SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-21775
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, 1999 totaled
$49,797,232.
As of September 9, 1999, 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
last sale price on that date, was approximately $109,263,848.
As of September 9, 1999, there were 10,105,327 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.
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PART I
ITEM 1. Description of Business ......................................... 3
ITEM 2. Description of Property ......................................... 22
ITEM 3. Legal Proceedings ............................................... 23
ITEM 4. Submission of Matters to a Vote of Security Holders ............. 24
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters ........ 25
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 25
ITEM 7. Consolidated Financial Statements ............................... F
ITEM 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures ....................................... 42
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act ............... 43
ITEM 10. Executive Compensation .......................................... 47
ITEM 11. Security Ownership of Certain Beneficial Owners and Management .. 53
ITEM 12. Certain Relationships and Related Transactions .................. 56
ITEM 13. Exhibits and Reports On Form 8-K ................................ 58
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NOTE: Certain sections of this document 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 "Factors Affecting Operating Results
and Market Price of Stock" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
THINK New Ideas, Inc. (the "Company") was incorporated in the State of
Delaware in January 1996. On June 30, 1996, the Company commenced its operations
upon completion of the acquisition of all of the capital stock of the following
entities: Internet One, Inc., a Colorado corporation ("Internet One"), Creative
Resources Agency, Inc., a Georgia corporation ("Creative Resources"); Scott A.
Mednick & Associates, Inc., a California corporation ("Mednick Group"); The S.D.
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"), in
exchange for issuance of an aggregate of 723,167 shares of the Company's common
stock (the "Common Stock"). All of the foregoing companies may be referred to
hereinafter as the "Founding Companies."
In August 1996, the Company entered into a strategic relationship with
Omnicom Group Inc., a publicly held company ("Omnicom"). Omnicom is the 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 from 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").
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. 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.
Effective as of May 31, 1997, the Company acquired certain assets and
operations of Fathom Advertising, a full service advertising agency ("Fathom"),
from Ketchum Communications, Inc., a wholly-owned subsidiary of Omnicom
("Ketchum"), in exchange for the issuance of an aggregate of 120,000 shares of
Common Stock (the "Fathom Acquisition").
In November 1997, the Company acquired all of the outstanding capital
stock of BBG New Media, Inc., a Massachusetts corporation, which provides
interactive marketing services ("BBG"), in exchange for the issuance of 303,334
shares of Common Stock and payment of $175,000 in cash pursuant to an Agreement
and Plan of Merger dated November 3, 1997 (the "BBG Agreement"). In addition,
under the terms of the BBG Agreement, the Company will issue additional shares
of Common Stock to the former stockholders of BBG if the Company achieves
certain sales growth during the period from November 1, 1998 through October 31,
1999. In the first quarter of fiscal 2000, it is probable that the Company will
issue approximately $4,550,000 in shares of Common Stock to the former
stockholders of BBG due to the attainment of such growth targets. See Note 2 to
the Consolidated Financial Statements of the Company.
In April 1998, the Company acquired all of the outstanding capital
stock of Herring/Newman, Inc., a Washington corporation, which provides
advertising services ("Herring/Newman"), in exchange
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for the issuance of 127,799 shares of Common Stock and payment of $400,000 in
cash pursuant to an Agreement and Plan of Merger dated April 2, 1998 (the "HN
Acquisition"). In addition, the Company issued into escrow 77,220 shares of
Common Stock which were released to the former stockholders of Herring/Newman in
the fourth fiscal quarter of 1999 upon the fulfillment of certain conditions,
including the retention of certain key clients. See Note 2 to the Consolidated
Financial Statements of the Company.
In June 1998, the Company acquired all of the outstanding capital stock
of Interweb, Inc., a Georgia corporation, which provides Web-based solutions to
Fortune 500 companies ("Interweb"), and UbiCube Group, Inc., a Delaware
interactive marketing corporation ("UbiCube"). The Company acquired Interweb
pursuant to an Agreement and Plan of Merger dated June 2, 1998 in exchange for
the issuance of 600,000 shares of Common Stock and $200,000 in cash (the
"Interweb Acquisition"). The Company acquired UbiCube pursuant to an Agreement
and Plan of Merger dated June 27, 1998 (the "UbiCube Agreement") through a
wholly-owned subsidiary, UbiCube Acquisition Corp., in exchange for the issuance
of 154,257 shares of Common Stock and the promise to pay $2,250,000 in shares of
Common Stock through January 15, 2000 (the "UbiCube Acquisition"). Pursuant to
the UbiCube Agreement, an additional 154,257 shares of Common Stock were placed
in escrow to be released to the former stockholders of UbiCube on January 15,
1999, January 15, 2000, and March 1, 2001, based on the attainment of certain
milestones. In the fourth quarter of 1999, 7,924 shares were released from
escrow to the former stockholders of UbiCube upon the attainment of the
milestones for the applicable period. In addition, in connection with the
UbiCube Acquisition, the Company agreed to issue additional shares of Common
Stock to the former stockholders of UbiCube subject to the attainment of certain
revenue and profit targets during the three-year period ending June 2001. In the
fourth quarter of 1999, 21,019 additional shares were issued to the former
stockholders of UbiCube upon the attainment of the targets for the applicable
period. See Note 2 to the Consolidated Financial Statements of the Company.
In March 1999, the Company acquired the assets of Envision Group, a
California Internet solutions partnership ("Envision") that provides Internet
marketing and Web-based solutions to Fortune 500 companies. The Company acquired
Envision pursuant to an Asset Purchase Agreement dated March 10, 1999 in
exchange for (i) the issuance of 477,002 shares of Common Stock; and (ii) a
contingent earnout of up to $5,500,000 in shares of Common Stock based upon
revenue for the year ended December 31, 1999. See Note 2 to the Consolidated
Financial Statements of the Company.
The Founding Companies, BBG, Herring/Newman, Interweb, UbiCube and
Envision may be collectively referred to hereinafter as the "Subsidiaries."
In March 1999, the Company entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement") with Capital Ventures International and
Marshall Capital Management, Inc. (the"Purchasers") whereby the Purchasers
agreed to purchase (i) shares of the Company's Common Stock, and (ii) warrants
to acquire shares of Common Stock, for an aggregate purchase price of up to
$11,000,000. The Company is using the proceeds of the financing for general
working capital purposes, including the funding of its strategic growth plan.
Pursuant to the Securities Purchase Agreement, on March 5, 1999 (the "Initial
Closing Date",) the Company issued, for proceeds of $6,000,000 (i) 871,142
shares of Common Stock at $6.8875 per share (the"Initial Closing Price")
representing ninety-five percent (95%) of the closing bid price as quoted by the
Nasdaq National Market System
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("Nasdaq") on the trading day immediately preceding the date of the Securities
Purchase Agreement and (ii) warrants (the "Closing Warrants") to purchase an
additional 174,230 shares (representing 20% of the number of shares issued on
the Initial Closing Date) of Common Stock at an exercise price of $10.33,
representing 150% of the Initial Closing Price for a five-year term.
The Purchasers have the right through March 5, 2000 to purchase (i)
530,504 additional shares (the "Optional Shares") of Common Stock at $9.425 per
share, representing 130% of the market price on the date of the Securities
Purchase Agreement, and (ii) warrants to purchase 106,101 shares (the "Optional
Warrants") of Common Stock (representing 20% of the number of Optional Shares)
at an exercise price equal to 150% of the market price on the date of exercise.
In exchange for the Optional Shares and the purchase of the Optional Warrants,
the Company will receive up to $5,000,000 in additional proceeds. See Note 9 to
the Consolidated Financial Statements of the Company.
