<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark one)
(X) Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended December 31, 1996
( ) Transition Report under Section 13 or 15(d) of the Exchange Act.
For the transition period from to
-------------------- ---------------------
Commission File Number: 000-21775
THINK New Ideas, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 95-4578104
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
45 West 36th Street, 12th Floor, New York, New York 10018
(Address of principal executive offices)
(212) 629-6800
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if change since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes __ No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 14, 1997
Common Stock, par value 6,416,667 shares
$.0001 per share
Transitional Small Business Disclosure Format (check one) Yes No X
<PAGE>
THINK New Ideas, Inc.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I Financial Information
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet as of December 31, 1996........................ 3
Condensed Consolidated Statements of
Operations for the three and six month periods
ended December 31, 1996 and 1995................................................. 4
Condensed Consolidated Statement of Shareholders' Equity for
the six months ended December 31, 1996........................................... 5
Condensed Consolidated Statements of Cash Flows for the six months ended
December 31, 1996 and 1995....................................................... 6
Notes to Condensed Consolidated Financial Statements................................ 7
Item 2 Management's Discussion and Analysis or Plan of Operation............................... 10
Part II Other Information
Item 1 Legal Proceedings 18
Item 2 Changes in Securities 18
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6 Exhibits and Reports on Form 8-K 18
</TABLE>
<PAGE>
Part I: Financial Information
Item 1. Financial Statements
THINK New Ideas, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
December 31,
-----------------------
1996
-----------------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 12,188,395
Accounts receivable, net of allowance for doubtful accounts 3,680,464
of $183,000
Unbilled receivables 479,242
Prepaid expenses and other assets 641,492
-----------------------
Total current assets 16,989,593
Property, plant and equipment, net 1,026,587
Software development costs 598,640
Goodwill, net of accumulated amortization of $540,000 1,618,500
Other assets 399,153
-----------------------
$ 20,632,473
=======================
Liabilities and shareholders' equity
Current liabilities:
Note payable to bank $ 265,295
Accounts payable 1,958,934
Accrued expenses and other 387,591
Deferred revenue 143,871
-----------------------
Total current liabilities 2,755,691
Note payable to related party 515,760
-----------------------
Total liabilities 3,271,451
-----------------------
Shareholders' equity
Preferred stock, $.0001 par value; 5,000,000 shares authorized;
none issued and none outstanding -
Common stock, $.0001 par value; 50,000,000 shares authorized; 641
6,416,667 shares issued
Additional paid in capital 18,444,686
Accumulated deficit (1,084,305)
-----------------------
Total shareholders' equity 17,361,022
-----------------------
$ 20,632,473
=======================
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
THINK New Ideas, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------- ----------------------------------------
1996 1995 1996 1995
------------ -------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Revenues $ 3,803,633 $ 2,419,132 $ 8,042,601 $ 4,685,594
Operating expenses:
Direct salaries and related expenses 1,990,080 884,818 3,936,087 1,687,346
Other direct expenses 1,318,366 1,126,057 2,315,975 2,147,389
Selling, general and administrative expenses 1,021,951 480,960 1,958,636 917,190
Depreciation and amortization 314,327 57,552 674,468 109,752
----------- ------------ ------------ -------------
Operating loss (841,091) (130,255) (842,565) (176,083)
Interest expense (19,542) (48,434) (144,373) (98,917)
Interest income 46,344 - 46,344 -
Other, net (2,159) (1,320) (50,335) (1,320)
----------- ------------ ------------ -------------
Loss before taxes on income (816,448) (180,009) (990,929) (276,320)
Taxes on Income 38,713 (32,920) 11,939 (88,447)
----------- ------------ ------------ -------------
Net loss $ (777,735) $ (212,929) $ (978,990) $ (364,767)
=========== ============ ============ =============
Loss per share $ (0.19) $ (0.09) $ (0.29) $ (0.15)
=========== ============ ============ =============
Weighted average shares outstanding 4,066,721 2,499,613 3,384,864 2,499,613
=========== ============ ============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
THINK New Ideas, Inc. and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-In Accumulated
Shares Amount Capital Deficit
--------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, June 30, 1996 2,894,673 $ 289 $ 1,334,630 $ (105,315)
Issuance of common stock 938,667 94 4,947,968 -
