UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB/A
(Mark one)
(X) Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
--------------
( ) 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)
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 May 2, 1997
- ----- --------------------------
Common Stock, par value $.0001 per share 6,416,667
shares
Transitional Small Business Disclosure Format (check one) Yes No X
<PAGE>
THINK New Ideas, Inc.
INDEX
Part I - Financial Information
Page
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet as of March 31, 1997.............. 3
Condensed Consolidated Statements of Operations for
the three and nine month periods ended March 31, 1997 and 1996......... 4
Condensed Consolidated Statement of Shareholders' Equity for the nine
months ended March 31, 1997............................................ 5
Condensed Consolidated Statements of Cash Flows for the Nine months ended
March 31, 1997 and 1996................................................ 6
Notes to Condensed Consolidated Financial Statements................... 7
Item 2. Management's Discussion and Analysis or Plan ofOperation......... 10
Part II - Other Information
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...................................... 19
Item 6. Exhibits and Reports on Form 8-K....................... 19
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31,
1997
(Restated - Note 1)
ASSETS
Current assets:
Cash and cash equivalents $9,303,481
Accounts receivable, net of allowance for doubtful
accounts of $213,000 3,891,869
Unbilled receivables 1,312,112
Prepaid expenses and other assets 440,261
Deferred income taxes 201,000
-------
Total current assets 15,148,723
Property, plant and equipment, net 1,395,512
Software development costs 739,143
Goodwill, net of accumulated amortization of $810,000 1,348,500
Other assets 446,121
-------
$19,077,999
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $34,426
Accounts payable 1,969,561
Accrued expenses and other 800,375
Deferred revenue 97,245
------
Total current liabilities 2,901,607
Note payable to related party 515,760
-------
Total liabilities 3,417,367
---------
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; 6,416,667 shares issued 641
Additional paid in capital 18,444,686
Accumulated deficit (2,784,695)
---------
Total shareholders' equity 15,660,632
----------
$19,077,999
===========
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Restated - Note 1) (Restated - Note 1)
Revenues $4,211,334 $1,951,809 $12,254,066 $6,637,403
Operating expenses:
Direct salaries and related expenses 2,565,314 648,747 6,501,401 2,336,093
Other direct expenses 1,247,612 815,568 3,563,587 2,962,957
Selling, general and administrative expenses 1,736,569 352,177 3,695,205 1,269,367
Depreciation and amortization 385,452 37,071 1,059,920 146,823
Merger expenses -- 70,735 57,395 70,735
------- ------ ------ ------
Operating (loss)/profit (1,723,613) 27,511 (2,623,442) (148,572)
Interest income/(expense) and other net 63,092 (15,761) (27,877) (115,998)
----------- -------- -------- ---------
(Loss)/profit before provision for taxes (1,616,521) 11,750 (2,651,319) (264,570)
Provision for income taxes 40,000 36,279 28,061 124,726
----------- ---------- ----------- ----------
Net loss $(1,700,521) $(24,529) $(2,679,380) $(389,296)
============ ========= ============ ==========
Net loss per share $(0.30) $(0.01) $(0.63) $ (0.16)
======= ======= ======= ===========
Weighted average shares outstanding 5,591,667 2,449,592 4,265,463 2,449,592
========= ========= ========= =========
</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 TOTAL
PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996 2,894,673 $289 $1,334,630 $(105,315) 1,229,604
Issuance of common stock 938,667 94 4,947,968 - 4,948,062
Conversion of convertible debt 433,327 43 189,452 - 189,495
Issuance of common stock 2,150,000 215 11,972,636 - 11,972,851
Net loss for the period - - - (2,679,380) (2,679,380)
--------- --- ---------- ---------- ----------
Balance March 31, 1997 6,416,667 $641 18,444,686 $(2,784,695) $15,660,632
=== ==== ========= ==== ========== =========== ===========
</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>
NINE MONTHS ENDED MARCH 31,
1997 1996
(Restated - Note 1)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES: Net loss $ (2,679,380) $(389,296)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation 190,743 146,823
Amortization of intangibles and deferred financing costs 941,985 -