PROPOSED MERGER WITH ANSWERTHINK
On June 24, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") by and among the Company, AnswerThink Consulting
Group, Inc. ("AnswerThink") and Darwin Acquisition Corp., a wholly-owned
subsidiary of AnswerThink ("Sub") pursuant to which Sub will merge with and into
the Company (the "Merger"). The Company will survive the Merger and become a
wholly-owned subsidiary of AnswerThink. Under the terms of the Merger Agreement,
all outstanding shares of the Company will be exchanged for shares of common
stock, par value $.001 per share, of AnswerThink ("AnswerThink Common Stock")
and all outstanding options to acquire shares of Common Stock will be assumed
and converted into options to acquire shares of AnswerThink Common Stock at a
ratio of 0.70 shares of AnswerThink Common Stock to one share of Common Stock
(the "Exchange Ratio"). The Merger is subject to certain conditions, including
shareholder approval of both companies. The Merger will be accounted for as a
pooling of interests and is intended to qualify as a tax-free reorganization.
Pursuant to the Merger Agreement, the Company has agreed to pay
AnswerThink a termination fee of $6,000,000 in the event the Merger Agreement is
terminated under certain circumstances, including; the withdrawal of the
recommendation of the Board of Directors of the Company (the "Board"), or the
Board's recommendation of a third party acquisition proposal. The Company has
also agreed to pay a termination fee of $3,000,000 to AnswerThink under other
termination circumstances such as the inability to obtain the requisite
shareholder approval. Pursuant to the Merger Agreement, AnswerThink has agreed
to pay the Company a termination fee of $3,000,000 for a material breach of the
Merger Agreement that has not been properly cured.
In connection with the Merger Agreement, the Company granted
AnswerThink an option to purchase up to 19.9% of the shares of the Company's
Common Stock (the "AnswerThink Option") outstanding on the date of exercise of
the AnswerThink Option. The AnswerThink Option is exercisable following the
execution or consummation of an alternative business combination involving the
Company and the occurrence of certain further triggering events, none of which
has occurred as of August 13, 1999. The per-share exercise price under the
AnswerThink Option is $18.50.
As further inducement to AnswerThink to enter into the Merger
Agreement, each director, Omnicom Group, Inc. and certain executive officers of
the Company (who, in the aggregate, beneficially
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own approximately 22% of the Company's outstanding Common Stock) entered into
voting agreements with AnswerThink pursuant to which they: (i) agreed to vote
their shares of Common Stock in favor of the Merger Agreement and the Merger;
and (ii) granted irrevocable proxies to AnswerThink to vote such shares in
accordance with the voting agreements. As an inducement to the Company to enter
into the Merger Agreement, each director and certain executive officers of
AnswerThink (who, in aggregate, beneficially own approximately 39.76% of
AnswerThink's outstanding Common Stock) entered into voting agreements with the
Company pursuant to which they: (i) agreed to vote their shares of AnswerThink
Common Stock in favor of the issuance of AnswerThink Common Stock pursuant to
the Merger Agreement; and (ii) granted irrevocable proxies to the Company to
vote such shares in accordance with the voting agreements.
The Company believes that it is likely that the Merger will be
completed on the terms contained in the Merger Agreement. However, there can be
no assurance that the required stockholder approvals will be obtained, or that
the other conditions to the Merger will be fulfilled. A termination of the
Merger Agreement for a reason that requires the Company to pay AnswerThink a
termination fee, as described above, could have a material adverse affect on the
Company's liquidity, financial position and results of operation. See Note 13 to
the Consolidated Financial Statements of the Company and "Risks Related to the
AnswerThink Merger. Additionally, the future strategies of the two companies,
operating on a combined basis, may differ from the strategies the Company had
been pursuing and which the Company would pursue if it continued to operate
alone. In that regard, all discussions of the Company's strategies, and other
forward-looking discussions in the sections that follow, are based on the
continued operation of the Company alone (that is, without the completion of the
proposed Merger with AnswerThink) unless otherwise indicated. See Note 13 to the
Consolidated Financial Statements of the Company and "Risks Related to the
AnswerThink Merger "commencing on page 19.
BUSINESS OVERVIEW
The Company provides integrated marketing, communications and
technology solutions to Fortune 1000 e-business and ".com" companies. The
Company's solutions help its clients to utilize the Internet and other
interactive technologies to enhance their competitive positions, add new
channels of distribution, capture new market segments, build long-term customer
relationships and reduce operating costs. The Company focuses on identifying
opportunities for companies to restructure their marketing and distribution
strategies around interactive technologies and implementing creative solutions
to deliver their messages with the greatest impact. The Company's solutions
incorporate various technologies, including customized interactive applications,
e-commerce and e-catalog technology, consumer modeling and response technology
and database development. The Company integrates its core expertise through a
standardized process that begins with strategic planning and consulting and
continues through implementation and post-implementation review and maintenance.
The Company's solutions help its clients determine and implement their business
strategies, build brand awareness, and effectively communicate information to
their internal and external constituents.
The Company approaches each client engagement utilizing its standard
proprietary methodology, the THINK Vision Process (described more fully below).
Utilizing this process, the Company thoroughly researches a client's business to
determine the effectiveness of existing communications programs and how such
programs may be improved and integrated into an interactive strategy that is
intended to help clients gain a competitive advantage in a changing business
landscape.
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The Company currently operates an international network of offices with
headquarters in New York City, New York and regional offices in Los Angeles, San
Francisco and Torrance, California; Seattle, Washington; Boston, Massachusetts;
Atlanta, Georgia; London, England and Sofia, Bulgaria. The Company provides
integrated solutions through multi-disciplinary teams with creative, consulting
and technological expertise from across the Company's network of offices.
METHODOLOGY
The THINK Vision Process. The Company approaches each client engagement
utilizing its standard proprietary methodology, the THINK Vision Process.
Through this process, the Company's consultants thoroughly research a client's
entire business - including internal audiences, such as employees, and external
audiences, such as customers and suppliers - to determine the effectiveness of
existing communications programs and how such programs may be improved and
integrated into an interactive communications strategy that helps the client
gain a competitive advantage. The THINK Vision Process places significant
emphasis on strategic planning and implementation. The THINK Vision Process is
composed of six phases: (1) assessment; (2) strategy development and
specification; (3) concept development; (4) implementation; (5) review and
adjustment; and (6) maintenance and long-term planning.
The Company helps its clients identify their customers and other target
audiences, define the processes of communicating to those audiences and analyze
the results of those communications. The Company applies its expertise to each
integrated solution to enable clients to deliver the right message at the right
time to the right audience. The Company's solutions range from extending,
enhancing and developing brands, designing corporate and product brand networks,
integrating and developing media programming and relationship-building, to
acquiring and maintaining customers.
The Company's expertise in business processes helps its clients improve
the entire value chain of their businesses, from sales, accounting, order
management, supply chain management and inventory procurement, to planning and
scheduling, manufacturing and finished goods delivery. The Company applies its
expertise in business processes to ensure that each integrated solution is
designed to consider, analyze and improve all components of each client's value
chain.
TECHNOLOGY EXPERTISE
The Company's technology expertise provides the Company with the
ability to design, develop and implement integrated marketing and communications
technology solutions. The Company is "technology agnostic" and seeks to develop
secure, flexible and innovative solutions across a wide range of networking and
telecommunications environments using third-party and proprietary technologies.
The Company's technology expertise encompasses multiple system architectures,
programming languages, broadband technologies, digital media applications, and
communication networks utilizing Internet, Intranet and extranet technologies.
The Company's core technical competencies include:
APPLICATIONS DESIGN AND DEVELOPMENT. The Company utilizes a variety of
programming languages and tools including C/C++, CORBA, Java, SQL, Visual Basic,
and other object-oriented technologies.
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The Company also develops programming tools and environments when appropriate in
order to implement the most cost-effective and functional Interactive Solutions.
INNOVATIVE GUI DESIGN AND DEVELOPMENT. In order to maximize the effectiveness of
the Company's solutions, the Company integrates creative marketing and
communications expertise with software applications development to create
engaging, innovative and easy-to-use GUIs for Web sites and other front-end
applications.
NETWORK INTEGRATION AND SYSTEMS MANAGEMENT. In order to implement effectively
the Company's solutions, the Company utilizes a wide range of database
management and information technology integration and implementation services.
The Company integrates its solutions into existing information technology
environments and infrastructures, including front- and back-end object oriented
and relational databases, enterprise-wide, local and wide area networks,
client/server architectures and other distributed computing environments.
