UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
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( ) Transition Report under Section 13 or 15(d) of the Exchange Act.
For the transition period from to
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Commission File Number: 000-21775
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THINK NEW IDEAS, INC.
(Exact name of small business issuer as specified in its charter)
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Delaware 95-4578104
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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45 West 36th Street, 12th Floor, New York, New York 10018
(Address of principal executive offices)
(212) 629-6800
(Issuer's telephone number)
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Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at February 9, 1998
- ----- --------------------------------
Common Stock, par value $.0001 per share 6,950,137 shares
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Transitional Small Business Disclosure Format (check one) Yes No X
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<PAGE>
THINK NEW IDEAS, INC.
FORM 10-QSB
INDEX
Page
Part I - Financial Information.................................................3
Item 1. Financial Statements...................................................3
Condensed Consolidated Balance Sheet as of December 31, 1997................3
Condensed Consolidated Statements of Operations for the Three
and Six Month Periods ended December 31 1997 and 1996.......................4
Condensed Consolidated Statements of Cash Flows for the Six Month
Periods ended December 31, 1997 and 1996....................................5
Notes to Condensed Consolidated Financial Statements........................6
Item 2. Management's Discussion and Analysis or Plan of Operation.............9
Part II - Other Information...................................................19
Item 1. Legal Proceedings.................................................19
Item 2. Changes in Securities.............................................19
Item 3. Defaults Upon Senior Securities...................................19
Item 4. Submission of Matters to a Vote of Security Holders...............19
Item 5. Other Information and Subsequent Events...........................20
Item 6. Exhibits and Reports on Form 8-K..................................20
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
DECEMBER 31, 1997
------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,790,909
Marketable securities 662,233
Accounts receivable, net of allowance for doubtful
accounts of $624,154 16,527,571
Unbilled receivables 2,519,172
Prepaid expenses and other current assets 1,319,507
------------
Total current assets 26,819,392
Property, plant and equipment, net 4,277,474
Software development costs 86,125
Goodwill, net of accumulated amortization of $1,766,819 4,806,224
Other assets 602,184
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Total assets $ 36,591,399
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,040,053
Accrued restructuring costs 434,632
Deferred revenue 411,223
Prebilled media 7,523,945
Income taxes payable 154,698
Due to related party 1,502,550
Current portion of obligations under capital leases 333,588
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Total current liabilities 19,400,689
Obligations under capital leases 603,819
Note payable to related party 515,760
Other long-term liability 41,671
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Total liabilities 20,561,939
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Commitments and contingencies
Shareholders' equity:
Preferred stock, $.0001 par value; 5,000,000 shares
authorized; none issued and outstanding --
Common stock, $.0001 par value; 50,000,000 shares
authorized; 6,945,137 shares issued and outstanding 695
Additional paid in capital 23,171,652
Accumulated deficit (7,142,887)
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Total shareholders' equity 16,029,460
============
Total liabilities and shareholders' equity $ 36,591,399
============
See accompanying notes to condensed consolidated financial statements.
3
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ------------------------------
1997 1996 1997 1996
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 10,067,406 $ 3,803,633 $ 17,023,886 $8,042,601
Operating expenses:
Direct salaries and related expenses 4,487,444 1,990,080 7,927,707 3,936,087
Other direct expenses 2,567,727 1,318,366 4,133,414 2,315,975
Selling, general and administrative
expenses 2,005,716 1,024,110 3,462,039 2,014,709
Depreciation and amortization 527,835 314,327 955,430 731,191
------------ ------------ ------------ ----------
Operating profit/(loss) 478,684 (843,250) 545,296 (955,361)
Interest income/(expense) and other, net 102,478 26,802 101,280 (35,568)
------------ ------------ ------------ ----------
Profit/(loss) before provision for taxes 581,162 (816,448) 646,576 (990,929)
Provision for income taxes 108,406 (38,713) 112,985 (11,939)
------------ ----------- ------------ ----------
Net (loss) income $ 472,756 $ (777,735) $ 533,591 $ (978,990)
============ =========== ============ ==========
Net income loss) per share - basic $ 0.07 $ (0.19) $ 0.08 $ (0.29)
Weighted average shares outstanding 6,819,819 4,066,721 6,703,608 3,384,864
Net income per share - diluted $ 0.06 $ (0.19) $ 0.07 $ (0.29)
Weighted average shares outstanding 7,469,069 4,066,721 7,245,809 3,384,864
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
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1997 1996
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<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 533,591 $ (978,990)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 287,049 84,337
Amortization of intangibles and deferred financing costs 668,381 646,854
Deferred income taxes -- (12,000)
Bad debt expense -- 51,664
Consulting fees, non-cash 38,000 --
Changes in assets and liabilities:
Accounts receivable (6,223,750) (1,337,396)
Unbilled receivables (21,783) (182,339)
Accounts payable and accrued expenses 2,903,098 325,600
