent or subsidiary), not including the shares of Common Stock
obtainable upon exercise of the Option, the minimum exercise price of such
Option shall be not less than one hundred ten percent (110%) of the "fair market
value" of the shares of Common Stock on the date of grant determined in
accordance with Section 5.1(b) below.
(b) The "fair market value" shall be determined by the
Administrator, which determination shall be binding upon the Company and its
officers, directors, employees and consultants. The determination of the "fair
market value" shall be based upon the following: (i) if the Common Stock is not
listed and traded upon a recognized securities exchange and there is no report
of stock prices with respect to the Common Stock published by a recognized stock
quotation service, on the basis of the recent purchases and sales of the Common
Stock in arms-length transactions; (ii) if the Common Stock is not then listed
and traded upon a recognized securities exchange or quoted on the NASDAQ
National Market System, and there are reports of stock prices by a recognized
quotation service, upon the basis of the last reported sale or transaction price
of the Common Stock on the date of grant as reported by a recognized quotation
service, or, if there is no last reported sale or transaction price on that day,
then upon the basis of the mean of the last reported closing bid and closing
asked prices for the Common Stock on that day or on the date nearest preceding
that day; or (iii) if the Common Stock shall then be listed and traded upon a
recognized securities exchange or quoted on the NASDAQ National Market System,
upon the basis of the last reported sale or transaction price at which shares of
Common Stock were traded on such recognized securities exchange on the date of
grant or, if the Common Stock was not traded on such date, upon the basis of the
5
<PAGE>
last reported sale or transaction price on the date nearest preceding that date.
The Administrator shall also consider such other factors relating to the "fair
market value" of the Common Stock as it shall deem appropriate.
(c) For the purpose of determining whether an Optionee owns more
than ten percent (10%) of the voting power of all classes of stock of the
Company, an Optionee shall be considered to own those shares of stock which are
owned directly or indirectly through brothers and sisters (including
half-blooded siblings), spouse, ancestors and lineal descendants; and
proportionately as a shareholder of a corporation, a partner of a partnership,
and/or a beneficiary of a trust or an estate that owns shares of capital stock
of the Company.
(d) Notwithstanding any other provision hereof, in accordance with
the provisions of Section 422(d) of the Code, to the extent that the aggregate
"fair market value" (determined at the time the Option is granted) of the shares
of Common Stock with respect to which Incentive Options (without reference to
this provision) are exercisable for the first time by any individual in any
calendar year under any and all stock option plans of the Company (and its
subsidiary corporations and its parent, if any) exceeds $100,000, such Options
shall be treated as Non-Qualified Options.
(e) An Optionee may, in the Administrator's discretion, be granted
more than one Incentive Option or Non-Qualified Option during the duration of
this Plan, and may be issued a combination of Non-Qualified Options and
Incentive Options; PROVIDED, HOWEVER, that non-employees are not eligible to
receive Incentive Options.
(f) The duration of any Option shall be within the sole discretion
of the Administrator; PROVIDED, HOWEVER, that any Incentive Option granted to a
ten percent (10%) or less stockholder or any Non-Qualified Option shall, by its
terms, be exercised within ten years after the date the Option is granted and
any Incentive Option granted to a greater than ten percent (10%) stockholder
shall, by its terms, be exercised within five years after the date the Option is
granted.
(g) An Option shall not be transferable by the Optionee other than
by will, or by the laws of descent and distribution. An Option may be exercised
during the Optionee's lifetime only by the Optionee.
(h) At least six months shall elapse from the date on which an
Option is granted to an officer, director, or beneficial owner of more than ten
percent (10%) of the outstanding shares of Common Stock of the Company under
this Plan by the Administrator to the date on which any share of Common Stock
underlying such Option is sold, unless the Administrator otherwise consents in
writing.
6
<PAGE>
ARTICLE VI
----------
EMPLOYMENT OR SERVICE OF OPTIONEE
---------------------------------
Section 6.1. If the employment or service of an Optionee is terminated for
cause, the option rights of such Optionee, both accrued and future, under any
then outstanding Non- Qualified or Incentive Option shall terminate immediately,
subject to the provisions of any employment agreement between the Company (or
any subsidiary) and an Optionee which, by its terms, provides otherwise. In the
event that an employee who is an Optionee hereunder has entered into an
employment agreement with the Company (or a subsidiary), "cause" shall have the
meaning attributed thereto in such employment agreement; otherwise, "cause"
shall mean incompetence in the performance of duties, disloyalty, dishonesty,
theft, embezzlement, unauthorized disclosure of patents, processes or trade
secrets of the Company, individually or as an employee, partner, associate,
officer or director of any organization. The determination of the existence and
the proof of "cause" shall be made by the Administrator and, subject to the
review of any determination made by the Administrator, such determination shall
be binding on the Optionee and the Company.