Conversion of convertible debt 433,327 43 189,452 -
Issuance of common stock 2,150,000 215 11,972,636 -
Net loss for the period - - - (978,990)
--------- --------- ----------- -------------
Balance December 31, 1996 6,416,667 $ 641 $18,444,686 $ (1,084,305)
========= ========= =========== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
THINK New Ideas, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended December 31,
-----------------------------
1996 1995
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<S> <C> <C>
Cash Flow from Operating Activities:
Net loss $ (978,990) $(364,767)
Adjustments to reconcile net loss
Depreciation 96,900 109,752
Amortization of intangibles and deferred financing costs 646,854 -
Deferred income taxes (12,000) -
Bad debt expense 51,664 -
Changes in assets and liabilities:
Accounts receivable (1,337,396) (337,364)
Unbilled receivables (182,339) 231,969
Accounts payable 714,877 481,675
Accrued expenses and other (389,277) 288,908
Deferred revenue (309,088) -
Due to shareholders (500,000) (201,589)
Other assets and liabilities (485,824) (49,696)
----------- ----------
Net cash (used in) provided by operating activities (2,684,619) 158,888
----------- ----------
Cash Flow from Investing Activities:
Additions to software development costs (367,829) -
Purchases of property and equipment (424,456) (236,260)
----------- ----------
Net cash used in investing activities (792,285) (236,260)
----------- ----------
Cash Flows from Financing activities
Repayment of promissory notes (1,880,505) -
Proceeds from issuance of common stock 11,972,851 -
Increase in notes payable to related party - 179,000
Borrowings from lines of credit 195,295 35,000
Issuance of common stock 4,948,062 -
Distributions to shareholders - (88,917)
----------- ----------
Net cash provided by financing activities 15,235,703 125,083
----------- ----------
Net increase in cash and cash equivalents 11,758,799 47,711
Cash and cash equivalents, beginning of period 429,596 334,174
----------- ----------
Cash and cash equivalents, end of period $ 12,188,395 $ 381,885
=========== ==========
Supplemental Cash Flow Information:
Cash paid during the period for:
Income taxes $ 101,000 $ 70,000
Interest 124,708 -
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
THINK New Ideas, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Financial Statements
The accompanying condensed consolidated financial statements presented herein
have been prepared in accordance with generally accepted accounting principles
for interim financial information, the instructions to Form 10-QSB and
Regulation S-B (including Item 310(b) thereof) and do not include all of the
information and note disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of management, such
condensed consolidated financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the Company's
financial position as of December 31, 1996 and the results of operations for the
three and six month periods ending December 31, 1996 and 1995. The results of
operations for the three and six month periods ended December 31, 1996 may not
be indicative of the results that may be expected for the year ending June 30,
1997. It is suggested that these condensed consolidated financial statements be
read in conjunction with the audited consolidated financial statements and the
notes thereto of the Company for the year ended June 30, 1996.
2. Business Acquisitions
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>
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 interest method of accounting, and
accordingly, the accompanying condensed consolidated financial statements give
retroactive effect to these acquisitions, as if the companies had always
operated as a single entity.
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<PAGE>
THINK New Ideas, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
2. Business Acquisitions (continued)
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 condensed 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
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.
3. Public Offering
In December 1996, the Company completed a public offering of 2,150,000 shares of
Common Stock. Proceeds from the offering (after transaction costs of
approximately $3,077,000) amounted to $11,973,000.
4. Private Placement
In August 1996, the Company sold equity securities in a private placement. 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 principal shareholders gave
the purchaser an additional 124,667 shares of the Company's Common Stock held by
them for no consideration.
-8-
<PAGE>
THINK New Ideas, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
5. Convertible Promissory Note Conversions and Extinguishments
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 $1,583,000, net of placement fees of $218,000,
through a private placement of 12% convertible promissory notes. The principal
balance, together with accrued interest, was due upon the earlier of April 30,
1997 or 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
$162,000 in principal was convertible into 216,660 shares of the Company's
common stock.