Deferred income taxes (12,000) -
Bad debt expense 81,664 -
Changes in assets and liabilities:
Accounts receivable (1,578,801) (606,046)
Unbilled receivables (1,015,209) 347,954
Accounts payable 725,504 702,779
Accrued expenses and other 5,084 433,362
Deferred revenue (355,714) -
Other assets and liabilities (528,644) (507,842)
-------------- ---------
Net cash provided by (used in) operating activities (4,224,768) 127,734
------------ --------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to software development costs (518,957) (126,218)
Purchases of property and equipment (887,224) (336,584)
-------------- -----------
Net cash used in investing activities (1,406,181) (462,802)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from insurance (repay) promissory notes (1,880,505) 270,000
Net proceeds from initial public offering of common stock 11,972,851 656
Due to shareholders (500,000) (51,644)
Increase in notes payable to related party - 268,500
Borrowings (repayment) on operating lines of credit (35,574) 52,500
Net proceeds from private placement 4,948,062 -
Distributions to shareholders - (133,377)
--------- --------
Net cash provided by financing activities 14,504,834 406,635
---------- -------
Net increase in cash and cash equivalents 8,873,885 71,567
Cash and cash equivalents, beginning of period 429,596 334,174
------- -------
Cash and cash equivalents, end of period $9,303,481 $405,741
========== ========
Supplemental Cash Flow Information:
Cash paid during the period for
: Income taxes $101,000 $70,000
Interest $125,244 -
</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 March 31, 1997 and the results of operations for the
three and nine month periods ending March 31, 1997 and 1996. The results of
operations for the three and nine month periods ended March 31, 1997 or any
other period 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.
The financial statements for the three and nine months ended March 31, 1997 have
been restated from those previously issued to increase other direct expenses by
$212,000, selling, general, and administrative expenses by $289,000, and the net
loss, and accounts payable, by $501,000 for costs incurred in the late stages of
the completion of contracts completed in the third quarter of fiscal 1997 which
previously were not identified and accrued. The Company identified these items
in the preparation of its financial statements for the year ended June 30, 1997,
and determined that the omission of their accrual in the originally issued March
31, 1997 financial statements resulted from failure of the production
departments to advise accounting and financial functions of certain late stage
expenses on a basis timely enough to allow their consideration when the
contracts were closed and billed to the client. In the first and second quarters
of fiscal 1998 the Company implemented certain new job budgeting and closing
systems and procedures to improve the control over both the amount of costs
incurred in performing client services and the timely identification and
consideration of such items. The restatement had the effect of increasing the
net loss per share by $.09 and $.12 for the three and nine months ended March
31, 1997, respectively.
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>
Scott Mednick & Associates, Inc.("Mednick")/October 1992 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 Corporation (Del); NetCube Corporation (NJ)/February 1978 195,182
</TABLE>
Mednick, Creative Resources and Goodman provide a wide variety of marketing-
related services. Internet One is principally a provider of new media services
and NetCube provides data mining software. The acquisition of each of these
companies has been accounted for using the pooling of interests 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 loaned $1,494,000 to On Ramp.
3. INITIAL PUBLIC OFFERING
In November 1996, the Company completed its initial public offering of 2,150,000
shares of Common Stock. Proceeds from the offering (after deduction of
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 deduction of transaction costs of approximately
$50,000) of $4,948,000. Additionally, certain of the Company's principal
shareholders transferred to the purchaser an additional 124,667 shares of the
Company's common stock held by them for no consideration. A portion of the
proceeds of the private placement was used to repay amounts outstanding under
certain convertible promissory notes described in Note 5 below.