Section 6.2. Subject to the provisions of any employment agreement between
the Company (or a subsidiary) and an Optionee, if the employment or service of
an Optionee is terminated by either the Optionee or the Company for any reason
other than cause, death, or for disability (as defined in Section 22(e)(3) of
the Code or pursuant to the terms of such an employment agreement), the option
rights of such Optionee under any then outstanding Non-Qualified or Incentive
Option shall, subject to the provisions of Section 5.1(h) hereof, be exercisable
by such Optionee at any time prior to the expiration of the Option or within
three months after the date of such termination, whichever period of time is
shorter, but only to the extent of the accrued right to exercise an Option at
the date of such termination.
Section 6.3. Subject to the provisions of any employment agreement between
the Company (or a subsidiary) and an Optionee, in the case of an Optionee who
becomes disabled (as defined by Section 22(e)(3) of the Code or pursuant to the
terms of such an employment agreement), the option rights of such Optionee under
any then outstanding Non-Qualified or Incentive Option shall, subject to the
provisions of Section 5.1(h) hereof, be exercisable by such Optionee at any time
prior to the expiration of the Option or within one year after the date of
termination of employment or service due to disability, whichever period of time
is shorter, but only to the extent of the accrued right to exercise an Option at
the date of such termination
Section 6.4. In the event of the death of an Optionee, the option rights
of such Optionee under any then outstanding Non-Qualified or Incentive Option
shall be exercisable by the person or persons to whom these rights pass by will
or by the laws of descent and distribution, at any time prior to the expiration
of the Option or within three years after the date of death, whichever period of
time is shorter, but only to the extent of the accrued right to exercise an
Option at the date of death. If a person or estate acquires the right to
exercise a Non-Qualified or Incentive Option by bequest or inheritance, the
Administrator may require reasonable evidence as to the ownership of such
Option, and may require such consents and releases of taxing authorities as the
Administrator may deem advisable.
7
<PAGE>
Section 6.5. The Administrator may also provide that an employee must be
continuously employed by the Company for such period of time as the
Administrator, in its discretion, deems advisable before the right to exercise
any portion of an Option granted to such employee will accrue, and may also set
such other targets, restrictions or other terms relating to the employment of
the Optionee which targets, restrictions, or terms must be fulfilled or complied
with, as the case may be, prior to the exercise of any portion of an Option
granted to any employee.
Section 6.6. Options granted hereunder shall not be affected by any change
of duties or position, so long as the Optionee continues in the service of the
Company.
Section 6.7. Nothing contained in this Plan or in any Option granted
pursuant hereto shall confer upon any Optionee any right with respect to
continuance of employment or service by the Company nor interfere in any way
with the right of the Company to terminate the Optionee's employment or service
or change the Optionee's compensation at any time.
ARTICLE VII
-----------
PURCHASE OF SHARES
------------------
Section 7.1. Except as provided in this Article VII, an Option shall be
exercised by tender to the Company of the full exercise price of the shares of
Common Stock with respect to which an Option is exercised and written notice of
the exercise. The right to purchase shares of Common Stock shall be cumulative
so that, once the right to purchase any shares of Common Stock has accrued, such
shares or any part thereof may be purchased at any time thereafter until the
expiration or termination of the Option. A partial exercise of an Option shall
not affect the right of the Optionee to subsequently exercise his or her Option
from time to time, in accordance with this Plan, as to the remaining number of
shares of Common Stock subject to the Option. The purchase price payable upon
exercise of an Option shall be in United States dollars and shall be payable in
cash or by certified bank check. Notwithstanding the foregoing, in lieu of cash,
an Optionee may, with the approval of the Administrator, exercise his or her
Option by tendering to the Company shares of Common Stock owned by him or her
having an aggregate fair market value at least equal to the aggregate purchase
price. The "fair market value" of any shares of Common Stock so surrendered
shall be determined by the Administrator in accordance with Section 5.1(b)
hereof.
Section 7.2. Except as provided in Article VI above, an Option may not be
exercised unless the holder thereof is an officer, director, employee, or
consultant of the Company at the time of exercise.
Section 7.3. No Optionee, or Optionee's executor, administrator, legatee,
or distributee or other permitted transferee, shall be deemed to be a holder of
any shares of Common Stock subject to an Option for any purpose whatsoever
unless and until such Option has been exercised and a stock certificate or
certificates for the shares of Common Stock purchased by the Optionee are issued
to the Optionee in accordance with the terms of this Plan. No adjustment shall
8
<PAGE>
be made for dividends (ordinary or extraordinary, whether in cash, securities or
other property) or distributions or other rights for which the record date is
prior to the date that any such stock certificate is issued, except as provided
in Article VIII hereof.