Deferred revenue (542,333) (309,088)
Prebilled media 7,523,945 --
Other assets and liabilities (994,889) (473,261)
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Net cash provided by (used in) operating activities 4,171,309 (2,184,619)
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CASH FLOW FROM INVESTING ACTIVITIES:
Additions to software development costs -- (367,829)
Payment for BBG New Media, Inc., net of cash acquired (743,888) --
Purchases of marketable securities (1,123,902) --
Sales of marketable securities 1,586,784 --
Purchases of property and equipment (1,039,856) (424,456)
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Net cash used in investing activities (1,320,862) (792,285)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of promissory notes (548,404) (1,880,505)
Proceeds from issuance of common stock 122,052 11,972,851
Proceeds from private placement -- 4,948,062
Borrowings from operating lines of credit -- 195,295
Due to shareholders -- (500,000)
Principal payments on capital leases (84,533) --
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Net cash (used in) provided by financing activities (510,885) 14,735,703
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Net increase in cash and cash equivalents 2,339,562 11,758,799
Cash and cash equivalents, beginning of period 3,451,347 429,596
================= ====================
Cash and cash equivalents, end of period $ 5,790,909 $ 12,188,395
================= ====================
Supplemental Cash Flow Information:
Cash paid during the period
Income taxes $ 9,880 $ 101,000
Interest 40,022 124,708
Noncash investing and financing activities:
Issuance of Common Stock to settle long-term liability 206,250 --
Issuance of Common Stock to consultant 359,268 --
Issuance of Common Stock related to acquisition of
BBG New Media, Inc. 3,602,091 --
Additions to capital lease obligations 465,000 --
See accompanying notes to condensed consolidated financial statements.
</TABLE>
5
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Financial Statements
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB and Regulation S-B
(including Item 310(b) thereof) and do not include all of the information and
note disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of management, such condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial position at December 31, 1997 and the results of operations for the
three and six month periods ended December 31, 1997 and 1996. The results of
operations for the three and six month periods ended December 31, 1997 may not
be indicative of the results that may be expected for the fiscal year ending
June 30, 1998 or any other period. These condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements of the Company and the notes thereto for the fiscal year ended June
30, 1997 included in the Company's Form 10-KSB.
Certain amounts for the three and six months ended December 31, 1996
have been reclassified to conform to the presentation of the three and six
months ended December 31, 1997.
Note 2 - Summary of Significant Accounting Policies
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("Statement 128").
Statement 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods presented have been restated to
conform to the Statement 128 requirements.
Note 3 - Business Acquisitions
FATHOM ADVERTISING AGENCY, INC. On May 31, 1997, the Company acquired
certain assets and operations of Fathom Advertising Agency, Inc. ("Fathom"), a
provider of traditional full service advertising services, from Ketchum
Communications, Inc. ("Ketchum"), a wholly-owned subsidiary of Omnicom Group
Inc. ("Omnicom"), a principal shareholder of the Company, in exchange for
120,000 shares of the Company's common stock (the "Common Stock"). Fathom had
revenues of approximately $1,800,000 for the year ended December 31, 1996, which
were derived primarily from one customer. The acquisition has been accounted for
using the purchase method of accounting and, accordingly, the results of
operations of Fathom have been reflected in the consolidated financial
statements of the Company from the date of acquisition. In connection with the
acquisition, the Company is to return the excess of media accounts receivable
purchased ($3,012,592) over accounts payable assumed ($1,106,080) to Ketchum in
the amount of $1,906,512, as collected. The purchase price of $442,500, which
equals the excess over the carrying values of the net assets acquired, is being
amortized by the Company over two years.
6
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 3 - Business Acquisitions (Continued)
BBG NEW MEDIA, INC. On November 3, 1997, the Company entered into an
agreement and plan of merger (the "BBG Agreement") with BBG New Media, Inc., a
Massachusetts corporation ("BBG"), which provides interactive marketing
services, in exchange for: (i) the issuance of 303,334 shares of Common Stock
and $175,000 in cash; and (ii) the subsequent issuance of shares of Common Stock
based upon a percentage of sales growth of BBG during the period from November
1, 1998 through October 31, 1999. In connection with the agreement, the Company
repaid approximately $548,000 in outstanding debt of BBG subsequent to the
closing. The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the results of operations of BBG will be reflected
in the Company's financial statements from the effective date of the merger. The
initial portion of the purchase price of $4,539,000 has been allocated to the
assets purchased and the liabilities assumed based upon their estimated fair
values at the date of merger as follows:
Value of shares issued $ 3,602,000
Cash paid 175,000
Estimated transaction costs 762,000
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4,539,000
BBG stockholders' equity - November 3, 1997 (567,000)
--------------
Excess of cost over fair value $ 3,972,000
=============
The Company is amortizing the excess of cost over fair value or goodwill over
thirty (30) years. Additional consideration is payable if BBG meets certain
sales targets, as discussed above, which would result in an increased balance of
goodwill and amortization related thereto.