INTERNET APPLICATIONS AND SERVICES. The Company's Internet applications and
services expertise includes the development of secure electronic-commerce and
electronic-catalog environments, Web-tracking software and other
Internet-related applications and services. This expertise has allowed the
Company to develop certain applications that are integrated into its Interactive
Solutions. For instance, the Company has developed the following applications
and tools that can be integrated into its Interactive Solutions:
MULTI-USER, OBJECT-ORIENTED AUTHORING TOOL ("MOAT"). Client authoring tool that
enables executives without technical experience to add animated graphics and
text to any part of a Web site, intranet or extranet.
WEBMECHANIC. Automated Web site and intranet building and management tool that
enables real-time generation of customized Web sites. WebMechanic also provides
the ability to edit, create and refresh content from any location in a
user-friendly process.
ELECTRONIC CONSUMER RELATIONS PROGRAM ("E-CORP"). Consumer relations program
that automates the communications aspect of relationship management systems,
automatically generating personalized responses based on information provided or
queried. E-CORP simultaneously logs and forwards messages to appropriate
internal departments. E-CORP collects responses in a relational database
allowing information to be segmented and analyzed, facilitating outward
communications with interest groups based on various criteria.
ADVANCED STATISTICAL ANALYSIS PROGRAM ("ASAP"). Tracks and analyzes Web site
usage and functionality. ASAP works with existing log file analysis technology
to present information in a format and language that can be easily understood.
X-TRACKER. Tracks and analyzes Web site traffic generation. Allows generation of
reports that show effectiveness of individual campaigns and events from any
medium in driving traffic to Web sites. X-Tracker reports graphically and
quantitatively show correlation between individual and integrated campaigns in
directing traffic.
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LIGHTWEIGHT DIRECTORY ACCESS PROTOCOL ("LDAP"). Directory service protocol that
allows end users to query directory entries for any attribute or combination of
attributes. LDAP provides answers to problems historically associated with
online directory systems by standardizing data storage structure and optimizing
use of system resources.
SALES AND BUSINESS DEVELOPMENT
The Company has 15 employees dedicated to sales and business
development divided between regional and national development teams in all of
its U.S. offices, its U.K. office, and in a national corporate business
development group (the "Development Group"). The Development Group manages the
many opportunities developed from (1) the leverage and expansion of existing
client opportunities, (2) pursuit of referrals from existing clients, partners
and third party organizations and (3) leads developed through the Company's
extensive conference and sponsored corporate speaking engagements.
The Development Group, staffed with strategic marketers and account
planners, leads and assists in developing and writing sophisticated responses to
requests for proposals as developed and aggregated by the Company's sales
efforts. The Development Group is also responsible for coordinating and tracking
all new business opportunities, resource allocation and revenue goal planning
and tracking. The Company tracks extensively all business development activity
and maintains an active business development database to statistically track and
measure the success of its sales and marketing efforts on a quarterly basis.
The Company markets itself through traditional brand promotion
strategies such as consolidated marketing and collateral material, public
relations campaigns, client and partner referrals, and speaking engagements. The
Company also depends on establishing and maintaining close relationships with
industry analysts, industry publications and speaking circuit registries.
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,
including specialized and integrated marketing and communication firms,
information technology consulting firms, and national and regional advertising
agencies. In addition, many national advertising agencies have internally
developed or acquired new media capabilities. New competitors have also emerged
that either provide integrated or specialized services (e.g., corporate identity
and packaging, advertising services or Web site design) or are technologically
proficient, especially in the new media arena. 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 business has moderately low barriers to entry. The
Company has no significant proprietary technology that would preclude or inhibit
competitors from entering the Company's market. The Company expects that it will
face additional competition from new market entrants. Existing or future
competitors may develop or offer marketing communication services and products
that provide significant performance, price, creative or other advantages over
those offered by the Company, which
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could have a material adverse effect on the Company's business, financial
condition and results of operations.
EMPLOYEES
As of June 30, 1999, the Company had 353 full-time employees and 38
part-time employees. None of the Company's employees are represented by a labor
union or are subject to a collective bargaining agreement. The Company has never
experienced a work stoppage and believes its employee relations are good.
GOVERNMENT REGULATION
The Company has no knowledge of any governmental regulations which
materially adversely affect its 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:
THE COMPANY'S FUTURE PROFITABILITY IS UNCERTAIN DUE TO CONTINUING OPERATING
LOSES AND OUR LIMITED HISTORY OF COMBINED OPERATIONS
The Company was formed in January 1996, completed the acquisition of
various companies that formed its initial core business in June 1996 and has
grown since its inception both through acquisitions and, to a lesser extent,
internal growth. Although certain of the acquired businesses have been in
operation for some time, the Company has had a limited history of combined
operations. Consequently, the historical and financial information contained
herein may not be indicative of the Company's future financial condition and
performance. The Company experienced operating losses in each of the fiscal
quarters ended September 30, 1998, December 31, 1998 and March 31,1999. For the
year ended June 30,1999,the Company has an accumulated deficit of approximately
$43,537,000. Future operating results will depend on many factors, including:
o the demand for the Company's services;
o the Company's ability to maintain client relationships and perform
service for new clients;
o the Company's ability to integrate successfully the many diverse
businesses acquired;
o the Company's success in attracting and retaining qualified personnel;
and
o the Company's ability to respond to competitive developments.
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THE COMPANY MAY NOT BE ABLE TO MANAGE SUCCESSFULLY THE RISKS ASSOCIATED WITH ITS
EXPANSION
The Company's business has grown rapidly in recent periods and its
customer base has expanded significantly. In fiscal 1998, fiscal 1999 and
through the date of this Form 10-KSB, the Company has:
o acquired companies with offices in Boston, Massachusetts; Seattle,
Washington; San Francisco and Torrance, California; Atlanta, Georgia;
Sofia, Bulgaria; and London, England; and
o continued the integration of several companies into one corporate
organization.
The Company expects that the number of employees will continue to grow
and that both existing and new management personnel will increase their
responsibilities. The Company's success depends on the ability of executive
officers and other members of senior management to operate effectively, both
independently and as a group. This continued growth is expected to continue to
strain the Company's existing operational, financial and management information
systems.
Additionally, the Company has only two offices outside of the United
States and has little experience in managing an international network of
consulting offices and marketing services to international clients.
There are also certain risks inherent in doing business on an
international level. These risks include:
o unexpected changes in regulatory requirements;
o export and import restrictions;
o tariffs and other trade barriers;
o difficulties in staffing and managing foreign operations;
o potentially adverse differences in business customs, practices and
norms;
o longer payment cycles;
o problems in collecting accounts receivable;
o political instability;
o fluctuations in currency exchange rates;
o software piracy;
o seasonal reductions in business activity; and
o potentially adverse tax consequences.
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One or more of these factors may materially adversely affect the
Company's future international operations and, consequently, its business,
results of operations and financial condition.
In addition, the Company plans to expand its offerings of integrated
marketing communication services and products. There can be no assurance,
however, that the Company will be successful in identifying new services or
products that will be attractive to clients or that such services or products
will ultimately generate revenues in excess of the costs of introducing 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. The Company may be unable to manage its recent or
any future expansions effectively. Any inability to do so would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company may be unable to sustain the rates of
growth that it has experienced in the past.
Further, as part of the Company's business strategy, the Company has
acquired companies in businesses that are complementary to its lines of
business. Such acquisitions are accompanied by risks encountered when acquiring
businesses, including:
o difficulty in assimilating the operations and personnel of the acquired
businesses;
o potential disruptions in ongoing business;
o difficulty in maintaining uniform standards, controls, procedures and
policies; and
o the impairment of relationships with employees and clients as a result
of the integration of new management personnel.
The Company has eliminated and is continuing to eliminate portions of
the businesses that it has acquired that no longer fit its business model.
Consequently, prior acquisitions may have a material adverse effect on the
Company's business, results of operations and financial condition.