Section 7.4. If: (i) the listing, registration or qualification of the
Options issued hereunder or of any securities issuable upon exercise of such
Options (the "Subject Securities") upon any securities exchange or quotation
system or under federal or state law is necessary as a condition of or in
connection with the issuance or exercise of the Options; or (ii) the consent or
approval of any governmental regulatory body is necessary as a condition of or
in connection with the issuance or exercise of the Options, the Company shall
not be obligated to deliver the certificates representing the Subject Securities
or to accept or to recognize an Option exercise unless and until such listing,
registration, qualification, consent or approval shall have been effected or
obtained. The Company will take reasonable action to so list, register, or
qualify the Options and the Subject Securities, or effect or obtain such consent
or approval, so as to allow for issuance and/or exercise.
Section 7.5. An Optionee may be required to represent to the Company as a
condition of his or her exercise of Options issued under this Plan that: (i) the
Subject Securities acquired upon exercise of his or her Option are being
acquired by him or her for investment purposes only and not with a view to
distribution or resale, unless counsel for the Company is then of the view that
such a representation is not necessary and is not required under the Securities
Act of 1933, as amended (the "Securities Act"), or any other applicable statute,
law, regulation or rule; and (ii) that the Optionee shall make no exercise or
disposition of an Option or of the Subject Securities in contravention of the
Securities Act, the Exchange Act of 1934, or the rules and regulations
thereunder. Optionees may also be required to provide (as a condition precedent
to exercise of an Option) such documentation as may be reasonably requested by
the Company to assure compliance with applicable law and the terms and
conditions of this Plan and the subject Option.
Section 7.6. An Option may be exercised by tender to the Administrator of
a written notice of exercise together with advice of the delivery of an order to
a broker to sell part or all of the shares of Common Stock subject to such
exercise notice and an irrevocable order to such broker to deliver to the
Company (or its transfer agent) sufficient proceeds from the sale of such shares
to pay the exercise price and any withholding taxes. All documentation and
procedures to be followed in connection with such a "cashless exercise" shall be
approved in advance by the Administrator.
ARTICLE VIII
------------
CHANGE IN NUMBER OF OUTSTANDING SHARES OF
-----------------------------------------
STOCK, ADJUSTMENTS, REORGANIZATIONS, ETC.
-----------------------------------------
Section 8.1. In the event that the outstanding shares of Common Stock of
the Company are hereafter increased or decreased or changed into or exchanged
for a different number of shares or kind of shares or other securities of the
Company or of another corporation by reason of reorganization, merger,
consolidation, recapitalization, reclassification, stock split, combination of
9
<PAGE>
shares, or a dividend payable in capital stock, appropriate adjustment shall be
made by the Administrator in the number and kind of shares for the purchase of
which Options may be granted under this Plan, including the maximum number that
may be granted to any one person. In addition, the Administrator shall make
appropriate adjustments in the number and kind of shares as to which outstanding
Options, or portions thereof then unexercised, shall be exercisable, to the end
that the Optionee's proportionate interest shall be maintained as before the
occurrence to the unexercised portion of the Option and with a corresponding
adjustment in the option price per share. Any such adjustment made by the
Administrator shall be conclusive.
Section 8.2. The grant of an Option hereunder shall not affect in any way
the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge or
to consolidate or to dissolve, liquidate or sell, or transfer all or any part of
its business or assets.
Section 8.3. Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company as a result of which the
outstanding securities of the class then subject to Options hereunder are
changed into or exchanged for cash or property or securities not of the
Company's issue, or upon a sale of substantially all the property of the Company
to an association, person, party, corporation, partnership, or control group as
that term is construed for purposes of the Exchange Act, this Plan shall
terminate, and all Options theretofore granted hereunder shall terminate, unless
provision be made in writing in connection with such transaction for the
continuance of this Plan and/or for the assumption of Options theretofore
granted, or the substitution for such Options of options covering the stock of a
successor employer corporation, or a parent or a subsidiary thereof, with
appropriate adjustments as to the number and kind of shares and prices, in which
event this Plan and options theretofore granted shall continue in the manner and
under the terms so provided. If this Plan and unexercised Options shall
terminate pursuant to the foregoing sentence, all persons owning any unexercised
portions of Options then outstanding shall have the right, at such time prior to
the consummation of the transaction causing such termination as the Company
shall designate, to exercise the unexercised portions of their Options,
including the portions thereof which would, but for this Section 8.3 not yet be
exercisable.
ARTICLE IX
----------
DURATION, AMENDMENT AND TERMINATION
-----------------------------------
Section 9.1. The Board of Directors may at any time terminate this Plan or
make such amendments hereto as it shall deem advisable and in the best interests
of the Company, without action on the part of the stockholders of the Company
unless such approval is required pursuant to Section 422 of the Code or the
regulations thereunder; PROVIDED, HOWEVER, that no such termination or amendment
shall, without the consent of the individual to whom any Option shall
theretofore have been granted, affect or impair the rights of such individual
under such Option. Pursuant to ss. 422(b) of the Code, no Incentive Option may
be granted pursuant to this Plan after ten years from the date this Plan is
adopted or the date this Plan is approved by the stockholders of the Company,
whichever is earlier.
