UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark one)
(X) Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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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) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 10, 1998
- ----- --------------------------------
Common Stock, par value $.0001 per share 8,442,906 shares
Transitional Small Business Disclosure Format (check one) Yes No X
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THINK NEW IDEAS, INC.
FORM 10-QSB
INDEX
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998 (Unaudited)
and June 30, 1998.................................................................................3
Condensed Consolidated Statements of Operations for the three months ended
and 1997 September 30, 1998 (Unaudited)...........................................................4
Condensed Consolidated Statement of Shareholders' Equity as of
September 30, 1998 (Unaudited) ...................................................................5
Condensed Consolidated Statements of Cash Flows for the three months ended
September 30, 1998 and 1997 (Unaudited) ..........................................................6
Notes to Condensed Consolidated Financial Statements (Unaudited)..................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................14
Item 2. Changes in Securities........................................................................14
Item 3. Defaults Upon Senior Securities..............................................................14
Item 4. Submission of Matters to a Vote of Security Holders..........................................15
Item 5. Other Information and Subsequent Events......................................................15
Item 6. Exhibits and Reports on Form 8-K.............................................................15
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2
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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<CAPTION>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
-------------- -----------
SEPTEMBER 30, JUNE 30,
1998 1998
-------------- -----------
(unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 4,243,752 $ 7,653,576
Accounts receivable, net of allowance for doubtful
accounts of $987,535 and $1,019,475 14,862,006 14,431,288
Unbilled receivables 3,046,944 3,455,181
Prepaid expenses and other assets 1,133,669 715,574
------------ ------------
Total current assets 23,286,371 26,255,619
Property, plant and equipment, net 5,532,747 5,682,059
Software development costs 1,772,365 1,858,370
Goodwill, net of accumulated amortization of
$2,879,761 and $2,534,207 17,089,619 17,344,798
Other assets 1,592,211 1,112,225
============ ============
Total assets $ 49,273,313 $ 52,253,071
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,878,416 $ 9,912,683
Accrued expenses 1,360,003 3,414,977
Accrued restructuring costs 100,242 307,482
Media payable 6,442,231 3,407,266
Income taxes payable 237,154 566,578
Bank payable 1,827,308 491,915
Due to related party 612,867 591,946
Current portion of obligations under capital leases 578,118 693,619
------------ ------------
Total current liabilities 18,036,339 19,386,466
Obligations under capital leases 41,328 260,645
Other long-term liability 82,703 102,548
------------ ------------
Total liabilities 18,160,370 19,749,659
------------ ------------
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; 8,441,697 and 8,433,656 shares issued
and outstanding 844 843
Additional paid-in capital 67,778,213 67,731,946
Accumulated deficit (36,664,892) (35,229,377)
Accumulated other comprehensive income (1,222) --
------------ ------------
Total shareholders' equity 31,112,943 32,503,412
------------ ------------
Total liabilities and shareholders' equity $ 49,273,313 $ 52,253,071
============ ============
</TABLE>
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)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
-------------- --------------
Revenues $ 11,369,742 $ 6,956,480
Operating
expenses:
Direct salaries and related expenses 4,195,050 3,440,264
Other direct expenses 2,997,876 1,565,687
Selling, general and administrative
expenses 4,606,665 1,456,322
Depreciation and amortization 1,006,984 427,595
------------ ------------
Operating profit/(loss) (1,436,833) 66,612
Interest income/(expense) and other net 21,318 (1,197)
------------ ------------
Income/(loss) before provision for taxes (1,415,515) 65,415
Provision for income taxes 20,000 4,580
============ ============
Net (loss) income $ (1,435,515) $ 60,835
============ ============
Net income (loss) per share - basic $ (0.17) $ 0.01
Weighted average shares outstanding 8,205,732 6,151,789
Net income per share - diluted $-- $ 0.01
Weighted average shares outstanding -- 7,257,489
See accompanying notes to condensed consolidated financial statements.