THE TRANSITION FROM PROVIDING TRADITIONAL ADVERTISING SERVICES TO PROVIDING
INTERACTIVE MARKETING AND CONSULTING SERVICES MAY PROVE UNSUCCESSFUL
For the year ended June 30, 1999, traditional advertising clients
accounted for twenty-six percent (26%) of the Company's net revenues. The
success of the Company's transition into the interactive marketing and
communication services sector cannot be certain. This market is characterized by
extremely rapid change in technologies and in client requirements. The Company's
reliance on this sector could materially affect its business, results of
operations and financial condition.
THE COMPANY IS SUSCEPTIVE TO GENERAL ECONOMIC CONDITIONS
The Company's revenues and results of operations will be subject to
fluctuations based upon 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
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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.
QUARTERLY OPERATING RESULTS AND MARGINS MAY CONTINUE TO FLUCTUATE
The Company's quarterly operating results have fluctuated in the past
and may fluctuate in the future as a result of a variety of factors, including:
o the timing of the completion or cancellation of, or a material
reduction in, major projects;
o the loss of a major client;
o the timing of the receipt of new business;
o the timing of the hiring or loss of personnel;
o the timing of the opening or closing of an office;
o the relative mix of high margin creative projects as compared to lower
margin production projects;
o changes in the pricing strategies or business model of the Company's
or its competitors;
o capital expenditures and other costs relating to the expansion of
operations; and
o other factors that are outside of the Company's control.
Operating results could also be materially adversely affected by
increased competition. The Company's operating margins may fluctuate from
quarter to quarter depending on the relative mix of lower cost, full time
employees as compared to 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 fiscal year reflecting the trends of its clients preparing marketing
campaigns for products launched in anticipation of fall trade shows and the
holiday season. 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 revenues and operating results are
not necessarily meaningful and that such comparisons cannot be relied upon as
indicators of future performance.
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DEPENDENCE ON KEY ACCOUNTS
The Company's four largest clients accounted for twenty-six percent
(26%) of its revenues for the year ended June 30, 1999, with fluctuations in the
amount of revenue contribution from each such client from quarter to quarter.
The Company's two largest clients during the year ended June 30, 1999, each
accounted for approximately sixteen percent (16%) of its revenues during the
period. Since the Company's clients generally retain it 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 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 business, financial condition and operating
results. A 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, clients may unilaterally reduce their use of
services or terminate existing projects without penalty. The termination of a
business relationship with any 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, results of operations and financial
condition.
RELIANCE ON PROPRIETARY TECHNOLOGIES
The Company regards certain of its products and technologies, including
its software applications, as proprietary. The Company relies upon a combination
of trademark, copyright and trade secret law, together with non-disclosure and
invention assignment agreements, to establish and protect its proprietary
rights. Much of the Company's proprietary information may not be patentable, and
the Company does not currently possess any patents. The Company's current
intellectual property rights may not afford meaningful protection and its
competitors may independently develop technologies that are substantially
equivalent or superior to its technologies. Others may infringe the Company's
proprietary rights or assert claims that the Company's technologies infringe
their proprietary rights. Litigation concerning the alleged violation of
intellectual property rights is inherently uncertain and could result in
significant costs to the Company, even if any such claims are not valid.
BUSINESS IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE
The market for marketing and communication services is characterized by
rapid technological change, changes in user and client requirements and
preferences, frequent new product and service introductions and evolving
industry standards and practices. Any of these factors could render the
Company's existing service practices and methodologies obsolete. The Company's
success will depend, in part, on its ability to improve existing services,
develop new services and solutions that address the increasingly sophisticated
and varied needs of current and prospective clients. The Company may not respond
quickly, cost-effectively or sufficiently to these developments. If the Company
is unable, for technical, financial or other reasons, to adapt in a timely
manner in response to changing market conditions or client requirements, the
Company's business, results of operations and financial condition would be
materially adversely affected.
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INTERNET INFRASTRUCTURE IS VULNERABLE
The Company currently operates servers and maintains Internet
connectivity from many of its offices. Although the Company has implemented
network security measures, such as limiting physical and network access to its
routers, the Company's Internet infrastructure could be vulnerable to computer
viruses, break-ins and similar disruptive problems. Computer viruses, break-ins
or other security problems could lead to interruption, delays or cessation in
service to the Company's Internet customers. Further, inappropriate use of the
Internet could also potentially jeopardize the security of confidential
information stored in the computer systems of the Company's customers and other
entities connected to the Internet. This may deter customers and give rise to
potential liability to users whose security or privacy has been infringed.
COMPUTER SYSTEMS AND EQUIPMENT COULD FAIL
The Company's success depends on its ability to deliver high quality,
uninterrupted Internet hosting. Therefore, it must protect its computer
equipment and the information stored in its servers against damage by fire,
natural disaster, power loss, telecommunications failures, unauthorized
intrusion and other catastrophic events. Any damage or failure that causes
interruptions in the Company's operations could have a material adverse effect
on its business, results of operations and financial condition. In particular, a
failure at the Company's New York office, if prolonged, could result in reduced
revenues, loss of customers and damage to its reputation. The Company has an
aggressive and stable back-up plan that encompasses daily full backups of all
server platforms-both inter-company and hosting devices. The Company has
contracted an off-site storage vendor to store the backup off-site in an
elements-proof storage facility outside the New York City area. This rotation
occurs on a weekly basis. The Company has the ability to retrieve at any time
the data back onsite if a need to do so should ever arise. This facility also
provides multiple network environments if ever the need arose to duplicate a
server at their location due to the inability to do so at the Company's offices
due to circumstances such as fire, flood, etc. The automated backup process is
accessible by only the most senior members of the Company's corporate technology
services department. Any of these events could have a material adverse effect on
business, results of operations and financial condition. Although the Company
carries property and business interruption insurance to cover its operations,
the coverage may not be adequate to compensate the losses that may occur.
FIXED-PRICE CONTRACTS INVOLVE FINANCIAL RISK
The Company generates most of its project revenues 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 document the project properly, 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. However, if the
Company does not accurately anticipate the progress of a number of significant
revenue-generating projects, business, results of operations and financial
condition could be materially adversely affected.
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THE COMPANY MAY HAVE 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 Company to provide
services to direct competitors of existing clients. In addition, the Company
risks alienating or straining relationships with existing clients each time the
Company agrees to provide services to indirect competitors of existing 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,
results of operations and financial condition.
THE COMPANY MAY BE SUBJECT TO LEGAL LIABILITY TO ITS CLIENTS
Many of the Company's consulting engagements involves the development,
implementation and maintenance of applications that are critical to the
operations of its clients' businesses. The Company's failure or inability to
meet a client's expectations could injure its business reputation or result in a
claim for substantial damages against the Company, whether or not it is
responsible for such failure. The Company attempts to limit contractually its
damages arising from negligent acts, errors, mistakes or omissions in rendering
its services. These contractual protections may not, however, be enforceable in
all instances and may not otherwise fully protect the Company from liability for
damages. The Company maintains general liability insurance coverage, including
coverage for errors and omissions. Nevertheless, this coverage may not continue
to be available on reasonable terms and may not be available in amounts
sufficient to cover one or more large claims. In addition, the insurer may
disclaim coverage as to any future claim. The Company's business, results of
operations and financial condition may be materially adversely affected if one
or more large claims are asserted against the Company that are uninsured, exceed
available insurance coverage or result in changes to the Company's insurance
policies, including premium increases.
LOSS OF KEY MANAGEMENT PERSONNEL COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS
The Company's operations depend on the continued efforts of its senior
management, including Ronald Bloom, the Company's chairman and chief executive
officer. Mr. Bloom performs significant new business, sales and product
development functions. The loss of the services of any of the Company's officers
could be detrimental to the Company. Mr. Bloom and certain other members of
senior management have entered into employment agreements with the Company.
Several of these agreements contain noncompete provisions that may not be
enforceable in certain states.
Qualified employees are in great demand and are likely to remain a
limited resource for the foreseeable future. Competition for skilled creative
and technical talent is intense. The Company may not be successful in attracting
and retaining such personnel. In addition, the Company's ability to generate
revenues relates directly to the number and expertise of the personnel that are
available to work on its projects. Any failure by the Company to retain existing
employees or to hire new employees when necessary could have a material adverse
effect upon its business, results of operations and financial condition.
