SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-21775
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THINK NEW IDEAS, INC.
(Name of small business issuer in its charter)
DELAWARE 95-4578104
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
45 WEST 36TH STREET, 12TH FLOOR, NEW YORK, NEW YORK 10018 (212) 629-6800
(Address and telephone number of principal executive offices)
-------------------------------
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, $0.0001 par value.
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve (12) months (or for such
period that the Registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past ninety (90) days.
Yes /x/ No / /
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /
The Registrant's revenues for the fiscal year ended June 30, 1997 totaled
$17,436,847.
As of September 26, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant (assuming for this purpose that only directors
and officers of the Registrant are affiliates of the Registrant), based on the
average of the closing bid and asked prices on that date, was approximately
$24,607,482.
As of September 26, 1997, there were 6,611,667 shares of Common Stock
outstanding.
Documents incorporated by reference: Certain exhibits hereto have been
specifically incorporated by reference herein in Item 13 under Part III hereof.
Transitional Small Business Disclosure Format: Yes / / No /x/
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INDEX TO FORM 10-KSB
OF
THINK NEW IDEAS, INC.
PAGE
PART I
ITEM 1. DESCRIPTION OF BUSINESS..............................................2
ITEM 2. DESCRIPTION OF PROPERTY.............................................12
ITEM 3. LEGAL PROCEEDINGS...................................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................14
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS..................................F-1
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES...........................................24
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF
THE EXCHANGE ACT....................................................24
ITEM 10. EXECUTIVE COMPENSATION..............................................28
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..........................................................33
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................35
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K....................................37
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The Business section and other parts hereof contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the sections entitled "Business-Factors Affecting
Operating Results and Market Price of Stock" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CORPORATE OVERVIEW
THINK New Ideas, Inc., a Delaware corporation (the "Company"), was
incorporated pursuant to the laws of the State of Delaware in January 1996 for
the purpose of creating a corporate structure to facilitate the combination,
operation, and integration of specialized businesses operating in the areas of
advertising, marketing, Internet and intranet services and data management. On
June 30, 1996, the Company completed the acquisition of all of the outstanding
shares of common stock of the following entities: Internet One, Inc., a Colorado
corporation ("Internet One"), Creative Resources, Inc., a Georgia corporation
("Creative Resources"); Scott A. Mednick & Associates, Inc., a California
corporation ("The Mednick Group"); The Goodman Group, Inc., a New York
corporation ("Goodman Group"); On Ramp, Inc., a New York corporation ("On
Ramp"); NetCube Corporation, a Delaware corporation and NetCube Corporation, a
New Jersey corporation (collectively, "NetCube"), (collectively referred to as
the "Subsidiaries") in exchange for an aggregate of 723,167 shares of the
Company's common stock (the "Common Stock"). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
In August 1996, the Company entered into a strategic relationship with
Omnicom Group Inc., a publicly held company ("Omnicom"). Omnicom is the third
largest marketing and advertising company in the world. Pursuant to the
Company's agreement with Omnicom (the "Omnicom Agreement"), the Company received
net proceeds of $4,948,000 through the issuance of 938,667 shares of Common
Stock to Omnicom. In November 1996, four principal stockholders of the Company
transferred an aggregate of 124,667 shares of Common Stock to Omnicom for no
cash consideration (the "Omnicom Transaction"). Since June 1996, the Company and
Omnicom have engaged in joint marketing of their services to several Omnicom
clients and the Company believes that the relationship is providing access to a
substantial additional client base.
In November 1996, the Company completed its initial public offering
(the "Initial Public Offering") pursuant to which the Company issued 2,150,000
shares of Common Stock. See "Management's Discussion and Analysis of Financial
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Condition and Results of Operations - Liquidity and Capital Resources." In
connection with the Initial Public Offering, the Company effected two reverse
stock splits; accordingly, all share and per share data reflects the effects of
such splits. See "Note 7 to the Company's Consolidated Financial Statements."
Pursuant to the terms of a certain Asset Acquisition and Forbearance
Agreement dated as of May 31, 1997 (the "Ketchum Agreement"), the Company
acquired certain assets and operations of Fathom Advertising ("Fathom"), a full
service advertising agency, from Ketchum Communications, Inc. ("Ketchum"), a
wholly-owned subsidiary of Omnicom in exchange for the issuance of an aggregate
of 120,000 shares of Common Stock. The Company's acquisition of certain assets
and operations of Fathom was accounted for using the purchase method of
accounting. Accordingly, the results of operations of Fathom have been included
in the Company's Consolidated Financial Statements since June 1, 1997. Fathom's
single largest client is Oracle Corporation, a Delaware corporation ("Oracle"),
which accounts for virtually all of its revenue. Larry Kopald, the individual
who was responsible for the Oracle account while at Fathom, joined the Company
in connection with its acquisition of Fathom. See "Management" and "Executive
Compensation."
In June 1997, the Company made the decision to restructure its
operations in Boulder, Colorado and Edgewater, New Jersey. These operations had
been conducted through Internet One and NetCube, respectively. Internet One had
become a production facility for high level technology client services, but with
limited sales and marketing efforts. The Company determined it could effectively
consolidate the client relationships of its Boulder office into its New York and
Los Angeles facilities with minimal impact, and therefore, the facility was
closed and all of the employees of Internet One were terminated. NetCube had
developed proprietary data mining and analysis software for large data base and
data warehousing applications. The Company determined that the marketing of
"shrink-wrapped" software was not its core competency and would both confuse the
Company's focus and involve too great an investment for the anticipated return.
The Company has hired several key developers from NetCube for its New York
interactive group, ceasing the ongoing marketing and helpdesk development at its
New Jersey facility. This has resulted in the termination of the remaining
employees of NetCube. The Company is currently discussing the sale of the
remaining assets of NetCube, primarily the software code, with several different
companies. Total estimated costs associated with the above in the amount of
approximately $1,732,000 have been included in the Company's Consolidated
Financial Statements for the fiscal year ended June 30, 1997. See the
Consolidated Financial Statements of the Company and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
BUSINESS
The Company's operations are conducted through several sectors of
business: Traditional, or "off-line" marketing and communications, Online
marketing and communications, Marketing and Technology Consulting, and Internet
and Intranet systems development and integration. The Company generates revenue
from both traditional marketing and Internet and interactive media services
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including Website development and hosting, corporate internal communications
solutions, database marketing, corporate identity and product branding and
packaging, advertising and media placement services, and interface solutions
that provide high-speed access via the Internet to off-line databases.
Historically, revenues from these services by the Subsidiaries have been derived
on a project-by-project basis, which tends to cause fluctuations in revenues
between reporting periods. A substantial portion of those revenues have been
fixed fees for services to be delivered. While the Company has recently entered
into a number of contracts for ongoing maintenance, content updates, server
hosting, software licensing and subscription services, which will create
recurring revenue streams for the life of their respective contracts (typically
twelve (12) months), it is anticipated that project revenue will continue to be
a significant component of total revenues and therefore revenue may continue to
fluctuate significantly from quarter to quarter.
The Company generally provides Website design and development and
traditional marketing services under contracts that vary in duration from two to
four weeks in the case of smaller projects and up to five months in the case of
larger projects. In connection with Website design and development, the Company
typically enters into twelve-month arrangements providing for maintenance,
content updates of Websites and software licensing and hosting of a client
Website on the Company's servers. Revenues from contracted services are
generally recognized using the percentage of completion method based upon the
ratio of costs incurred to total estimated costs of the project. Revenues from
hosting, maintenance and updates are recognized as the services are provided.
Part of the Company's overall business strategy is to continue to
increase the percentage of revenue which is recurring and to continue to
increase the number of services provided to a particular client. The Company is
implementing this strategy by increasing its over-all marketing and
cross-marketing efforts.
Another part of the Company's business strategy is to grow through the
acquisition and integration of synergistically compatible businesses. The
Company believes that there will be a consolidation among technology-based
marketing solution providers and that this consolidation will continue to create
opportunities for the Company to expand through acquisitions and joint ventures.
In addition to its acquisition of certain assets and operations of Fathom, the
Company has undertaken discussions with several companies engaged in businesses
that are complimentary or supplementary to those of the Company. The Company's
acquisition strategies include acquiring companies that will be integrated into
the Company's existing infrastructure, enabling the Company to acquire access to
additional product or service offerings, experienced management that can
contribute to building the business in a profitable manner, and potentially,
provide international expansion (through the acquisition of companies outside of
the United States).
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SERVICES AND PRODUCTS
The Company combines technological expertise in Internet and
interactive communications with extensive traditional marketing experience to
provide integrated solutions to leading corporate accounts. The Company's
solutions incorporate brand and corporate strategy and positioning, Website
development, maintenance, updating and hosting, corporate intranet solutions,
sophisticated content development capabilities, data access and profile-driven
response technologies, and advertising and media placement services. The Company
has developed several proprietary software applications (including WebMechanic,
E-Corp, ASAP, Comparabase) that it utilizes in delivering marketing solutions to
its clients. The Company focuses on assisting its clients in the following
areas:
POSITION AND BRAND PRODUCTS AND SERVICES. The Company utilizes its
experience in traditional advertising and marketing, as well as its
understanding of the capabilities of different and emerging media, to position
clients and market their products. The Company provides a range of services,
including brand positioning, developing corporate identity and print, television
and packaging design.
MARKET CLIENT PRODUCTS, SERVICES AND ENHANCE CORPORATE COMMUNICATION
USING INTERNET TECHNOLOGY. The Company combines traditional and interactive
media approaches to advertising and marketing in order to position its clients
and market their products and services on the Internet. This includes the
development of Websites that incorporate the latest in Internet technology. For
example, at the NEC Website a visitor can request a database-driven catalogue to
compare a number of NEC products and generate customized Webpages displaying a
comparative presentation of those NEC products in which that visitor has an
interest (http://www.nec.com). The Company's "smart Website" methodology helps
to track visitors as they are referred by online advertising and journey through
a Website, making suggestions via "dynamically generated content" targeted
toward an individual's browsing habits (http://www.avon.com), or category of
interest (www.as400.ibm.com). The Company's WebMechanic sitebuilding system
enables centralized corporations to empower their distributors, wholesalers,
retailers, etc. to created custom, personalized "satellite" Websites and edit
them at will with virtually no online experience (www.bigleaguers.com;
www.chrysler.com). The skillful application of these technologies enable a
business to enhance targeted communications directly with and between
wholesalers, retailers, manufacturers and customers.
IDENTIFY AND DEVELOP NEW LINES OF DISTRIBUTION. The Company is working
with its clients to develop new channels of distribution utilizing the Internet.
For example, Avon sought to utilize a marketing channel not currently addressed
by its traditional distribution system. The Company is assisting Avon in
establishing a Website from which it will market directly to customers over the
Internet and allow Avon representatives to receive product information and
communicate internally. The Website (http://www.avon.com) was introduced during
the fiscal year ended June 30, 1997. The Company has also created a Website that
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enables Bloomingdale's to sell a variety of its merchandise online, allowing it
to extend its distribution beyond its current retail store and catalog presence
(http://www.bloomingdales.com).
COMMUNICATE AND OPERATE MORE EFFECTIVELY INTERNALLY. The Company's
user-friendly interfaces and Internet tools, combined with training software and
methodology, enable it to develop and deploy sophisticated intranet solutions
for its clients. For example, the Company developed a password-protected
intranet to allow Anheuser Busch to deliver proprietary marketing information to
its distributors. This intranet allows Anheuser Busch, among other things, to
distribute information and engage in communication with its distributors quickly
and provides a means for distributors to order marketing materials easily
through a secure medium.
ACCESS DATA MORE EFFICIENTLY. The Company's proprietary technologies
allow users of both the World Wide Web and corporate intranets to easily access,
analyze and utilize data via an online environment. The Company's solutions
include such software components as WebMechanic, E-Corp, ASAP, and Comparabase.
The Company has integrated the learning derived from the NetCube technology into
a variety of software solutions, enhancing data retrieval and analysis.
WebMechanic and E-Corp enable the Company's clients to automate data publishing
and email on the Internet, via an "automated Website building" engine and
"automated email engine" that can be simply controlled by non-technical users.
ASAP, the Advanced Statistical Analysis Program, is a software application that
provides proprietary statistical analysis to the sponsor of a Website regarding
the number and nature of the visits to that Website. Comparabase is a searchable
comparative on-line database that enables consumers to select products from a
sizeable on-line catalogue and compare them to similar products by feature.
These proprietary tools allow the Company to: (i) craft on-line marketing
solutions that are responsive to user needs, allowing the user to more easily
access, compile and analyze data; and (ii) provide necessary tools to allow the
Website sponsor to assess the effectiveness of its marketing solutions.
CUSTOMERS
The following is a list of customers of the Company that represented
$50,000 or more of the combined revenues of the Company during the fiscal year
ended June 30, 1997.
<TABLE>
<CAPTION>
<S> <C> <C>
CONSUMER GOODS SPORTS & ENTERTAINMENT TECHNOLOGY
Anheuser Busch Disney Art Classics Adlink
Avon Products, Inc. Home Box Office. Amgen, Inc.
Bandai Major League Baseball Players I-LINK
Bloomingdale's Association Inquiry.com
Busch Entertainment NFL Properties IBM
Coca-Cola Company Request Television Internet Shopping Network
Colorado Utility Turner Corp Logitech
Crystal Geyser Water McAfee
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Curtis Mathes Holding BUSINESS TO BUSINESS Mita
Nioxin Bankers Trust MSNBC
Pioneer Electronics Eagle River Interactive NEC USA
Reebok ING Barings NETCOM
Reebok International, Inc. Janus Funds Netscape
Rockport Security First Network Oracle
Rockport Foundation Security First Technology Securware, Inc.
Segasoft Sony Electronics
Tambrands Sprint TRAVEL & TRANSPORTATION
Toshiba VisionNet Continental Airlines
VF Corporation Wentworth Research Chrysler Motors
Western Digital Corp
</TABLE>
During the fiscal year ended June 30, 1997, Chrysler Corporation
accounted for approximately 10% of the Company's combined revenue and Pioneer
Electronics accounted for approximately 13% of the Company's combined revenue.
No other customers accounted for more than 10% of the Company's combined
revenue.
COMPETITION
The market for the Company's services is highly competitive and is
characterized by pressures to incorporate new capabilities and accelerate job
completion schedules. The Company faces competition from a number of sources.
These sources include national and regional new media marketing companies and
national and local advertising agencies, many of which have started to develop
or acquire interactive media capabilities. New boutiques that either provide
integrated or specialized services (e.g., corporate identity and packaging,
advertising services or Website design) and are technologically proficient, have
emerged and are competing with the Company. Many of the Company's competitors or
potential competitors have longer operating histories, longer client
relationships and significantly greater financial, management, technology,
development, sales, marketing and other resources than the Company. The
Company's ability to maintain its existing clients and generate new clients
depends to a significant degree on the quality of its services and its
reputation among its clients and potential clients, as compared with the quality
of services provided by and the reputations of the Company's competitors. In the
event that the Company loses clients to competitors because of dissatisfaction
with the services performed or provided by the Company, or the reputation of the
Company is otherwise adversely impacted, the business, financial condition and
operating results of the Company could be materially adversely affected.
There are relatively low barriers to entry into the Company's business.
The Company expects that it will face additional competition from new entrants
into the market in the future. There can be no assurance that existing or future
competitors will not develop or offer marketing communication services and
products that provide significant performance, price, creative, technological or
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other advantages over those offered by the Company, which could have a material
adverse effect on the business, financial condition and operating results of the
Company.
The Company believes that the principal competitive factors in the
market for new media marketing services are creative content, quality of
service, breadth of services offered, technological and new media
sophistication, perceived value, responsiveness to clients' needs and timeliness
in delivering solutions. The Company believes that it generally competes
favorably with respect to each of these factors.
EMPLOYEES
As of September 26, 1997, the Company employed 149 full-time employees,
including 5 officers, 13 management personnel, 126 in operations, and 5 sales
and service representatives. The Company considers its relationship with its
employees satisfactory and is not a party to any collective bargaining
agreement.
GOVERNMENT REGULATION
The Company has no knowledge of any governmental regulations which
materially adversely affect its business operations.
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
The Company operates in a rapidly changing environment that involves a
number of uncertainties, some of which are beyond the Company's control. In
addition to the uncertainties described elsewhere in this report, these
uncertainties include:
DEPENDENCE ON KEY ACCOUNTS. The Company's four largest clients
accounted for thirty-eight percent (38%) of the Company's revenues for the
fiscal year ended June 30, 1997, with fluctuations in the amount of revenue
contribution from each such client from quarter to quarter. Pioneer Electronics
and Chrysler Corporation, the Company's two largest clients during the fiscal
year ended June 30, 1997, accounted for approximately thirteen percent (13%) and
ten percent (10%) of the Company's revenues, respectively, during the period.
Since the Company's clients generally retain the Company on a project by project
basis, a client from whom the Company generates substantial revenue in one
period may not be a substantial source of revenue in a subsequent period. To the
extent that the Company's major clients do not remain a significant source of
revenues, and the Company is unable to replace these clients, there could be a
direct and immediate material adverse effect on the Company's business,
financial condition and operating results. The Company's typical project lasts
from two to four weeks in the case of smaller projects and up to five months in
the case of larger projects. Once a project is completed there can be no
assurance that a client will engage the Company for further services. In
addition, the Company's clients may unilaterally reduce their use of the
Company's services or terminate existing projects without penalty. The
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termination of the Company's business relationship with any of its significant
clients or a material reduction in the use of the Company's services by a
significant client would have a material adverse effect on the Company's
business, financial condition and operating results.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND MARGINS; SEASONALITY OF
BUSINESS. The Company's operating results have fluctuated in the past and may
fluctuate in the future as a result of a variety of factors, including timing of
the completion, material reduction or cancellation of major projects or the loss
of a major client, timing of the receipt of new business, timing of the hiring
or loss of personnel, timing of the opening or closing of an office, the
relative mix of high margin creative projects as compared to lower margin
production projects, changes in the pricing strategies and business model of the
Company or its competitors, capital expenditures and other costs relating to the
expansion of operations, and other factors that are outside of the Company's
control. Operating results could also be materially adversely affected by
increased competition in the Company's markets. The Company's operating margins
may fluctuate from quarter to quarter depending on the relative mix of lower
cost full time employees versus higher cost independent contractors. The Company
experiences some seasonality in its business which results from timing of
product introductions and business cycles of the Company's clients. The
Company's revenues may be somewhat higher during certain quarters of the
Company's fiscal year reflecting the trends of its clients preparing marketing
campaigns for products launched in anticipation of fall trade shows and the
holiday season. The Company's revenues for the first fiscal quarter tend to be
somewhat lower because many clients have expended most of their marketing
budgets prior to the end of the calendar year and do not release funds from the
next calendar year's marketing budget until mid to late January. The Company
expects this seasonality to continue in the future. As a result of the foregoing
and other factors, the Company anticipates that it may experience material and
adverse fluctuations in future operating results on a quarterly or annual basis.
Therefore, the Company believes that period to period comparisons of its
revenues and operating results are not necessarily meaningful and that such
comparisons cannot be relied upon as indicators of future performance.
MANAGEMENT OF GROWTH; RISKS ASSOCIATED WITH EXPANSION. The Company's
business has grown rapidly in recent periods. The growth of the Company's
business and expansion of its customer base have placed a significant strain on
the Company's management and operations. In the last year, the Company has
opened an office in Seattle, Washington; integrated several companies into one
corporate organization; and has increased the size of each of its divisions in
Los Angeles and New York. The Company's expansion has resulted, and is expected
in the future to result, in substantial growth in the number of its employees
and in increased responsibility for both existing and new management personnel
and strain on the Company's existing operational, financial and management
information systems. The Company's success depends to a significant extent on
the ability of its executive officers and other members of senior management to
operate effectively, both independently and as a group.