Note 4 - Restructuring Costs
In June 1997, the Company implemented a plan to close the operations of
two of its subsidiaries, NetCube Corporation ("NetCube") and Internet One, Inc.
("Internet One") and to dispose of related assets. The Company's decision was
based upon the continued decline in the operating performance of NetCube and
Internet One. The cost of this plan was accounted for in accordance with the
guidance set forth in Emerging Issues Task Force Issue 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)" ("EITF 94-3").
The pretax costs of approximately $1,732,000 which were incurred as a part of
this plan represent employee termination and severance costs, the write-down of
capitalized software costs and other related costs that were incurred as a
direct result of the plan. The components of the restructuring costs accrued as
of June 30, 1997, amounts paid for the six months ended December 31, 1997 and
remaining accrual as of December 31, 1997 are as follows:
7
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Note 4 - Restructuring Costs (Continued)
June 30, December 31,
1997 Paid 1997
----------- ----------- ------------
<S> <C> <C> <C>
Write-down of capitalized software costs $ 597,000 $ 597,000 $ --
Severance benefits and employee termination costs 681,000 533,000 148,000
Disposal of fixed assets and other assets 369,000 -- 369,000
Other 85,000 167,000 (82,000)
----------- ----------- -----------
$ 1,732,000 $ 1,297,000 $ 435,000
=========== =========== ===========
</TABLE>
Aggregate revenues and operating losses for NetCube and Internet One for
fiscal 1997 and 1996 were as follows:
1997 1996
------------------ ---------------------
Revenues $1,253,000 $2,740,000
Operating loss (1,746,000) (1,073,000)
Note 5- Consulting Agreement
On June 30, 1997, the Company entered into a one (1) year consulting
agreement with an individual whereby the Company agreed to issue up to an
aggregate of 200,000 shares of Common Stock and options to acquire up to 150,000
shares of Common Stock. The agreement was terminated by the Company during the
quarter ended December 31, 1997. Pursuant to the terms of the Agreement, the
Company issued an aggregate of 75,000 shares of Common Stock and options,
exercisable through June 30, 1998, to purchase 75,000 shares of Common Stock at
exercise prices based on the market value of the Common Stock and ranging from
$5.30 to $11.56 per share. The fair value of the shares of Common Stock were and
the options will be charged to operations on the date of issuance and grant,
respectively.
In connection with the termination of the Agreement in November 1997,
the Company and the Consultant have agreed, in lieu of issuing shares of Common
Stock and options to purchase shares of Common Stock, the Company will pay
finders fees to the Consultant in the future on a transaction-by-transaction
basis. The Company has paid $700,000 pursuant to this agreement.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of the Company's consolidated
financial condition and results of operations should be read in conjunction with
the Condensed Consolidated Financial Statements and Notes thereto appearing
elsewhere herein. This document may contain forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section entitled "Business--Factors Affecting Operating
Results and Market Price of Stock" included in the Company's Form 10-KSB for the
year ended June 30, 1997 filed with the Securities and Exchange Commission in
October 1997.
Corporate Background
The Company was incorporated in the State of Delaware in January 1996
for the purpose of creating a corporate structure to facilitate the combination
and integration of specialized businesses operating in the areas of advertising,
marketing, Internet and Intranet services and data management.
On June 30, 1996, the Company completed the acquisition of all of the
outstanding shares of capital stock of Scott A. Mednick & Associates, Inc.
("Mednick"), On Ramp, Inc. ("On Ramp"), Internet One, NetCube, Creative
Resources Agency, Inc. ("Creative Resources") and The S.D. Goodman Group, Inc.
("Goodman") in exchange for an aggregate of 723,167 shares of Common Stock. The
Company's acquisition of On Ramp was accounted for using the purchase method of
accounting. Each of the Company's other acquisitions was accounted for using the
pooling of interests method. Accordingly, the results of operations for each of
the Company's subsidiaries (other than On Ramp) have been included in the
Company's financial statements since the earlier of July 1, 1993 or each of such
subsidiary's inception. The results of operations of On Ramp have been included
in the Company's financial statements since July 1, 1996.