4
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
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Accumulated
Common Stock Additional Other
------------------------- Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Income Total
----------- ----------- ---------- ------------ ------------- -----------
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Balance at June 30, 1998 8,433,656 $ 843 $67,731,946 $(35,229,377) $ -- $32,503,412
-----------
Comprehensive income
Net loss -- -- -- (1,435,515) -- (1,435,515)
Foreign currency translation
adjustments -- -- -- -- (1,222) (1,222)
----------
Comprehensive income -- -- -- -- -- (1,436,737)
Issuance of common stock on exercise
of stock options 8,041 1 46,267 -- -- 46,268
=========== =========== =========== ============ ============== ===========
Balance at September 30, 1998 8,441,697 $ 844 $67,778,213 $(36,664,892) $ (1,222) $31,112,943
=========== =========== =========== ============ ============== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1998 1997
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CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,435,515) $ 60,835
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 478,489 84,364
Amortization of intangibles and deferred financing costs 528,495 343,231
Consulting fees -- 38,000
Changes in assets and liabilities:
Accounts receivable, net (864,920) (6,414,424)
Unbilled receivables 408,237 (1,945,045)
Accounts payable and accrued expenses (5,089,241) (407,932)
Accrued restructuring (207,240) --
Media payable 3,034,965 10,935,583
Other assets and liabilities (846,496) (1,273,438)
------------ ------------
Net cash (used in) provided by operating activities (3,993,226) 1,421,174
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of marketable securities -- (3,262,464)
Sales of marketable securities -- 4,221,140
Purchases of property and equipment (329,177) (214,685)
Other (155,185) --
------------ ------------
Net cash (used in) provided by investing activities (484,362) 743,991
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 46,268 --
Net borrowings on short term debt 1,335,393 --
Proceeds from related party 20,921 --
Principal payments on capital leases (334,818) (30,546)
------------ ------------
Net cash provided by (used in) financing activities 1,067,764 (30,546)
------------ ------------
Net (decrease) increase in cash and cash equivalents (3,409,824) 2,134,619
Cash and cash equivalents, beginning of period 7,653,576 3,451,347
------------ ------------
Cash and cash equivalents, end of period $ 4,243,752 $ 5,585,966
============ ============
Supplemental cash flow information:
Cash paid during the period
Income taxes $ 3,077 $ 9,880
Interest 26,588 4,917
Non-cash investing and financing activities:
Issuance of common stock to settle long-term liability -- 206,250
Receipt of marketable securities for payment of accounts
receivable $ 434,202 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Notes to Consolidated Financial
Statements contained in the Company's Form 10-KSB for the fiscal year ended June
30, 1998, as filed with the Securities and Exchange Commission (the "SEC") in
September 1998. Certain items included in these statements are based on
management's estimates. In the opinion of management, all material adjustments,
which are of a normal recurring nature necessary for a fair presentation of the
results for the interim period, have been included. The results for the three
months ended September 30, 1998, are not necessarily indicative of the results
expected for the year.
PRO FORMA FINANCIAL DATA
The following unaudited pro forma information for the three months ended
September 30, 1997 is presented as if the Company had completed the acquisitions
of BBG New Media, Inc. ("BBG"), Herring/Newman, Inc. ("Herring/Newman"),
Interweb, Inc. ("Interweb"), UbiCube Group, Inc. ("UbiCube") as of July 1, 1997.
These acquisitions were completed in the Company's fiscal year 1998.
Revenue $ 10,852,000
Net Loss (49,000)
Net Loss per share - basic (0.01)
Weighted average shares
outstanding - basic 6,151,789
The pro forma information for the three months ended September 30, 1997
above is not necessarily indicative of the results of operations that would have
occurred had the transactions actually been made as of July 1, 1997.
EARNINGS PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share" requires the presentation of basic earnings per share and diluted
earnings per share. Basic earnings per share is computed as net earnings divided
by the weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflect the potential dilution that could occur from
common shares issuable through stock options and other convertible securities.
Shares of common stock held in escrow related to the Company's acquisitions are
not included in the calculation of weighted-average shares outstanding for the
periods presented, as the conditions required to release escrow shares for these
acquisitions were not fulfilled at the end of the applicable periods presented.