In addition, the Company plans to expand its offerings of integrated
marketing communication services and products. There can be no assurance that
the Company will be successful in identifying new services or products that will
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be attractive to clients or that such services or products will ultimately
generate revenues in excess of costs to implement them. Difficulties in
recruiting and assimilating new personnel, enhancing the Company's financial and
operational controls and expanding the Company's marketing and customer support
capabilities may impede the Company's ability to pursue its growth strategy. In
general, there can be no assurance that the Company will be able to manage its
recent or any future expansions effectively, and any inability to do so would
have a material adverse effect on the Company's business, financial condition
and operating results. There also can be no assurance that the Company will be
able to sustain the rates of growth that it has experienced in the past. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEVELOPING MARKET FOR NEW MEDIA; NEW ENTRANTS; UNPROVEN ACCEPTANCE OF
THE COMPANY'S NEW MEDIA Solutions. The Company's future growth is dependent to a
significant extent upon its ability to increase the amount of revenue it derives
from providing marketing and advertising solutions to its customers through new
media, which the Company defines as media that delivers content to end users in
digital form, including the World Wide Web, the Internet, proprietary online
services, CD-ROMs and laptop PC presentations. The market for marketing and
advertising through new media has only recently begun to develop, is rapidly
evolving and is characterized by an increasing number of market entrants who
have introduced or developed products and services for communication and
commerce through new media. Demand and market acceptance for recently introduced
products and services are subject to a high level of uncertainty. There can be
no assurance that commerce and communication through new media will continue to
grow. The use of new media in marketing and advertising, particularly by those
individuals and enterprises that have historically relied upon traditional means
of marketing and advertising, generally requires the acceptance of a new way of
conducting business and exchanging information. In particular, enterprises that
have already invested substantial resources in other means of conducting
commerce and exchanging information may be particularly reluctant or slow to
adopt a new strategy that may make their existing resources and infrastructure
less useful.
In connection with the Company's new media services, the Company is
exploring new methods to derive revenue, so that a larger percentage of its
revenues is recurring. These methods include long-term service contracts,
ongoing content development contracts and technology consulting and maintenance
services. There is no assurance that the Company will be able to negotiate such
arrangements with clients.
RISKS ASSOCIATED WITH ACQUISITIONS. As part of its business strategy,
the Company expects to make acquisitions of companies that are in complementary
and/or supplementary to the Company. Any such future acquisitions would be
accompanied by the risks commonly encountered in acquisitions of businesses.
Such risks include, among other things, the difficulty of assimilating the
operations and personnel of the acquired businesses, the potential disruption of
the Company's ongoing business, the inability of management to maximize the
financial and strategic position of the Company through the successful
incorporation of acquired personnel and clients, the maintenance of uniform
standards, controls, procedures and policies and the impairment of relationships
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with employees and clients as a result of any integration of new management
personnel. In June 1997, the Company acquired certain assets for consideration
consisting of 120,000 shares of Common Stock. The Company is also negotiating
with other potential acquisition targets. The Company expects that future
acquisitions, if any, could provide for consideration to be paid in cash, stock
or a combination of cash and stock. There can be no assurance that any potential
acquisition will be consummated. The Company has also closed the operations of
two (2) of the Subsidiaries. Therefore, there can be no assurance that the
Company's prior acquisitions or any other potential acquisitions will not have a
material adverse effect on the Company's business, financial condition and
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
UNCERTAIN ADOPTION OF INTERNET AS A MEDIUM OF COMMERCE AND
COMMUNICATIONS; DEPENDENCE ON THE INTERNET. The Company's ability to derive
revenues from new media solutions will depend in part upon a robust industry and
the infrastructure for providing Internet access and carrying Internet traffic.
The Internet may not prove to be a viable commercial marketplace because of
inadequate development of the necessary infrastructure, such as a reliable
network backbone or timely development of complementary products, such as high
speed modems. Because global commerce and online exchange of information on the
Internet and other similar open wide area networks are new and evolving, it is
difficult to predict with any assurance whether the Internet will prove to be
and remain a viable commercial marketplace. Moreover, critical issues concerning
the commercial use of the Internet (including security, reliability, cost, ease
of use and access, and quality of service) remain unresolved and may impact the
growth of Internet use. There can be no assurance that the Internet will become
a viable commercial marketplace. If the necessary infrastructure or
complementary products are not developed, or if the Internet does not become a
viable commercial marketplace, the Company's business, operating results and
financial condition could be materially adversely affected.
PROJECT PROFIT EXPOSURES. The Company generates the substantial
majority of its revenues through project fees on a fixed fee for service basis.
The Company assumes greater financial risk on fixed-price type contracts than on
either time-and-material or cost-reimbursable contracts. Failure to anticipate
technical problems, estimate costs accurately or control costs during
performance of a fixed-price contract may reduce the Company's profit or cause a
loss. Although the majority of the Company's projects typically last four to six
weeks and therefore each individual short-term project creates less exposure
than a long-term fixed-price contract, in the event the Company does not
accurately anticipate the progress of a number of significant revenue-generating
projects it could have a material adverse effect on the Company's business,
operating results and financial condition.
CONFLICTS OF INTEREST. Conflicts of interest are inherent in certain
segments of the marketing communications industry, particularly in advertising.
The Company has in the past and will in the future be unable to pursue potential
advertising and other opportunities because such opportunities will require the
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Company to provide services to direct competitors of existing clients of the
Company. In addition, the Company risks alienating or straining relationships
with existing clients each time the Company agrees to provide services to even
indirect competitors of existing Company clients. Conflicts of interest may
jeopardize the stability of revenues generated from existing clients and
preclude access to business prospects, either of which developments could have a
material adverse effect on the Company's business, financial condition and
operating results.
MARKET ACCEPTANCE OF THE COMPANY'S APPROACH; SERVICE DEVELOPMENT; RAPID
TECHNOLOGICAL CHANGE. The Company provides an integrated approach to meet the
marketing communications needs of its clients. To compete successfully against
specialized service providers, the Company believes that its products and
services in each marketing communication discipline will need to be competitive
with the services offered by the firms that specialize in each discipline. There
can be no assurance that the Company will be successful in providing competitive
solutions to clients in each of its integrated marketing communication services
and products. Failure to do so could result in the loss of existing customers or
the inability to attract and retain new customers, either of which developments
could have a material adverse effect on the Company's business, financial
condition and operating results.
SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS. The Company's revenues
and results of operations will be subject to fluctuations based upon the general
economic conditions. If there were to be a general economic downturn or a
recession in the United States, then the Company expects that business
enterprises, including its clients and potential clients, will substantially and
immediately reduce their advertising and marketing budgets. In the event of such
an economic downturn, there can be no assurance that the Company's business,
operating results and financial condition would not be materially and adversely
affected.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive and administrative offices are located in New
York, New York. The Company also maintains offices in Los Angeles, California;
Atlanta, Georgia; Edgewater, New Jersey; and Seattle, Washington.
The New York facilities consist of approximately 20,000 square feet on
two floors in midtown Manhattan (the "Manhattan Space"). The Manhattan Space is
currently leased on a month-to-month basis for $145,000 per annum from October
1, 1996 to September 2001 and then for $155,000 per annum from October 1, 2001
to September 30, 2006.
The California facility consists of approximately 14,000 square feet of
space located in Los Angeles. Such space is currently leased by the Company for
a term of ten (10) years. The initial rent for the first three years of the
lease is approximately $27,524 per month. The rent for the following three years
is approximately $30,276 per month and approximately $34,405 per month for the
remaining term of the lease.
12
<PAGE>
The Company operates a facility in New Jersey, which is currently
utilized to support the Company's accounting operations. Additionally, the
Company operates facilities in Boulder, Colorado; Atlanta, Georgia; and Seattle,
Washington that are engaged in the Company Business sectors. These facilities
range in space from 2,500 square feet to 9,000 square feet. Each of these
facilities is leased, with monthly rents ranging from $750 to $10,000.
The Company believes that its existing facilities are adequate to meet
its current operating needs and that suitable additional space will be available
to the Company on favorable terms should the Company require additional space to
accommodate future operations or expansion. Further, in the event that any one
of the foregoing leases was not renewed, the Company believes that it would be
able to obtain suitable alternative space on terms comparable to those currently
afforded to the Company.
The Company owns no real estate and does not intend to invest in real
estate or interests in real estate, real estate mortgages, or securities of or
interests in persons primarily engaged in real estate activities for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings required to be
disclosed pursuant hereto.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the stockholders of the Company for
consideration during the fourth quarter of the fiscal year ended June 30, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
In November 1996, in connection with the Initial Public Offering, the
Company applied for and was granted inclusion of its securities for quotation on
the Nasdaq National Marketsm ("Nasdaq"). Consequently, the Common Stock
commenced on quotation on Nasdaq on November 26, 1996 under the symbol "THNK."
The following table sets forth, for the periods indicated, the reported
high and low bid and asked price quotations for the Common Stock for the period
from November 26, 1996 (when the Company's securities commenced quotation on
Nasdaq) through June 30, 1997 (the end of the Company's most recent fiscal
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year). Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------
BID ($) ASKED ($)
PERIOD OF QUOTATION HIGH LOW HIGH LOW
------------------- ---- --- ---- ---
Fiscal 1997:
- ------------
<S> <C> <C> <C> <C>
Second Quarter 7.00 5.88 7.38 6.13
(commencing November 26, 1996)
Third Quarter 6.00 3.75 6.25 4.13
Fourth Quarter 4.50 2.50 5.88 2.88
</TABLE>
As of September 26, 1997, there were 47 holders of record of Common
Stock based upon information furnished by Continental Stock Transfer and Trust
Company, New York, New York, the transfer agent for the Company's securities.
The Company believes, based upon security positions listings, that there are
more than 300 beneficial owners of the Common Stock. The closing bid and asked
prices of the Company's securities as reported on Nasdaq on September 26, 1997
were: $10.63 and $10.75 per share of Common Stock, respectively. As of September
26, 1997, there were 6,611,667 shares of Common Stock outstanding.
The Company has never paid and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. The Company intends to
retain all earnings for use in the Company's business operations and in the
expansion of its business.
Pursuant to the terms the Ketchum Agreement, the Company issued an
aggregate of 120,000 shares of Common Stock to Ketchum, a wholly-owned
subsidiary of Omnicom pursuant to Section 4(2) of the Securities Act of 1933.
Further description of the transaction is provided under the sections entitled
"Business" and "Certain Relationships and Related Transactions."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's consolidated
financial condition and results of operations should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto in Item 7
hereof. The Business section and other parts of this Report contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled
"Business--Factors Affecting Operating Results and Market Price of Stock"
commencing on page 2.
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<PAGE>
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, the Company completed the acquisition of all of the
outstanding shares of common stock of the Subsidiaries in exchange for an
aggregate of 723,167 shares of Common Stock. The Company's acquisition of On
Ramp was accounted for using the purchase method of accounting. Each of the
Company's other acquisitions was accounted for using the pooling of interests
method. Accordingly, the results of operations for each of the Subsidiaries
(other than On Ramp) have been included in the Company's Financial Statements
since the earlier of July 1, 1993 or each of such Subsidiary's inception. The
results of operations of On Ramp have been included in the Company's Financial
Statements since July 1, 1996.
Pursuant to the terms of the Ketchum Agreement, effective as of May 31,
1997, the Company acquired certain assets and operations of Fathom, a full
service advertising agency, from Ketchum (a wholly-owned subsidiary of Omnicom)
for an aggregate of 120,000 shares of Common Stock. The Company's acquisition of
the assets and operations of Fathom was accounted for using the purchase method
of accounting. Accordingly, the results of operations of Fathom have been
included in the Company's Consolidated Financial Statements since June 1, 1997.
Fathom's single largest client is Oracle, which accounts for virtually all of
its revenue. Larry Kopald, the individual who was responsible for the Oracle
account while at Fathom, joined the Company in connection with its acquisition
of Fathom. See "Management" and "Executive Compensation."
In June 1997, the Company made the decision to restructure its
operations in Boulder, Colorado and Edgewater, New Jersey. These operations had
been conducted through Internet One and NetCube, respectively. Internet One had
become a production facility for high level technology client services, but with
limited sales and marketing efforts. The Company determined it could effectively
consolidate the client relationships of its Boulder office into its New York and
Los Angeles facilities with minimal impact, and therefore, the facility was
closed and all of the employees of Internet One were terminated. NetCube had
developed proprietary data mining and analysis software for large data base and
data warehousing applications. The Company determined that the marketing of
"shrink-wrapped" software was not its core competency and would both confuse the
Company's focus and involve too great an investment for the anticipated return.
The Company has hired several key developers from NetCube for its New York
interactive group, ceasing the ongoing marketing and helpdesk development at its
New Jersey facility. This has resulted in the termination of the remaining
employees of NetCube. The Company is currently discussing the sale of the
remaining assets of NetCube, primarily the software code, with several different
companies. Total estimated costs associated with the above in the amount of
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<PAGE>
approximately $1,732,000 have been included in the Company's Consolidated
Financial Statements for the fiscal year ended June 30, 1997.
See the Consolidated Financial Statements of the Company.
The Company generates revenue from both traditional marketing and
Internet and interactive media services including Website development and
hosting, corporate internal communications solutions, database marketing,
corporate identity and product branding and packaging, advertising and media
placement services, and interface solutions that provide high-speed access via
the Internet to off-line databases. Historically, revenues from these services
by the Company have been derived on a project-by-project basis, which tends to
cause fluctuations in revenues between reporting periods. Substantial portions
of those revenues have been fixed fees for services to be delivered. While the
Company has recently entered into a number of contracts for ongoing maintenance,
content updates, server hosting and software licensing and subscription
services, which will create recurring revenue streams for the life of their
respective contracts (typically twelve (12) months), it is anticipated that
project revenue will continue to be a significant component of total revenues
and therefore revenue may continue to fluctuate significantly from quarter to
quarter.
The Company generally provides Website design and development and
traditional marketing services under contracts that vary in duration from two to
four weeks in the case of smaller projects and up to five months in the case of
larger projects. In connection with Website design and development, the Company
typically enters into twelve-month arrangements providing for maintenance,
content updates of Websites and software licensing and hosting of a client
Website on the Company's servers. Revenues from contracted services are
generally recognized using the percentage of completion method based upon the
ratio of costs incurred to total estimated costs of the project. Revenues from
hosting, maintenance and updates are recognized as the services are provided.
Part of the Company's overall business strategy is to continue to
increase the percentage of revenue that is recurring and to continue to increase
the number of services provided to a particular client. The Company is
implementing this strategy by increasing its over-all marketing and
cross-marketing efforts.
Another part of the Company's business strategy is to grow through the
acquisition and integration of synergistically compatible businesses. The
Company believes that there will be a consolidation among technology-based
marketing solution providers and that this consolidation will continue to create
opportunities for the Company to expand through acquisitions and joint ventures.
In addition to its acquisition of the assets and operations of Fathom, the
Company has undertaken discussions with several companies engaged in businesses
that are complementary or supplementary to those of the Company. The Company's
acquisition strategies include acquiring companies that will be integrated into
Company's existing infrastructure, enabling the Company to acquire access to
additional product or service offerings, experienced management that can
contribute to building the business in a profitable manner, and potentially,
provide international expansion (through the acquisition of companies outside of
the United States).
16
<PAGE>
YEARS ENDED JUNE 30, 1997 AND 1996
REVENUES. The following table presents the Company's consolidated
revenues, by reference to line of business, for the fiscal years ended June 30,
1997 and 1996. The individual and combined historical revenues of the
Subsidiaries are not necessarily indicative of the future revenues that may be
expected.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------
($ IN THOUSANDS)
1997 1996
------------------------------ -----------------------------
$ % $ %
<S> <C> <C> <C> <C>
Traditional Marketing $ 7,685 44% $7,084 72%
Interactive Marketing
9,752 56% 2,739 28%
------ ------ ---
Total
$17,437 100% $9,823 100%
======== ===== ====== ====
</TABLE>
Revenues for the Traditional Marketing business, consisting primarily
of advertising, strategic marketing and corporate and brand positioning,
increased to $7,685,000 in fiscal 1997 from $7,084,000 in fiscal 1996 (9%). The
increase in revenues in fiscal 1997 primarily resulted from the Company's
acquisition of the assets and operations of Fathom.
Revenues for the Interactive Marketing business, consisting primarily
of Internet and intranet site development, systems and services, on-line system
licensing and site hosting and maintenance, increased to $9,752,000 in fiscal
1997 from $2,739,000 in fiscal 1996 (256%). The increase in revenues in fiscal
1997 is primarily due to the acquisition of On Ramp on June 30, 1996 (which had
revenues of $8,673,000 in fiscal 1997) and the result of increased demand for
Internet access and infrastructure. This increase was partially offset by a
decrease in revenues at NetCube and Internet One, as previously discussed.
DIRECT SALARIES AND RELATED EXPENSES. Direct salaries and related
expenses consist of wages, payroll taxes and employee benefits. Direct salaries
and related expenses increased to $10,029,000 in fiscal 1997 from $3,629,000 in
fiscal 1996 (176%). The increase in fiscal 1997 is primarily due to the
acquisition of On Ramp (which caused an increase of $3,862,000) and the hiring
of additional personnel necessary to build the infrastructure for future growth
of the Company.
OTHER DIRECT EXPENSES. Other direct expenses consist of contract labor,
materials and facility expenses associated with providing services to clients.
Other direct expenses increased to $4,692,000 in fiscal 1997 from $3,870,000 in
fiscal 1996 (21%). The increase in fiscal 1997 is primarily due to incremental
costs incurred by the Subsidiaries as a result of higher levels of operations.
17
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist of marketing expenses and technology costs such
as hardware and software purchases and leasing, as well as telecommunications
costs for Internet access. Additionally, this category includes occupancy costs,
insurance, consulting and professional fees, general office expenses and bad
debt expense. Selling, general and administrative expenses increased to
$6,842,000 in fiscal 1997 from $2,377,000 in fiscal 1996 (188%). The increase in
fiscal 1997 is primarily due to the acquisition of On Ramp (which caused an
increase of $2,918,000). The remainder is due to increased occupancy expenses
and administrative salaries, particularly at the corporate level, as the Company
continued to build its infrastructure to accommodate the Company's operational
growth, as well as non-cash consulting fees in the amount of $369,000 for the
value of Common Stock issued to a consultant and options issued to non-employee
directors. See "Executive Compensation" and "Certain Relationships and Related
Transactions."
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
to $1,619,000 in fiscal 1997 from $209,000 in fiscal 1996. The increase in
fiscal 1997 is primarily due to amortization of intangibles, primarily goodwill
acquired in connection with the acquisition of On Ramp (which caused an increase
of $1,325,000). The remaining increase in fiscal 1997 is primarily due to
increased depreciation and amortization associated with higher capital
expenditures. It was anticipated that depreciation and amortization expenses
would increase significantly in fiscal 1997 and 1998 as a result of the
amortization of goodwill and other intangible assets arising from the
acquisition of On Ramp.
RESTRUCTURING COSTS. The Company incurred restructuring costs in 1997
of $1,732,000 due to its decision in June 1997 to cease operations in Boulder,
Colorado and Edgewater, New Jersey and to close the offices of its Internet One
and NetCube respectively located there, as previously discussed.
MERGER EXPENSES. Merger expenses consist of the nonrecurring costs
incurred by the Company in completing the acquisitions of the Subsidiaries on
June 30, 1996, including a finder's fee paid to an affiliate of the Company. See
"Certain Relationships and Related Transactions."