On May 31, 1997, the Company acquired certain assets and operations of
Fathom from Ketchum, a wholly-owned subsidiary of Omnicom, in exchange for the
issuance of an aggregate of 120,000 shares of Common Stock. The Company's
acquisition of the assets and operations of Fathom has been accounted for using
the purchase method of accounting. Accordingly, the results of operations of
Fathom have been included in the Company's financial statements since June 1,
1997. Fathom's single largest client accounts for virtually all of its revenue.
See Note 3 to the Condensed Consolidated Financial Statements included elsewhere
herein. Larry Kopald, the individual who was responsible for the this principal
client account while at Fathom, joined the Company as an officer and employee of
the Company in connection with its acquisition of Fathom.
9
<PAGE>
In June 1997, the Company commenced implementation of a plan to
restructure the operations of two of its subsidiaries, Internet One in Boulder,
Colorado and NetCube in Edgewater, New Jersey. 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, Colorado office into its
New York and Los Angeles facilities with minimal impact, and therefore, the
facility was closed and all of the employees of Internet One were terminated.
NetCube had developed proprietary data mining and analysis software for large
data base and data warehousing applications. The Company determined that the
marketing of "shrink-wrapped" software was not its core competency and would
both confuse the Company's focus and involve too great an investment for the
anticipated return. The Company has hired several key developers from NetCube
for its New York interactive group, ceasing the ongoing marketing and helpdesk
development at its New Jersey facility. This has resulted in the termination of
the remaining employees of NetCube. The Company is currently discussing the sale
of the remaining assets of NetCube, primarily the software code, with several
different companies. Total estimated costs associated with the above in the
amount of approximately $1,732,000 were included in the Company's financial
statements for the fiscal year ended June 30, 1997. As of December 31, 1997,
approximately $1,297,000 was paid under this arrangement. See Note 4 to the
Condensed Consolidated Financial Statements included elsewhere herein.
On November 3, 1997, the Company entered into the BBG Agreement,
pursuant to which the Company acquired BBG in exchange for: (i) the issuance of
303,334 shares of Common Stock and $175,000 in cash; and (ii) the subsequent
issuance of shares of Common Stock based upon a percentage of sales growth of
BBG during the period from November 1, 1998 through October 31, 1999. The
acquisition has been accounted for using the purchase method of accounting and,
accordingly, the results of operations of BBG has been reflected in the
Company's financial statements from the effective date of the merger. See Note 3
to the Condensed Consolidated Financial Statements included elsewhere herein.
Overview of Operations and Revenue
The Company generates revenue from both traditional marketing and
Internet and interactive media services including Website development and
hosting, corporate internal communications solutions, database marketing,
corporate identity and product branding and packaging, advertising and media
placement services, and interface solutions that provide high-speed access via
the Internet to off-line databases. Historically, revenues from these services
by the Company have been derived on a project-by-project basis, which tends to
cause fluctuations in revenues between reporting periods. Substantial portions
of those revenues have been fixed fees for services to be delivered. While the
Company has recently entered into a number of contracts for ongoing maintenance,
content updates, server hosting and software licensing and subscription
services, which will create recurring revenue streams for the life of their
respective contracts (typically twelve (12) months), it is anticipated that
project revenue will continue to be a significant component of total revenues
and therefore revenue may continue to fluctuate significantly from quarter to
quarter.
The Company generally provides Website design and development and
traditional marketing services under contracts that vary in duration from two to
four weeks in the case of smaller projects and up to five months in the case of
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.
10
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Business Strategy
Part of the Company's overall business strategy is to continue to
increase the percentage of revenue that is recurring and to continue to increase
the number of services provided to a particular client. The Company is
implementing this strategy by increasing its over-all marketing and
cross-marketing efforts.
Another part of the Company's business strategy is to grow through the
acquisition and integration of synergistically compatible businesses. The
Company believes that there will be a consolidation among technology-based
marketing solution providers and that this consolidation will continue to create
opportunities for the Company to expand through acquisitions and joint ventures.
In addition to its acquisition of the assets and operations of Fathom and its
acquisition of and merger with BBG, the Company has continued to pursue
discussions with several companies engaged in businesses that are complementary
or supplementary to those of the Company. The Company's acquisition strategies
include acquiring companies that will be integrated into the Company's existing
infrastructure, enabling the Company to acquire access to additional product or
service offerings, experienced management that can contribute to building the
business in a profitable manner, and potentially, provide international
expansion (through the acquisition of companies outside of the United States).