10
<PAGE>
ARTICLE X
---------
RESTRICTIONS
------------
Section 10.1. Any Options and shares of Common Stock issued pursuant
hereto shall be subject to such restrictions on transfer and limitations as
shall, in the opinion of the Administrator, be necessary or advisable to assure
compliance with the laws, rules and regulations of the United States government
or any state or jurisdiction thereof. In addition, the Administrator may in any
Option Agreement impose such other restrictions upon the disposition or exercise
of an Option or upon the sale or other disposition of the shares of Common Stock
deliverable upon exercise thereof as the Administrator may, in its sole
discretion, determine. By accepting the grant of an Option or SAR pursuant
hereto, each Optionee shall agree to any such restrictions.
Section 10.2. Any certificate evidencing shares of Common Stock issued
pursuant to exercise of an Option shall bear such legends and statements as the
Administrator, the Board of Directors or counsel to the Company shall deem
advisable to assure compliance with the laws, rules and regulations of the
United States government or any state or jurisdiction thereof. No certificate
evidencing shares of Common Stock shall be delivered pursuant to exercise of the
Options granted under this Plan until the Company has obtained such consents or
approvals from such regulatory bodies of the United States government or any
state or jurisdiction thereof as the Administrator, the Board of Directors or
counsel to the Company deems necessary or advisable.
ARTICLE XI
----------
FINANCIAL ASSISTANCE
--------------------
Section 11.1 The Company is vested with the authority hereunder to assist
any employee to whom an Option is granted hereunder (including any officer or
director of the Company or any of its subsidiaries who is also an employee) in
the payment of the purchase price payable upon exercise of such Option, by
lending the amount of such purchase price to such employee on such terms and at
such rates of interest and upon such security (or unsecured) as shall have been
authorized by or under authority of the Board of Directors. Any such assistance
shall comply with the requirements of Regulation G promulgated by the Board of
the Federal Reserve System, as amended from time to time, and any other
applicable law, rule or regulation.
ARTICLE XII
-----------
APPLICATION OF FUNDS
--------------------
Section 12.1. The proceeds received by the Company from the issuance and
sale of Common Stock upon exercise of Options granted pursuant to this Plan are
to be added to the general funds of the Company and used for its corporate
purposes as determined by the Board of Directors.
11
<PAGE>
ARTICLE XIII
------------
EFFECTIVENESS OF PLAN
---------------------
Section 13.1 This Plan shall become effective upon adoption by the Board
of Directors, and Options may be issued hereunder from and after that date
subject to the provisions of Section 3.3 above. This Plan must be approved by
the Company's stockholders in accordance with the applicable provisions
(relating to the issuance of stock or options) of the Company's governing
documents and state law or, if no such approval is prescribed therein, by the
affirmative vote of the holders of a majority of the votes cast at a duly held
stockholders meeting at which a quorum representing a majority of all the
Company's outstanding voting stock is present and voting (in person or by proxy)
or, without regard to any required time period for approval, by any other method
permitted by Section 422 of the Code and the regulations thereunder. If such
stockholder approval is not obtained within one year of the adoption of this
Plan by the Board of Directors or within such other time period required under
Section 422 of the Code and the regulations thereunder, this Plan shall remain
in force, provided however, that all Options issued and issuable hereunder shall
automatically be deemed to be Non-Qualified Options.
IN WITNESS WHEREOF, pursuant to the approval of this Plan by the Board of
Directors, this Plan is executed and adopted the 10th day of February, 1997.
THINK NEW IDEAS, INC.
[CORPORATE SEAL]
By: /s/ Scott A. Mednick
----------------------------------
Scott A. Mednick, Chief Executive Officer
ATTEST:
By: /s/ Melvin Epstein
--------------------------
Melvin Epstein
12
July 31, 1997
Mr. Larry Kopald
THINK New Ideas, Inc.
8000 Sunset Boulevard, Penthouse East
Los Angeles, California 90046
Re: Employment
----------
Dear Mr. Kopald:
This is to confirm the agreement reached as of May 31, 1997 between you
and THINK New Ideas, Inc. (the "Company") relating to your employment with the
Company as of such date. The material terms of your agreement with the Company,
to be embodied in a written employment agreement, to be executed no later than
August 31, 1997, and substantially in the form attached hereto, are as follows:
1. TERM: Two years
2. TITLE: Chief Creative Officer; President of The Mednick Group
3. COMPENSATION: Year 1: $300,000; Year 2: $350,000.
4. ORACLE ACCOUNT BONUS: Year 1: up to $150,000; Year 2: up to
$100,000 (based upon Oracle entering one-to-two year
advertising services agreement).