NET INTEREST INCOME. Interest income was $286,000 in fiscal 1997 due to
income earned on investment of the proceeds of the Initial Public Offering on
November 26, 1996. Interest expense decreased to $134,000 in fiscal 1997 from
$373,000 in fiscal 1996 (64%). The decrease in fiscal 1997 was primarily due to
savings resulting from the elimination of debt through the repayment and
conversion of amounts outstanding under certain convertible promissory notes.
See "Certain Relationships and Related Transactions."
TAXES ON INCOME. The Company had income tax expense of $246,000 in
fiscal 1997 and $141,000 in fiscal 1996. Income tax expense in fiscal 1997 is
the result of the Company establishing a valuation allowance on deferred tax
assets due to the uncertainty of their future realization and state tax
liabilities. In fiscal 1996, certain of the Subsidiaries were not subject to
taxation in fiscal 1996 (as such subsidiaries had elected Subchapter S
18
<PAGE>
corporation status under applicable provisions of the Internal Revenue Code of
1986, as amended, and certain state statutes) and the remaining Subsidiaries
were subject to state income taxes based on their respective discreet
operations. Therefore, an effective tax rate on a consolidated historical basis
is not meaningful. The Company intends to file consolidated Federal tax returns
beginning with the June 30, 1997 tax year.
NET LOSS. As a result of the above factors, the net loss per share
increased to $(1.63) in fiscal 1997 from a pro forma net loss per share of
$(.32) in fiscal 1996.
FOURTH QUARTER OPERATING RESULTS. The Company incurred an operating
loss of $4,911,000 for the fourth quarter of fiscal 1997 as compared to an
operating loss of $1,724,000 for the three months ended March 31, 1997 (the
third quarter of fiscal 1997). The third quarter operating loss of $1,724,000 is
after the restatement of the financial statements for the three and nine months
ended March 31, 1997, which were restated through the filing of an amended Form
10-QSB to increase other direct expenses by $212,000, selling, general and
administrative 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 had not been 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.
Revenues for the fourth quarter, as compared to the third quarter,
increased 23% to $5,123,000, due to the June 1, 1997 acquisition of Fathom,
which accounted for $300,000 of the increase, and an increase in the number of
projects from existing clients in the Company's interactive business. Operating
expenses increased 70% to $10,094,000 from $5,935,000 in the third quarter,
principally as the result of the $1,732,000 restructuring charge recorded in the
fourth quarter and a $1,987,000 increase in selling, general and administrative
expenses. Selling, general and administrative expenses increased principally due
to the expenses of Fathom ($523,000) and due to added payroll and related costs
in New York and Los Angeles, each of which increased staffing in efforts to
pursue revenue growth. In the fourth quarter of fiscal 1997 and the first
quarter of fiscal 1998 the Company reviewed the causes of the fourth quarter
increase in selling, general and administrative expenses and made certain
operational changes, including the closing or consolidation of certain
operations (see "Overview"). As a result the Company anticipates that the level
19
<PAGE>
of expenses for fiscal 1998 will be returned to levels, relative to revenues,
closer to those experienced in the first three quarters of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since their respective formations, the Subsidiaries have financed their
operations primarily through cash generated from operations, bank borrowings,
shareholder contributions and private financings.
During 1996, the Company entered into a series of transactions in order
to fund the operations of the Subsidiaries and to prepare itself for the Initial
Public Offering. The Company raised $270,000 in a private offering, pursuant to
which the Company issued three convertible 10% promissory notes (the "10%
Notes"). Proceeds of the private placement were used to cover costs related to
the Company's acquisitions of the Subsidiaries and the Initial Public Offering.
The Company raised an additional $1,800,000 in another private offering,
pursuant to which the Company issued several 12% convertible promissory notes
(the "12% Notes"). Proceeds received by the Company, after deducting placement
fees and other expenses, totaled $1,582,500. Of the funds received from this
private placement, $1,000,000 was loaned to On Ramp in order to complete a
transaction in which On Ramp redeemed outstanding shares of its common stock.
The remaining funds received from this private placement were used to provide
working capital for On Ramp and Internet One.
In August 1996, the Company received net proceeds of $4,948,000 through
the issuance of 938,667 shares of Common Stock to Omnicom. Proceeds raised from
the Omnicom Transaction were used by the Company to retire the nonconvertible
portion of the outstanding principal and accrued interest under the 10% Notes
and 12% Notes (aggregating $1,880,505), to repay certain other debt and
outstanding obligations, to fund the operations of the Subsidiaries and to cover
expenses and costs incurred in connection with the acquisitions of the
Subsidiaries and the Initial Public Offering.
In November 1996, the Company completed its Initial Public Offering,
which has provided significant working capital to the Company and its
Subsidiaries. The Company issued 2,150,000 shares of Common Stock and received
net proceeds from the Initial Public Offering of $11,973,000.
At June 30, 1997, the Company had cash and cash equivalents of
approximately $3,451,000 and working capital of approximately $8,079,000,
primarily as a result of effecting the following transactions during the year
ended June 30, 1997: (i) the Omnicom Transaction and the receipt of net proceeds
therefrom of $4,948,000; (ii) the conversion of $27,000 in principal amount
under the 10% Notes and $162,000 in principal amount under the 12% Notes,
respectively, into 216,667 and 216,660 shares of Common Stock; (iii) the
repayment of the non-convertible portion of principal and interest under the 10%
Notes and the 12% Notes, aggregating $1,880,550 from the proceeds of the Omnicom
Transaction; (iv) the payment of a finder's fee in consideration for the
20
<PAGE>
termination of a certain finder's agreement using proceeds from the Omnicom
transaction; (v) the renegotiation of the terms of a note payable to a related
party, providing for liquidation of $288,000 of such debt using proceeds from
the Omnicom Transaction and extending the maturity of the remaining balance of
$516,000 until March 1998; and (vi) the Initial Public Offering.
Net cash used in operating activities for fiscal 1997 of $7,849,000
resulted primarily from a net loss of $7,571,000 combined with an increase in
accounts and unbilled receivables of $4,336,000 and $2,200,000, respectively,
offset in part by non-cash charges for: (i) depreciation and amortization of
$1,619,000 (including amortization of intangibles of $1,297,000), and (ii)
restructuring costs of $1,732,000, combined with an increase in accounts payable
and accrued expenses of $1,843,000. The increase in unbilled receivables is
principally due to two Website development projects undertaken by On Ramp for
which significant work has been performed in advance of the dates billings are
permitted under the contracts. Accounts receivable increased primarily due to
the increased volume of work performed by On Ramp and an increase in the aging
of accounts receivable. Accounts receivable greater than sixty (60) days old
increased from $494,000 at June 30, 1996 to $1,582,000 at June 30, 1997. The
increase in such receivables is primarily due to certain receivables arising
from ongoing strategic marketing and branding assignments undertaken for certain
significant long-standing customers which the Company believes are credit-
worthy. Such amounts were either collected subsequent to June 30, 1997 or the
Company believes them to be collectible. The Company believes that the provision
for bad debts of approximately $614,000 recognized during the year ended June
30, 1997 is sufficient to adjust the carrying amount of its receivables at June
30, 1997 to an amount which approximates net realizable value. Accounts payable
and accrued expenses increased principally due to the inclusion of On Ramp in
fiscal 1997.
Net cash used in investing activities for fiscal 1997 of $2,898,000
resulted primarily from capital expenditures of $1,487,000 and purchase of
marketable securities of $1,322,000.
Net cash provided by financing activities for fiscal 1997 of
$14,198,000 resulted primarily from net cash proceeds from the Initial Public
Offering and the Omnicom Transaction of $11,973,000 and $4,948,000,
respectively, partially offset by repayments on promissory notes and related
party payables of $1,881,000 and $500,000 respectively.
The Company has entered into employment agreements ranging in term from
one year to three years (exclusive of extensions) with several of its executive
officers pursuant to which the Company is obligated to pay such individuals up
to an aggregate of $1,095,000 per year. See "Executive Compensation."
The Company anticipates significant changes in its operating cost
structure once the remaining subsidiaries have been completely integrated, and
administration and control of the Company's future operations have been
centralized. The Company believes that its existing cash balances and the cash
generated from continuing operations will be sufficient to fund its operations,
21
<PAGE>
the anticipated expenditures required for product development, its
organizational infrastructure (including additional personnel and upgraded
telecommunications and computer systems) and general corporate needs for the
next twelve (12) months.
There can be no assurance that the Company will not be required to seek
additional sources of financing within the foreseeable future. The failure to
raise the funds necessary to finance the Company's future cash requirements
would adversely affect the Company's ability to pursue its operational
strategies.
In connection with the acquisition of On Ramp, the Company recorded
goodwill and other intangible assets in the aggregate amount of $2,410,000,
substantially all of which is being amortized using the straight-line method
over a period of two years. As a result, the Company incurred during the year
ended June 30, 1997, and will incur over the next fiscal year, a non-cash charge
to operations of approximately $1,205,000 each year.
In connection with the acquisition of the assets and operations of
Fathom, the Company recorded goodwill in the amount of $442,500, which is being
amortized using the straight-line method over a period of two (2) years. As a
result, the Company incurred during the year ended June 30, 1997, a non-cash
charge to operations of approximately $18,000 and will incur over the next two
(2) fiscal years, a non-cash charge to operations of approximately $18,000 per
month.
In connection with the Initial Public Offering, certain stockholders of
the Company agreed to place their shares of Common Stock in an escrow to be
released upon the Company's attainment of certain performance goals (the "Escrow
Shares"). In the event of the release of the Escrow Shares, the Company will
recognize during the period in which the earnings thresholds are probable of
being met or such stock levels achieved, a substantial noncash charge to
earnings equal to the fair market value of such shares on the date of their
release, which would have the effect of significantly increasing the Company's
loss or reducing or eliminating earnings, if any, at such time. The recognition
of such compensation expense may have a depressive effect on the market price of
the Company's securities. Notwithstanding the foregoing discussion, there can be
no assurance that the Company will attain the targets which would enable the
Escrow Shares to be released from escrow. Similar accounting treatment is
expected to be applied with respect to the issuance in subsequent periods of the
securities issuable under a certain consulting agreement between the Company and
Jason H. Pollak. See "Certain Relationships and Related Transactions."
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<PAGE>
INFLATION
While inflation has not had a material effect on the Company's
operations in the past, there can be no assurance that the Company will be able
to continue to offset the effects of inflation on the costs of its products or
services through price increases to its customers without experiencing a
reduction in the demand for its products; or that inflation will not have an
overall effect on the advertising, marketing, Internet and intranet and data
management market that would have a material affect on the Company.
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
EARNINGS PER SHARE. In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS
No. 128 specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS No. 128 is effective for periods ending after December
15, 1997. The adoption of this statement is not expected to have a material
effect on the consolidated financial statements.
REPORTING COMPREHENSIVE INCOME. In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"), which established standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS No. 130 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of this standard,
management has been unable to fully evaluate the impact, if any, the standard
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of this
standard.
REPORTING SEGMENTS OF AN ENTERPRISE. In June 1997, the Financial
Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"), which supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No.
131 establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
23
<PAGE>
earlier years to be restated. Because of the recent issuance of this standard,
management has been unable to fully evaluate the impact, if any, it may have on
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of this standard.
24
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
THINK NEW IDEAS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS...........................F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet............................................................F-3
Statements of Operations.................................................F-4
Statements of Shareholders' Equity ......................................F-5
Statements of Cash Flows.................................................F-6
Notes to Consolidated Financial Statements...............................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of THINK New Ideas, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of THINK New Ideas,
Inc. and subsidiaries as of June 30, 1997 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
two years in the period ended June 30, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of THINK New Ideas,
Inc. and subsidiaries as of June 30, 1997 and the results of their operations
and their cash flows for each of the two years in the period ended June 30,
1997, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
New York, New York
September 19, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1997
--------------------------
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $3,451,347
Marketable securities 1,321,722
Accounts receivable, net of allowance for doubtful accounts of $614,137 9,314,851
Unbilled receivables 2,497,389
Prepaid expenses and other current assets 535,307
--------------------------
Total current assets 17,120,616
Property and equipment, net (Note 3) 2,285,620
Software development costs 131,253
Goodwill, net of accumulated amortization of $1,098,938 (Note 2) 1,502,562
Other assets 362,119
--------------------------
Total assets $21,402,170
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $4,848,932
Accrued restructuring costs (Note 10) 1,135,000
Deferred revenue 953,556
Income taxes payable (Note 5) 40,571
Due to related party (Note 2) 1,906,512
Current portion of obligations under capital leases (Note 6) 156,867
--------------------------
Total current liabilities 9,041,438
Obligations under capital leases (Note 6) 264,372
Note payable to related party (Note 9) 515,760
Other long-term liability (Note 6) 206,250
--------------------------
Total liabilities 10,027,820
--------------------------
Commitments and contingencies (Note 6) Shareholders' equity (Note 7):
Preferred stock, $.0001 par value; 5,000,000 shares authorized; none issued and
outstanding -
Common stock, $.0001 par value; 50,000,000 shares authorized; 6,536,667 shares issued
654
Additional paid-in capital 19,050,174
Accumulated deficit (7,676,478)
--------------------------
Total shareholders' equity 11,374,350
==========================
Total liabilities and shareholders' equity $21,402,170
==========================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
-----------------------------------------------------
1997 1996
----------------------- --------------------------
<S> <C> <C>
Revenues $17,436,847 $9,822,983
Operating expenses:
Direct salaries and related expenses 10,029,004 3,628,643
Other direct expenses 4,691,563 3,869,634
Selling, general and administrative expenses 6,842,308 2,377,053
Depreciation and amortization 1,619,104 208,813
Restructuring costs (Note 10) 1,732,000 -
Merger expenses (Note 2) - 676,198
----------------------- --------------------------
Operating loss (7,477,132) (937,358)
Interest expense (134,489) (372,736)
Interest income 286,358 -
Other, net - 36,232
----------------------- --------------------------
Loss before taxes on income (7,325,263) (1,273,862)
Taxes on income (Note 5) 245,900 140,870
----------------------- --------------------------
Net loss $(7,571,163) $(1,414,732)
======================= ==========================
Net loss per share $(1.63)
=======================
Pro forma amounts (unaudited):
Historical loss before taxes on income $(1,273,862)
Compensation adjustment (227,000)
Merger expense adjustment 676,198
--------------------------
Net loss $(824,664)
==========================
Net loss per share $(.32)
==========================
Weighted average common and common equivalent shares outstanding
4,638,337 2,506,681
======================= ==========================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained earnings
COMMON STOCK Additional (accumulated
Shares Amount paid-in capital deficit)
----------------- ------------ ------------------ ---------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 491,595 $48 $83,837 $199,101
Issuance of common stock for cash 2,171,506 217 439 -
Acquisition of On Ramp (Note 2) 231,572 24 1,088,363 -
Conversion of shareholders' loans and
interest - - 1,450,142 -
Distributions to shareholders - - (24,325) (153,510)
Capitalization of accumulated deficit
of subsidiaries upon termination of
S corporation elections - - (1,263,826) 1,263,826
Net loss for the year - - - (1,414,732)
----------------- ------------ ------------------ ---------------------
Balance at June 30, 1996 2,894,673 289 1,334,630 (105,315)
Issuance of common stock in connection
with private placement (Note 7(b))
938,667 94 4,947,968 -
Conversion of convertible debt
(Note 7(c)) 433,327 44 189,452 -
Issuance of common stock pursuant to
initial public offering (Note 7(d))
2,150,000 215 11,972,636 -
Issuance of common stock in connection
with acquisition (Note 2)
120,000 12 442,488 -
Issuance of stock options to
non-employee directors (Note 8(b))
- - 163,000 -
Net loss for the year - - - (7,571,163)
----------------- ------------ ------------------ ---------------------
Balance at June 30, 1997 6,536,667 $654 $19,050,174 $(7,676,478)
================= ============ ================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year ended June 30,
---------------------- ---- ----------------------
1997 1996
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,571,163) $(1,414,732)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 322,085 208,813
Amortization of intangibles and deferred financing costs 1,297,019 163,000
Deferred income taxes 140,000 (364,000)
Bad debt expense 428,137 113,655
Restructuring charges 1,732,000 -
Consulting fees 369,250 -
Changes in assets and liabilities, excluding effects of acquisitions:
Accounts receivable (4,335,664) (595,516)
Unbilled receivables (2,200,486) 494,912
Due from shareholders - 89,400
Accounts payable and accrued expenses 1,842,772 702,400
Deferred revenue 500,597 (272,882)
Other assets and liabilities (373,492) 146,328
---------------------- ----------------------
Net cash used in operating activities (7,848,945) (728,622)
---------------------- ----------------------
Cash flows from investing activities:
Additions to software development costs (518,315) (167,436)
Purchases of property and equipment (1,487,435) (171,900)
Purchases of marketable securities (1,321,722) -
Advances to and acquisition of On Ramp, net of cash acquired - (1,691,739)
(Note 2) ---------------------- ----------------------
Net cash used in investing activities (3,327,472) (2,031,075)
---------------------- ----------------------
Cash flows from financing activities:
Proceeds from issuance (repayment) of promissory notes (1,880,505) 2,070,000
Deferred financing costs - (217,500)
Increase in notes payable to related parties - 827,326
Deferred offering costs (272,240) (217,528)
Borrowings (repayment) on operating lines of credit (70,000) 70,000
Proceeds from private placement 4,948,062 -
Issuance of common stock - 656
Proceeds from initial public offering 11,972,851 -
Proceeds from (payments on) amounts due to related party (500,000) 500,000
Distributions to shareholders - (177,835)
---------------------- ----------------------
Net cash provided by financing activities 14,198,168 2,855,119
---------------------- ----------------------
Net increase in cash and cash equivalents 3,021,751 95,422
Cash and cash equivalents, beginning of year 429,596 334,174
---------------------- ----------------------
Cash and cash equivalents, end of year $3,451,347 $ 429,596
====================== ======================
Supplemental cash flow information: Cash paid during the year for:
Income taxes $153,010 $139,967
Interest 180,949 8,091
Noncash investing and financing activities:
Loans and accrued interest payable to shareholders converted to
additional paid-in capital - 1,450,142
Issuance of common stock for acquisitions (Note 2) 442,500 1,088,387
Conversion of convertible promissory notes into common stock
(Notes 4 and 7(c)) 189,496 -
Purchases of equipment by capital leases (Notes 3 and 6(a)) 421,439 -
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of THINK New
Ideas, Inc. ("THINK" or the "Company") and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company was incorporated in January 1996. On June 30, 1996, the
Company acquired the companies discussed in Note 2 in business combinations.
Certain of the business combinations were accounted for using the pooling of
interests method. The consolidated financial statements give retroactive effect
to those acquisitions. One business combination was accounted for using the
purchase method, and the accounts of this business have been reflected in the
consolidated financial statements from the date of acquisition.
The Company provides marketing and communications services to clients
seeking to market their products and services and convey messages and images to
the public. The Company provides traditional services, such as advertising,
graphic design and artwork, and "new media" services. New media services include
developing Internet web sites and related analytical tools.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated balance sheets and consolidated
statements of cash flows, the Company considers all highly liquid investments
having original maturities of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities are stated at fair market value which approximates
cost and classified as available for sale in accordance with Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", and consist of investments in corporate commercial
paper maturing through December 1997.
F-7
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided
using the straight-line method and includes the amortization of capital lease
assets. The estimated useful lives of property and equipment are as follows:
Years
------------------
Equipment 3 to 5
Furniture and fixtures 5 to 7
Leasehold improvements are amortized over the term of the lease or the
useful life, if shorter.