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<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's receipt of $2,000,000 in proceeds from a debt or equity
financing. Pursuant to the terms of the notes an aggregate of $27,000 in
principal was converted by the holder thereof 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's receipt of $3,000,000 in proceeds from a debt or equity
financing. The notes were secured by the pledge of all of the then outstanding
shares of common stock of On Ramp. Pursuant to the terms of the notes, an
aggregate of $162,000 in principal was converted by the holders thereof into
216,660 shares of the Company's common stock.
During the nine months ended March 31, 1997, 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.
-9-
<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 all periods presented.
The results of operations of On Ramp have been included in the Company's
financial statements since June 30, 1996.
The Company generates 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 interface solutions that provide high-speed access
via the Internet to off-line databases. Historically, revenues from these
services 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.
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.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW (CONTINUED)
In connection with Website design and development, the Company typically enters
into 12 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 MARCH 31, 1997 AND 1996
REVENUES. Consolidated revenues increased to $4,211,334 for the three month
period ended March 31, 1997 from $1,951,809 for the three month period ended
March 31, 1996 (116%). Revenues for interactive services increased to
approximately $2,080,000 during the third quarter of fiscal 1997 from $784,000
during the third quarter of fiscal 1996 (165%), substantially due to the
accounting treatment associated with the acquisition of On Ramp. Revenues for
traditional strategic marketing operations increased to approximately $2,131,000
during the third quarter of 1997 from $1,168,000 during the third quarter of
fiscal 1996 (82%) primarily as a result of revenue generated by new clients and
increased revenue from additional services provided to existing clients.
OPERATING EXPENSES.
DIRECT SALARIES AND RELATED EXPENSES increased to $2,565,314 during the third
quarter of fiscal 1997 from $648,747 during the third quarter of fiscal 1996
(295%) partially as a result of the accounting treatment associated with the
acquisition of On Ramp, which accounted for an increase of approximately
$1,097,000. Also, the Company had a significant increase in the number of
employees employed by the Company to meet its higher level of operations and its
expected growth from existing outstanding project proposals.
OTHER DIRECT EXPENSES increased to $1,536,612 during the third quarter of fiscal
1997 from $815,568 during the third quarter of fiscal 1996 (88%) as a result of
the increase in revenues, as well as the accounting treatment associated with
the acquisition of On Ramp, which accounted for an increase of approximately
$384,000, partially offset by decreases primarily at NetCube which approximated
$164,000 due to the shift in business direction from consulting to product
development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased to $1,447,569 during the
third quarter of fiscal 1997 from $352,177 during the third quarter of fiscal
1996 (311%), primarily due to the accounting treatment associated with the
acquisition of On Ramp which accounted for an increase of approximately $576,000
and the formation and expansion of the Company's corporate infrastructure during
fiscal 1997.
-11-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (CONTINUED)
DEPRECIATION AND AMORTIZATION increased to $385,452 during the third quarter of
fiscal 1997 from $37,071 during the third quarter of fiscal 1996 (940%)
primarily due to the amortization of goodwill and other intangible assets
arising from the accounting treatment associated with the acquisition of On
Ramp.
INTEREST INCOME/EXPENSE AND OTHER NET. The $63,092 in net other income reflected
in the third quarter of fiscal 1997 compares favorably to the net other expense
of $15,761 reflected in the third quarter of fiscal 1996 primarily due to the
effect of the investment of the cash proceeds from the Company's initial public
offering.
PRE-TAX LOSS. The Company had a pre-tax loss of $1,616,521 in the third quarter
of fiscal 1997 compared to a pre-tax profit of $11,750 in the third quarter of
fiscal 1996. The loss in 1997 included non-cash charges of approximately
$385,000 for depreciation and amortization of fixed assets, goodwill and other
intangibles incurred in the acquisition of On Ramp (this related amortization
amounted to $295,000 in the quarter.) Also contributing to the third quarter
pre-tax loss of fiscal 1997 is the $319,000 loss for On Ramp. On Ramp's results
were not included in the pre-tax loss in the third quarter of fiscal 1996.