During the six months ended December 31, 1996, the holders of the convertible
promissory notes, as discussed above, converted such notes, aggregating $189,000
into 433,327 shares of common stock. In addition, a portion of the proceeds of
the private placement discussed in Note 4 was used to extinguish the remaining
$1,881,000 of such notes.
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<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
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 and
integration of specialized businesses operating in the areas of advertising,
marketing, Internet and intranet services and data management. On June 30, 1996,
in exchange for the issuance of an aggregate of 723,167 shares of Common Stock,
the Company acquired all of the issued and outstanding capital stock of seven
companies: Scott Mednick & Associates, Inc. ("Mednick"); On Ramp, Inc. ("On
Ramp"); Internet One, Inc. ("Internet One"); Creative Resources Agency, Inc.
("Creative Resources"); The S.D. Goodman Group, Inc. ("Goodman Group"), NetCube
Corporation of Delaware and NetCube Corporation of New Jersey (collectively,
"NetCube"). Each of the foregoing business acquisitions was accounted for using
the pooling of interests method except for On Ramp, which was accounted for
using the purchase method. The foregoing companies have been defined and are
collectively referred to hereinafter as the "Subsidiaries". Accordingly, the
results of operations for each of the Subsidiaries (other than On Ramp) have
been included in the Company's Financial Statements for the fiscal year ended
June 30, 1996. The results of operations of On Ramp have been included in the
Company's financial statements since July 1, 1996.
The Subsidiaries generate revenue from 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, 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 and software licensing,
which will create recurring revenue streams for the life of their respective
contracts (typically 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.
-10-
<PAGE>
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
Revenues. Consolidated revenues for the Company increased to $3,804,000 for the
three month period ended December 31, 1996 from $2,419,000 for the three month
period ended December 31, 1995 (57%). Revenues for the Company's interactive
services increased to $1,858,000 during the second quarter of fiscal 1997 from
$276,000 during the second quarter of fiscal 1996 (573%) due to the acquisition
of On Ramp (which accounted for an increase of $1,494,000) as well as the
continuing strength of corporate demand for Internet related services. Revenues
for the Company's traditional strategic marketing operations increased to
$1,940,000 during the second quarter of 1997 from $1,793,000 during the second
quarter of fiscal 1996 (8%) primarily as a result of continuing revenue growth
and new clients in the Atlanta region.
Operating Expenses and Interest Items. Direct salaries and related expenses for
the Company increased to $1,990,000 during the second quarter of fiscal 1997
from $885,000 during the second quarter of fiscal 1996 (125%) primarily as a
result of the acquisition of On Ramp, which accounted for an increase of
$778,000, and a significant increase in the number of employees employed by the
Company to meet its higher level of operations. Other direct expenses for the
Company increased to $1,318,000 during the second quarter of fiscal 1997 from
$1,126,000 during the second quarter of fiscal 1996 (17%) partially as a result
of the acquisition of On Ramp, which accounted for an increase of $506,000.
Offsetting this increase was a $289,000 decrease in NetCube's other direct
expenses. During the fiscal year ended June 30, 1996, NetCube modified its
business so as to emphasize the development of its proprietary NetCube data
applications and deemphasize hourly consulting services, resulting in a
significant decrease in other direct expenses. Selling, general and
administrative expenses increased to $1,022,000 during the second quarter of
fiscal 1997 from $481,000 during the second quarter of fiscal 1996 (112%),
primarily due to the acquisition of On Ramp which accounted for an increase of
$493,000 and the formation and expansion of the Company's corporate
infrastructure during late fiscal 1996. Depreciation and amortization increased
to $314,000 during the second quarter of fiscal 1997 from $58,000 during the
second quarter of fiscal 1996 (441%) primarily due to the amortization of
goodwill and other intangible assets arising from the acquisition of On
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<PAGE>
Ramp. Interest expenses decreased and interest income increased during the
second quarter of fiscal 1997 as compared to fiscal 1996. Net interest income of
$27,000 during the second quarter of fiscal 1997 as compared to net interest
expense of $48,000 during the second quarter of fiscal 1996 is due to the effect
of investment of the cash proceeds of the Company's initial public offering.