5. PROFITABILITY BONUS: Year one: Ten percent (10%) of profits on
billings on the Oracle Account in excess of $16 million
dollars; Year 2: Ten percent (10%) of profits on billings on
the Oracle Account in excess of $20 million dollars.
6. OPTIONS: 250,000 shares of common stock at an exercise price
of $3.69 per share exercisable in equal increments over four
years, subject to acceleration in year one and year two based
on the Company's gross billings of $20 million in year one and
$30 million in year two and a realized profit margin, before
taxes, of eight percent (8%) in year one and fifteen percent
(15%) in year two.
<PAGE>
Mr. Larry Kopald
August 1, 1997
Page 2
If the foregoing reflects your understanding of the agreement we have reached,
please counter-execute below where indicated to confirm such understanding.
Very truly yours,
/s/ Scott A. Mednick
---------------------------
Scott A. Mednick
Chief Executive Officer
Agreed to and
Accepted this 1st day of August, 1997:
/s/ Larry Kopald
-------------------------
Larry Kopald
Enclosure
cc: Victoria A. Baylin, Esq.
THINK NEW IDEAS, INC.
8000 Sunset Boulevard, Penthouse East
Los Angeles, California 90046
July 30, 1997
Mr. James Grannan
Vice President
THINK New Ideas, Inc.
500 Bishop Street, Suite 5A
Atlanta, Georgia 30305
Re: Amendment To Employment Agreement Dated June 30, 1996
-----------------------------------------------------
Dear Jim:
Reference is hereby made to that certain employment agreement dated as of
June 30, 1996 (the "Employment Agreement") between THINK New Ideas, Inc. (the
"Corporation") and James Grannan (the "Employee"). This letter is intended to
confirm that, notwithstanding anything else to the contrary set forth in the
Employment Agreement, the Corporation and the Employee hereby agree that the
Period of Employment, as that term is defined in the Employment Agreement, be
and hereby is extended for a period of one (1) year from June 30, 1997, and is
subject to renewal as specified in the Employment Agreement. In consideration of
the Employee's agreement to extend the Period of Employment as set forth herein,
the Corporation has agreed to grant the Employee a bonus of $15,000 payable upon
Employee's counter-execution hereof.
Except as otherwise expressly modified hereby or required to effectuate
the modification set forth herein, the Employment Agreement shall remain
unchanged and shall continue in full force and effect pursuant to the terms
thereof.
This letter agreement contains the entire agreement between the
Corporation and the Employee with respect to the modification which is the
subject hereof. This letter agreement may not be amended, changed, modified or
discharged, nor may any provision hereof be waived, except by an instrument in
writing executed by or on behalf of the party against whom enforcement of any
amendment, waiver, change, modification or discharge is sought. No course of
conduct or dealing shall be construed to modify, amend or otherwise effect any
of the provisions hereof.
Please confirm that the Employee is in agreement with the foregoing, and
that the foregoing is in accordance with your understanding by signing and
returning this letter, which shall thereupon constitute a binding agreement.
Agreed to and accepted as of this
31st day of July, 1997: Very truly yours,
THE EMPLOYEE THINK NEW IDEAS, INC.
By: /s/ James Grannan By: /s/ Scott A. Mednick
------------------------- ------------------------
James Grannan Scott A. Mednick
Chief Executive Officer
TERMINATION AGREEMENT
THIS TERMINATION AGREEMENT (the "Agreement") is entered into as of this
20th day of May, 1997, between Think New Ideas, Inc., a Delaware corporation
(the "Company"), and David R. Hieb, an individual, resident in Boulder, Colorado
(the "Employee").
WITNESSETH:
WHEREAS, the Company and the Employee are parties to a certain
employment agreement dated as of June 30, 1996 (the "Employment Agreement"); and
WHEREAS, it is the desire of the Company and the Employee to terminate
the Employee's employment with the Company upon the terms and subject to the
conditions set forth herein; and
WHEREAS, it is the desire of the Company and the Employee to terminate
the Employment Agreement upon the terms and subject to the conditions set forth
herein.
NOW THEREFORE, in consideration of the premises and mutual covenants,
conditions and agreements contained herein and for such other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto, each intending to be legally bound hereby, agree as follows:
1. TERMINATION OF EMPLOYMENT AND EMPLOYMENT AGREEMENT. The Employee and
the Company hereby agree that as of the date hereof the Employee's employment
with the Company be and hereby is terminated. Further, any offices, positions,
directorships or other like capacities held by Employee with the Company or any
of its affiliates or subsidiaries be and hereby are resigned by Employee as of
the date hereof. The Employment Agreement be and hereby is terminated, including
without limitation Sections 2, 3, 4, and 5 thereof, but excluding Sections 10
through 15 and Section 17 thereof, which sections shall specifically survive
termination as hereinafter set forth.