INCOME TAXES. The Company had an income tax expense of $40,000 in the third
quarter of fiscal 1997 compared to income tax expenses of $36,279 during the
third 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 a
consolidated Federal tax return beginning with the year ending June 30, 1997.
-12-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
REVENUES. Consolidated revenues increased to $12,254,066 for the nine month
period ended March 31, 1997 from $6,637,403 for the nine month period ended
March 31, 1996 (85%). Revenues for interactive services increased to
approximately $6,398,000 during the first nine months of fiscal 1997 from
approximately $1,938,000 during the first nine months of fiscal 1996 (230%)
substantially due to the accounting treatment associated with the acquisition of
On Ramp and the strength of corporate demand for Internet related services.
Revenues for traditional strategic marketing operations increased to
approximately $5,856,000 during the first nine months of 1997 from approximately
$4,699,000 during the first nine months of fiscal 1996 (25%) primarily as a
result of revenue generated by new clients and increased revenue from additional
services provided to existing clients.
OPERATING EXPENSES.
DIRECT SALARIES AND RELATED EXPENSES increased to $6,501,401 during the first
nine months of fiscal 1997 from $2,336,093 during the first nine months of
fiscal 1996 (178%) primarily as a result of the accounting treatment associated
with the acquisition of On Ramp, which accounted for an increase of
approximately $2,538,000. Also, the Company had a significant increase in the
number of employees employed by the Company to meet its higher level of
operations and its expected growth from existing outstanding project proposals.
OTHER DIRECT EXPENSES increased to $3,852,587 during the first nine months of
fiscal 1997 from $2,962,957 during the first nine months of fiscal 1996 (30%) as
a result of the increase is revenues, as well as the accounting treatment
associated with the acquisition of On Ramp, which accounted for an increase of
approximately $997,000, an increase at Mednick and Creative Resources totaling
approximately $478,000 due to costs related to increases in client projects,
partially offset by decreases totaling approximately $1,054,000 at Internet One
due to a low volume of hardware sales and NetCube due to the shift in business
direction from consulting to product development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased to $3,406,205 during the
first nine months of fiscal 1997 from $1,269,367 during the first nine months of
fiscal 1996 (168%) which is primarily due to the accounting treatment associated
with the acquisition of On Ramp which accounted for an increase of approximately
$1,426,000 and the formation and expansion of the Company's corporate
infrastructure during late fiscal 1996.
DEPRECIATION AND AMORTIZATION increased to $1,059,920 during the first nine
months of fiscal 1997 from $146,823 during the first nine months of fiscal 1996
(622%) primarily due to the amortization of goodwill and other intangible assets
arising from the accounting treatment associated with the acquisition of On
Ramp.
INTEREST INCOME/EXPENSE AND OTHER NET. The $27,877 of other net expense
reflected in the nine month period ending March 31, 1997 compares favorably
to the $115,998 of other
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1997 AND 1996 (CONTINUED)
net expense reflected in the nine month period ending March 31, 1996 primarily
due to the effect of the investment of the cash proceeds from the Company's
initial public offering.
PRE-TAX LOSS. The Company had a pre-tax loss of $2,651,319 in the first nine
months of fiscal 1997 compared to a pre-tax loss of $264,570 in the first nine
months of fiscal 1996. The loss in 1997 includes non-cash charges of
approximately $1,060,000 for depreciation and amortization, primarily of the
goodwill and other intangibles incurred in the acquisition of On Ramp (this
related amortization amounted to $885,000 in the nine month period.) Also
included in this pre-tax loss are losses from Netcube of approximately $908,000
and other costs incurred in the Company's software development operation of
approximately $205,000 compared with pre-tax losses of NetCube of approximately
$822,000 in the first nine months of fiscal 1996. 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 de- emphasize hourly consulting
services, resulting in a significant decrease in revenue effect on 1997
revenues.