Pre-Tax Loss. The Company had a pre-tax loss of $816,000 in the second quarter
of fiscal 1997 compared to a pre-tax loss of $180,000 in the second quarter of
fiscal 1996. The loss in 1997 included non-cash charges of $314,000 for
depreciation and amortization, primarily of the goodwill incurred in the
acquisition of On Ramp (this related amortization amounted to $270,000 in the
quarter.) Also contributing to the second quarter of fiscal 1997 pre-tax loss
are losses of On Ramp of $310,000 that was not included in the pre-tax loss of
the second quarter of fiscal 1996.
Income taxes. The Company had an income tax benefit of $39,000 in the second
quarter of fiscal 1997 compared to income tax expenses of $33,000 during the
second quarter of fiscal 1996. Given that certain of the Subsidiaries were not
subject to taxation (as such Subsidiaries had elected 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 income
taxes based on their respective operations, the effective tax rate on a
consolidated historical basis is not meaningful. The Company will file
consolidated tax returns in the future.
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
Revenues. Consolidated revenues for the Company increased to $8,043,000 for the
six month period ended December 31, 1996 from $4,686,000 for the six month
period ended December 31, 1995 (72%). Revenues for the Company's interactive
services increased to $4,174,000 during the first half of fiscal 1997 from
$454,000 during the first half of fiscal 1996 (819%) due to the acquisition of
On Ramp (which accounted for an increase of $3,419,000) and the strength of
corporate demand for Internet related services. Revenues for the Company's
traditional strategic marketing operations increased to $3,724,000 during the
first half of 1997 from $3,445,000 during the first half of fiscal 1996 (8%)
primarily as a result of expanded revenue growth and new clients in the Atlanta
region.
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<PAGE>
Operating Expenses and Interest Items. Direct salaries and related expenses for
the Company increased to $3,936,000 during the first half of fiscal 1997 from
$1,687,000 during the first half of fiscal 1996 (133%) primarily as a result of
the acquisition of On Ramp, which accounted for an increase of $1,440,000, and a
significant increase in the number of employees employed by the Company to meet
its higher level of operations. Other direct expenses for the Company increased
to $2,316,000 during the second quarter of fiscal 1997 from $2,147,000 during
the second quarter of fiscal 1996 (17%) partially as a result of the acquisition
of On Ramp, which accounted for an increase of $717,000. Offsetting this
increase was a $548,000 decrease in NetCube's other direct expenses. During the
fiscal year ended June 30, 1996, NetCube modified its business so as to
emphasize the development of its proprietary NetCube data applications and
deemphasize hourly consulting services, resulting in a significant decrease in
other direct expenses. Selling, general and administrative expenses increased to
$1,959,000 during the first half of fiscal 1997 from $917,000 during the first
half of fiscal 1996 (114%) which is primarily due to the acquisition of On Ramp
which accounted for an increase of $848,000 and the formation and expansion of
the Company's corporate infrastructure during late fiscal 1996. Depreciation and
amortization increased to $674,000 during the first half of fiscal 1997 from
$110,000 during the first half of fiscal 1996 (513%) primarily due to the
amortization of goodwill and other intangible assets arising from the
acquisition of On Ramp. Interest and other expenses also increased during the
first half of fiscal 1997 as compared to the first half of fiscal 1996. The
increase in interest expense of $45,000 in the first half of fiscal 1997
compared with the first half of fiscal 1996 resulted from certain notes that
were outstanding in the first half of fiscal 1997 that were not outstanding in
the first half of fiscal 1996. The increase in interest expense was offset by an
increase in interest income which resulted from investment of the proceeds of
the initial public offering that occurred in the first half of fiscal 1997.
Pre-Tax Loss. The Company had a pre-tax loss of $991,000 in the first half of
fiscal 1997 compared to a pre-tax loss of $276,000 in the first half of fiscal
1996. The loss in 1997 included non-cash charges of $674,000 for depreciation
and amortization, primarily of the goodwill incurred in the acquisition of On
Ramp (this related amortization amounted to $540,000 in the six month period.)