A reconciliation of weighted-average common shares outstanding to
weighted-average common shares outstanding assuming dilution follows:
7
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
September 30,
---------------------------
1998 1997
----------- -------------
Weighted-average common shares
outstanding 8,205,732 6,151,789
Incremental common shares issuable -- 1,105,700
Weighted-average common shares
assuming dilution 8,205,732 7,257,489
Incremental common shares were not included in the computation for the
quarter ended September 30, 1998 since their inclusion in periods when the
Company reported a net loss would be anti-dilutive.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130 "Reporting Comprehensive Income," in the
first fiscal quarter of 1998. SFAS No. 130 establishes standards for reporting
and displaying comprehensive income and its components in the financial
statements. Comprehensive income is a more inclusive financial reporting
methodology that includes the disclosure of certain financial information that
has not been recognized in the calculation of net income or loss, such as
foreign currency translations and changes which are recorded directly to
shareholders' equity. Accumulated other comprehensive loss was comprised of
foreign currency translation adjustments of $1,222 at September 30, 1998 as a
result of the Company's United Kingdom operations in the United Kingdom, which
were acquired in the fourth quarter 1998 acquisition of UbiCube.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
presentation adopted in the current period.
LEGAL PROCEEDINGS
On September 25, 1998, a shareholder of the Company filed a putative class
action suit against the Company and current and former officers of the Company.
The suit, filed in the United States District Court for the Southern District of
New York, alleges that the Company and certain of its current and former
officers and directors disseminated materially false and misleading information
about the Company's financial position and results of operations through certain
public statements and in certain documents filed by the Company with the SEC.
Plaintiff alleges that these statements and documents caused the market price of
the Company's common stock to be artificially inflated. Plaintiff further
alleges that he purchased his shares of common stock at such artificially
inflated prices and suffered damages as a result.
On October 16, 1998, and October 19, 1998, two additional putative class
action suits were filed by shareholders of the Company. These subsequent suits
make similar allegations to those made in the first suit. The relief sought in
each of the three lawsuits is unspecified. The Company is aware that at least
four additional putative class action complaints making what appear to be
similar allegations against the Company have been filed in the same court,
although the Company has not yet been served with any complaints other than the
three identified above. See Part II: "Item 1. Legal Proceedings."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which is effective for years beginning
after December 15, 1997. SFAS No. 131 establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company operates in one business
segment that provides marketing and communication services that include
traditional services, such as advertising, graphic design and development of
internet web sites and related tools.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
8
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
133 must first be applied in the first quarter of fiscal years that begin after
June 15, 1999, and in general, requires that entities recognize all derivative
financial instruments as assets or liabilities, measured at fair value, and
include in earnings the changes in the fair value of such assets and
liabilities. SFAS No. 133 also provides that changes in the fair value of assets
or liabilities being hedged with recognized derivative instruments be recognized
and included in earnings. The Company does not utilize derivative instruments,
either for hedging or other purposes, and therefore anticipates that the
adoption of the requirements of SFAS No. 133 will not have a material affect on
its consolidated financial statements.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
Consolidated revenues for the three months ended September 30, 1998
increased sixty-three percent (63%) or $4,414,000 to $11,370,000 as compared
with $6,956,000 for the three months ended September 30, 1997. This increase
reflects the Company's strategic plan to grow both through acquisitions and
internally. Of the overall increase in revenues, approximately $4,300,000 is the
result of the Company's fiscal 1998 acquisitions of BBG, Herring/Newman,
Interweb and UbiCube (the "1998 Acquisitions") which were completed in the
second (BBG) and fourth quarters (Herring/Newman, Interweb and UbiCube) of
fiscal 1998. The remaining increase represents growth in the Company's existing
interactive marketing and communications services, which was offset by a
$555,000 loss of revenues resulting from the Company's fourth quarter fiscal
1998 closure of its Atlanta graphic design department. This closure was
reflected in the restructuring charge recorded in fiscal 1998.