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IMPACT OF THE YEAR 2000
During calendar 1999 the Company has been, and continues to be, engaged
in efforts to identify and remediate its exposure to the impact of the year
("Y2K") on its computer hardware and software systems. The Y2K issue is the
result of computer programs being written using two digits, rather than four, to
define the applicable year. Any of the Company's computer programs that have two
digit date sensitive software may encounter system failures or miscalculations
if date entry of "00" is recognized as the year 1900 rather than 2000. The
failure of the Company's critical computer systems to properly recognize the
year 2000 could result in the interruption of the Company's operations and have
material adverse affects on the Company's financial position and results of
operations.
The Company has studied the importance to its operations of its various
hardware and software systems, and is giving priority to the remediation of
those systems that have been deemed critical. Currently, Company personnel, with
the assistance of consultants from AnswerThink, are reviewing the Company's
critical hardware and software systems to identify those with potential Y2K
issues and develop remediation plans. In general, the Company's systems for
processing its accounting data, and for hosting the Internet functions of
clients, are the systems likely to contain Y2K issues, while the Company's other
software and hardware systems, because of the relative newness, are already Y2K
compliant. To date the Company's expenditures for the study and remediation of
its Y2K issues, which, except of the costs for the purchase of new software or
the purchase or lease of new hardware, are being expensed as incurred, have not
been material.
In some instances the remediation of a system's Y2K issue will be
accomplished by the correction of code within the software. This will be
performed by the Company's personnel with the assistance of the consultants from
AnswerThink. In other instances, the nature or degree of the Y2K non-compliance
within a system will require the replacement of the hardware or software.
The Company's initial Y2K remediation plan was revised when the Company
reached the agreement for the proposed Merger with AnswerThink. This is because,
if the Merger is completed, many of the Company's systems which may contain Y2K
issues would be replaced by software and hardware systems currently used by
AnswerThink which are more advanced than that of the Company's and which are
already Y2K compliant. Accordingly, the Company's revised Y2K plan calls for the
remediation of many of its Y2K issues through the conversion to AnswerThink
systems prior to January 1, 2000, and the Company believes that if the Merger is
approved on the schedule currently contemplated that such conversion can be
completed without material expenditures (including revenues lost due to the use
of Company and AnswerThink personnel for this internal project) prior to January
1, 2000.
In the event the proposed Merger with AnswerThink is not approved, the
Company will engage AnswerThink on a consulting basis to complete the study and
remediation of the Company's software and hardware systems. AnswerThink has
expertise in this area, and the Company believes that the remediation of it
critical systems could be completed by January 1, 2000. The Company currently
estimates that the cost of engaging AnswerThink for this purpose, and for
purchasing any required software or hardware, would approximate $500,000 to
$1,000,000.
As a part of its Y2K project the Company has also been addressing the
Y2K readiness of vendors and other third parties deemed critical to its
operations. The Company has been, and continues to, inquire of and receive from
these vendors information on their Y2K compliance. These efforts will continue
into the fourth quarter of calender 1999. To date the Company has not identified
any critical vendor or third party that presents a material Y2K readiness issue.
If a critical vendor or third party is found to not be Y2K ready, the Company
will seek to convert to the use of an alternative vendor. In that regard, in
many instances the Company, assuming the completion of the Merger with
AnswerThink, might convert to a vendor or third party with which AnswerThink
already has a relationship.
The Company is also in the process of developing contingency plans for
Y2K issues that are not successfully identified and remediated by the efforts
described above. Those contingency plans have not yet been fully developed.
The Company believes that it will be able to successfully address all
critical Y2K issues by January 1, 2000. However there can be no assurance that
all Y2K issues will be resolved by that date, and the Company's failure to
successfully identify and remediate all Y2K issues by January 1, 2000 could lead
to an interruption of its operations and have a material adverse effect on its
financial position and results of operations.
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THE MARKET PRICE OF THE COMPANY'S COMMON STOCK MAY BE HIGHLY VOLATILE
The trading price of the Company's Common Stock has been and is
expected to continue to be subject to extreme fluctuations. This may result from
business-related issues such as:
o quarterly variations in operating results;
o the timing of commencement or completion of client projects;
o reductions or increases in client spending on marketing and
communication services;
o announcements of new services or business acquisitions by the Company
or its competitors; or
o the gain or loss of client accounts.
This may also result from stock market-related influences, such as:
o changes in estimates of securities analysts;
o the presence or absence of short-selling of the Company's common
stock; and
o events affecting other companies that the market deems to be
comparable to the Company.
In addition, the stock market has from time to time experienced extreme
price and volume fluctuations that have particularly affected the market price
of many technology-oriented companies and that often have been unrelated or
disproportionate to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of the Company's
common stock. As a result, the trading price of the Company's common stock may
not remain at or near its current level.
FUTURE SALES OF COMMON STOCK COULD DILUTE THE OUTSTANDING COMMON SHARES AND
THEREBY CAUSE THE COMPANY'S STOCK TO DECLINE
Existing stockholders can sell outstanding shares of Common Stock and
shares that may be issued on exercise of outstanding options and warrants under
Rule 144 of the Securities Act of 1993, as amended or through the exercise of
outstanding registration rights. These sales, or the perception that these sales
could occur, could have an adverse effect on the price of the Common Stock.
Shares of Common Stock will be eligible for sale in the public market under Rule
144 based on the Company's obligation to make certain earnout payments in
connection with previous acquisitions or financings or with the acceleration of
earnout payments pursuant to the Merger Agreement between the Company and
AnswerThink.
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ANTI-TAKEOVER PROVISIONS COULD MAKE A THIRD-PARTY ACQUISITION DIFFICULT
The Company's certificate of incorporation authorizes the issuance of
up to 5,000,000 shares of preferred stock with such rights and preferences as
may be determined from time to time by the Company's Board. Accordingly, the
Board may issue shares of preferred stock with dividend, liquidation,
conversion, and voting or other rights without stockholder approval. This could
adversely affect the voting power or other rights of the holders of Common
Stock. Although the Company does not currently intend to issue any shares of
preferred stock, the Company may do so in the future.
In addition, the Company's certificate of incorporation and bylaws
contain provisions that may discourage certain transactions involving actual or
threatened change in control of the Company. The bylaws prescribe the manner in
which stockholder proposals may be presented for consideration at meetings of
stockholders. The Company is also subject to a Delaware statute regarding
business combinations. Notwithstanding the Merger Agreement, any of these
provisions may make it more difficult, or discourage an acquisition or change in
control of the Company.
THE COMPANY DOES NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE
The Company has not paid any dividends on its common stock since its
incorporation. The Company anticipates that, for the foreseeable future, working
capital and earnings, if any, will be retained for use in the Company's business
operations and in the expansion of its business.
RISKS RELATING TO THE ANSWERTHINK MERGER
The Company expects to close the Merger with AnswerThink during the
last quarter of calendar 1999. The closing is subject to conditions, including
customary regulatory approvals and approval by the Company's stockholders and
AnswerThink's stockholders. There are numerous risks associated with the
AnswerThink transaction.
THE VALUE OF THE ANSWERTHINK COMMON STOCK THAT THE COMPANY'S STOCKHOLDERS WILL
RECEIVE IN THE MERGER COULD BE REDUCED IF THE MARKET VALUE OF ANSWERTHINKS'S
COMMON STOCK DECREASES.
When the Company completes the Merger, each share of the Company's
Common Stock will be exchanged for 0.70 of a share of AnswerThink Common Stock.
This exchange ratio is fixed and will not be adjusted if the market price of
AnswerThink's Common Stock changes. Before the Merger's closing, if the price of
AnswerThink Common Stock price decreases, the Company's stockholders will
receive less value for their shares of Common Stock that are exchanged in the
Merger. Also, the Company is not permitted to abandon the Merger or resolicit
the Company's stockholders' approval solely because of changes in the market
price of AnswerThink Common Stock. Accordingly, the specific value of
AnswerThink Common Stock the Company's stockholders will receive upon the
Merger's completion may decrease.
THE COMPANY MAY NOT REALIZE THE MERGER'S POTENTIAL BENEFITS
The Company entered into the Merger Agreement with AnswerThink with the
expectation that the Merger will result in benefits and potential cost savings.