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
REVENUES
Consolidated revenues increased to $10,067,000 for the three months
ended December 31, 1997 from $3,804,000 for the three months ended December 31,
1996 (165%). The increase is attributed to larger projects for both existing and
new clients as well as the acquisition of Fathom in May 1997. Revenues for
interactive services increased to $3,936,000 during the three months ended
December 31, 1997 from $1,863,000 during the three months ended December 31,
1996 (111%). The increase results from the inclusion of the operations of BBG
since its merger with the Company in November 1997. Revenues for traditional
strategic marketing operations increased to $6,131,000 during the three months
ended December 31, 1997 from $1,941,000 during the three months ended December
31, 1996 (216%). The increase is a result of including the revenues for clients
gained through the acquisition of Fathom, the garnering of new clients, and
providing additional services to existing clients. Traditional services revenue
increased as a percentage of total revenue from 51% in the second quarter of
fiscal 1997 to 61% in the second quarter of fiscal 1998 which can be attributed
to an increase in media advertising fees from both new and existing clients as
well as the acquisition of Fathom in May 1997.
OPERATING EXPENSES
Direct Salaries And Related Expenses
Direct salaries and related expenses consist primarily of wages for
regular and temporary employees, as well as payroll taxes, employment agency
fees and benefits for regular employees. The Company's direct salaries and
11
<PAGE>
related expenses increased to $4,487,000 during the three months ended December
31, 1997 from $1,990,0000 during the three months ended December 31, 1996 (125%)
principally resulting from the Company's hiring of additional marketing,
technology and creative employees to meet its higher level of revenues and its
expected growth from existing outstanding project proposals. Direct salaries and
related expenses as a percentage of revenues decreased from 52% in the second
quarter of fiscal 1996 to 45% in the second quarter of fiscal 1997 which can be
attributed to the Company's more efficient use of resources and economies of
scale achieved with the increase in revenues and acquisitions of both Fathom in
May 1997 and BBG in November 1997.
Other Direct Expenses
Other direct expenses include materials, contract freelance talent
(independent consultants and contractors), facilities and equipment expenses.
Other direct expenses increased to $2,568,000 during the three months ended
December 31, 1997 from $1,318,000 during the three months ended December 31,
1996 (95%). The increase was primarily related to increased costs associated
with the Company's higher level of revenues. Other direct expenses as a
percentage of revenues decreased from 35% in the second quarter of fiscal 1996
to 26% in the second quarter of fiscal 1997 which can be attributed to more
efficient use of resources and economies of scale achieved given both the
increase in revenues and acquisitions of both Fathom in May 1997 and BBG in
November 1997.
Selling, General And Administrative Expenses
Selling, general and administrative expenses include corporate
expenses, insurance, personnel costs for finance and administration, accounting
and legal fees, bad debt expense, management information systems expenses, and
employee benefits. Selling, general and administrative expenses increased to
$2,006,000 during the three months ended December 31, 1997 from $1,024,000
during the three months ended December 31, fiscal 1996 (96%), primarily due to
the formation and continued expansion of the Company's corporate infrastructure
for both internal growth and growth through acquisition.
Depreciation and Amortization
Depreciation and amortization increased to $528,000 during the three
months ended December 31, 1997 from $314,000 during the three months ended
December 31, 1996 (68%) Approximately 36% of the increase is from amortization
of goodwill and other intangibles resulting from the acquisitions of Fathom in
May 1997 and BBG in November 1997 both of which were accounted for using the
purchase method of accounting. The remaining percentage increase is from
increased depreciation which resulted from capital expenditures made to expand
the Company's infrastructure. Depreciation and amortization includes $300,000,
$55,000 and $22,000 for the amortization of goodwill and other intangibles
relating to the purchase method of accounting required for the Company's
acquisitions of On Ramp in June 1996, Fathom in May 1997 and BBG in November
1997, respectively.
12
<PAGE>
INTEREST INCOME/EXPENSE AND OTHER, NET
The $102,000 in net other income reflected for the three months ended
December 31, 1997 compares favorably to the net other income of $27,000
reflected for the three months ended December 31, 1996 primarily because of
interest income earned from investment of the cash proceeds from the Company's
initial public offering in November 1996 (the "Initial Public Offering").
PRE-TAX PROFIT/LOSS
The Company had a pre-tax profit of $581,000 in the three months ended
December 31, 1997 compared to a pre-tax loss of $816,000 in the three months
ended December 31, 1996. This represents the Company's second consecutive
profitable fiscal quarter since the Initial Public Offering and results from
both an increase in revenues as well as a reduction in operating expenses as a
percentage of revenues.
INCOME TAXES
The Company incurred income tax expense of $108,000, primarily relating
to state and local taxes, in the three months ended December 31, 1997 compared
to an income tax credit of $39,000 in the three months ended December 31, 1996.