OPERATING RESULTS
The operating loss for the three months ended September 30, 1998 of
$1,437,000 reflects a $1,370,000 change from an operating profit of $67,000 in
the corresponding prior year period. The decrease in operating results is
primarily due to the $4,414,000 increase in revenue being more than offset by
increases in direct expenses and selling, general, and administrative expenses
of $5,337,000 for the three months ended September 30, 1998.
Although the Company's revenues increased by sixty-three percent (63%) in
the quarter ended September 30, 1998, revenues were below management's
expectations as a result of which the increase in expenses, although at budgeted
levels, was not offset and caused the Company to incur an operating loss. The
Company's operating expenses increased both in anticipation of new assignments
and higher revenues in the current quarter and to support the Company's future
growth. Revenues for the quarter were below projected levels due mainly to
decisions by clients to delay new projects or to postpone decisions as to
undertaking new projects, which the Company believes were in reaction to the
economic uncertainties in the quarter ended September 30, 1998.
Direct salaries and related expenses consist primarily of wages and
associated payroll costs and benefits for permanent and temporary employees.
Direct salaries and related expenses increased $755,000 or twenty-two percent
(22%) to $4,195,000 in the three months ended September 30, 1998 from
$3,440,000, in the corresponding prior year period. Of the overall increase in
direct salaries and related expenses, the 1998 Acquisitions accounted for
approximately $1,939,000. Excluding the effect of these acquisitions, there was
a decrease of $1,184,000 over the same period in 1997. The Company's disposal of
its traditional graphic design departments in fiscal 1998 accounted for
approximately $230,000 of this reduction. The remaining decrease of $954,000 is
due to better utilization of multi-skilled employees and higher profit margin
projects in the three months ended September 30, 1998 compared to the same
period in 1997. This is evidenced by the decline in direct salaries and related
10
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expenses as a percentage of revenues from forty-nine percent (49%) for the three
months ended September 30, 1997 to thirty-seven percent (37%) for the three
months ended September 30, 1998.
Other direct expenses consist of contract labor, travel and production
expenses associated with providing services to clients. Other direct expenses
increased $1,432,000 to $2,998,000 for the three months ended September 30, 1998
from $1,566,000 for the same period in 1997. This increase is due to the
inclusion of the operations of the 1998 Acquisitions as well as
production-related costs associated with the Company's higher levels of
revenues.
Selling, general and administration expenses consist of marketing
expenses, technology costs (hardware and software purchases and leasing) and
telecommunications costs for Internet access. Selling, general and
administration expenses also include corporate expenses such as insurance,
personnel costs for finance and administration, accounting and legal fees,
management information systems, and employee benefits. Selling, general and
administration expenses increased by $3,151,000 to $4,607,000 for the three
months ended September 30, 1998 from $1,456,000 for the three months ended
September 30, 1997. Of this increase, $1,821,000 is due to the inclusion of the
1998 Acquisitions. The remaining net increase of $1,330,000 reflects increases
in salary expenses for additional management at the executive level and
increased financial and administrative personnel at the corporate level to
support the Company's growth. In addition, there was increased technology
spending required to support the Company's infrastructure and the growing
workforce.
INCOME TAXES
The effective tax rate for 1998 on income before income taxes is lower
than the United States federal statutory rate of thirty-four percent (34%) as a
result of the Company's net operating loss carryforwards. The Company did not
record an income tax benefit in the three months ended September 30, 1998
because the realization of available net operating loss carryforwards was not
assured. The Company recorded $20,000 of income tax expense for the three months
ended September 30, 1998 relating to state and local taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities of $3,993,000 for the three months
ended September 30, 1998 reflects the net loss of $1,436,000 in the period
combined principally with a decrease in accounts payable and accrued expenses of
$5,089,000, offset in part, by an increase in media payable of $3,035,000. The
decrease in accounts payable and accrued expenses at September 30, 1998, which
was funded with the cash on hand at June 30, 1998, is the result of the timing
of vendor payments. The level of media payables will vary with the volume and
timing of client media advertising expenditures, and the increase at September
30, 1998 reflects increased media placements for clients. Amortization expense
related to goodwill for the three months ended September 30, 1998 was
approximately $345,000. Of this expense, $290,000 is related to the 1998
Acquisitions. Accrued restructuring costs represent the charges recorded in
fiscal 1998 related to the Company's disposition of its traditional graphic
design departments. The reduction of the accrued restructuring charge reflects
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the payment of certain severance and other costs included in the fiscal 1998
accrual, and the adjustment of $80,000 reflecting the cancellation of an
equipment lease. The Company financed the negative operating cash flow for the
first quarter of fiscal 1998 through the use of cash on hand at June 30, 1998.