SOFTWARE DEVELOPMENT COSTS
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed," software development costs incurred by the
Company subsequent to establishing technological feasibility of the resulting
product or enhancement and, until the product is available for general release
to customers, are capitalized and carried at the lower of unamortized cost or
net realizable value. Net realizable value is determined based on estimates of
future revenues to be derived from sale of the software product reduced by costs
of completing and disposing of that product. Amortization of the costs
capitalized began in 1997 and is based on current and anticipated future
revenues for each product or enhancement with an annual minimum equal to
straight-line amortization over the remaining estimated economic life of the
product or enhancement.
LONG-LIVED ASSETS
Long-lived assets, such as goodwill and property and equipment, are
evaluated for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value. No
impairment losses have been necessary through June 30, 1997.
F-8
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
GOODWILL
Goodwill represents the excess of the cost over the fair value of the
identifiable assets acquired in a business combination and is being amortized
using the straight-line method over a period of two years unless future events
or changes in circumstances indicate that an impairment has occurred. No
impairment losses have been necessary through June 30, 1997.
REVENUE RECOGNITION
Revenues from the design and development of Internet web sites and
traditional marketing services are recognized using the percentage-of-completion
method based on the ratio of costs incurred to total estimated costs. Unbilled
receivables represent costs incurred and anticipated profits earned on projects
in progress in excess of amounts billed, and are recorded as assets. Deferred
revenue includes amounts billed in excess of costs incurred and estimated
profits earned, and are recorded as liabilities. To the extent costs incurred
and anticipated costs to complete projects in progress exceed anticipated
billings, a loss is recognized for the excess.
Payments received for subsequent maintenance of Internet web sites are
deferred and recognized over the period during which the maintenance is
supplied.
TAXES ON INCOME
Certain of the Company's subsidiaries had elected S corporation status
under applicable provisions of the Internal Revenue Code and certain state
statutes and, accordingly, were not subject to income taxes. The S corporation
status of these subsidiaries terminated on June 30, 1996 as a result of their
acquisition by the Company.
The Company accounts for income taxes in accordance with the provisions
of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the
recognition of deferred tax assets and liabilities for the expected future
income tax consequences of events that have been recognized in a company's
financial statements or tax return. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts for income tax
purposes using enacted tax rates in effect in the years in which the temporary
differences are expected to reverse.
F-9
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PRO FORMA DATA (UNAUDITED)
Concurrent with the business combinations consummated on June 30, 1996,
the Company entered into employment agreements with certain of its officers (as
discussed further in Note 6(c)). Pro forma adjustments for the year ended June
30, 1996 have been presented to exclude the costs of effecting the business
combination transactions accounted for using the pooling-of-interests method and
reflect these employment agreements as if they had been in effect throughout
1996.
The pro forma data for 1996 do not reflect a benefit for income taxes
because none would have been recognized if the business combinations accounted
for using the pooling of interests method had occurred and the Company and all
of its subsidiaries had been taxed as C corporations since July 1, 1993.
LOSS PER SHARE
Loss per share is computed based on historical net loss for the year
ended June 30, 1997 and pro forma net loss for the year ended June 30, 1996
using the weighted average number of shares of common stock and common stock
equivalents outstanding (which excludes 825,000 shares held in escrow (see Note
7(d)) as adjusted for the effects of applying Securities and Exchange Commission
Staff Accounting Bulletin ("SAB") No. 83, using the treasury stock method.
Pursuant to SAB No. 83, common stock issued by the Company at prices less than
the initial public offering price during the twelve months preceding the initial
filing of a registration statement, together with the number of shares of common
stock subject to options and convertible debt issued during such period having
exercise or conversion prices below the initial public offering price have been
treated as outstanding for all periods presented. As a result, 4,638,337 and
2,506,681 shares were used in the calculations for the years ended June 30, 1997
and 1996, respectively. Similarly, historical and pro forma net loss used in the
calculations were adjusted by approximately $10,000 and $19,000 for the years
ended June 30, 1997 and 1996, respectively, to exclude the related amount of
interest expense on convertible debt issued (see Note 4).
F-10
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LOSS PER SHARE (CONTINUED)
Supplemental pro forma loss per share was $(1.58) and $(.22) for the
years ended June 30, 1997 and 1996, respectively, and was computed by dividing
supplemental historical and pro forma net loss (each as adjusted as described in
the preceding paragraph, further adjusted by approximately $95,000 and $224,000
for the years ended June 30, 1997 and 1996, respectively, the amount of interest
expense on debt repaid with the proceeds of the August 1996 private placement
(see Note 7(b)), by the weighted average number of shares that would have been
treated as outstanding (4,713,660 and 2,617,878 for the years ended June 30,
1997 and 1996, respectively) had the portion of the proceeds from the shares
sold in August 1996 to fund debt repayments been used to repay debt on the dates
it was issued, rather than for the assumed purchase of treasury stock.
Historical loss per share data for the year ended June 30, 1996 is not
considered meaningful and, therefore, is not presented.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet for cash
equivalents, accounts and unbilled receivables, and accounts and notes payable
approximate fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amounts reported for the nonconvertible
portions of the convertible promissory notes approximate fair value. The fair
values of the convertible portions of the convertible promissory notes were
estimated based on the estimated fair value of the common stock into which the
notes were convertible. Based on the price per share for which the Company's
common stock was sold in a private placement in August 1996 (see Note 4), the
estimated aggregate fair value of the convertible portions of the convertible
promissory notes approximated $2,037,000 at June 30, 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-11
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CONCENTRATION OF CREDIT RISK, MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
Financial instruments which potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, marketable
securities and accounts and unbilled receivables. Cash and cash equivalents and
marketable securities consist of deposits and money market funds placed with
various high credit quality financial institutions.
The Company generates revenue principally from customers located in
North America, many of which are large multi-national organizations. During
1997, two customers accounted for 10% and 13%, respectively, of total revenues.
One of these customers accounted for 18% of total revenues in 1996.
Concentrations of credit risk with respect to receivables are limited due to the
geographically diverse customer base. The Company maintains an allowance for
uncollectible receivables based upon expected collectibility of accounts
receivable. At June 30, 1997, one customer accounted for approximately 10% of
accounts and unbilled receivables, collectively.
STOCK-BASED COMPENSATION
The Company accounts for its stock option awards under the intrinsic
value based method of accounting, prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic
value based method, compensation cost is the excess, if any, of the quoted
market price of the stock at grant date or other measurement date over the
amount an employee must pay to acquire the stock. The Company makes pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting had been applied as required by SFAS No. 123, "Accounting
for Stock-Based Compensation."
RECLASSIFICATIONS
Certain amounts as previously reported have been reclassified to conform
to current year classifications.
NEW ACCOUNTING PRONOUNCEMENTS
(a) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share". SFAS No. 128 specifies the computation,
presentation and disclosure
F-12
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
requirements for earnings per share. SFAS No. 128 is effective for periods
ending after December 15, 1997. The adoption of this statement is not expected
to have a material effect on the consolidated financial statements.
(b) REPORTING COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS No. 130 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Because of the recent issuance of this standard, management has
been unable to fully evaluate the impact, if any, the standard may have on
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of this standard.
(c) REPORTING SEGMENTS OF AN ENTERPRISE
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"), which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise". SFAS No. 131 establishes standards for the
way that public companies report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
F-13
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Because of the recent issuance of this standard, management has
been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
NOTE 2 - BUSINESS ACQUISITIONS
On May 31, 1997, the Company acquired certain assets and operations of
Fathom Advertising Agency, Inc. ("Fathom"), a provider of traditional full
service advertising services, from Ketchum Communications, Inc. ("Ketchum"), a
wholly-owned subsidiary of Omnicom Group Inc. ("Omnicom"), a shareholder of the
Company, in exchange for 120,000 shares of the Company's common stock. Fathom
had revenues of approximately $1,800,000 for the year ended December 31, 1996,
which were derived primarily from one customer. The acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
results of operations of Fathom have been reflected in the consolidated
financial statements from the date of acquisition. In connection with the
acquisition, the Company is to return the excess of media accounts receivable
purchased ($3,012,592) over accounts payable assumed ($1,106,080) to the seller
in the amount of $1,906,512, as collected. The purchase price of $442,500, which
equals the excess over the carrying values of the net assets acquired, is being
amortized over two years.
On June 30, 1996, the Company acquired all of the issued and outstanding
shares of common stock of the following entities in exchange for 491,595 shares
of the Company's common stock:
<TABLE>
<CAPTION>
Number of shares
Entity/Date Operations Commenced issued to effect
acquisition
- -------------------------------------------------------------------- ------------------------
<S> <C>
The Mednick Group ("Mednick")/October 1982 208,084
Creative Resources Agency, Inc. ("Creative Resources")/November 1994 3,970
The S.D. Goodman Group ("Goodman")/July 1993 49,623
Internet One, Inc. ("Internet One")/November 1993 34,736
NetCube, Inc. ("NetCube")/February 1978 195,182
</TABLE>
F-14
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 2 - BUSINESS ACQUISITIONS (CONTINUED)
Mednick, Creative Resources and Goodman provide a wide variety of
marketing-related services. NetCube and Internet One are principally providers
of new media services. The acquisition of each of these companies has been
accounted for using the pooling of interests method of accounting, and
accordingly, the accompanying consolidated financial statements give retroactive
effect to these acquisitions, as if the companies had always operated as a
single entity. In connection with these acquisitions, approximately $676,000 of
transaction costs and expenses were incurred and have been charged to expense
during 1996.
Separate results of operations for the combining entities for the year
ended June 30, 1996 are as follows:
Revenues:
Mednick $6,150,950
Creative Resources 371,298
Goodman 561,203
Internet One 1,338,246
NetCube 1,401,286
THINK -
----------------------
Combined $9,822,983
======================
Net income (loss):
Mednick $263,428
Creative Resources 74,000
Goodman 133,010
Internet One 2,974
NetCube (1,032,583)
THINK (855,561)
----------------------
Combined $(1,414,732)
======================
On June 30, 1996, the Company also acquired all of the outstanding
shares of common stock of On Ramp, Inc. ("On Ramp"), a provider of new media
services, in exchange for 231,572 shares of the Company's common stock. The
acquisition has been accounted for using the purchase method of accounting, and
accordingly, the accounts of On Ramp have been reflected in the consolidated
financial statements from the date of acquisition. The purchase price of
$1,338,000 (which includes transaction costs of approximately $250,000) has been
allocated to the assets purchased and the liabilities assumed based upon their
estimated fair
F-15
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 2 - BUSINESS ACQUISITIONS (CONTINUED)
values at the date of acquisition. The excess of the purchase price over the
carrying values of the net assets acquired was approximately $2,310,000 and has
been allocated as follows:
Goodwill $2,159,000
Purchased software and other intangible assets 251,000
Deferred income taxes (100,000)
===============
$2,310,000
===============
Prior to the acquisition, the Company had loaned $1,494,000 to On Ramp.
The following table presents summarized consolidated unaudited pro forma
results of operations for 1997 and 1996 as if the above purchase acquisitions
had occurred at the beginning of each year. The table presents first the
Company's historical 1997 and 1996 operating results, as adjusted for the
effects of the Fathom acquisition in 1997 and both Fathom and On Ramp in 1996.
Below those amounts are the pro forma 1996 operating results reflected in the
consolidated statements of operations, as further adjusted to give effect to the
On Ramp acquisition. These pro forma results are provided for comparative
purposes only and do not purport to be indicative of the results which would
have been obtained if the acquisition had been effected on those dates or of
future results of operations of the consolidated entities.
June 30,
--------------------------------------
1997 1996
----------------- -------------------
Revenues $19,342,847 $13,293,348
Historical net loss (8,707,633) (3,588,682)
Loss per share (1.84) --
Pro forma net loss (3,139,484)
Pro forma net loss per share (1.09)
Transaction costs and expenses relating to the On Ramp acquisition
referred to above include $500,000 in finder's fees to Benchmark Equity Group
("Benchmark"), a shareholder of the Company.
F-16
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Equipment $3,065,576
Furniture and fixtures 660,137
Leasehold improvements 1,127,519
---------------
4,853,232
Less: Accumulated depreciation and amortization 2,567,612
===============
Property and equipment, net $2,285,620
===============
Included in equipment is $465,855 of equipment with accumulated
amortization of $16,796 under capital leases.
NOTE 4 - CONVERTIBLE PROMISSORY NOTES
In March 1996, the Company borrowed $270,000 pursuant to the terms of
three separate convertible promissory notes. Two of the notes, having original
principal balances of $225,000 and $20,000, were payable to an entity controlled
by a shareholder of the Company and to a shareholder, respectively. Each of the
notes bore interest at 10% and were due upon the earlier of September 30, 1996
or the Company raising $2,000,000 through a debt or equity financing. At the
option of the note holders, up to an aggregate of $27,000 in principal was
convertible into 216,667 shares of the Company's common stock.
In April 1996, the Company raised $1,582,500, net of placement fees of
$217,500, through a private placement of 12% convertible promissory notes. The
principal balance, together with accrued interest, was due upon the earlier of
April 30, 1997 or the Company raising $3,000,000 through a debt or equity
financing. The notes were secured by the pledge of all of the outstanding shares
of common stock of On Ramp. At the option of the note holders, up to an
aggregate of $162,495 in principal was convertible into 216,660 shares of the
Company's common stock.
As discussed more fully in Note 7(c), the convertible promissory notes
were converted into common stock or repaid with proceeds obtained from the sale
of the Company's common stock.
F-17
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 5 - INCOME TAXES
Taxes on income consist of the following:
1997 1996
------------------ ------------------
Current:
Federal $ - $382,735
State 105,900 122,135
------------------ ------------------
105,900 504,870
------------------ ------------------
Deferred:
Federal 120,000 (311,000)
State 20,000 (53,000)
------------------ ------------------
140,000 (364,000)
================== ==================
Taxes on income $245,900 $140,870
================== ==================
The difference between the Federal statutory tax rate and the effective
tax rate resulted from the following:
1997 1996
------------ -------------
Federal statutory tax rate (34.0)% (34.0)%
Subsidiaries not subject to income taxes - 5.7
Merger expenses and other permanent differences
- 28.3
State income taxes, net of Federal tax benefit 1.4 6.3
Change in valuation allowance 39.4 7.1
Other items, net (3.4) (2.3)
============ =============
Effective tax rate 3.4% 11.1%
============ =============
F-18
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 5 - INCOME TAXES (CONTINUED)
Temporary differences which gave rise to the deferred tax assets
(liabilities) consisted of the following at June 30, 1997:
Current:
Accounts receivable $(95,250)
Allowance for doubtful accounts 253,655
Accounts payable 176,250
Other 21,600
--------------
Total current 356,255
--------------
Noncurrent:
Property and equipment 98,830
Software development costs and other intangibles (17,000)
Net operating loss carryforwards 3,223,600
--------------
Total noncurrent 3,305,430
--------------
Deferred tax asset valuation allowance (3,366,685)
--------------
Net deferred tax asset $ -
==============
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
These factors include the lack of significant history of profits, the fact that
the market in which the Company competes is intensely competitive and
characterized by rapidly changing technology, and the lack of carryback capacity
to realize these assets.
At June 30, 1997, the Company had Federal net operating loss
carryforwards of approximately $7,500,000. The net operating loss carryforwards
will expire at various dates beginning 2011, if not utilized. Utilization of the
net operating losses may be subject to a substantial annual limitation due to
the ownership change limitations provided by the Internal Revenue Code of 1986
and similar state provisions. The annual limitation may result in the expiration
of net operating losses before utilization.
F-19
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 6 - COMMITMENTS AND CONTINGENCIES
(a) LEASES
Future minimum payments, by year and in the aggregate, under operating
and capital leases with initial or remaining terms of one year or more consisted
of the following at June 30, 1997:
<TABLE>
<CAPTION>
Operating leases Capital leases Total
------------------ --------------- -------------------
<S> <C> <C> <C>
1998 $635,100 $208,424 $843,524
1999 631,080 208,424 839,504
2000 625,282 16,800 642,082
2001 658,704 16,800 675,504
2002 673,716 8,392 682,108
Thereafter 3,306,960 - 3,306,960
================== --------------- ===================
Total minimum lease payments $6,530,842 458,840 $6,989,682
================== ===================
Amount representing interest 37,601
---------------
Present value of net minimum lease
payments 421,239
Less: Current portion 156,867
===============
$264,372
===============
</TABLE>
Total rent expense under operating leases amounted to $654,268 and
$572,248 for the years ended June 30, 1997 and 1996, respectively.
At June 30, 1997, the Company has a commitment to a landlord of $400,000
for a standby letter of credit in connection with one of its operating leases.
Such commitment expires on November 30, 1997, but is renewable on an annual
basis at the landlord's option.
(b) CONSULTING AGREEMENTS
On June 30, 1997, the Company entered into a one year consulting
agreement with an individual whereby the Company will issue up to an aggregate
of 200,000 shares of common stock and options to acquire up to 150,000 shares of
common stock. The agreement, which can be terminated with or without cause by
the Company upon thirty days notice, provides for the issuance of 50,000 shares
within 15 days of signing for services rendered prior to such issuance and the
issuance of 12,500 shares of common stock and options to purchase 12,500 shares
of common stock at the end of each month. The fair value of the shares and
options will be charged to operations on the date of issuance and grant,
respectively. At June 30, 1997, the
F-20
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Company has charged approximately $206,000 to operations and, accordingly,
classified the liability for the issuance of 50,000 shares as noncurrent.
(b) CONSULTING AGREEMENTS (CONTINUED)
In March 1996, the Company entered into a two year consulting agreement
with Benchmark. Under the agreement, the Company is required to pay Benchmark
$35,000 at signing and a monthly fee of $7,000. The Company paid $84,000 and
$56,000 for the years ended June 30, 1997 and 1996, respectively, to Benchmark
in connection with the agreement.
(c) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
officers. The agreements have terms from three to five years and include, among
other things, noncompete agreements and salary and benefits continuation. On May
31, 1997, the Company entered into an employment agreement with the former
president of Fathom (see Note 2). The agreement, which is for two years,
provides for, among other things, salaries of $300,000 and $350,000,
respectively, options, which vest evenly over four years and are subject to
accelerated vesting during the first two years based on certain profitability
milestones, to purchase 250,000 shares of the Company's common stock, at an
exercise price of $3.69 per share (the market price on the date of grant), and
bonuses based on certain profitability and other milestones. Future minimum
salaries under the agreements as of June 30, 1997 are as follows:
Year ended June 30,
1998 $1,095,000
1999 1,020,000
2000 475,000
2001 475,000
NOTE 7 - SHAREHOLDERS' EQUITY
(a) STOCK SPLITS
In June 1996, the Company effected a 6.855-for-one stock split. In
September 1996, the Company effected a .496-for-one reverse stock split. In
November 1996, the Company
F-21
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
effected a two-for-three reverse stock split. All applicable share and per share
data have been retroactively restated to reflect the stock splits.
(b) PRIVATE PLACEMENT
In August 1996, the Company sold equity securities in a private
placement. In November 1996, the agreement pursuant to which the securities were
sold was amended. As a result, the Company issued an aggregate of 938,667 shares
of its common stock in exchange for net proceeds (after transaction costs of
approximately $50,000) of $4,948,000. Additionally, certain of the Company's
shareholders gave the purchaser an additional 124,667 shares of the Company's
common stock held by them for no consideration.
(c) DEBT CONVERSIONS AND EXTINGUISHMENTS
In August 1996, the holders of the convertible promissory notes
discussed in Note 4 converted such notes, aggregating $189,496, into 433,327
shares of common stock. In addition, a portion of the proceeds of the private
placement discussed above was used to extinguish the remaining $1,880,505 of
such notes.