2. TERMINATION PAYMENT; TRANSFER OF COMPUTER. Concurrent with the
execution of this Agreement by the parties hereto;
(a) the Company shall remit to the Employee the amount of thirty
thousand dollars ($30,000), payable by cashier's or official bank check; and
(b) the Company shall transfer to Employee that certain laptop
computer, more specifically described as an NEC model
Versa-6030-H-PC-6220-91753, Serial Number 66022928, currently the property of
the Company but in the possession of Employee, and such computer shall hereafter
be deemed to be the property of Employee.
3. STOCK OPTIONS. Those incentive stock options ("Stock Options") granted
by the Company to Employee pursuant to the Company's 1997 Stock Option Plan (the
<PAGE>
"Stock Option Plan"), evidenced by an Incentive Stock Option Certificate and
Agreement dated February 10, 1997 by and between the Company and Employee (the
"Option Agreement") as to an aggregate of forty-one thousand eight hundred
eighty-one (41,881) unregistered shares of common stock of the Company ("Common
Stock"), shall be modified hereby as follows:
a) VESTING AND EXERCISE. Stock Options to acquire up to 10,470 shares
of Common Stock, exercisable commencing in September 1997, shall be deemed to be
fully vested and exercisable as of the date hereof, at the prices and upon the
other terms set forth in the Option Agreement and the Stock Option Plan;
PROVIDED, HOWEVER, notwithstanding anything contained in the Employment
Agreement or in the Stock Option Plan, in the event Employee elects to exercise
any such vested Stock Options, payment of the exercise price therefore shall be
paid to the Company solely in cash, by cashier's check or official bank check.
All Stock Options granted to the Employee under the Option Agreement which have
not vested or become exercisable as of the date hereof or pursuant hereto shall
be deemed to have expired unexercised and shall be, after the date hereof, null
and void.
b) TERMINATION OF OPTIONS. Notwithstanding anything contained elsewhere
herein, in the Employment Agreement or in the Stock Option Plan, the period
during which the Stock Options may be exercised shall terminate ninety (90) days
after the date hereof. After such ninety (90) day period, the Option Agreement
shall be null and void.
4. NON-COMPETITION. As set forth hereinabove, the terms of the
non-competition provisions set forth in Section 10 of the Employment Agreement,
as further elaborated by Sections 12 and 15 of the Employment Agreement, shall
survive the termination of the Employment Agreement and remain in full force and
effect, and shall be deemed to be a part of this Agreement as if set forth in
their entirety herein, and are hereby incorporated herein by this reference;
PROVIDED, HOWEVER, the period during which the restrictions contemplated by
Section 10 of the Employment Agreement are applicable shall expire on December
31, 1997; and, FURTHER PROVIDED, that such provision shall not be construed to
prevent the Employee from accepting a job (and performing his obligations) as an
employee of Sun Microsystems, Inc.
5. CONFIDENTIAL INFORMATION. As set forth hereinabove, the terms of the
confidential information provisions set forth in Section 11 of the Employment
Agreement, as further elaborated by Sections 12 and 15 of the Employment
Agreement, shall survive the termination of the Employment Agreement and remain
in full force and effect, and shall be deemed to be a part of this Agreement as
if set forth in their entirety herein, and are hereby incorporated herein by
this reference; PROVIDED, HOWEVER, the period during which the restrictions
contemplated by Section 11 of the Employment Agreement are applicable shall
expire on December 31, 1997.
6. RELEASE OF CLAIMS. a) The Employee and any or all persons or entities
acting on his behalf, or who might claim through him, hereby agree to
compromise, release, and forever discharge and hereby compromise, release and
forever discharge the Company, and all of its successors, predecessors, assigns,
affiliates, shareholders, officers, directors, principals, employees, agents,
servants, spouses, legal representatives, and all other persons who might be
liable through them, their successors and assigns (collectively, the "Company
2
<PAGE>
Parties") of and from any and all claims, debts, liabilities, assessments,
obligations, demands, actions, causes of action or suits at law or in equity, of
whatever kind or nature, for or because of any matter or thing done, omitted or
suffered to be done by them, or their shareholders, officers, directors,
principals, agents or employees, occurring or arising from the beginning of time
through the date hereof, and particularly with respect to any claim arising
from, referring to, relating to, or in connection with the Employment Agreement
and the termination thereof and the Agreement and Plan of Reorganization dated
as of June 30, 1996 by and between Employee and the Company. The Employee agrees
and covenants not to sue or bring any action in law or in equity, including, but
not limited to, an action in any court, forum, or arbitration proceeding whether
by original process or demand, counterclaim, cross-claim, third-party process,
impleader, claim for indemnity or contribution or otherwise against the Company
or any of the Company Parties, arising from, referring to, relating to, or in
connection with, the Employment Agreement and the termination thereof; PROVIDED,
HOWEVER, that the parties hereto may initiate any action required to enforce
this Agreement in accordance with its terms. It is understood and agreed that
the release and covenant not to sue herein are a full and final general release
and covenant not to sue from Employee which covers any and all future damages
not now known to Employee which may later develop or be discovered, arising
from, referring to, relating to, or in connection with the Employment Agreement
and the termination thereof, except that this Section 6 does not cover any
damages or claims which may arise solely as a result of a breach by a party of
any provision of this Agreement or any damages or claims which may arise as a
result of a claim or threatened claim by an unaffiliated third party.