Additionally, the Company borrowed $1,564,000 under its line of credit with Bank
of New York to allow it to maintain adequate cash reserves, which totaled $4.2
million at September 30, 1998. At September 30, 1998, the Company had $3,436,000
available for borrowing under its line of credit.
Net cash provided by operating activities for the three months ended
September 30, 1997 of $1,421,000 reflects net income of $61,000 which includes
non cash charges of $428,000 for depreciation and amortization, and $38,000 for
consulting fees. Media payables increased $10,936,000, however, this increase
was offset by the increases in accounts receivable and unbilled receivables of
$6,414,000 and $1,945,000, respectively, and an increase in accounts payable and
accrued expenses of $408,000. The increase in unbilled receivables at September
30, 1997 is principally due to specific Website development projects undertaken
by the Company for which significant work has been performed in advance of the
dates billings are permitted under the applicable contracts. Accounts receivable
increased primarily due to pass-through media costs billed to clients of Fathom
Advertising, which was acquired in May 1997, and increased the volume of work.
Net cash used in investing activities totaled $484,000 for the three
months ended September 30, 1998 as compared with cash provided by investing
activities of $744,000 in the corresponding prior year period. Net cash used in
investing activities for the three months ended September 30, 1998 is the result
of additions to property and equipment and software development costs of
$394,000. Additions to software development costs of $65,000 are included as
other investing activities. Cash provided by investing activities for the three
months ended September 30, 1997 resulted primarily from net sales of marketable
equity securities of $959,000, offset in part by capital expenditures of
$215,000.
Net cash provided by financing activities was $1,068,000 for the three
months ended September 30, 1998 compared with cash used in financing activities
of $31,000 for the corresponding prior year period ended September 30, 1997.
Cash provided by financing activities for the three months ended September 30,
1998 relates primarily to the increase of $1,300,000 in borrowings on short term
debt which was used to finance capital expenditures and operating activities,
offset slightly by payments on capital leases. Net cash used in financing
activities for the three months ended September 30, 1997 of $31,000 resulted
from principal payments on long-term capital leases.
The Company believes that cash generated from its operations in 1999 will
be sufficient to fund its operations, pay required debt and capital lease
obligations, and continue the Company's strategy growth through acquisitions.
However, there can be no assurance that such cash requirements can be funded
totally from operations, and in particular, the cash required for acquisitions
that cannot be structured solely with common stock or deferred payments. The
Company may be required to seek additional sources of capital to facilitate
transactions that require significant cash payments. There can be no assurance
12
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that such additional capital would be available when needed, and the inability
to obtain such financing could adversely affect the Company's pursuit of its
strategies.
IMPACT OF YEAR 2000
The Year 2000 issue is a result of computer programs being written using
two digits, rather than four, to define the applicable year. Accordingly, any of
the Company's computer programs that have date sensitive software may cause
system failures or miscalculations if data entry of "00" is recognized as the
year 1900 rather than 2000. The Company is addressing this risk to the
availability and integrity of its financial systems. The Company has established
processes for evaluating and managing the risks and costs associated with this
problem. The Company's assessment of its systems will be completed during fiscal
1999. Additionally, the Company has provided its clients and vendors with the
tools needed to perform their Year 2000 compliance initiatives. Due to the
Company having state of the art computer systems, no hardware upgrade will be
required. The Company's primary focus is the state of readiness of the Internet
infrastructure and is working with the Internet Engineering Task force ("IETF"),
of which the Company is a member, Cisco Systems and Worldcom to ensure
mitigation of risk with redundant and Year 2000 compliant infrastructure.