(d) INITIAL PUBLIC OFFERING
On November 26, 1996, the Company completed its initial public offering
of 2,150,000 shares of its common stock at a price of $7.00 per share (the
"Offering") which resulted in the Company receiving net proceeds of $11,972,851.
In connection with the Offering, the Company issued the underwriters of
the Offering warrants to purchase up to 215,000 shares of common stock. Such
warrants are exercisable during the four-year period commencing one year after
the Offering at an exercise price of $9.80 per share, subject to adjustment in
certain events to protect against dilution, and are not transferable for a
period of one year after the date of the Offering. In addition, the warrant
agreement contains "cashless exercise" provisions, as defined.
(d) INITIAL PUBLIC OFFERING (CONTINUED)
Also in connection with the Offering, the Company's founding
shareholders, together with the shareholders who acquired shares in connection
with the business acquisitions discussed in Note 2, contributed, on a pro rata
basis, 825,000 shares of the Company's common stock held by them into an escrow
account. The shares are to be released to the shareholders from the escrow
account upon the Company achieving certain net income targets, as defined in the
F-22
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
escrow agreement, or the closing price of the Company's common stock averages in
excess of $20.00 per share for forty consecutive business days during the
three-year period subsequent to the Offering. The value of the shares released,
as determined by the market price of the shares on the date of the release, will
be recognized as compensation expense in future periods.
NOTE 8 - EMPLOYEE RETIREMENT PLANS
(a) 401(K) PLANS
Certain of THINK's subsidiaries sponsor defined contribution retirement
plans (the "Plans") which cover all employees meeting minimum service
requirements. The Plans qualify as deferred salary arrangements under Section
401(k) of the Internal Revenue Code. The subsidiaries' contributions to the
plans are based on percentages of the employees' contributions. Employer
contributions to the Plans during the years ended June 30, 1997 and 1996 were
approximately $52,000 and $35,000, respectively.
(b) STOCK COMPENSATION PLAN
In July 1996, the Board of Directors adopted and the Company's
shareholders approved the 1996 Stock Option Plan (the "1996 Plan") , which was
subsequently amended and restated in November 1996. The 1996 Plan provided for
the grant of options which qualify as incentive stock options ("Incentive
Options") under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), to officers and employees of the Company and options which do not
so qualify ("Non-Qualified Options") to officers, directors, employees and
consultants of the
(b) STOCK COMPENSATION PLAN (CONTINUED)
Company. A total of 966,667 shares of common stock was reserved for issuance
under the 1996 Plan (subject to adjustment in the event of the Company's
declaration of stock dividends, stock splits, reclassifications and the
occurrence of other similar events). Options to purchase 966,667 shares of
common stock at an exercise price per share of $7.50 (the estimated fair value
of the shares on the date of grant) were granted to certain employees in
November 1996. The options granted were to vest in increments of one-fourth at
the end of each year over a four year period from the date of grant and expire
after ten years.
Pursuant to a resolution of the Board of Directors, the Company
terminated the 1996 Plan and established the THINK New Ideas, Inc. 1997 Stock
Option Plan (the "1997 Plan") which provides for the granting of options, which
qualify as Incentive Options under Section 422 of the Code, to officers and
employees of the Company and Non-Qualified Options to officers, directors,
employees and consultants of the Company. The Board of Directors deemed it
advisable and in the best interest of the Company and its shareholders to
F-23
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
terminate the 1996 Plan and to establish the 1997 Plan. All of the persons
entitled to participate in the 1996 Plan were given the opportunity to
participate in the 1997 Plan and received options to purchase the same number of
shares, with the same terms as the 1996 Plan options, of the common stock they
were entitled to purchase under the 1996 Plan at a price per share equal to
$4.05 (the market price on the date of grant). Under the 1997 Plan, the Company
may grant options to purchase up to 2,000,000 shares of common stock. As of June
30, 1997, there were outstanding options exercisable to purchase up to 1,137,796
shares of common stock.
During the fiscal year ended June 30, 1997, the Board of Directors
granted options to purchase 20,000 shares at an exercise price ranging from
$3.69 to $4.46 (based on the closing bid price of the Common Stock) of common
stock to each of seven directors, of which four are non-employee directors and,
accordingly, the Company has recognized $163,000 of expense, which equals the
fair value of the options granted based on a Black-Scholes model, upon granting
the options. Such options become exercisable over a period of four years.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
(b) STOCK COMPENSATION PLAN (CONTINUED)
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997; risk-free interest rates of 5.53% to 6.51%; volatility
factor of the expected market price of the Company's common stock of 35%; and a
weighted average expected life of the option of 10 years.
F-24
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Under the accounting provisions of SFAS No. 123, the Company's net loss
and loss per share would have been increased to the pro forma amounts indicated
below:
Year ended
June 30, 1997
--------------------------
Net loss:
As reported $(7,571,163)
Pro forma (8,129,163)
Net loss per common share:
As reported $(1.63)
Pro forma (1.75)
NOTE 8 - EMPLOYEE RETIREMENT PLANS (CONTINUED)
A summary of the status of the Company's fixed stock option plans as of
and for the year ended June 30, 1997 is presented below:
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------
Weighted average
Shares exercise price
------------------------ -------------------------
<S> <C> <C>
Outstanding at beginning of year - $ -
Granted 2,104,463 5.59
Exercised - -
Forfeited/cancelled (966,667) 7.50
------------------------
Outstanding at end of year 1,137,796 3.97
========================
Options exercisable at year-end -
========================
Weighted average fair value of options 1.69
granted during the year
</TABLE>
(b) STOCK COMPENSATION PLAN (CONTINUED)
The following table summarizes information about stock options
outstanding at June 30, 1997.
<TABLE>
<CAPTION>
Options outstanding Options exercisable
-------------------------------------------------- ------------------------------
Weighted
Number average Weighted Weighted
Exercise price outstanding remaining average Number average
contractual exercise exercisable exercise
life price price
- ----------------------- ------------- --------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
$3.69 250,000 9.9 years $3.69 - $3.69
4.05 887,796 9.6 4.05 - 4.05
============= ============
1,137,796 9.7 3.96 - 3.96
============= ============
</TABLE>
NOTE 9 - RELATED PARTY TRANSACTIONS
At June 30, 1997, the Company owed $515,760 to the father of the former
shareholder of NetCube. Upon completion of the Offering (see Note 7(d)), the
F-25
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Company repaid approximately $288,000 of an outstanding unsecured promissory
note bearing interest at 10%. On October 1, 1996, the Company amended the terms
of the promissory note whereby the note is convertible, at the payee's option
through March 31, 1998, into shares of the Company's common stock at $7.00 per
share (the initial public offering price), is unsecured and bears interest at
8%. Interest expense incurred by the Company related to the promissory note
totaled approximately $58,000 and $58,000 for the years ended June 30, 1997 and
1996, respectively.
NOTE 10 - RESTRUCTURING COSTS
In June 1997, the Company implemented a plan for NetCube and Internet
One which was designed to close the operations of these subsidiaries and dispose
of related assets due to continued decline in the entities' performance. The
cost of this plan was accounted for in accordance with the guidance set forth in
Emerging Issues Task Force Issue 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)" ("EITF 94-3").
The pretax costs of approximately $1,732,000 which were incurred as a
part of this plan represent employee termination and severance costs, the
write-down of capitalized software costs and other related costs that were
incurred as a direct result of the plan. As of June 30, 1997 no amounts were
paid under this arrangement. The components of the restructuring costs are as
follows:
Write-down of capitalized software costs $597,000
Severance benefits and employee termination costs 681,000
Disposal of fixed assets and other assets 369,000
Other 85,000
===============
$1,732,000
===============
F-26
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Aggregate revenues and operating losses for NetCube and Internet One for
1997 and 1996 were as follows:
1997 1996
------------------ -------------------
Revenues $1,253,000 $2,740,000
Operating loss (1,746,000) (1,073,000)
F-27
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There were no changes in or disagreements with the Company's
independent accountants with respect to accounting and financial disclosures
during the fiscal year ended June 30, 1997.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The names and ages of all directors and executive officers of the
Company are as follows:
NAME AGE POSITION WITH THE COMPANY
Scott Mednick 41 Chief Executive Officer and Chairman of the Board
Ronald Bloom 45 President, Chief Operating Officer and Director
Melvin Epstein 50 Chief Financial Officer and Secretary
Adam Curry 33 Chief Technology Officer and Director
Larry Kopald 43 Chief Creative Officer and Director
James Grannan 34 Executive Vice President
Susan Goodman 42 Executive Vice President
James Carlisle 50 Executive Vice President
Richard Char 38 Director
Marc Canter 40 Director
Barry Wagner 57 Director
MANAGEMENT BIOGRAPHIES
SCOTT MEDNICK has been Chairman of the Board of Directors and Chief Executive
Officer of the Company since its inception in January 1996. Mr. Mednick founded
The Mednick Group a Subsidiary primarily engaged in the provision of strategic
marketing and corporate and brand positioning, in 1985. Mr. Mednick is an
officer and director of The Mednick Group. Mr. Mednick holds a B.F.A. Degree
from the Rhode Island School of Design and a M.A. from the University of Santa
Monica.
RONALD BLOOM has been a Director and the President and Chief Operating Officer
of the Company since June 1996. From 1995 to 1996, Mr. Bloom was Chief Operating
Officer and General Manager of On Ramp, a Subsidiary primarily engaged in the
provision of Internet and intranet systems and services and presently serves as
its Vice President and Secretary. Prior to joining On Ramp, Mr. Bloom founded
24
<PAGE>
and served as the President of Ron Bloom Productions, a production company and
consulting firm founded by Mr. Bloom from 1989 to 1994.
MELVIN EPSTEIN has been the Chief Financial Officer of the Company since
November 1996. From 1994 to August 1996, Mr. Epstein was Managing Director of TN
Services, a unit of True North Communications, an advertising agency. Prior to
joining TN Services, Mr. Epstein was the Chief Financial Officer of Backer
Spielvogel Bates, a subsidiary of Saatchi & Saatchi, P.L.C., from 1987 to 1994.
Mr. Epstein holds a B.S. in Accounting from Queens College.
ADAM CURRY has been a Director and the Chief Technical Officer of the Company
since June 1996. Mr. Curry founded and has been Chairman of the Board of
Directors of On Ramp since 1994 and its President since March 1996. From 1987 to
1992, Mr. Curry served as an On-Air Personality for MTV Networks in New York.
JAMES GRANNAN has been Executive Vice President of the Company since June 1996.
Mr. Grannan founded Creative Resources, a Subsidiary primarily engaged in the
provision of strategic marketing and corporate and brand positioning services,
in 1994. Mr. Grannan was Creative Manager for the Coca-Cola Company from 1992 to
1994 and Promotional Packaging and Design Manager for the Coca- Cola Company
from 1988 to 1992. Mr. Grannan holds a B.A. Degree in Advertising Design from
the Atlanta College of Art.
SUSAN GOODMAN has been Executive Vice President of the Company since June 1996.
Ms. Goodman founded the Goodman Group, a Subsidiary primarily engaged in the
provision of strategic marketing and corporate and brand positioning services,
in 1993. Previously she was Director of Client Services at Chiat Day Direct
Marketing from February 1992 through July 1992. Ms. Goodman serves on the
Operating Committee of the Direct Marketing Association's Business to Business
Council. Ms. Goodman has a B.A. in history from Tufts University and received
her M.B.A. in Marketing, Finance and Strategic Planning from Northwestern
University's Kellogg School of Management.
JAMES CARLISLE has been Executive Vice President of the Company since June 1996.
Dr. Carlisle founded NetCube Corporation, a Subsidiary primarily engaged in the
provision of database and information management and utilization services, in
1978. Dr. Carlisle received his Ph.D. and M.Phil. from Yale University's School
of Organization and Management and a B.S. in Engineering with Honors from
Princeton University.
BARRY WAGNER has been a Director of the Company since September 1996. Mr. Wagner
has been an employee of Omnicom since 1974, and currently serves as Secretary
and General Counsel of Omnicom. Mr. Wagner also serves as Secretary and Chief
Legal Officer of BBDO Worldwide Inc. and is Senior Vice President and Chief
Legal Officer of BBDO New York, both of which are part of Omnicom. Prior to
joining Omnicom, Mr. Wagner was an attorney with the National Broadcasting
Company and the Federal Reserve Bank of New York. Mr. Wagner is a graduate of
Hamilton College and Harvard Law School.
25
<PAGE>
RICHARD CHAR has been a director of the Company since August 1997. Mr Char is
Managing Director and Head of Technology Investment Banking at Cowen & Company.
Prior to joining Cowen & Company, Mr. Char was an attorney for Wilson Sonsini
Goodrich & Rosati for thirteen years. Mr. Char holds an A.B. from Harvard
University and a J.D. from Stanford University.
MARC CANTER has been a director of the Company since August 1997. Mr. Canter has
been the Chairman of Canter Technology since founding the company in 1992. Prior
to forming Canter Technology, Mr. Canter was the founder and chairman of
MacroMind, which merged into MacroMedia, until he retired in 1991. Mr. Canter
holds a B.F.A. from Oberlin Conservatory of Music.
LARRY KOPALD, a director has been the Chief Creative Officer of the Company and
the President of the Company's Los Angeles office since May 1997 and a Director
of the Company since September 1997. Prior to joining the Company, Mr. Kopald
was the Executive Creative Officer of Fathom, a division of Ketchum
Communications, Inc. from 1995 to 1997. Prior to joining Fathom, Mr. Kopald was
the Executive Creative Director/Executive Vice President of Foote, Coyne &
Belding from 1987 to 1994. In 1994, Mr. Kopald founded The Kopald Group, a
consulting firm specializing in strategic and creative issues. Mr. Kopald holds
a B.S. in Pre-Med. from Drake and a Masters degree in Journalism form
Northwestern University.
ANGEL MARTINEZ, formerly a director of the Company, resigned from his position
on the Board of Directors in February 1997.
MICHAEL RIBERO, formerly a director of the Company, resigned from his position
on the Board of Directors in August 1997.
FRANK DELAPE, formerly a director of the Company, resigned from his position on
the Board of Directors in September 1997.
All officers of the Company are elected to serve in such capacities
until the next annual meeting of the Board of Directors of the Company and until
their successors are duly elected and qualified.
The Board of Directors met in excess of five (5) times during the
fiscal year ended June 30, 1997. Two former directors attended fewer than
seventy-five percent (75%) of the total number of meetings held by the Board of
Directors.
There are no material proceedings to which any director, officer or
affiliate of the Company, any owner of record or beneficially of more than five
percent (5%) of any class of voting securities of the Company, or any associate
of any such director, officer, affiliate of the Company or security holder is a
party adverse to the Company.
26
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee, an Executive
Committee and a Compensation Committee, as more fully described below.
AUDIT COMMITTEE. The Company's audit committee (the "Audit Committee")
is responsible for making recommendations to the Board of Directors concerning
the selection and engagement of the Company's independent certified public
accountants and for reviewing the scope of the annual audit, audit fees, and
results of the audit. The Audit Committee also reviews and discusses with
management and the Board of Directors such matters as accounting policies and
internal accounting controls, and procedures for preparation of financial
statements. Prior to his resignation, Mr. Ribero served on the Audit Committee.
Currently, Messrs. Char and Wagner serve as members of the Audit Committee. The
Audit Committee held no meetings during the fiscal year ended June 30, 1997.
EXECUTIVE COMMITTEE. The Company's executive committee (the "Executive
Committee") has the rights, privileges, duties and responsibilities to exercise
the full power and authority of the Board of Directors in the management of the
business of the Company, to the extent not assigned to other committees of the
Board of Directors and to the extent permitted by Delaware law, the Articles of
Incorporation and the Bylaws of the Company. Currently, Messrs. Mednick, Bloom
and Wagner serve as members of the Executive Committee. The Executive Committee
was formed in June 1997 and held one meeting during the fiscal year ended June
30, 1997. The Company has no nominating committee, but the Executive Committee
currently serves the function that a nominating committee would be created to
serve.
COMPENSATION COMMITTEE. The Company's compensation committee (the
"Compensation Committee") approves the compensation for executive employees of
the Company. The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of all officers of the Company, reviews
general policy matters relating to compensation and benefits of employees of the
Company and administers the Company's 1997 Stock Option Plan. Prior to their
resignations, Messrs. Ribero and Martinez served on the Compensation Committee.
Currently, Messrs. Char and Canter serve as members of the Compensation
Committee. The Compensation Committee held one meeting during the fiscal year
ended June 30, 1997.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Commission and NASDAQ. Officers, directors
and greater than ten percent stockholders are required by regulation to furnish
the Company with copies of all Section 16(a) forms that they file.
27
<PAGE>
Based solely upon a review of Forms 3, Forms 4 and Forms 5 furnished to
the Company pursuant to Rule 16a-3 under the Exchange Act, it is the Company's
belief that, other than as set forth below, any such forms required to be filed
pursuant to Section 16(a) of the Exchange Act were filed, as necessary, by the
officers, directors and securityholders required to file the same but some were
filed late as set forth below.
Based on the Company's knowledge, Messrs. Mednick, Bloom, Curry,
Epstein, Wagner, DeLape, Ribero and Martinez were required to file Forms 5. Each
of Messrs. Mednick, Bloom, Curry, DeLape, Epstein and Wagner were required to
file a Form 5 for the fiscal year ended June 30, 1997, and filed such form late.
Messrs. Ribero and Martinez did not file Forms 5. Other than Mr. Epstein who
received options to purchase 133,333 shares of Common Stock, each such person
received during the fiscal year ended June 30, 1997, an option to acquire 20,000
shares of Common Stock, which transaction would have been the subject of such
Form 5.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate cash compensation awarded
to, earned by or paid for services rendered to the Company during the last two
fiscal years by each person serving as the Company's Chief Executive Officer and
the five most highly compensated executive offices serving at June 30, 1997
whose compensation was in excess of $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------------- ------------------------ ---------
SECURITIES
RESTRICTED UNDERLYING
NAME AND OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($) SARS(#) PAYOUTS($) COMPENSATION($)
- ------------------ ---- --------- -------- --------------- --------- ------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Scott A. Mednick1 1997 225,000 28,782 -- -- 20,0002 -- 9,60010
Chairman and CEO 1996 225,000 11,376 20,000 -- -- -- 9,60010
Ronald E. Bloom3 1997 125,000 69,6964 -- -- 20,0002 -- 9,60010
President 1996 106,250 58,234 -- -- -- -- 9,60010
Adam C. Curry5 1997 125,000 81,4804 -- -- 20,0002 -- 9,60010
Chief Technology 1996 125,000 2,684 -- -- -- -- 9,60010
Officer
Melvin Epstein6 1997 156,923 -- -- -- 133,3332 -- --
Chief Financial 1996 -- -- -- -- -- -- --
Officer
Susan Goodman7 1997 195,000 46,825 -- -- 36,6672 -- --
Executive Vice 1996 138,000 -- -- -- -- -- 130,0008
President
Larry Kopald9 1997 300,000 -- -- -- 250,0002 -- 9,60010
President, The 1996 -- -- -- -- -- -- --
Mednick Group
- --------------------------
</TABLE>
28
<PAGE>
1 Mr. Mednick commenced his employment with the Company in March 1996 and
was appointed Chairman and Chief Executive Officer in March 1996.
2 Represents shares of Common Stock issuable upon exercise of options
granted to the noted officer pursuant to the 1997 Stock Option Plan at an
exercise price of $4.05 per share for each individual, other than Mr.