The Company can achieve these benefits and
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savings only if it can integrate its technology, operations and personnel timely
and efficiently. If the Company fails to do this, it may lose customers or key
employees. This integration could also divert the Company's management's
attention from operations. Among the challenges involved in this integration is
demonstrating to customers that the merger will not result in adverse changes in
client service standards or business focus, and persuading the Company's
personnel that its business cultures are compatible. The Company may not be able
to integrate successfully with AnswerThink and may not be able to realize any of
the Merger's anticipated benefits or cost savings. The failure to do so could
impair AnswerThink's finances and business prospects after the Merger.
THE COMPANY'S EXECUTIVE OFFICERS AND DIRECTORS HAVE DIFFERENT INTERESTS FROM
SHAREHOLDERS IN CONNECTION WITH THE MERGER
The Company's directors and executive officers have interests in the
Merger and participate in certain arrangements that are different from, or are
in addition to, those of the Company's stockholders generally. These include
continuing indemnification against certain liabilities. Also, Ronald Bloom, the
Chairman and Chief Executive Officer of the Company, will become a director of
AnswerThink if the Merger closes. As a result, these directors and executive
officers could be more likely to vote to approve the Merger Agreement and the
Merger than if they did not hold these interests.
THE COMPANY MAY LOSE RIGHTS UNDER CONTRACTS WITH THIRD PARTIES IF IT DOES NOT
OBTAIN CONSENTS AND WAIVERS
The Company has contracts with many of its suppliers, customers,
licensors, licensees, and other business partners. Under some of these
contracts, the Company has to obtain the consent, waiver, or approval of these
other parties in connection with the Merger Agreement. If the Company cannot do
so, the Company and AnswerThink may lose the right to use intellectual property
or other rights that are necessary for the operation of Company business. The
Company has agreed to use all reasonable efforts to secure the necessary
consents, waivers and approvals. However, the Company may not be able to obtain
all of the necessary consents, waivers, and approvals. The Company's failure to
do so could impair AnswerThink's finances and business prospects.
FAILURE TO COMPLETE THE MERGER
If the Company does not complete the Merger, in addition to the risks
referred to above, the Company may be subject to the following:
o the Company may be required to pay AnswerThink a termination fee of
either $6,000,000 or $3,000,000, depending on the circumstances;
o an option the Company granted to AnswerThink to purchase 2,008,288
shares Common Stock for $18.50 per share may become exercisable; and
o the market price of the Company's Common Stock may decline to the
extent that its current market price reflects a market assumption that
the Merger will be completed.
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Also, the public announcement of the Company's failure to complete the Merger
could have an adverse effect on:
o Company sales and operating results;
o the Company's ability to attract and retain key management, marketing,
and technical personnel; and
o progress of certain development projects.
Additionally, the Company will have to pay the costs related to the Merger, such
as legal, accounting, and financial advisor fees, even if the Company does not
close the Merger.
If the Merger is not consummated and the Company's Board determines to
seek another merger or business combination, the Company may not be able to find
a partner willing to pay an equivalent or more attractive price than the merger
consideration. In addition, while the Merger Agreement is in effect and subject
to exceptions, the Company is prohibited from soliciting, initiating, knowingly
encouraging, or entering into extraordinary transactions such as a merger, sale
of assets, or other business combination with any party other than AnswerThink.
Furthermore, if the Merger Agreement is terminated and AnswerThink exercises its
option to purchase shares of Common Stock, the Company may not be able to
account for future transactions as a "pooling of interests." Consequently, this
inability to obtain pooling of interests accounting treatment could adversely
affect the Company's ability to enter into other transactions.
FORWARD-LOOKING STATEMENTS
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains statements about activities, events or
developments which the Company expects or anticipates will occur in the future,
including without limitation, business strategies, industry trends, market
potential, acquisitions of assets and businesses, and financial performance.
The Company also uses the words "intend to," "anticipate," "expect,"
and similar expressions to identify those types of forward-looking statements.
These statements are based on certain assumptions and analyses the Company has
made in light of its perception of historical trends, current business and
economic conditions and expected future developments as well as other factors.
However, whether actual results and developments will conform with the Company's
expectations and predictions is subject to a number of risks and uncertainties
beyond the Company's control, including without limitation, the risk factors
discussed in this Form 10-KSB, general economic, market or business conditions,
changes in the laws or regulations and business opportunities, or lack thereof,
that may be presented to the Company. Additionally, although the Company
believes that it is likely that the Merger will be completed on the terms
contained in the Merger Agreement, the future strategies of the two companies,
operating on a combined basis, may differ from the strategies the Company had
been pursuing and which the Company would pursue if it continued to operate
alone. In that regard, all discussions of the Company's strategies, and other
forward-looking discussions in the sections that follow, are based on the
continued operation of the Company alone (that is, without the completion of the
proposed Merger with AnswerThink) unless otherwise indicated.
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Consequently, the Company cannot assure that the actual results or
developments the Company anticipates will be realized or, even if subsequently
realized, that they will have the expected consequences or effects.
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, San Francisco
and Torrance California; Atlanta, Georgia; Boston, Massachusetts; Seattle,
Washington; London, United Kingdom and Sofia, Bulgaria.
The New York facilities consist of approximately 20,000 square feet on
two floors in midtown Manhattan. The office space is currently leased for
$290,000 per annum from October 1, 1996 to September 2001. The rent on the New
York facilities will increase to $310,000 per annum from October 1, 2001 to
September 30, 2006.
The Los Angeles, California facility consists of approximately 15,500
square feet of space. The lease is for a term of ten years ending May 31, 2007.
The rent for the first three years of the lease is approximately $370,000 per
annum. The rent for the following three years is approximately $409,000 and the
rent for the remainder of the lease is approximately $460,000 per annum.
The Georgia facility consists of approximately 14,000 square feet of
space located in Atlanta. The Company leased this space for a term of five years
ending May 15, 2002. The rent for the lease term is approximately $108,000 per
annum.
The Massachusetts facility consists of approximately 17,500 square feet
of space located in Boston. The lease expires October 1, 2003. The rent for the
first year of the lease is approximately $639,000 per annum and will increase
$17,500 for each year thereafter.
The Washington facility consists of approximately 21,298 square feet of
space located in Seattle. The lease expires on May 20, 2009. The rent for the
lease term is approximately $543,000 per annum.
The San Francisco, California facility consists of approximately 14,520
square feet of space. The lease expires on June 30, 2004. The rent for the lease
term is approximately $324,000 per annum.
The Torrance, California facility consists of approximately 15,900
square feet of space, which is leased through August 31, 2004. The rent for the
lease term is approximately $351,500 per annum.
The London facility consists of approximately 3,400 square feet of
space, which is leased through March 31, 2000 at the rate of $44,000 per annum.
The Sofia, Bulgaria facility consists of approximately 450 square feet.
The rent for the lease term is approximately $3,600 per annum.
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
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that any one of the foregoing leases is 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
interest in persons primarily engaged in real estate activities for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On September 25, 1998, Michael R. Farrell, a shareholder of the
Company, filed a putative class action suit, styled Farrell v. Think New Ideas,
Inc., Scott Mednick, Melvin Epstein and Ronald Bloom, No. 98 Civ. 6809, against
the Company, Ronald Bloom (an officer of the Company), Melvin Epstein and Scott
Mednick (both former officers of the Company) (the "Farrell complaint"). The
suit was filed in the United States District Court for the Southern District of
New York on behalf of all persons who purchased or otherwise acquired shares of
the Company's common stock in the class period from November 14, 1997 through
September 21, 1998.
On various dates in October, 1998, six additional putative class action
suits were filed in the same court against the same parties by six different
individuals, each purporting to represent a class of purchasers of Think New
Ideas, Inc., common stock. These subsequent suits claimed substantially similar
class periods (one alleged a class period starting on November 5, 1997, rather
than November 14, 1997) and made similar allegations as those made in the
Farrell complaint. All seven of these lawsuits were ultimately transferred to
Judge Sidney H. Stein of the United States District Court for the Southern
District of New York and consolidated by order of the Court dated December 15,
1998, into one action styled In Re: Think New Ideas, Inc., Consolidated
Securities Litigation, No. 98 Civ. 6809 (SHS).