The increase results from the Company's profitability in the second quarter of
fiscal 1998 versus its loss in the second quarter of fiscal 1997. Net operating
loss carryforwards have been applied against pre-tax profits for federal tax
purposes.
SIX MONTHS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
REVENUES
Consolidated revenues increased to $17,024,000 for the six months ended
December 31, 1997 from $8,043,000 for the six months ended December 31, 1996
(112%). The increase is attributed to larger projects for both existing and new
clients as well as the acquisition of Fathom in May 1997. Revenues for
interactive services increased to $7,000,000 during the six months ended
December 31, 1997 from $4,318,000 during the six months ended December 31, 1996
(62%).The increase results from the inclusion of the operations of BBG since its
merger with the Company in November 1997. Revenues for traditional strategic
marketing operations increased to $10,024,000 during the six months ended
December 31, 1997 from $3,725,000 during the six months ended December 31, 1996
(169%). The increase is a result of including the revenues for clients gained
through the acquisition of Fathom, the garnering of new clients, and providing
additional services to existing clients. Traditional services revenue increased
as a percentage of total revenue from 46% in fiscal 1997 to 59% in fiscal 1998
which can be attributed to an increase in media advertising fees from both new
and existing clients as well as the acquisition of Fathom in May 1997.
13
<PAGE>
OPERATING EXPENSES
Direct Salaries And Related Expenses
Direct salaries and related expenses consist primarily of wages for
regular and temporary employees, as well as payroll taxes, employment agency
fees and benefits for regular employees. The Company's direct salaries and
related expenses increased to $7,928,000 during the six months ended December
31, 1997 from $3,936,0000 during the six months ended December 31, 1996 (101%)
principally resulting from the Company's hiring of additional marketing,
technology and creative employees to meet its higher level of revenues and its
expected growth from existing outstanding project proposals. Direct salaries and
related expenses as a percentage of revenues decreased from 49% in the second
quarter of fiscal 1996 to 47% in the second quarter of fiscal 1997 which can be
attributed to the Company's more efficient use of resources and economies of
scale achieved with the increase in revenues and acquisitions of both Fathom in
May 1997 and BBG in November 1997.
Other Direct Expenses
Other direct expenses include materials, contract freelance talent
(independent consultants and contractors), facilities and equipment expenses.
Other direct expenses increased to $4,133,000 during the six months ended
December 31, 1997 from $2,316,000 during the six months ended December 31, 1996
(79%). The increase was primarily related to increased costs associated with the
Company's higher level of revenues. Other direct expenses as a percentage of
revenues decreased from 29% in the second quarter of fiscal 1996 to 24% in the
second quarter of fiscal 1997 which can be attributed to more efficient use of
resources and economies of scale achieved given both the increase in revenues
and acquisitions of both Fathom in May 1997 and BBG in November 1997.
Selling, General And Administrative Expenses
Selling, general and administrative expenses include corporate
expenses, insurance, personnel costs for finance and administration, accounting
and legal fees, bad debt expense, management information systems expenses, and
employee benefits. Selling, general and administrative expenses increased to
$3,462,000 during the six months ended December 31, 1997 from $2,015,000 during
the six months ended December 31, fiscal 1996 (72%), primarily due to the
formation and continued expansion of the Company's corporate infrastructure for
both internal growth and growth through acquisition.
Depreciation and Amortization
Depreciation and amortization increased to $955,000 during the six
months ended December 31, 1997 from $731,000 during the six months ended
December 31, 1996 (31%) Approximately 36% of the increase is from amortization
of goodwill and other intangibles resulting from the acquisitions of Fathom in
May 1997 and BBG in November 1997 both of which were accounted for using the
purchase method of accounting. The remaining percentage increase is from
increased depreciation which resulted from capital expenditures made to expand
the Company's infrastructure. Depreciation and amortization includes $600,000,
$110,000 and $22,000 for the amortization of goodwill and other intangibles
14
<PAGE>
relating to the purchase method of accounting required for the Company's
acquisitions of On Ramp in June 1996, Fathom in May 1997 and BBG in November
1997, respectively.
INTEREST INCOME/EXPENSE AND OTHER, NET
The $101,000 in net other income reflected in the six months ended
December 31, 1997 compares favorably to the net other expense of $36,000
reflected in the six months ended December 31, 1996 primarily because of
interest income earned from investment of the cash proceeds from the Company's
Initial Public Offering in November 1996 as well as the elimination of interest
expense associated with debt securities repaid in the first quarter of fiscal
1996.
PRE-TAX PROFIT/LOSS
The Company had a pre-tax profit of $647,000 for the six months ended
December 31, 1997 compared to a pre-tax loss of $990,000 for the six months
ended December 31, 1996 which results from both an increase in revenues as well
as a reduction in operating expenses as a percentage of revenues.