Bloom, who owned in excess of ten percent (10%) of the outstanding Common
Stock on the date of grant and whose options have an exercise price of
$4.46 per share and Mr. Kopald, whose options have an exercise price of
$3.69 per share (representing the fair market value of the Common Stock at
the time of grant as determined in accordance with the provisions of such
plan).
3 Mr. Bloom commenced his employment with the Company in June 1996 and was
appointed President in July 1996.
4 Represents a bonus as determined by the Compensation Committee of the
Board of Directors.
5 Mr. Curry commenced his employment with the Company in June 1996 and was
appointed Chief Technology Officer in June 1996.
6 Mr. Epstein commenced his employment with the Company in August 1996.
7 Ms. Goodman commenced her employment with the Company in June 1996.
8 Represents distributions to the noted executive as the former sole
stockholder of the S.D. Goodman Group, lnc., a Subsidiary and previously a
Subchapter S corporation.
9 Mr. Kopald commenced his employment with the Company effective as of May
31, 1997; consequently, prior to the end of fiscal 1997, Mr. Kopald
received approximately $25,000 of the salary noted above.
10 Represents car allowances provided to the noted individuals.
STOCK OPTION PLANS
In July 1996, the Board of Directors adopted and the Company's
stockholders approved the 1996 Stock Option Plan (the "1996 Plan"), which was
subsequently amended and restated in November 1996. The 1996 Plan provided for
the grant of options which qualify as incentive stock options ("Incentive
Options") under Section 422 of the Internal Revenue Code of 1986, as amend (the
"Code"), to officer and employees of the Company and options which do not so
qualify ("Non-Qualified Options") to officers, directors, employees and
consultants of the Company (including Subsidiaries). A total of 966,667 shares
of Common Stock was reserved for issuance under the 1996 Plan (subject to
adjustment in the event of the Company's declaration of stock dividends, stock
splits, reclassifications and the occurrence of other similar events). Options
to purchase 966,667 shares of Common Stock at an exercise price per share of
$7.50 were granted by the Company in November 1996. The Options granted were to
vest in increments of one-fourth at the end of each year over a four year period
from the date of grant.
Pursuant to a resolution of the Board of Directors, the Company
terminated the 1996 Plan and established the THINK New Ideas, Inc. 1997 Stock
Option Plan (the "1997 Plan") which provides for the grant of options which
quality as Incentive Options under Section 422 of the Code, to officers and
employees of the Company (and the Subsidiaries) and Non-Qualified Options to
officers, directors, employees and consultants of the Company (and the
Subsidiaries). The Board of Directors deemed it advisable and in the best
interests of the Company and its shareholders to terminate the 1996 Plan and to
establish the 1997 Plan and has, by resolution, directed that adoption of the
1997 Plan be presented to the shareholders of the Company for approval and
ratification at the Annual Meeting (currently scheduled to take place on
December 11, 1997). All of the persons entitled to participate in the 1996 Plan
were given the opportunity to participate in the 1997 Plan and received options
to purchase the same number of shares of Common Stock they were entitled to
29
<PAGE>
purchase under the 1996 Plan at an price per share equal to $4.05, the market
price as established pursuant to the 1997 Plan on the date of grant. Under the
1997 Plan, the Company may grant options to purchase up to 1,250,000 shares of
Common Stock. In July 1997, the Executive Committee authorized an amendment to
the 1997 Plan to increase the number of shares reserved for issuance from
1,250,000 shares of common stock to 2,000,000 shares of common stock. As of June
30, 1997, there were options to purchase 1,137,796 shares of Common Stock
outstanding under the 1997 Plan.
An aggregate of 68 persons are eligible to participate in the 1997
Plan. Such persons include 4 executive officers and/or directors who are also
employees of the Company and 64 other employees of the Company who are eligible
to receive Incentive Options under the 1997 Plan, all of which persons (in
addition to 4 non-employee directors) are eligible to receive Non-Qualified
Options under the 1997 Plan.
In addition to the foregoing, during the fiscal year ended June 30,
1997, the Board of Directors granted options to purchase 20,000 shares of Common
Stock to each of Scott A. Mednick, Ronald Bloom, Adam Curry, Frank DeLape, Barry
Wagner, Michael Ribero and Angel Martinez. Consultants engaged by the Company
from time to time are also expected to be eligible to receive Non-Qualified
Options under the 1997 Plan.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SECURITIES PERCENT OF TOTAL 1EXERCISE
UNDERLYING OPTIONS/SARS GRANTED TO OR BASE
NAME OPTIONS/SARS GRANTED (#) EMPLOYEES IN FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- ------------------ ------------------------ ------------------------ ------------ ---------------
<S> <C> <C> <C> <C>
Scott Mednick 20,000 1.76 4.05 2002
Ronald Bloom 20,000 1.76 4.46 2002
Adam Curry 20,000 1.76 4.05 2002
Melvin Epstein 133,333 11.72 4.05 2007
Susan Goodman 36,667 3.22 4.05 2007
Larry Kopald 250,000 21.97 3.69 2007
</TABLE>
- --------------------------
1 Based upon the closing bid price of the Company's Common Stock on the day
prior to the grant date as quoted by the Nasdaq National Market Systemsm.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
There were no options exercised during fiscal 1997 by the Named
Executive Officers. The following table sets forth certain information with
respect to unexercised options held by such persons at the end of fiscal 1997.
30
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
SHARES UNEXERCISED OPTIONS/SARS AT VALUE OF UNEXERCISED IN THE MONEY
ACQUIRED ON VALUE FY-END (#) OPTIONS/SARS AT FY-END ($)1
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Scott Mednick None None None 20,000 None $1,600
Ronald Bloom None None None 20,000 None $1,600
Adam Curry None None None 20,000 None $1,600
Melvin Epstein None None None 133,333 None $10,667
Susan Goodman None None None 36,667 None $2,933
Larry Kopald None None None 250,000 None $110,000
</TABLE>
- --------------------------
1 The calculations of the value of unexercised options are based on the
difference between the closing bid price quoted by the Nasdaq National
Market System of the Common Stock on June 30, 1997, and the exercise
price of each option, multiplied by the number of shares covered by the
option.
EMPLOYMENT AGREEMENTS
In June 1996, the Company entered into an employment agreement with
each of Scott Mednick, Ronald Bloom, Adam Curry and James Carlisle, each of
which provides for an initial term of three years, subject to automatic
extension for a period of two years in the absence of notice to the contrary at
the option of the Company. Mr. Mednick's employment agreement provides that he
is entitled to receive an annual salary of $225,000. Pursuant to the terms of
their respective employment agreements, as amended, each of Messrs. Bloom, Curry
and Carlisle receives an annual salary of $125,000. Each of Messrs. Mednick,
Bloom, Curry and Carlisle are entitled to receive bonuses as determined by the
Board of Directors. The Compensation Committee has granted bonuses to each of
Messrs. Mednick, Bloom and Curry in the aggregate amounts, respectively, of
$28,782; $69,696 and $81,480.
The Company also entered into an employment agreement with James
Grannan which provided for a term of one year, subject to renewal for a period
of one year at the discretion of the Company. On July 31, 1997, Mr. Grannan's
employment agreement was renewed for a period of one year. Pursuant to the terms
of such agreement, Mr. Grannan receives an annual salary of $125,000 and bonuses
as determined by the Board of Directors. In connection with the recent renewal,
Mr. Grannan was granted a $15,000 bonus.
The Company is also a party to an employment agreement with Susan
Goodman, entered into in June 1996, which provides for an initial term of three
years. Pursuant to the terms of the employment agreement, Ms. Goodman is
entitled to receive an annual salary of $195,000 and bonuses thereafter as
determined by the Board of Directors. In addition, Ms. Goodman has received
bonuses pursuant to the terms of her employment agreement with the Company.
The Company also entered into an employment letter with Mel Epstein,
which provides for a term of one year, subject to renewal for periods of one
year at the discretion of the Company. Pursuant to the terms of such agreement,
Mr. Epstein receives an annual salary of $180,000.
31
<PAGE>
In April 1997, the Company and David Hieb, formerly the owner of
Internet One, entered into an agreement pursuant to which Mr. Hieb's employment
with the Company was terminated in exchange for the payment to Mr. Hieb of
$40,000 and acceleration of the vesting of options previously granted to him
under the 1997 Plan to acquire 10,470 shares of Common Stock.
In May 1997, in connection with the Company's acquisition of certain
assets of Ketchum, the Company reached an agreement with Larry Kopald, pursuant
to which Mr. Kopald is entitled to receive an annual salary of $300,000 the
first year of his employment and $350,000 the second year of his employment. In
addition, Mr. Kopald is entitled to receive bonuses of up to $150,000 in the
first year of his employment and up to $100,000 in the second year of his
employment based upon Oracle entering into advertising services agreements. Mr.
Kopald is also entitled to receive bonuses of up to ten percent (10%) of profits
on billings on the Oracle account in excess of $16 million dollars in the first
year of his employment agreement and up to ten percent (10%) of profits on
billings on the Oracle account in excess of $20 million dollars in the second
year of his employment, and options exercisable to purchase up to 250,000 shares
of Common Stock in equal increments over a period of four years at an exercise
price of $3.69 per share, the market price of the Common Stock at the date of
grant.
The Company's employment agreements provide for termination by the
Company upon death or disability of the individual and may be terminated with or
without cause (as defined therein). Such agreements also provide for severance
payments upon termination without cause based upon a multiple of the monthly
salaries provided for therein (for up to twelve months following the number of
months otherwise remaining under such agreements). In addition, all of the
foregoing employment agreements contain non-competition and confidentiality
provisions that extend beyond the respective terms of such agreements for
periods of up to one year.
CONSULTING AND OTHER ARRANGEMENTS
In March 1996, the Company entered into consulting agreements with
Benchmark Equity Group, Inc. ("Benchmark") pursuant to which the Company paid
Benchmark $500,000 in finders fees and pays $7,000 per month in consulting fees.
As of the date hereof, only one of such agreements (the $7,000 per month
agreement) remains in effect and is scheduled to expire in March 1998. Frank
DeLape, a stockholder and former director of the Company, is a principal and
director of Benchmark.
In June 1997, the Company entered into a consulting agreement with
Jason H. Pollak, pursuant to which Mr. Pollak agreed to render to the Company
for a period of one year certain consulting services, including, among other
things, providing merger and acquisition and investor and public relations
services. In exchange therefor, the Company issued, in July 1997, 50,000 shares
of Common Stock and agreed to issue an aggregate of 150,000 shares of Common
Stock and options to acquire up to 150,000 additional shares of Common Stock.
The securities subject to the consulting agreement are issuable in equal monthly
installments and the option exercise prices are based upon the closing bid price
of the Common Stock in each month that the corresponding options are issued.
32
<PAGE>
REMUNERATION OF DIRECTORS
Employee directors of the Company receive no compensation for acting as
directors or attending meetings of the Board of Directors. Non-employee
directors receive $1,000 per year for each year such director serves on the
Board of Directors and $2,500 per meeting attended. In addition, all directors
are eligible to receive options under the 1997 Plan. All directors are entitled
to reimbursement of reasonable expenses related to attending meetings of the
directors. In addition, each director received an option to purchase an
aggregate of 20,000 shares of Common Stock. See the charts set forth
hereinabove.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of the date hereof, certain
information with respect to stock ownership of: (i) all persons known by the
Company to be beneficial owners of five percent or more of outstanding Common
Stock; (ii) each of the Company's directors and executive officers; and (iii)
all directors and executive officers as a group (7 persons). Unless otherwise
indicated, the beneficial owners have sole voting and investment power over the
shares of Common Stock listed below.
<TABLE>
<CAPTION>
NUMBER OF SHARES % OF OUTSTANDING
NAME AND ADDRESS OF COMMON STOCK SHARES OF COMMON
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) STOCK BENEFICIALLY OWNED
- ------------------- --------------------- ------------------------
<S> <C> <C>
Frank M. DeLape(2) 898,898(3) 13.6%
16406 Brook Forest Drive
Houston, Texas 77059
Benchmark Equity Group, Inc. 682,231(4) 10.3%
700 Gemini
Houston, Texas 77058
Ronald Bloom(5) 955,933(6) 14.3%
45 West 36th Street
New York, New York 10018
Scott A. Mednick(5) 710,467(6) 10.6%
8000 Sunset Boulevard, Penthouse East
Los Angeles, California 90046
33
<PAGE>
NUMBER OF SHARES % OF OUTSTANDING
NAME AND ADDRESS OF COMMON STOCK SHARES OF COMMON
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) STOCK BENEFICIALLY OWNED
- ------------------- --------------------- ------------------------
Adam Curry(5) 258,225(6) 3.9%
30 Glen Road
Verona, New Jersey 07044
Melvin Epstein(7) 33,333(8) *
45 West 36th Street
New York. New York 10018
Larry Kopald(5) 250,000(9) *
8000 Sunset Boulevard, Penthouse East
Los Angeles, California 90046
James Carlisle(10) 211,849(11) 3.2%
45 Allison Road
Alpine, New Jersey 07620
Susan Goodman(10) 58,790(12) *
45 West 36th Street
New York. New York 10018
James Grannan(10) 12,637(13) *
500 Bishop Street, Suite 5A
Atlanta, GA 30305
Omnicom Group Inc. 1,183,333(14) 17.9%
437 Madison Avenue
New York, New York 10022
Barry Wagner(15) 20,000(16) *
437 Madison Avenue, 9th Floor
New York, New York 10022
Richard Char(15) 20,000(16) *
14 Sunkist Lane
Los Altos, California 94022
Marc Canter(15) 20,000(16) *
701 Rhode Island
San Francisco, California 94107
All Directors and Executive Officers as a 2,261,234 32.7%
Group (11 persons)
</TABLE>
- -------------------
* Denotes less than one percent.
1 Unless otherwise noted, all of such shares of Common Stock listed above
are owned of record by each individual named as beneficial owner and each
such individual has sole voting and dispositive power with respect to the
shares of Common Stock owned. The percentage of ownership is determined by
assuming that any options or convertible securities held by the noted
securityholder which are exercisable within 60 days from the date hereof
have been exercised or converted, as the case may be.
2 Former director of the Company. See "Directors and Executive Officers"
below.
3 Includes 682,231 shares and 180,000 shares of Common Stock beneficially
owned by Benchmark Equity Group, Inc. and Trident II, L.L.C., respectively
and 16,667 shares of Common Stock beneficially owned by Frank DeLape. Also
includes options to acquire 20,000 shares of Common Stock granted to Frank
DeLape as a director of the Company prior to his resignation. Mr. DeLape
is an officer, director and principal stockholder of Benchmark Equity
34
<PAGE>
Group, Inc., a principal stockholder of the Company, and is an officer,
director and principal of Oak Tree Capital, Inc., which is the manager and
a member of Trident II, L.L.C. Mr. DeLape may be deemed to be beneficial
owner of all such shares. Excludes 97,461 shares held by Christopher
Efird, a principal of Benchmark Equity Group, Inc., and a former director
of the Company.
4 Excludes 180,000 shares of Common Stock owned by Trident II, L.L.C.,
16,667 shares of Common Stock owned by Frank DeLape and 20,000 shares of
Common Stock issuable upon exercise of options granted to Mr. DeLape.
5 Officer and director of the Company. See "Directors and Executive
Officers" below.
6 Includes 80,000 shares of Common Stock issuable upon exercise of currently
exercisable options granted to the noted securityholder, but excludes
20,000 shares of Common Stock subject to options which are not currently
exercisable. See "Executive Compensation."
7 Chief Financial Officer of the Company. See "Directors and Executive
Officers" below.
8 Includes 33,333 shares of Common Stock issuable upon exercise of currently
exercisable options granted to the noted securityholder, but excludes
125,000 shares of Common Stock subject to options which are not currently
exercisable. See "Executive Compensation."
9 Includes 250,000 shares of Common Stock issuable upon exercise of options
granted to the noted securityholder, which options are not currently
exercisable. See "Executive Compensation."
10 Officer of the Company.
11 Includes 16,667 shares of Common Stock issuable upon exercise of currently
exercisable options granted to the noted securityholder, but excludes
50,000 shares of Common Stock subject to options which are not currently
exercisable.
12 Includes 9,167 shares of Common Stock issuable upon exercise of options
granted to the noted securityholder but excludes 52,500 shares of Common
Stock subject to options which are not currently exercisable.
13 Includes 8,667 shares of Common Stock issuable upon exercise of options
granted to the noted securityholder but excludes 36,000 shares of Common
Stock subject to options which are not currently exercisable.
14 Includes 120,000 shares issued to Omnicom Group Inc. in connection with
the Company's acquisition of the assets and operations of Fathom
Advertising from Ketchum Communications, Inc., a wholly-owned subsidiary
of Omnicom Group Inc.
15 Director of the Company. See "Directors and Executive Officers" below.
16 Includes 20,000 shares of Common Stock issuable upon exercise of options
granted to the noted securityholder, which options are not currently
exercisable.
There are no agreements or other arrangements or understandings known
to the Company concerning the voting of the Common Stock or otherwise concerning
control of the Company which are not disclosed herein. There are no pre-emptive
rights applicable to the Company's securities.
35
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1996, Scott Mednick, Ronald Bloom, Benchmark and Christopher
Efird, as the founding stockholders of the Company, acquired an aggregate of
2,171,506 shares of Common Stock in exchange for payment of an aggregate of $656
therefor.
In connection with the Company's acquisition of The Mednick Group in
June 1996, the Company issued to Scott Mednick, as the sole stockholder of The
Mednick Group, an aggregate of 208,084 shares of Common Stock. Mr.
Mednick is a founding stockholder, an officer and a director of the Company.
In March 1996, the Company obtained a loan in the aggregate principal
amount of $270,000 from three separate lenders, including Trident II, L.L.C. and
Frank M. DeLape. In exchange for extension of the loan, the Company issued
the10% Notes, including one in the principal amount of $225,000 to Trident II,
L.L.C. and one in the principal amount of $20,000 to Mr. DeLape. Mr. DeLape, a
founder of the Company and a former director, is an officer, director and
principal of Benchmark and of Oak Tree Capital, Inc., which is the manager and a
member of Trident II, L.L.C. In August 1996, an aggregate of $27,000 in
principal amount of the foregoing 10% Notes was converted by the holders thereof
into an aggregate of 216,667 shares of Common Stock. In July 1996, Trident II,
L.L.C. loaned the Company an additional $75,000 evidenced by a separate
non-convertible promissory note. Principal and interest outstanding under the
10% Notes and the $75,000 non-convertible promissory note were repaid out of the
proceeds of the Omnicom Transaction in August 1996, as more fully described
elsewhere herein.
Also in March 1996, the Company entered into consulting agreements with
Benchmark pursuant to which the Company paid Benchmark $500,000 in finders fees
and pays $7,000 per month in consulting fees. As of the date hereof, only one of
such agreements (the $7,000 per month agreement) remains in effect and is
scheduled to expire in March 1998. Frank DeLape, a stockholder and former
director of the Company, is a principal and director of Benchmark.
In April 1996, upon release of an escrow account established to
facilitate the following loan transaction, the Company loaned an aggregate of
$1,000,000 to On Ramp in connection with the redemption by On Ramp of 100 shares
of its common stock (which shares of common stock represented 66% of the issued
and outstanding capital stock of On Ramp). Such redemption was the result of an
agreement previously reached among the former stockholders of On Ramp arising
out of fundamental differences among such individuals relating to the operation
and business strategy of On Ramp. In addition, pursuant to the terms of a
certain loan agreement between the Company and On Ramp, the Company agreed to
make available to On Ramp an additional $600,000, of which $494,000 has been
borrowed by On Ramp as of the date hereof. Such loans are evidenced by
promissory notes executed on behalf of On Ramp in favor of the Company in the
36
<PAGE>
principal amounts of $1,000,000 and $600,000, respectively (the "On Ramp
Notes"). Amounts outstanding under the On Ramp Notes accrue interest at the rate
of 12% per annum. Payment of principal and interest on the On Ramp Notes was due
on August 16, 1996, subject to a six-month cure period. Repayment of amounts
outstanding under the On Ramp Notes were secured by the pledge in favor of the
Company of 26 shares of common stock of On Ramp by Adam Curry (who, as a result
of the foregoing redemption, became the sole stockholder of On Ramp).