Pursuant to an order of the Court, the plaintiffs filed a Consolidated
and Amended Class Action Complaint on February 10, 1999 (the "consolidated
complaint"). The consolidated complaint supersedes all prior complaints in all
of the cases and shall serve as the operative complaint in the consolidated
class action. The consolidated complaint names fourteen individual plaintiffs
and purports to be filed on behalf of a class of individuals who purchased Think
New Ideas, Inc., common stock from November 5, 1997, through September 21, 1998.
The consolidated complaint makes substantially similar allegations as the
Farrell complaint. Like the Farrell complaint, the consolidated complaint
alleges that the Company and certain of its current and former officers and
directors disseminated materially false and misleading information about the
Company's financial position and results of operations through certain public
statements and in certain documents filed by the company with the Securities and
Exchange Commission ("SEC"). The consolidated complaint further alleges that
these statements and documents caused the market price of the Company's Common
Stock to be artificially inflated. The plaintiffs further allege that they
purchased shares of common stock at such artificially inflated prices and
suffered damages as a result. The relief sought in the consolidated complaint is
unspecified, but includes a plea for compensatory damages and interest, punitive
damages where appropriate, reasonable costs and expenses associated with the
action (including attorneys' fees and experts' fees) and such other relief as
the court deems just and proper.
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Management believes that the Company has meritorious defenses to the
consolidated complaint and intends to contest it vigorously. The Company has
filed a motion to dismiss the consolidated complaint on a number of grounds and
the plaintiffs have opposed the motion. The motion is currently pending before
the court and the court has not yet determined whether oral arguments will be
heard. Although there can be no assurance as to the outcome of these matters,
unfavorable resolution could have a material adverse effect on the results of
operations and/or financial condition of the Company in the future.
Additionally, in the normal course of business, the Company is subject to
certain other claims and litigation, which the Company is of the opinion that,
based on information presently available, such legal matters will not have a
material adverse effect on the financial position or results of operations of
the Company.
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, 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF COMMON STOCK
The Common Stock commenced quotation on Nasdaq under the symbol "THNK"
on November 26, 1996 upon consummation of the Initial Public Offering. Prior to
that date, there was no public market for the Common Stock. The following table
sets forth, for the periods indicated the high and low transaction prices of the
Common Stock as quoted by Nasdaq.
<TABLE>
<CAPTION>
High Low
------------------------
<S> <C> <C> <C>
First Quarter 1998 $10.8750 $4.0625
Second Quarter 1998 13.0000 7.2500
Third Quarter 1998 17.9375 7.6250
Fourth Quarter 1998 39.2500 17.000
First Quarter 1999 33.2500 5.6250
Second Quarter 1999 16.1250 3.0000
Third Quarter 1999 18.7500 6.1250
Fourth Quarter 1999 17.4375 9.6250
First Quarter 2000 (through September 9, 1999) 16.3750 8.8750
</TABLE>
As of September 9, 1999, there were 180 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 400 beneficial owners of the Common Stock. The sales price of the
Common Stock as reported by Nasdaq on September 9, 1999 was $10 13/16. As of
September 9, 1999, there were 10,105,327 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.
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. This section and other parts hereof contain forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
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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 "Factors Affecting Operating Results and
Market Price of Stock" commencing on page 10.
OVERVIEW
The Company was incorporated in January 1996 and commenced operations
in June 1996 upon completion of its acquisitions of Internet One, Creative
Resources, Mednick Group, Goodman Group, On Ramp and NetCube (previously defined
as the "Founding Companies"). In fiscal 1997, the Company acquired Fathom. In
fiscal 1998, the Company acquired BBG, Herring/Newman, Interweb and UbiCube and
in fiscal 1999, the Company acquired Envision. See Note 2 to the Company's
Consolidated Financial Statements.
The combination of the Mednick Group, the Goodman Group, Internet One,
Creative Resources and NetCube was accounted for using the pooling of interests
method of accounting. Accordingly, the Consolidated Financial Statements of the
Company have been prepared as if each of the foregoing entities had been a part
of the Company since the respective dates of each such entity's inception. The
Company's acquisitions of On Ramp, Fathom, BBG, Herring/Newman, Interweb,
UbiCube and Envision were accounted for using the purchase method of accounting.
Accordingly, the results of operations of each of the foregoing have been
included in the Consolidated Financial Statements of the Company since the
respective date of each such acquisition. As a result of these purchase method
acquisitions, the Company's financial statements may lack comparability from
period to period.
On June 24, 1999, the Company entered into the Merger Agreement with
AnswerThink. Pursuant to the Merger Agreement, a wholly-owned subsidiary of
AnswerThink ("Sub") will merge with and into the Company. The Company will
survive the Merger and become a wholly owned subsidiary of AnswerThink. The
Merger is subject to certain conditions, including shareholder approval of both
companies. The completion of the proposed Merger is likely to have a material
effect on the Company's financial position and results of operations, in that,
among other things, the Company would operate as a subsidiary of AnswerThink,
and, as the Merger will be accounted for as a pooling of interests, the
Company's historical results of operations would be combined with those of
AnswerThink as if the companies had always operated on a combined basis.
Additionally, the future strategies of the two companies, operating on a
combined basis, may differ from the strategies the Company has been pursuing,
and which the Company would pursue if it continued to operate alone. In that
regard, all discussions of the Company's strategies, and other forward-looking
discussions, in the sections that follow, are based on the continued operation
of the Company alone (that is, without the completion of the proposed Merger
with AnswerThink) unless otherwise indicated. See "Proposed Merger with
AnswerThink."
The Company provides integrated marketing, communications and
technology solutions enabling clients to utilize the Internet and other
interactive technologies to enhance their competitive position. The Company
focuses on identifying opportunities for companies to restructure their
marketing and distribution strategies around interactive technologies and
implementing creative solutions to deliver their messages with the greatest
impact. The Company's solutions incorporate various technologies including
customized interactive applications, e-commerce and e-catalog technology,
consumer modeling and response technology and database development. The Company
integrates its core expertise through a standardized process that begins with
strategic planning and consulting and
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continues through implementation and post-implementation review and maintenance.
The Company's solutions are intended to help clients determine and implement
their business strategies, build brand awareness, and effectively communicate
information to their internal and external constituents.
The Company approaches each client engagement utilizing its standard
proprietary methodology, the THINK Vision Process. Utilizing this process, the
Company thoroughly researches a client's business to determine the effectiveness
of existing communications programs and how such programs may be improved and
integrated into an interactive strategy that is intended to help clients gain a
competitive advantage in a changing business landscape. See Part I, Item 1
"Description of Business."
The Company has historically generated revenue from both traditional
marketing and interactive media services including Web site 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. Although the Company derives revenues from
both traditional marketing and interactive media services, management of the
Company assesses the performance of the internal organization and makes
operational decisions on the Company as one integrated client service business.
Revenues from both these services 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 from fixed-fee contracts for
services to be delivered. 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 period to period.
The Company generally provides Web site 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. 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.
The Company's strategy is to concentrate its future on the expansion of
its interactive marketing services and, as a result, revenues from traditional
advertising services are anticipated to decrease in importance. As a part of
this strategy the Company decided, in April 1998, to dispose of its traditional
graphic design departments, and in the fourth quarter of 1998 recorded a
restructuring charge of $921,000 for the costs associated with that disposal.
Revenues and operating losses generated from the graphic design and digital
output businesses located in Atlanta, Los Angeles and Boston are included in the
results of operations for fiscal 1998. The disposal of these operations
eliminated the revenues and expenses from fiscal 1999, and the absence of these
operations from the fiscal 1999 results of operations affects the comparability
of fiscal 1998 and 1999.
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 overall marketing and
cross-marketing efforts.