INCOME TAXES. The Company had an income tax expense of $28,061 in the first nine
months of fiscal 1997 compared to an income tax expense of $124,726 during the
same period 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 a
consolidated federal tax return beginning with the year ending June 30, 1997.
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 financing.
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.
-14-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 non-convertible 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. In November 1996, the Company completed its initial 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.
At March 31, 1997, the Company had cash and cash equivalents of approximately
$9,303,000 and working capital of approximately $12,247,000, primarily as a
result of effecting the following transactions during the nine months ended
March 31, 1997: (i) the sale of 938,667 shares of common stock and the receipt
of net proceeds therefrom of $4,948,000, (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 on 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.
During the nine month period ended March 31, 1997, the Company increased its
cash and cash equivalents position by approximately $8,874,000 to approximately
$9,303,000.
-15-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
This resulted from cash used in operating and investing activities of
approximately $4,225,000 and approximately $1,406,000, respectively, offset by
cash provided by financing activities of $14,505,000.
The cash used in operating activities of approximately $4,225,000 principally
resulted from a loss from ongoing operations of approximately $2,178,000, offset
by non-cash charges of approximately $885,000 for amortization of the goodwill
and other intangibles incurred in the acquisition of On Ramp and depreciation
and amortization charges and other non-cash charges of approximately $248,000,
which total approximately $1,133,000. Additionally contributing to the use of
cash was a combined increase in accounts receivable and unbilled receivables,
and a decrease in deferred revenue of approximately $2,594,000, and
approximately $356,000, respectively. As well as the net use of cash for net
other assets and liabilities of approximately $460,000. Offsetting these uses
was a net increase in accounts payable and accrued expenses which provided cash
of approximately $731,000.
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 as
permitted under the contracts with the client. 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 $1,003,000 at March 31, 1997. The increase in such receivables is
primarily due to certain receivables arising from ongoing strategic marketing
and branding assignments undertaken for certain significant long-standing
customers which the Company believes are credit-worthy. Such amounts were either
collected subsequent to March 31, 1997 or the Company believes them to be
collectible. The Company believes the allowance for doubtful accounts of
approximately $213,000 at March 31, 1997 is sufficient to adjust the carrying
amount of its receivables at March 31, 1997 to an amount which approximates net
realizable value.
The cash used in investing activities of approximately $1,406,000 resulted from
increased software development costs of approximately $519,000 and additions to
leasehold improvements and other purchases of computer related hardware and
facilities of approximately $887,000.
The cash generated by financing activities of $14,505,000 is principally a
result of the net proceeds of the Company's initial public offering undertaken
in November 1996 of $11,973,000 and the issuance in August 1996 of 938,667
shares of common stock to
-16-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Omnicom Group Inc. for $4,948,000, offset in part by the repayment of certain
promissory notes, lines of credit for cash and payments to shareholders in the
amount of $1,881,000, $36,000, and $500,000 respectively.
The Company has entered into employment agreements ranging 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 $1,365,000 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 nine months ended March 31,
1997, a non-cash charge to operations of approximately $885,000.
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 non-cash
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.
-17-
<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.
-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
There have been no matters submitted to a vote of security holders during the
period ended March 31, 1997.
ITEM 5. OTHER INFORMATION AND SUBSEQUENT EVENTS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. There are no exhibits incorporated herein by reference; (b)
REPORTS on Form 8-K. There were no Current Reports on Form 8-K filed
by the Company during the period ended March 31, 1997.
-19-
<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. May 4, 1998
By: /S/ Scott A. Mednick
----------------------------------
Scott A. Mednick
Chief Executive Officer
By: /S/ Melvin Epstein
----------------------------------
Melvin Epstein
Chief Financial Officer
-20-
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<PERIOD-START> JUL-01-1996
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