INCOME TAXES
The Company incurred income tax expense of $113,000, primarily relating
to state and local taxes, in the six months ended December 31, 1997 compared to
an income tax credit of $12,000 in the six months ended December 31, 1996. The
increase results from the Company's profitability in fiscal 1998 versus its loss
in fiscal 1997. Net operating loss carryforwards have been applied against
pre-tax profits for federal tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Since their respective formations, the Company's subsidiaries (the
"Subsidiaries") have financed their operations primarily through cash generated
from operations, bank borrowings, shareholder contributions and private
financings. Since the Initial Public Offering in November 1996, the Company has
financed its operations with the proceeds of such offering and cash generated by
operations.
During 1996, the Company entered into a series of transactions in order
to fund the operations of the Subsidiaries and to prepare itself for the Initial
Public Offering. In March 1996, the Company raised $270,000 in a private
offering, pursuant to which the Company issued six 10% convertible promissory
notes (the "10% Notes"). Proceeds of the private placement were used to cover
costs related to the Company's acquisitions of the Subsidiaries and the Initial
Public Offering. The Company raised an additional $1,800,000 in another private
offering in April 1996, pursuant to which the Company issued several 12%
convertible promissory notes (the "12% Notes"). Proceeds received by the
Company, after deducting placement fees and other expenses, totaled $1,582,500.
An aggregate of $1,000,000 of the proceeds received from this private placement
was loaned to On Ramp in order to complete a transaction in which On Ramp
redeemed outstanding shares of its capital stock. The remaining proceeds
received from this private placement were used to provide working capital for On
Ramp and Internet One.
15
<PAGE>
In August 1996, the Company received net proceeds of $4,948,000 through
the issuance of 938,667 shares of Common Stock to Omnicom. Proceeds from this
transaction (the "Omnicom Transaction") were used by the Company to retire the
nonconvertible portion of the outstanding principal and accrued interest under
the 10% Notes and 12% Notes (aggregating $1,880,505), to repay certain other
debt and outstanding obligations, to fund the operations of the Subsidiaries and
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. In connection with the Initial Public Offering the Company issued
2,150,000 shares of Common Stock and received net proceeds of $11,973,000.
The Company had cash and cash equivalents of approximately $3,451,000
and $5,791,000 at June 30, 1997, and December 31, 1997, respectively. This
increase principally relates to the net cash provided by operations of
$4,171,000 which was partially offset by net cash used in both investing and
financing activities of $1,321,000 and $511,000, respectively. Working capital
decreased from $8,079,000 at June 30, 1997 to $7,419,000 at December 31, 1997
primarily as a result of an increase in pass-through cost related payables in
excess of the increase in pass-through related accounts receivables associated
with media advertising revenue.
Net cash provided by operating activities for the six months ended
December 31, 1997 of $4,171,000 resulted from net income of $534,000, increased
by non-cash charges for: (i) depreciation and amortization of $955,000
(including amortization of intangibles of $668,000), and (ii) consulting fees of
$38,000, absolute changes in the balances of accounts payable and accrued
expenses and prebilled media of $2,903,000 and $7,524,000, respectively, offset
by absolute changes in the balances of accounts receivables, unbilled
receivables, deferred revenue and other assets and liabilities of $6,224,000,
$22,000, $542,000 and $995,000, respectively. The increase in the balance of
prebilled media substantially represent pass-through costs billed to clients
associated with the operation of Fathom, which was acquired in May 1997 and is
related almost entirely to the increase in accounts receivable. Accounts
receivable greater than sixty (60) days old increased from $1,582,000 at June
30, 1997 to $2,964,000 at December 31, 1997. Such receivables primarily arose
from ongoing strategic marketing and branding assignments undertaken for certain
significant long-standing clients whom the Company believes to be credit-worthy.
These amounts were either collected subsequent to December 31, 1997 or the
Company believes them to be collectible in the near future. The Company believes
that its reserve for bad debts of approximately $624,000 is sufficient to adjust
the carrying amount of its receivables at December 31, 1997 to an amount which
approximates net realizable value.
Net cash used in investing activities for the six months ended December
31, 1997 of $1,321,000 resulted primarily from capital expenditures of
$1,040,000 to expand the Company's infrastructure, net cash paid in connection
with the merger with BBG of $744,000 offset, in part, by net sales of marketable
securities of $463,000.
Net cash used in financing activities for the period ended December 31,
1997 of $511,000 resulted from loan repayments in connection with the merger
with BBG of $548,000, and principal payments on long-term capital leases of
16
<PAGE>
$85,000 offset, in part, by proceeds from the issuance of Common Stock to those
employees who exercised their stock options during the six months ended December
31, 1997.