b) The Company and any or all persons or entities acting on its behalf,
or who might claim through it, hereby agree to compromise, release, and forever
discharge and hereby compromise, release and forever discharge the Employee, and
all of his successors, predecessors, assigns, affiliates, employees, agents,
servants, spouses, legal representatives, and all other persons who might be
liable through them, their successors and assigns (collectively, the "Employee
Parties") of and from any and all claims, debts, liabilities, assessments,
obligations, demands, actions, causes of action or suits at law or in equity, of
whatever kind or nature, for or because of any matter or thing done, omitted or
suffered to be done by them, or their shareholders, officers, directors,
principals, agents or employees, occurring or arising from the beginning of time
through the date hereof, and particularly with respect to any claim arising
from, referring to, relating to, or in connection with, the Employment Agreement
and the termination thereof. The Company agrees and covenants not to sue or
bring any action in law or in equity, including, but not limited to, an action
in any court, forum, or arbitration proceeding whether by original process or
demand, counterclaim, cross-claim, third-party process, impleader, claim for
indemnity or contribution or otherwise against the Employee or any of the
Employee Parties, arising from, referring to, relating to, or in connection
with, the Employment Agreement and the termination thereof; PROVIDED, HOWEVER,
that the parties hereto may initiate any action required to enforce this
Agreement in accordance with its terms. It is understood and agreed that the
release and covenant not to sue herein are a full and final general release and
covenant not to sue from Company which covers any and all future damages not now
known to Company which may later develop or be discovered, arising from,
referring to, relating to, or in connection with the Employment Agreement and
the termination thereof, except that this Section 6 does not cover any damages
or claims which may arise solely as a result of a breach by a party of any
3
<PAGE>
provision of this Agreement or any damages or claims which may arise as a result
of a claim or threatened claim by an unaffiliated third party.
7. APPROVALS. This Agreement has received all required board of directors
and other corporate approvals. This Agreement, upon execution by the parties
hereto, shall be a valid, legally binding and existing agreement of the
respective parities, enforceable against each in accordance with its terms.
8. SEVERABILITY. The provisions of this Agreement shall be considered
severable in the event that any of such provisions are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable. Such
invalid, void or otherwise unenforceable provisions shall be automatically
replaced by other provisions which are valid and enforceable and which are as
similar as possible in term and intent to those provisions deemed to be invalid,
void or otherwise unenforceable. Notwithstanding the foregoing, the remaining
provisions hereof shall remain enforceable to the fullest extent permitted by
law.
9. ENTIRE AGREEMENT; AMENDMENT. This Agreement, including the provisions
incorporated herein by reference, constitutes the entire agreement between the
Company and the Employee with respect to the subject matter hereof. This
Agreement may not be amended, changed, modified or discharged, nor may any
provision hereof be waived, except by an instrument in writing executed by or on
behalf of the party against whom enforcement of any amendment, waiver, change,
modification or discharge is sought. No course of conduct or dealing shall be
construed to modify, amend or otherwise affect any of the provisions hereof.
10. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
physically delivered, delivered by express mail, or other expedited service or
upon receipt if mailed, postage prepaid, via first class mail. as follows:
a) If to the Company: Think New Ideas, Inc.
8522 National Boulevard, Suite 101
Culver City, CA 90232
Attention: President
with an additional
copy by like means to: De Martino Finkelstein Rosen & Virga
1818 N Street, N.W., Suite 400
Washington, DC 20036
Attention: Ralph V. De Martino, Esquire
b) If to the Employee: Mr. David R. Hieb
5888 Orchard Street
Boulder, CO 80301
<PAGE>
with an additional
copy by like means to: Lamm, Freemen & Butler
4730 Table Mesa Drive, Suite I
Boulder, CO 80303
Attention: Tom Lamm, Esquire
4
<PAGE>
11. ASSIGNABILITY. Except as otherwise set forth herein, this Agreement
shall not be assignable by either party hereto, but shall be binding upon and
shall inure to the benefit of the heirs, executors, administrators, successors
and legal representatives of each such party.
12. GOVERNING LAW. This Agreement shall be governed by and construed under
the laws of the State of Delaware, without regard to the principles of conflicts
of laws thereof.