Also included in this pre-tax loss are costs incurred in the Company's
software development operation of $137,000 in the first half of fiscal 1996.
Income taxes. The Company had an income tax benefit of $12,000 in the first half
of fiscal 1997 compared to income tax expenses of $88,000 during the second
quarter of fiscal 1996. Given that certain of the Subsidiaries were not subject
to taxation (as such Subsidiaries had elected 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 income
taxes based on their respective operations, the effective tax rate on a
consolidated historical basis is not meaningful. The Company will file
consolidated tax returns in the future.
-13-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since their respective formations, the Subsidiaries have financed their
operations primarily through cash generated from operations, bank borrowings and
shareholder contributions and 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 its initial public
offering. The Company raised $270,000 through the issuance of three 10% Notes.
Proceeds obtained from the issuance have been 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 through a private placement of 12%
Notes. Proceeds received by the Company, after deducting placement agent fees
and other expenses, totaled $1,583,000. Of the funds received from the 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 the private placement have been used to provide working
capital for On Ramp and Internet One.
In August 1996, the Company received proceeds of $4,948,000 through the issuance
of 938,667 shares of common stock. Proceeds raised from this 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
$1,881,000), to retire 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.
At December 31, 1996, the Company had cash and cash equivalents of approximately
$12,188,000 and working capital of approximately $14,234,000, primarily as a
result of effecting the following transactions during the six months then ended
December 31, 1996: (i) the sale of 938,667 shares of common stock and the
receipt of net proceeds therefrom of $4,948,000 and the transfer by four
principal stockholders of the Company of an aggregate of 124,667 shares of
common stock for no cash consideration; (ii) the repayment of the
non-convertible portion of the 10% Notes and the 12% Notes, aggregating
$1,881,000 from the proceeds of the private placement discussed above; (iii) the
payment of a finder's fee in consideration for the termination of a certain
finder's agreement using proceeds from the private placement discussed above;
(iv) 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
private placement discussed above and extending the maturity of the remaining
balance of $500,000 until March 1998; and (v) the sale of 2,150,000 shares of
common stock of the Company in an initial public offering and the receipt of net
proceeds therefrom of $11,973,000.
-14-
<PAGE>
During the six month period ended December 31, 1996, the Company increased its
cash and cash equivalents position by $11,759,000 to $12,188,000. This resulted
from cash generated by financing activities of $15,453,000 offset by cash used
in operating activities and investing activities of $2,902,000 and $792,000,
respectively. The cash generated by financing activities of $15,453,000 is a
result of the net proceeds of the Company's initial public offering in December
of $11,973,000 and the issuance in August of 938,667 shares of common stock to
The Omnicom Group, Inc. for $4,948,000, offset in part by the repayment of
certain promissory notes for cash in the amount of $1,881,000.
The cash used in investing activities of $792,000 resulted from gross software
development costs of $367,000 and additions to leasehold improvements and other
acquisitions of computer related hardware and facilities of $424,000.
The cash used in operating activities of $2,902,000 resulted from a loss from
ongoing operations of $979,000, offset by non-cash charges of $540,000 for
amortization of the goodwill incurred in the acquisition of On Ramp and
depreciation and amortization charges and other non-cash charges of $243,000 or
total non-cash charges of $783,000. Additionally, there was an increase in
accounts receivable and unbilled receivables of $1,520,000 directly related to
the overall increase in the Company's level of business activities and revenue.
The increase in unbilled receivables is principally due to one web site
development project undertaken by the Company's interactive division 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 the Company's interactive division
and, to a lesser extent, the Company's traditional strategic marketing services
division. Accounts receivable greater than sixty days old increased from
$494,000 at June 30, 1996 to $1,086,000 at December 31, 1996. 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 December 31, 1996 or the Company
believes them to be collectible. The Company believes that provision for bad
debts of approximately $52,000 recognized during the six months ended December
31, 1996 is sufficient to adjust the carrying amount of its receivables at
December 31, 1996 to an amount which approximates net realizable value. The
increase in accounts payable and accrued expenses provided cash of $108,000
principally due to the overall increase in the Company's level of business
activities. Additionally, payments to shareholders and net other assets and
liabilities used cash of $500,000 and $795,000, respectively.