Subsequently, in connection with the Company's acquisition of On Ramp, the
Company acquired all of the issued and outstanding capital stock of On Ramp,
including the shares of common stock subject to the On Ramp Pledge Agreement.
In May 1996, pursuant to the terms of a certain loan agreement between
the Company and Internet One, the Company agreed to make available to Internet
One up to $70,000, of which $50,000 has been borrowed by Internet One as of the
date hereof. Such loan is evidenced by a promissory note executed by Internet
One in favor of the Company in the principal amount of $70,000 (the "Internet
One Note"). Amounts outstanding under the Internet One Note accrue interest at
the rate of 12% per annum. Payment of principal and interest on the Internet One
Note is due on September 30, 1996. Repayment of amounts outstanding under the
Internet One Note was secured by the pledge in favor of the Company (the
"Internet One Pledge Agreement") of 132,000 shares of common stock of Internet
One (which shares of common stock represent 33% of the issued and outstanding
capital stock of Internet One) by David R. Hieb. Subsequently, in connection
with the Company's acquisition of Internet One, the Company acquired all of the
outstanding shares of capital stock of Internet One, including the shares of
common stock subject to the Internet One Pledge Agreement.
Historically, Dr. Carlisle and his father, Dan Carlisle, extended
credit to NetCube. In connection with the Company's acquisition of NetCube in
June 1996, Dr. Carlisle agreed to forgive an aggregate of approximately
$1,220,000 in debt owed to him by NetCube. In addition, the Company agreed to
issue three promissory notes providing for repayment of amounts owed to each of
Dr. Carlisle and Dan Carlisle. Each of such promissory notes accrued interest at
the rate of 8% per annum and was convertible into shares of Common Stock prior
to expiration thereof at the rate of $7.50 per share. The principal amount of
the promissory note issued to Dr. Carlisle was $132,000 and the principal
amounts of the two promissory notes issued to Dan Carlisle were $288,000 and
$515,760, respectively. The $132,000 promissory note issued to Dr. Carlisle and
the $288,000 promissory note issued to Dan Carlisle were repaid prior to the
Initial Public Offering. The $515,760 convertible promissory note issued to Dan
Carlisle is payable on March 31, 1998 (or earlier, upon the Company's receipt of
$3,000,000 from a private offering of securities, the sale of 50% of the assets
of the Company or another public offering).
Pursuant to the terms of the Omnicom Agreement: (a) Omnicom purchased
938,667 shares of Common Stock from the Company in exchange for net proceeds of
$4,948,000; (b) the Company appointed Barry Wagner to represent Omnicom on the
Board of Directors; (c) Omnicom agreed not to increase its ownership interest in
37
<PAGE>
the Company absent the approval of the Board of Directors; and (d) Omnicom
granted the Company a right of first refusal to purchase the shares of Common
Stock owned by Omnicom.
In November 1996, four principal stockholders of the Company
transferred an aggregate of 124,667 shares of Common Stock to Omnicom for no
cash consideration. In connection therewith, Omnicom consented to a stock split
by the Company and related amendments to the Omnicom Agreement and the Company
agreed to decrease the number of shares available under the 1996 Plan.
The Company entered into the Omnicom Transaction to establish a
strategic relationship which management of the Company believes could provide
access to a substantial additional client base, although there can be no
assurance that such result will occur. Since June 1996, Omnicom and the Company
have engaged in the joint marketing of their services to several Omnicom
clients. There can be no assurance that such joint marketing will continue, nor
can there be any assurance with respect to the effect of such marketing on the
Company's operations.
In May 1997, the Company entered into the Ketchum Agreement, pursuant
to which the Company acquired certain assets and operations of Fathom from
Ketchum, a wholly-owned subsidiary of Omnicom, in exchange for the issuance of
120,000 shares of Common Stock.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
EXHIBIT
NUMBER TITLE OF EXHIBIT
2.1 Asset Purchase and Forbearance Agreement, dated May
31, 1997, by and between THINK New Ideas, Inc. and
Ketchum Communications, Inc.
3.1 Articles of Incorporation of THINK NEW IDEAS, Inc.,
(Delaware) (Registrant) filed with the Securities and
Exchange Commission on September 26, 1996 as an
exhibit to the Company's Registration Statement on
Form SB-2 (File No. 333-12795) and incorporated
herein by reference.
3.2 Agreement and Plan of Merger by and among THINK NEW
IDEAS, Inc., On Ramp, Inc. and Adam Curry filed with
the Securities and Exchange Commission on September
26, 1996 as an exhibit to the Company's Registration
38
<PAGE>
Statement on Form SB-2 (File No. 333-12795) and
incorporated herein by reference.
3.3 Agreement and Plan of Merger by and among THINK NEW
IDEAS, Inc., NetCube Corporation and James Carlisle,
Ph.D. filed with the Securities and Exchange
Commission on September 26, 1996 as an exhibit to the
Company's Registration Statement on Form SB-2 (File
No. 333-12795) and incorporated herein by reference.
3.4 Agreement and Plan of Merger by and among THINK NEW
IDEAS, Inc., Creative Resources, Inc. and James
Grannan filed with the Securities and Exchange
Commission on September 26, 1996 as an exhibit to the
Company's Registration Statement on Form SB-2 (File
No. 333-12795) and incorporated herein by reference.
3.5 Agreement and Plan of Merger by and among THINK NEW
IDEAS, Inc., The S.D. Goodman Group, Inc. and Susan
Goodman filed with the Securities and Exchange
Commission on September 26, 1996 as an exhibit to the
Company's Registration Statement on Form SB-2 (File
No. 333-12795) and incorporated herein by reference.
3.6 Agreement and Plan of Merger by and among THINK NEW
IDEAS, Inc., Internet One, Inc. and David and Dana
Hieb filed with the Securities and Exchange
Commission on September 26, 1996 as an exhibit to the
Company's Registration Statement on Form SB-2 (File
No. 333-12795) and incorporated herein by reference.
3.7 Agreement and Plan of Merger by and among THINK NEW
IDEAS, Inc., Scott Mednick & Associates, Inc. and
Scott Mednick filed with the Securities and Exchange
Commission on September 26, 1996 as an exhibit to the
Company's Registration Statement on Form SB-2 (File
No. 333-12795) and incorporated herein by reference.
3.8 Bylaws of THINK New Ideas, Inc. filed with the
Securities and Exchange Commission on September 26,
1996 as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 333-12795) and
incorporated herein by reference.
4.1 Specimen Common Stock Certificate filed with the
Securities and Exchange Commission on September 26,
1996 as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 333-12795) and
incorporated herein by reference.
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<PAGE>
4.2 Form of Warrant Agreement among the Company,
Commonwealth Associates and Continental Stock
Transfer and Trust Company filed with the Securities
and Exchange Commission on September 26, 1996 as an
exhibit to the Company's Registration Statement on
Form SB-2 (File No. 333-12795) and incorporated
herein by reference.
4.3 THINK New Ideas, Inc. 1996 Stock Option Plan, filed
with the Securities and Exchange Commission on
September 26, 1996 as an exhibit to the Company's
Registration Statement on Form SB-2 (File No.
333-12795) and incorporated herein by reference.
4.4 THINK New Ideas, Inc. 1997 Stock Option Plan.
10.1 Employment Agreement between THINK New Ideas, Inc.
and Scott Mednick, filed with the Securities and
Exchange Commission as an exhibit to the Company's
Registration Statement on Form SB-2, dated September
26, 1996 (File No. 333-12795), and incorporated
herein by reference.
10.2 Employment Agreement between THINK New Ideas, Inc.
and Ron Bloom, filed with the Securities and Exchange
Commission as an exhibit to the Company's
Registration Statement on Form SB-2, dated September
26, 1996 (File No. 333-12795), and incorporated
herein by reference.
10.3 Employment Agreement between THINK New Ideas, Inc.
and Adam Curry, filed with the Securities and
Exchange Commission as an exhibit to the Company's
Registration Statement on Form SB-2, dated September
26, 1996 (File No. 333-12795), and incorporated
herein by reference.
10.4 Employment Agreement between THINK New Ideas, Inc.
and Susan Goodman, filed with the Securities and
Exchange Commission as an exhibit to the Company's
Registration Statement on Form SB-2, dated September
26, 1996 (File No. 333-12795), and incorporated
herein by reference.
10.5 Employment Agreement between THINK New Ideas, Inc.
and James Carlisle, filed with the Securities and
Exchange Commission as an exhibit to the Company's
Registration Statement on Form SB-2, dated September
26, 1996 (File No. 333-12795), and incorporated
herein by reference.
40
<PAGE>
10.6 Employment Agreement between THINK New Ideas, Inc.
and James Grannan, filed with the Securities and
Exchange Commission as an exhibit to the Company's
Registration Statement on Form SB-2, dated September
26, 1996 (File No. 333-12795), and incorporated
herein by reference.
10.7 Employment Agreement between THINK New Ideas, Inc.
and Mel Epstein.
10.8(a) Employment Letter between THINK New Ideas, Inc. and
Larry Kopald.
10.8(b)* Employment Agreement between THINK New Ideas, Inc.
and Larry Kopald.
10.9 Consulting Agreement, dated June 30, 1997, between
THINK New Ideas, Inc. and Jason H. Pollak, filed with
the Securities and Exchange Commission as an exhibit
to the Company's Registration Statement on Form S-8
filed with the Commission on July 17, 1997 (File
No.333-31511) and incorporated herein by reference.
10.10 Letter Amendment to Employment Agreement of James
Grannan.
10.11 Termination Agreement between THINK New Ideas, Inc.
and David Hieb.
11 Statement regarding earnings per share.
12.1 Quarterly Report on Form 10-QSB for quarter ended
December 31, 1997 filed with the Securities and
Exchange Commission on February 15, 1997 and
incorporated herein by reference.
12.2 Quarterly Report on Form 10-QSB for quarter ended
March 31, 1997 filed with the Securities and Exchange
Commission on April 15, 1997 and incorporated herein
by reference.
23.1 Consent of BDO Seidman, LLP
27 Financial Data Schedule.
* Denotes documents filed herewith. Other documents are incorporated herein by
reference as noted above.
41
<PAGE>
(b) REPORTS ON FORM 8-K.
There were no Current Reports on Form 8-K filed by the Company during
the last quarter of the fiscal year ended June 30, 1997.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized.
THINK NEW IDEAS, INC.
Dated: May 4, 1998 By: /s/ Scott A. Mednick
----------------------
Scott A. Mednick, Chairman and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Scott A. Mednick Chief Executive Officer, Chairman May 4, 1998
- ----------------------------- of the Board and Director
Scott A. Mednick
/s/ Ronald Bloom President and Director May 4, 1998
- -----------------------------
Ronald Bloom
/s/ Adam Curry Chief Technology Officer and May 4, 1998
- ----------------------------- Director
Adam Curry
/s/ Melvin Epstein Chief Financial Officer May 4, 1998
- -----------------------------
Melvin Epstein
/s/ Barry Wagner Director May 4, 1998
- -----------------------------
Barry Wagner
Director
- -----------------------------
Richard Char
Director
- -----------------------------
Marc Canter
/s/ Larry Kopald Director May 4, 1998
- -----------------------------
Larry Kopald
</TABLE>
43
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of the
31st day of May, 1997, between THINK New Ideas, Inc., a Delaware corporation
(the "Company"), and Larry Kopald, an individual resident of Los Angeles,
California (the "Employee").
WITNESSETH:
WHEREAS, it is the desire of the Company to offer the Employee
employment with the Company upon the terms and subject to the conditions set
forth herein; and
WHEREAS, it is the desire of the Employee to accept the Company's offer
of employment with the Company upon the terms and subject to the conditions set
forth herein.
NOW THEREFORE, in consideration of the premises and mutual covenants,
conditions and agreements contained herein and for such other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, each intending to be legally bound hereby, agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ the Employee and the
Employee hereby agrees to be employed by the Company upon the terms and subject
to the conditions set forth herein for the period of employment as set forth in
Section 2 hereof (the "Period of Employment").
2. TERM; PERIOD OF EMPLOYMENT. Subject to extension or termination as
hereinafter provided, the Period of Employment hereunder shall be from the date
hereof (the "Effective Date") through the second anniversary of the Effective
Date. Thereafter, the Period of Employment may be extended for successive one
(1) year periods (each, a "Renewal Period") at the option of the Company upon
delivery of written notice by the Company to the Employee, subject to acceptance
by the Employee, not less than one (1) month prior to the expiration of the
Period of Employment, as previously extended. The phrase "Period of Employment"
as used herein shall, unless otherwise indicated: (a) specifically include any
extensions permitted hereunder or provided herein, except as otherwise noted;
and (b) be deemed to have terminated as of the date of any notice provided to
the Employee pursuant to Section 9 hereof, notwithstanding the Company's
obligation to pay the Employee pursuant to Subsections 9(b) and 9(c) hereof.
3. OFFICE AND DUTIES. During the Period of Employment:
a) the Employee shall serve as the chief creative officer of
the Company, having the authority and duties of an officer as set forth in the
bylaws of the Company (the "Bylaws") with the responsibilities reasonably
prescribed for such position by the board of directors of the Company (the
"Board of Directors") in accordance with the Bylaws;
<PAGE>
b) in addition to the foregoing, the Employee shall serve as
the president of the Company's wholly-owned subsidiary, Scott Mednick &
Associates, Inc. for so long as the Company owns at least a majority of the
outstanding voting securities of such entity and thereafter, the Employee shall
serve as the president of any west coast division of the Company;
c) the Employee shall devote substantially all of his time to
the business and affairs of the Company except for vacations, illness or
incapacity, as hereinafter set forth. Notwithstanding the preceding sentence,
nothing in this Agreement shall preclude the Employee from devoting reasonable
amounts of time:
(i) for serving as a director, officer or member of a
committee of any organization or entity involving no conflict of interest with
the Company; or
(ii) engaging in charitable and community activities;
PROVIDED, HOWEVER, that such activities do not interfere with the performance by
the Employee of his duties hereunder. In consideration of such employment, the
Employee agrees that he shall not, directly or indirectly, individually or as a
member of any partnership or joint venture, or as an officer, director,
stockholder, employee or agent of any other person, firm, corporation, business
organization or other entity, engage in any trade or business activity or
pursuit for his own account or for, or on behalf of, any other person, firm,
corporation, business organization or other entity, irrespective of whether the
same competes, conflicts or interferes with that of the Company or the
performance of the Employee's obligations hereunder; PROVIDED, however, that
nothing contained herein shall be construed to prevent the Employee from: (x)
investing in the stock of any corporation, which does not compete with the
Company, which is listed on a national securities exchange or traded in the
over-the-counter market if the Employee does not and will not as a result of
such investment own more than five percent (5%) of the stock of such corporation
("Permitted Investments"); or (y) engaging in personal business ventures to
which the Employee devotes time outside of the time required to be devoted to
the business of the Company hereunder. The Employee represents and warrants that
he is not party to any agreement, oral or written, which restricts in any way:
(a) his ability to perform his obligations hereunder; or (b) his right to
compete with a previous employer or such employer's business;
d) the Employee shall be entitled to four (4) weeks of
vacation per year, subject to adjustment at the discretion of the Board of
Directors.
e) the Employee shall be nominated by the Board of Director to
stand for re-election as a director of the Company for as long as the Employee
is employed by the Company.
4. COMPENSATION AND BENEFITS. In exchange for the services rendered by
the Employee pursuant hereto in any capacity during the Period of Employment,
including without limitation, services as an officer, director, or member of any
committee of the Company or any affiliate, subsidiary or division thereof, the
Employee shall be compensated as follows:
2
<PAGE>
a) COMPENSATION. During the first year of the Period of
Employment, the Company shall pay the Employee compensation equal to Three
Hundred Thousand Dollars ($300,000) at a rate of Twenty-Five Thousand Dollars
($25,000) per month. During the second year of the Period of Employment, the
Company shall pay the Employee compensation equal to Three Hundred Fifty
Thousand Dollars ($350,000) at the rate of Twenty-Nine Thousand One Hundred
Sixty-Six Dollars and Sixty-Six Cents ($29,166.66) per month (such monthly
amount as the same may be increased from time to time by the Board of Directors
shall be defined as the "Monthly Compensation"). Such salary shall be payable in
accordance with the customary payroll practices of the Company.
b) ORACLE ACCOUNT BONUS. In the event that, during the first
year of the Period of Employment, Oracle Corporation ("Oracle") enters into a
one (1) year advertising services agreement with the Company, the Employee shall
be entitled to receive a bonus of One Hundred Fifty Thousand Dollars ($150,000)
upon execution of such agreement; in the event that, during the second year of
the Period of Employment, Oracle extends such agreement or otherwise enters into
another agreement with the Company for a successive period of one (1) year, the
Employee shall be entitled to receive a bonus of One Hundred Thousand Dollars
($100,000) upon extension or execution of such agreement. In the event that
Oracle does not enter into such an agreement with the Company during either the
first or the second year of the Period of Employment, but the Company's billing
from advertising services equals or exceeds Sixteen Million Dollars
($16,000,000) in either or both such years, the Employee shall be entitled to
receive in each such year the bonus he would otherwise have received in such
year had Oracle signed or otherwise extended the agreement as described above;
provided that, any such bonus shall be payable to the Employee in equal
quarterly installments.
c) PROFITABILITY BONUS. The Employee shall be entitled to
receive a bonus nine (9) months from the Effective Date (payable within thirty
(30) days thereof) equal to ten percent (10%) of the profits on the amount by
which the Company's billings on the Oracle account exceed Sixteen Million
Dollars ($16,000,000). The Employee shall also be entitled to receive a bonus
eighteen (18) months from the Effective Date (payable within thirty (30) days
thereof) equal to ten percent (10%) of the profits on the amount by which the
Company's billings on the Oracle account exceed Twenty Million Dollars
($20,000,000). In addition, without limiting the foregoing, the Company may pay
the Employee a bonus if, in the sole judgment of the Board of Directors, the
earnings of the Company or the services of the Employee merit such a bonus.
d) WITHHOLDING AND EMPLOYMENT TAX. Payment of all compensation
hereunder shall be subject to customary withholding tax and other employment
taxes as may be required with respect to compensation paid by an
employer/corporation to an employee.
e) OPTIONS. In consideration of the Employee's agreement to
render the services provided herein, the Employee shall receive an option
exercisable to purchase an aggregate of 250,000 shares of the Company's common
stock (the "Common Stock") at an exercise price of $3.69 per share, which amount
represents the last sale/transaction price at which shares of the Common Stock
were traded on the NASDAQ National Market System ("Nasdaq") on the Effective
Date. Such option shall vest and become exercisable to purchase 62,500 shares of
3
<PAGE>
Common Stock on each of the first through fourth anniversaries of the Effective
Date; subject to acceleration as follows: (x) in the event that, during the
first year of the Period of Employment, the Company's gross billings from
advertising business introduced by the Employee exceeds Twenty Million Dollars
($20,000,000) and the Company realizes a profit margin before taxes of eight
percent (8%) from such advertising business, the option to acquire an aggregate
of 125,000 shares of Common Stock shall immediately vest and be exercisable; and
(y) in the event that, during the second year of the Period of Employment, the
Company's gross billings from advertising business introduced by the Employee
exceeds Thirty Million Dollars ($30,000,000) and the Company realizes a profit
margin before taxes of fifteen percent (15%) from such advertising business, the
option to acquire the remaining 125,000 shares of Common Stock shall immediately
vest and be exercisable. If either or both of the targets in subsections (x) and
(y) are not met, the option granted herein shall vest and be exercisable in four
annual increments as first set forth in this Section 4(e). In the event that the
Employee's employment hereunder is terminated by the Company pursuant to
Subsection 9(a) prior to exercise of the option granted hereunder, such option,
to the extent not exercised, shall expire. In the event that the Employee's
employment hereunder is otherwise terminated, such option, to the extent that
the same has vested and become exercisable, must be exercised within ninety (90)
days after such termination.
e) Any bonus payable hereunder may be paid by the Company,
upon request of the Employee, by issuance of securities of the Company,
including options to purchase Common Stock at an exercise price based upon the
last sale/transaction price of the Common Stock on Nasdaq on the day prior to
the issuance of such options (the "Exercise Price"). The number of shares of
Common Stock issuable pursuant to such options shall be determined by dividing
the amount of the bonus payable by the Company by the Exercise Price.