Additionally, the Company is working with and seeking Year 2000 compliance
statements from its software vendors, such as Microsoft, Sun Microsystems and
Apple. The Company estimates the total direct amount to remediate the Year 2000
issue to be immaterial to the Company's results of operations or financial
condition. All costs will be expensed as incurred, unless new software is
purchased which will be capitalized.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of the federal
securities laws. All statements of historical facts, which address activities,
events or developments that the Company expects or anticipates will or may occur
in the future, including such things as expansion, strategic plans, growth of
the Company's business and operations, Year 2000 related actions, and other such
matters are forward-looking statements. The forward-looking statements are based
on many assumptions and factors including effects of currency fluctuations,
consumer preferences and economic conditions worldwide, and the ability of the
Company to implement, in a timely manner, the programs and actions related to
the Year 2000 issue. Any changes in such assumptions or factors could produce
significantly different results.
13
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PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 25, 1998, Michael R. Farrell, a shareholder of the Company,
filed a putative class action suit, styled Farrell v. Think New Ideas, Inc.,
Scott Mednick, Melvin Epstein and Ronald Bloom, No. 98 Civ. 6809, against the
Company, Ronald Bloom and Melvin Epstein (both officers of the Company) and
Scott Mednick (a former officer of the Company). The suit was filed in the
United States District Court for the Southern District of New York on behalf of
all persons who purchased or otherwise acquired shares of the Company's common
stock in the class period from November 14, 1997 through September 21, 1998. The
complaint alleges that the Company and certain of its current and former
officers and directors disseminated materially false and misleading information
about the Company's financial position and results of operations through certain
public statements and in certain documents filed by the Company with the SEC.
Plaintiff alleges that these statements and documents caused the market price of
the Company's common stock to be artificially inflated. Plaintiff further
alleges that he purchased his shares of common stock at such artificially
inflated prices and suffered damages as a result.
Subsequently, on October 16, 1998, and October 19, 1998, two additional
putative class action suits, styled Saint Ours v. Think New Ideas, Inc., et.
al., No. 98 Civ. 7306; and Henzel v. Think New Ideas, Inc., et. al., No. 98 Civ.
7362, respectively, were filed by shareholders of the Company. These subsequent
suits, which have substantially similar class periods (the class period in
Henzel v. Think New Ideas, Inc., et. al. is from November 5, 1998 through
September 21, 1998), make similar allegations to those made in Farrell v. Think
New Ideas, Inc., et. al. with only minor differences. The relief sought in each
of the three lawsuits is unspecified, but includes pleas for compensatory
damages and interest, punitive damages (the plaintiff in Henzel v. Think New
Ideas, Inc., et. al. has not sought punitive damages), reasonable costs and
expenses associated with the action (including attorneys' fees and experts'
fees) and such other relief as the court may deem proper.
Management believes that the Company has meritorious defenses to these
actions and intends to contest them vigorously. Although there can be no
assurance as to the outcome of these matters, unfavorable resolution could have
a material adverse effect on the results of operations and/or financial
condition of the Company in the future.
The Company is aware that at least four additional putative class action
complaints making what appear to be similar allegations against the Company have
been filed in the same court, although the Company has not yet been served with
any complaints other than the three identified in the preceding paragraphs.
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.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of security holders during
the period ended September 30, 1998.
ITEM 5. OTHER INFORMATION AND SUBSEQUENT EVENTS
There is no other information or subsequent events to report at September
30, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K. The Company filed a current report on Form 8-K during
the period ended September 30, 1998 relating to the acquisition of UbiCube
Group, Inc. on June 29, 1998. Financial statements relating to the
acquisition of UbiCube Group, Inc. were filed by amendment to the Form 8-K
on September 14, 1998. In addition, Financial Statements relating to the
acquisition of Interweb, Inc. were filed by the Company by amendment to the
Form 8-K relating to the acquisition on August 14, 1998.
15
<PAGE>
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, as
amended, the Issuer has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
November 14, 1998 THINK New Ideas, Inc.
By: /s/ Melvin Epstein
---------------------------------------
Melvin Epstein, Chief Financial Officer
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS SEPTEMBER 30, 1998 AND
THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 000's
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
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