The Company is a party to employment agreements ranging in term from
one year to three years (exclusive of extensions) with several of its executive
officers pursuant to which the Company is obligated to pay such individuals up
to an aggregate of $2,200,000 per year.
Management of the Company anticipates that the Company will continue to
experience significant changes in its operating cost structure as the
Subsidiaries and newly acquired companies continue to be integrated, and
administration and control of the Company's future operations become more
centralized. Management believes that the Company's existing cash balances and
the cash generated from continuing operations will be sufficient to fund its
operations, the anticipated expenditures required for product development, its
organizational infrastructure (including additional personnel and upgraded
telecommunications and computer systems) and general corporate needs for the
next twelve (12) months. However, there can be no assurance that the Company
will not be required to seek additional sources of financing within the
foreseeable future. The failure to raise the funds necessary to finance the
Company's future cash requirements would adversely affect the Company's ability
to pursue its operational strategies.
In connection with the acquisition of On Ramp, the Company recorded
goodwill and other intangible assets in the aggregate amount of $2,410,000,
substantially all of which is being amortized using the straight-line method
over a period of two years. As a result, during the first fiscal quarter of 1997
and over the next several fiscal quarters, the Company has incurred and will
incur non-cash charges to operations aggregating for each full fiscal year
approximately $1,205,000.
In connection with the acquisition of the assets and operations of
Fathom, the Company recorded goodwill in the amount of $442,500, which is being
amortized using the straight-line method of accounting over a period of two (2)
years. As a result, during the three months ended September 30, 1997, the
Company incurred a non-cash charge to operations of approximately $55,000 and
will incur over the next eight (8) fiscal quarters non-cash charges to
operations aggregating approximately $55,000 per quarter.
In connection with the acquisition of BBG, the Company recorded
goodwill in the amount of $3,972,000, which is being amortized using the
straight-line method of accounting over a period of thirty (30) years. As a
result, during the six months ended December 31, 1997, the Company incurred a
non-cash charge to operations of approximately $22,000 and will incur over the
next one hundred and twenty (120) fiscal quarters non-cash charges to operations
aggregating approximately $33,000 per quarter. Additional consideration is
payable if BBG meets certain sales targets which would result in an increased
balance of goodwill and amortization related thereto.
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
17
<PAGE>
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 being
applied with respect to the issuance in subsequent periods of the shares of
Common Stock pursuant to exercise of the options under a certain consulting
agreement. See Note 5 to the Condensed Consolidated Financial Statements
included elsewhere herein.
18
<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
The Company held its annual meeting of stockholders on December 11,
1997 (the "Annual Meeting"). There were two (2) proposals submitted to a vote of
the stockholders at the Annual Meeting: (i) to elect seven (7) directors to
serve for a period of one year or until their successors have been duly elected
and qualified; and (ii) to approve the adoption of the THINK New Ideas, Inc.
Amended and Restated 1997 Stock Option Plan which provides for the issuance of
Qualified Incentive Options and Non-Qualified Stock Options (the "1997 Stock
Option Plan"). At the Annual Meeting:
(i) each of the following persons were elected to serve as directors
of the Company for a term of one (1) year: Scott Mednick, Ronald
Bloom, Adam Curry, Barry Wagner, Larry Kopald, Richard Char and
Marc Canter. Each of the foregoing received 5,704,210 votes cast
in favor of election, with 10,700 shares withheld for each
nominee; and
(ii)the stockholders approved the adoptions of the 1997 Stock Option
Plan. There were 4,458,081 votes cast in favor of this proposal,
with 31,800 votes against, 9,545 votes abstaining and 1,215,484
votes not voted.
No other matters were submitted to the stockholders for a vote.
19
<PAGE>
ITEM 5. OTHER INFORMATION AND SUBSEQUENT EVENTS
There has been no other information or subsequent events required to be
disclosed pursuant to this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. There are no exhibits incorporated herein by reference.
(b) REPORTS ON FORM 8-K. The Company filed a Current Report on Form 8-K during
the period ended December 31, 1997 relating to its acquisition of BBG on
November 18, 1997. The financial statements relating to the acquisition of
BBG were filed by amendment to the Form 8-K on January 20, 1998.
20
<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.
February 12, 1997 THINK New Ideas, Inc.
By: /s/ Scott A. Mednick
-------------------------------
Scott A. Mednick, Chief Executive
Officer
By: /s/ Melvin Epstein
--------------------------------
Melvin Epstein, Chief Financial
Officer
21
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<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
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<SECURITIES> 662,233
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