5. BUSINESS EXPENSES. The Company shall: (a) pay or reimburse the
Employee for all reasonable travel or other expenses incurred by the Employee in
connection with the performance of his duties under this Agreement, provided
that the same are previously authorized by the Company, in accordance with such
procedures as the Company may from time to time establish for employees and as
required to preserve any deductions for federal income taxation purposes to
which the Company may be entitled; and (b) pay the Employee Eight Hundred
Dollars ($800) per month as an automobile allowance, which amount shall include
all expenses related to maintenance of such an automobile including all
necessary repairs, registration, insurance and fuel.
6. DISABILITY. The Company shall provide the Employee with
substantially the same disability insurance benefits as those, if any, currently
being provided by the Company, if any, for similar employees, which insurance
benefits must provide for disbursement thereunder of an amount equal to no less
than sixty percent (60%) of the Employee's then current compensation as set
forth in Section 4(a) hereof.
7. DEATH. The Company shall provide the Employee with substantially the
same life insurance benefits as those currently being provided by the Company
for similar employees. In the event of the Employee's death, the obligation of
4
<PAGE>
the Company to make payments pursuant to Section 4 hereof shall cease as of the
date of such Employee's death and the Company shall pay to the estate of the
Employee any amount due to the Employee under Sections 4 and 5 which has accrued
up to the date of death.
8. OTHER BENEFITS. The Employee shall be entitled to participate in
fringe benefit, deferred compensation and stock option plans or programs of the
Company, if any, to the extent that his position, tenure, salary, age, health
and other qualifications make him eligible to participate, subject to the rules
and regulations applicable thereto. Such additional benefits shall include, but
not be limited to, paid sick leave and individual health insurance (all in
accordance with the policies of the Company) and professional dues and
association memberships. Except as specifically set forth herein, the terms of,
and participation by the Employee in, any deferred compensation plan or program
shall be determined by the Board of Directors in its sole discretion.
9. TERMINATION OF EMPLOYMENT. Notwithstanding any other provision of
this Agreement, employment hereunder may be terminated:
a) By the Company, in the event of the employee's death or
Disability (as hereinafter defined) or for "Just Cause." "Just Cause" shall be
defined to be limited to: (i) the Employee's indictment or conviction of a crime
involving a felonious act or acts, including dishonesty, fraud or moral
turpitude by the Employee; (ii) prolonged or repeated absence from duty without
the consent of the Company (for reasons other than the Employee's health or
incapacity); (iii) habitual engaging in any activity which is competitive with
the business of the Company; and (iv) habitual and willful misconduct on the
part of the Employee relating to the performance of his duties hereunder. The
Employee shall be deemed to have a "Disability" for purposes of this Agreement
if he is unable to perform, by reason of physical or mental incapacity, a
material portion of his duties or obligations under this Agreement for a period
of one hundred twenty (120) consecutive days in any 365-day period. The Board of
Directors shall determine whether and when the Disability of the Employee has
occurred and such determination shall not be arbitrary or unreasonable. The
Company shall by written notice to the Employee given within thirty (30) days
after discovery of the occurrence of an event or circumstance which constitutes
"Just Cause, " specify the event or circumstance giving rise to the Company's
exercise of its right hereunder and, with respect to Just Cause arising under
Section 9(a)(i), the Employee's employment hereunder shall be deemed terminated
as of the date of such notice; with respect to Just Cause arising under Section
9(a)(ii), the Company shall provide the Employee with thirty (30) days written
notice of such violation and the Employee shall be given reasonable opportunity
during such thirty (30) day period to cure the subject violation;
b) By the Company in its sole and absolute discretion,
provided that in such event the Company shall, as liquidated damages or
severance pay, or both, pay the Employee an amount equal to the Employee's then
Monthly Compensation (as defined in Section 4(a) hereof) multiplied by the sum
of the number of months remaining during the Period of Employment exclusive of
any subsequent Renewal Period, as previously defined in Section 2 hereof (the
"Termination Formula");
5
<PAGE>
c) By the Employee: (i) upon any material violation of any
material provision of this Agreement by the Company, which violation remains
unremedied for a period of thirty (30) days after written notice of the same is
delivered to the Company by the Employee; and (ii) upon any material change in
the responsibilities of the Employee, without the Employee's prior consent;
provided that, in such event the Company shall, as liquidated damages or
severance pay, or both, pay to the Employee an amount equal to the Employee's
Monthly Compensation multiplied by the Termination Formula; or
d) By the Employee in the event that Scott A. Mednick is
removed by the Board of Directors as Chief Executive Officer and/or Chairman of
the Board of Directors. In such event the Company shall pay to the Employee an
amount equal to the Employee's Monthly Compensation multiplied by the
Termination Formula and bonuses accrued through the date of such termination.
Nothing set forth in this section shall: (i) require the Employee in
the event of termination pursuant to Subsections 9(b) or 9(c) above to mitigate
damages during the period in which the Employee is receiving payment thereunder
(the "Severance Period"); or (ii) entitle the Company to offset the amounts owed
by the Company to the Employee pursuant to Subsections 9(b) or 9(c) by any
income or compensation received by the Employee from sources other than the
Company during such Severance Period. In addition, the Company shall not be
entitled to withhold or otherwise offset any amounts payable to the Employee
under Subsections 9(b) or 9(c) above in response to an alleged violation by the
Employee of any of the obligations which are imposed under this Agreement and
survive termination hereof until such time as court of competent jurisdiction or
other appropriate governing body has rendered judgment or otherwise made a
determination with respect to whether such violation has occurred.
In the event that this Agreement is terminated pursuant to Sections
9(b) or 9(c), the Employee shall be entitled to continue to participate, at the
Company's expense, in any health insurance plan of the Company then in place for
such period as the Employee is entitled to receive severance payment hereunder.
10. NON-COMPETITION. Notwithstanding any earlier termination, during
the Period of Employment (including any Renewal Period) and for one (1) year
thereafter:
a) the Employee shall not, anywhere in North America directly
or indirectly, individually or as a member of any partnership or joint venture,
or as an officer, director, stockholder, employee or agent of any other person,
firm, corporation, business organization or other entity, participate in, engage
in, solicit or have any financial or other interest in any activity or any
business or other enterprise in any field which at the time of termination is
competitive with the business or is in substantially the same business as the
Company or any affiliate, subsidiary or division thereof (unless the Board of
Directors shall have authorized such activity and the Company shall have
consented to in writing), as an individual or as a member of any partnership or
joint venture, or as an officer, director, stockholder, investor, employee or
6
<PAGE>
agent of any other person, firm, corporation, business organization or other
entity; PROVIDED, HOWEVER, that nothing contained herein shall be construed to
prevent the employee from investing in Permitted Investments; and
b) the Employee shall not: (i) solicit or induce any employee
of the Company to terminate his or her employment or otherwise leave the
Company's employ or hire any such employee (unless the Board of Directors shall
have authorized such employment and the Company shall have consented thereto in
writing); or (ii) contact or solicit any clients or customers of the Company,
either as an individual or as a member of any partnership or joint venture, or
as an officer, director, stockholder, investor, employee or agent of any other
person, person, corporation, business organization or other entity.
11. CONFIDENTIAL INFORMATION. The parties hereto recognize that it is
fundamental to the business and operation of the Company, its affiliates,
subsidiaries and divisions thereof to preserve the specialized knowledge, trade
secrets, and confidential information of the foregoing concerning the field of
advertising, marketing and interactive Internet solutions. The strength and good
will of the Company is derived from the specialized knowledge, trade secrets,
and confidential information generated from experience through the activities
undertaken by the Company, its affiliates, subsidiaries and divisions thereof.
The disclosure of any of such information and the knowledge thereof on the part
of competitors would be beneficial to such competitors and detrimental to the
Company, its affiliates, subsidiaries and divisions thereof, as would the
disclosure of information about the marketing practices, pricing practices,
costs, profit margins, design specifications, analytical techniques, concepts,
ideas, process developments (whether or not patentable), customer and client
agreements, vendor and supplier agreements and similar items or technologies. By
reason of his being an employee of the Company, in the course of his employment,
the Employee has or shall have access to, and has obtained or shall obtain,
specialized knowledge, trade secrets and confidential information such as that
described herein about the business and operation of the Company, its
affiliates, subsidiaries and divisions thereof. Therefore, the Employee hereby
agrees as follows, recognizing and acknowledging that the Company is relying on
the following in entering into this Agreement:
a) The Employee hereby sells, transfers and assigns to the
Company, or to any person or entity designated by the Company, any and all
right, title and interest of the Employee in and to all creations, designs,
inventions, ideas, disclosures and improvements, whether patented or unpatented,
and copyrightable material, made or conceived by the Employee solely or jointly,
in whole or in part, during or before the term hereof (commencing with the date
of the Employee's employment with the Company) which: (i) relate to methods,
apparatus, designs, products, processes or devices created, promoted, marketed,
distributed, sold, leased, used, developed, relied upon or otherwise provided by
the Company or any affiliate, subsidiary or division thereof; or (ii) otherwise
relate to or pertain to the business, operations or affairs of the Company or
any affiliate, subsidiary or division thereof. Whether during the Period of
Employment or thereafter, the Employee shall execute and deliver to the Company
such formal transfers and assignments and such other papers and documents as may
be required of the Employee to permit the Company or any person or entity
designated by the Company to file, enforce and prosecute the patent applications
to any of the foregoing and, as to copyrightable material, to obtain cop right
thereon; and
7
<PAGE>
b) Notwithstanding any earlier termination, during the Period
of Employment (including any Renewal Period) and for a period of one (1) year
thereafter, the Employee shall, except as otherwise required by or compelled by
law, keep secret and retain in strict confidence, and shall not use, disclose to
others, or publish any information, other than information which is in the
public domain or becomes publicly available through no wrongful act on the part
of the Employee, which information shall be deemed not to be confidential
information, relating to the business, operation or other affairs of the
Company, its affiliates, subsidiaries and divisions thereof, including but not
limited to confidential information concerning the design and marketing
practices, pricing practices, costs, profit margins, products, methods,
guidelines, procedures, engineering designs and standards, design
specifications, analytical techniques, technical information, customer, client,
vendor or supplier information, employee information, and any and all other
confidential information acquired by him in the course of his past or future
services for the Company or any affiliate, subsidiary or division thereof. The
Employee shall hold as the Company's property all notes, memoranda, books,
records, papers, letters, formulas and other data and all copies thereof and
therefrom in any way relating to the business, operation or other affairs of the
Company, its affiliates, subsidiaries and divisions thereof, whether made by him
or otherwise coming into his possession. Upon termination of his employment or
upon the demand of the Company, at any time, the Employee shall deliver the same
to the Company within twenty-four (24) hours of such termination or demand.
12. REASONABLENESS OF RESTRICTIONS. The Employee hereby agrees that the
restrictions in this Agreement, including without limitation, those relating to
the duration of the provisions hereof and the territory to which such
restrictions apply, are necessary and fundamental to the protection of the
business and operation of the Company, its affiliates, subsidiaries and
divisions thereof, and are reasonable and valid.
13. REFORMATION OF CERTAIN PROVISIONS. In the event that a court of
competent jurisdiction determines that the non-competition or the
confidentiality provisions hereof are unreasonably broad or otherwise
unenforceable because of the length of their respective terms or the breadth of
their territorial scope, of for any other reason, the parties hereto agree that
such court may reform the terms and/or scope of such covenants so that the same
are reasonable and, as reformed, shall be enforceable.
14. REMEDIES. Subject to Section 15 below, in the event of a breach of
any of the provisions of this Agreement, the non-breaching party shall provide
written notice of such breach to the breaching party. The breaching party shall
have thirty (30) days after receipt of such notice in which to cure its breach.
If, on thirty-first (31st) day after receipt of such notice, the breaching party
shall have failed to cure such breach, the non-breaching party thereafter shall
be entitled to seek damages. It is acknowledged that this Agreement is of a
unique nature and of extraordinary value and of such a character that a breach
hereof by the Employee shall result in irreparable damage and injury to the
Company for which the Company may not have any adequate remedy at law.
Therefore, if, on the thirty-first (31st) day after receipt of such notice, the
breaching party shall have failed to cure such breach, the non-breaching party
shall also be entitled to seek a decree of specific performances against the
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breaching party, or such other relief by way of restraining order, injunction or
otherwise as may be appropriate to ensure compliance with this Agreement. The
remedies provided by this section are non-exclusive and the pursuit of such
remedies shall not in any way limit any other remedy available to the parties
with respect to this Agreement, including, without limitation, any remedy
available at law or equity with respect to any anticipatory or threatened breach
of the provisions hereof. In the event of any litigation or other proceeding
between the Company and the Employee with respect to the subject matter of this
Agreement and the enforcement of the rights hereunder, the losing party shall
reimburse the prevailing party for all of his/its reasonable costs and expenses,
as well as any forum fees, relating to such litigation or other proceeding,
including, without limitation, his/its reasonable attorneys' fees and expenses,
provided that such litigation or proceeding results in a final settlement
requiring payment to the prevailing party or final judgment.
15. CERTAIN PROVISIONS; SPECIFIC PERFORMANCE. In the event of a breach
by the Employee of the non-competition or Confidentiality provisions hereof,
such breach shall not be subject to the cure provision of Section 14 above and
the Company shall be entitled to seek immediate injunctive relief and a decree
of specific performance against the Employee. Such remedy is non-exclusive and
shall be in addition to any other remedy to which the Company or any affiliate,
subsidiary or division thereof may be entitled.
16. CONSOLIDATION; MERGER; SALE OF ASSETS. Nothing in this Agreement
shall preclude the Company from combining, consolidating or merging with or
into, transferring all or substantially all of its assets to, or entering into a
partnership or joint venture with, another corporation or other entity, or
effecting any other kind of corporate combination, provided that, the
corporation resulting from or surviving such combination, consolidation or
merger, or to which such assets are transferred, or such partnership or joint
venture assumes this Agreement and all obligations and undertakings of the
Company hereunder. Upon such a consolidation, merger, transfer of assets or
formation of such partnership or joint venture, this Agreement shall inure to
the benefit of, be assumed by, and the binding upon such resulting or surviving
transferee corporation or such partnership or joint venture, and the term
"Company," as used in this Agreement, shall mean such corporation, partnership
or joint venture, or other entity and this Agreement shall continue in full
force and effect and shall entitle the Employee and his heirs, beneficiaries and
representatives to exactly the same compensation, benefits, perquisites,
payments and other rights as would have been their entitlement had such
combination, consolidation, merger, transfer of assets or formation of such
partnership or joint venture not occurred.
17. SURVIVAL. Sections 10 through 15 shall survive the termination for
any reason of this Agreement (whether such termination is by the Company, by the
Employee, upon the expiration of this Agreement by its terms or otherwise);
provided, however, that in the event that the Company ceases to exist and
neither an affiliate, subsidiary or division thereof has assumed, at its option,
the obligations of the Company hereunder, the Employee shall no longer be bound
by the non-competition provision set forth in Section 10 hereof.
18. SEVERABILITY. The provisions of this Agreement shall be considered
severable in the event that any of such provisions are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable. Such
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invalid, void or otherwise unenforceable provisions shall be automatically
replaced by other provisions which are valid and enforceable and which are as
similar as possible in term and intent to those provisions deemed to be invalid,
void or otherwise unenforceable. Notwithstanding the foregoing, the remaining
provisions hereof shall remain enforceable to the fullest extent permitted by
law.
19. ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the entire
agreement between the Company and the Employee with respect to the subject
matter hereof and thereof. This Agreement may not be amended changed, modified
or discharged, nor may any provision hereof be waived, except by an instrument
in writing executed by or on behalf of the party against whom enforcement of any
amendment waiver, change, modification or discharge is sought. No course of
conduct or dealing shall be construed to modify, amend or otherwise affect any
of the provisions hereof.
20. NOTICES. All notices, request, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
physically delivered, delivered by express mail or other expedited service or
upon receipt if mailed, postage prepaid, via first class mail as follows:
a) To the Company : THINK New Ideas, Inc.
8000 Sunset Boulevard-Penthouse East
Los Angeles, California 90046
Attention: Scott A. Mednick
Chief Executive Officer
b) To the Employee: Mr. Larry Kopald
12021 Wilshire Boulevard, # 524
Los Angeles, California 90025
c) With an addition; it copies
by like means to: Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, D.C. 20036
Attn: Victoria A. Baylin, Esq.
and/or to such other persons and addresses as any party hereto shall have
specified in writing to the other.
21. ASSIGNABILITY. This Agreement shall not be assignable by the
Employee, but shall be binding upon and shall inure to the benefit of his heirs,
executors, administrators and legal representatives. This Agreement shall be
assignable by the Company to any affiliate, subsidiary or division thereof and
to any success or in interest.
22. GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Delaware, without regard to the principles of
conflicts of laws thereof.
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23. WAIVER AND FURTHER AGREEMENT. Any waiver of any breach of any terms
or conditions of this Agreement shall not: operate as a waiver of any other
breach of such terms or conditions or any other term or condition hereof, nor
shall any failure to enforce any provision hereof operate as a waiver of such
provision or of any other provision hereof. Each of the parties hereto agrees to
execute all such further instruments and documents and to take all such further
action as the other party may reasonably require in order to effectuate the
terms and purposes of this Agreement.
24. HEADINGS OF NO EFFECT. The headings contained in this Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
25. VESTING. Upon termination of this Agreement pursuant to Sections
9(b) or 9(d) any and all options, warrants, rights or other securities which are
exercisable or convertible into shares with of common stock of the Company
granted to the Employee prior to such expiration shall be accelerated, vest and
become immediately exercisable (subject to applicable law).
26. CONDITIONS. It shall be a condition to the vesting of the option
granted in Section 4 above and to performance of the respective obligations of
each of the Company and the Employee hereunder that Oracle become a client of
the Company by June 15, 1997; in the event that Oracle does not become a client
of the Company by June 15, 1997, this Agreement shall terminate and neither
party hereto shall have any further obligation hereunder.
27. INDEMNIFICATION. To the fullest extent allowed, and in the manner
provided, by Delaware law, the Company shall indemnify the Employee and hold the
Employee harmless from and against any claims arising out of the Employee's
performance of his services hereunder as permitted by the Articles of
Incorporation of the Company.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
THINK NEW IDEAS, INC., the Company
/s/ Scott A. Mednick
By: ----------------------------------------
Scott A Mednick, Chief Executive Officer
THE EMPLOYEE
/s/ Larry Kopald
By: ----------------------------------------
Larry Kopald