-15-
<PAGE>
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 $1,225,000 per year.
The Company anticipates significant changes in its operating cost structure once
the Subsidiaries have been completely integrated, and administration and control
of the Company's future operations have been centralized. The Company expects
that the cash generated from future operations combined with its existing cash
balances will be sufficient to fund the anticipated expenditures required for
product development, organizational infrastructure (including additional
personnel and upgraded telecommunications and computer systems) and general
corporate needs for the next 12 months.
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 six months ended December
31, 1996 a non-cash charge to operations of approximately $588,000.
In connection with the initial public offering, certain holders of common stock
placed, on a pro rata basis, 825,000 shares into escrow (the "Escrow Shares")
pursuant to an escrow agreement between such holders and Continental Stock
Transfer & Trust Company, as escrow agent. The Escrow Shares are not
transferable or assignable; however, the Escrow Shares may be voted by the
beneficial holders thereof. 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.
-16-
<PAGE>
Impact of New Accounting Pronouncements. Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" ("SFAS No. 123")
issued by the Financial Accounting Standards Board ("FASB") is effective for
specific transactions entered into after December 15, 1995, while the disclosure
requirements are effective for financial statements for fiscal years beginning
after December 15, 1995. The new standards establish a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from nonemployees in exchange for equity
instruments. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities electing to remain with the accounting in APB Opinion No.
25 must make pro forma disclosures of net income and earnings per share, as of
the fair value based method of accounting defined in the Statement had been
applied. The Company elected to make pro forma disclosures as allowed by SFAS
No. 123, and the Company's adoption of SFAS No. 123 during the first quarter of
fiscal 1997 did not have a material effect on the Company's financial position
or results of operations.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"), issued by the FASB is
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard establishes new guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment and certain
identifiable intangible assets and goodwill, should be recognized and how
impairment losses should be measured. The Company adopted SFAS No. 121 during
the first quarter of fiscal 1997 with no material effect on its financial
position or results of operations.
-17-
<PAGE>
Part II: Other Information
Item 1. Legal Proceedings
The Company is not a party to any pending or ongoing litigation required to be
disclosed pursuant to this item.
Item 2. Changes in Securities
There have been no changes in the securities of the Company required to be
disclosed pursuant to this item.
Item 3. Defaults Upon Senior Securities
There have been no material defaults with respect to any indebtedness of the
Company required to be disclosed pursuant to this item.
Item 4. Submission of Matters to a Vote of Security Holders
There have been no matters submitted to a vote of security holders during the
period ended December 31, 1996.
Item 5. Other Information and Subsequent Events
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are incorporated herein by
reference:
3.1 Articles of Incorporation of THINK New Ideas, Inc. Delaware
(Registrant) filed 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 Certificate of Amendment to Articles of Incorporation of THINK
New Ideas, Inc., Delaware (Registrant) filed 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.
3.3 Certificate of Amendment to Articles of Incorporation of THINK
New Ideas, Inc., Delaware (Registrant) filed 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 Amended and Restated By-Laws of THINK New Ideas, Inc.
(Registrant) filed 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.
(b) Reports on Form 8-K. There were no Current Reports on Form 8-K
filed by the Company during the period ended December 31, 1996.
-18-
<PAGE>
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, as amended, the
Issuer has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
THINK NEW IDEAS, INC. February 14, 1997
By: /s/ Scott A. Mednick
---------------------------------------------------------
Scott A. Mednick
Chief Executive Officer
By /s/ Melvin Epstein
---------------------------------------------------------
Melvin Epstein
Chief Financial Officer
-19-
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<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,188,395
<SECURITIES> 0
<RECEIVABLES> 3,680,464
<ALLOWANCES> 183,000
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<CURRENT-ASSETS> 16,989,593
<PP&E> 1,026,587
<DEPRECIATION> 96,900
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0
0
<COMMON> 641
<OTHER-SE> 17,360,381
<TOTAL-LIABILITY-AND-EQUITY> 20,632,473
<SALES> 0
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<INCOME-PRETAX> (990,929)
<INCOME-TAX> (11,939)
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