13. WAIVER AND FURTHER AGREEMENT. Any waiver of any breach of the terms or
conditions of this Agreement shall not operate as a waiver of any other breach
of such terms or conditions or any other term or condition hereof, nor shall any
failure to enforce any provision hereof operate as a waiver of such provision or
of any other provision hereof. Each of the parties hereto agrees to execute all
such further instruments and documents and to take all such further action as
the other party may reasonably require in order to effectuate the terms and
purposes of this Agreement.
14. HEADINGS. The headings contained in this Agreement are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
THINK NEW IDEAS, INC.
/s/ Scott Mednick
--------------------------------------
By: Scott Mednick, Chief Executive Officer
THE EMPLOYEE
By: /s/ David R. Hieb
------------------------------
David R. Hieb
5
THINK NEW IDEAS, INC.
LOSS PER SHARE CALCULATIONS
YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
--------------------------
1997 1996
------------ -------------
<S> <C> <C>
PRO FORMA LOSS PER SHARE
Net loss (Pro Forma in 1996) (7,571,163) (824,664)
Interest on convertible debt issued with conversion
rates below the IPO price during the period beginning
one year prior to the initial filing of the
registration statement. 10,459 19,463
---------- -----------
Net loss (Pro forma in 1996) used in the
calculation ........................................... (7,560,704) (805,201)
---------- -----------
Weighted average number of shares outstanding............ 2,069,673 1,134,364
Adjustments for "cheap" shares--
Effect of shares issued during 1996..................... ---- 882,646
Effect of shares issued in Initial Public Offering...... 1,278,219 ----
Effect of shares issued on May 31, 1997 in
connection with an acquisition........................ 10,192 ----
Shares issuable pursuant to convertible debt
issued in March 1996.................................. 216,667 216,667
Shares issuable pursuant to convertible debt issued
in April 1996......................................... 216,660 216,660
Shares issued in August 1996 private placement ......... 938,667 938,667
Repurchases assumed, using the treasury stock method ... (91,741) (882,323)
------------ -----------
Shares used in the calculation........................... 4,637,337 2,506,681
------------ -----------
Loss per share (Pro forma in 1996)...................... $(1.63) $(.32)
============ ==========
SUPPLEMENTAL PRO FORMA LOSS PER SHARE
- -------------------------------------
Net loss (Pro forma in 1996) used in pro
forma loss per share calculation..................... $(7,560,704) $(805,201)
Interest on debt extinguished using a portion
of proceeds obtained through the private placement
of shares............................................ 95,491 224,212
----------- ---------
Supplemental pro forma net loss used in the
calculation.......................................... $(7,465,213) $(580,989)
----------- ---------
Shares used in pro forma loss per share
calculation.......................................... 4,638,337 2,506,681
Increase in weighted average number of shares
outstanding if the proceeds from the shares
sold to fund debt extinguishment had been
used to repay debt on the date such debt was
issued, rather than for the assumed purchase of
treasury stock...................................... 74,723 111,197
----------- ----------
Shares used in the calculation ....................... 4,713,060 2,617,878
----------- ----------
Supplemental loss per share (Pro forma in 1996)....... $(1.58) $(.22)
========== =========
NOTE - The amounts of fully diluted loss per share and supplemental loss per
share would not differ from the amounts shown above.
</TABLE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
THINK New Ideas, Inc.
New York, New York
We hereby consent to the incorporation by reference in the Registration
Statement of THINK New Ideas, Inc. on Form S-8, filed with the Securities and
Exchange Commission on July 17, 1997, of our report dated September 19, 1997 on
the consolidated financial statements of THINK New Ideas, Inc. included in its
annual report on Form 10-KSB for the year ended June 30, 1997.
BDO Seidman, LLP
New York, New York
October 2, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THINK NEW IDEAS, INC. AS OF JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,451,347
<SECURITIES> 1,321,722
<RECEIVABLES> 12,426,377
<ALLOWANCES> 614,137
<INVENTORY> 0
<CURRENT-ASSETS> 17,120,616
<PP&E> 4,853,232
<DEPRECIATION> (2,567,612)
<TOTAL-ASSETS> 21,402,170
<CURRENT-LIABILITIES> 9,041,438
<BONDS> 0
0
0
<COMMON> 654
<OTHER-SE> 19,050,174
<TOTAL-LIABILITY-AND-EQUITY> 21,402,170
<SALES> 0
<TOTAL-REVENUES> 17,436,847
<CGS> 0
<TOTAL-COSTS> 14,720,567
<OTHER-EXPENSES> 10,193,412
<LOSS-PROVISION> 428,137
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,325,263)
<INCOME-TAX> 245,900
<INCOME-CONTINUING> (7,571,163)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,571,163)
<EPS-PRIMARY> (1.63)
<EPS-DILUTED> 0
</TABLE>