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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 recent acquisitions, the Company continued to pursue
acquisition opportunities during fiscal 1999 and was in discussions with several
companies engaged in businesses that are complementary or supplementary to those
of the Company. The Company's acquisition strategy was to focus on acquiring
companies that could be integrated into the Company's existing infrastructure,
enabling the Company to acquire access to additional product or service
offerings and experienced management that can contribute to building the
business in a profitable manner, and providing international expansion, such as
that achieved in Europe through the UbiCube Acquisitions. The Company expects to
continue its focus on growth opportunities through new clients and expanded
representation of existing clients. The Company will look to continue to
maximize the use of its resources by the divestiture of non-strategic businesses
and investment in those portions of the business offering the highest returns.
RESULTS OF OPERATIONS- YEARS ENDED JUNE 30, 1999 AND 1998
REVENUES
Consolidated revenues were $49,797,000 in fiscal 1999, an increase of
$7,153,000 or 17% from revenues of $42,644,000 in fiscal 1998. This growth in
the Company's revenues reflects increased revenues from interactive marketing
and communication services, offset by lower revenues from traditional marketing
and communication services. The decline in revenues from traditional marketing
and communication services reflects the Company's shift in focus from
traditional marketing assignments to interactive marketing assignments. For the
fiscal year ended June 30, 1999, revenue from interactive marketing and
communication services increased 66% and revenue from traditional marketing and
communications services decreased 37%, compared with fiscal 1998.
The Company achieved the growth in interactive services from both the
acquisitions of companies engaged in the interactive market, and the addition of
new clients and competencies at its existing offices. Interactive services
revenue increased approximately $14,691,000 for the fiscal year ended June 30,
1999, as compared with June 30, 1998. Assignments performed by BBG, Interweb and
UbiCube which were acquired in fiscal 1998, and Envision which was acquired in
fiscal 1999, accounted for approximately $12,713,000 of the increase. These
acquisitions were completed in the second quarter (for BBG) fourth quarter (for
Interweb and UbiCube) of fiscal 1998 and in the third quarter (for Envision) of
fiscal 1999. The increase in interactive services revenue from the Company's
internal growth from its existing offices was approximately $1,978,000. Revenues
from traditional marketing and communication services declined by approximately
$7,539,000. That decline included $2,171,000 from the fiscal 1998 closure of the
Atlanta graphic design department. Traditional and marketing communications
revenues were positively affected by the fiscal 1998 acquisition Herring/Newman,
which increased revenues in fiscal 1999 by $3,518,000. The remaining (net)
decline reflects the Company's previously discussed shift away from traditional
services.
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OPERATING RESULTS
The operating loss of $8,250,000 for fiscal 1999, represents a
$19,162,000 decrease from the fiscal 1998 operating loss of $27,412,000. The
fiscal 1998 operating loss included charges of $29,164,000 for stock
compensation, purchased in-process research and development and restructuring
initiatives. Except for $180,000 of stock compensation charges, the fiscal 1999
results of operations did not include any similar charges. However, the fiscal
1999 operating loss reflects the effect of a $989,000 charge for the impairment
of capitalized software costs.
Excluding the effect of such charges from both 1999 and 1998, the
operating loss of $7,081,000 for fiscal 1999, reflects a $8,833,000 change from
an operating profit of $1,752,000 in fiscal 1998. This change is due to the
$7,153,000 increase in consolidated revenues being more than offset by increases
in all other components of operating expenses totaling $15,986,000 in fiscal
1999.
The increases in the Company's operating expenses throughout fiscal
1999 have been the result of the Company's growth strategy, which included plans
for growth through acquisitions, and from the addition of new services to
clients. To achieve this latter growth the Company has added personnel with
certain specialized competencies, and to support both the acquisitions and
internally generated growth, the Company has added personnel in senior
management, finance and administrative positions as well as sales/new business
development and strategy/planning. The Company has also increased its
competencies in production, creative and client service departments to support
the shift towards interactive marketing assignments. As a result, operating
expenses, relative to revenues, have been at levels above the Company's
long-term goals. The operating loss the Company experienced in fiscal 1999 has
been due, in part, to these higher levels of expenses. Additionally, the Company
has found that as it, and its competitors, seek larger and more complex
assignments, the decision process of prospective clients has lengthened. This
has caused revenue growth from new clients to be more sporadic and slower than
management expected. As a result, projecting short-term revenue and adjusting
operating expenses accordingly has been more difficult, leading to the operating
losses throughout fiscal 1999.
SALARIES AND RELATED EXPENSES
Salaries and related expenses consist primarily of wages and associated
payroll costs and benefits for all employees, including such costs for finance
and administrative personnel. Salaries and related expenses increased 71% or
$11,797,000 in fiscal 1999 to $28,522,000 from $16,725,000 for the corresponding
prior year period. The inclusion of the operations of BBG, Interweb, UbiCube and
Herring/Newman, which were acquired in fiscal 1998, and Envision, which was
acquired in fiscal 1999 (collectively the "Acquisitions") accounted for
approximately $9,410,000 of the overall increase in salaries and related costs.
The remaining $2,387,000 increase, which includes the effect of the savings of
$631,000 from the fourth quarter fiscal 1998 closure of the Atlanta graphic
design department, was due to the addition of personnel in the client
development/services and finance and administration functions, consistent with
the growth strategy discussed above.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist of marketing
expenses, technology costs (hardware and software purchases and leasing) and
telecommunications costs for Internet access. Selling, general and
administrative expenses also include corporate expenses such as insurance,
accounting and legal fees, temporary help, management information systems, and
employee benefits. In addition, selling, general and administrative expenses
include direct expenses such as contract labor and travel and production
expenses associated with providing services to clients. Selling, general and
administrative expenses increased 13% or $2,788,000 to $24,128,000 in fiscal
1999 compared with $21,340,000 for the corresponding prior year period. The
Acquisitions caused selling, general and administrative expenses to increase by
$5,961,000. That increase was offset by a decrease of $3,173,000, net of the
effect of increases in legal and accounting fees of $1,200,000, in the expenses
of the Company's other operations compared to the prior year. The increases in
these expenses are related to additional legal and accounting services required
to support the Company's expanded operations as well as legal fees caused by the
class action litigation filed against the Company. Also included in selling,
general and administrative expenses is a fourth quarter of fiscal 1999 charge of
approximately $500,000 for the write-off of both an accounts receivable and an
equity securities receivable from a client, which the Company concluded were
unrecoverable. The net decrease includes the $1,116,000 of expense eliminated by
the closure of the Atlanta graphic design department and other decreases of
$2,057,000, primarily the result from the decline in traditional marketing and
communication assignments.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the fiscal year ended June 30, 1999
increased $1,402,000 to $4,229,000 as compared with $2,827,000 for the fiscal
year ended June 30, 1998. This increase primarily relates to the additional
fixed assets and goodwill associated with the Company's acquisitions as well as
the addition to goodwill related to new shares of Common Stock issued to the
former stockholders of UbiCube for the achievement of certain revenue and profit
targets in the fourth quarter of fiscal 1999.
IMPAIRMENT OF CAPITALIZED SOFTWARE
Capitalized software development costs consist principally of salaries
and certain other expenses directly related to the development of software
products capitalized in accordance with the provision of Statement of Financial
Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." Capitalization of such
costs begins after the determination of the software product's technological
feasibility. Capitalization ceases and amortization of capitalized costs begins
when the software product is available for use. The amortization period is
estimated to equate the term during which meaningful revenue from the related
product is expected to be recognized. The Company periodically reviews the
impairment on long lived assets when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amounts. As the result of such review, during the
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fourth quarter of 1999, the Company recognized a non-cash pre-tax charge of
$989,000 related to the write-off to net realizable value of previously
capitalized software development costs. The capitalized software written off was
related to the software acquired in the fourth quarter of 1998 with the
Company's acquisition of Interweb. The write-off resulted from the Company's
downward revision of its estimate of future revenues from the software. The
estimate of future revenues from the use of the software declined as the result
of the departure during the second half of fiscal 1999 of personnel key to the
original development and continued maintenance and upgrade of the software, as a
result of which the software lost its advantage over other, newly developed
products available outside the Company.
STOCK COMPENSATION EXPENSE
In fiscal 1999, the Compensation Committee of the Company approved the
grant of options to two directors, appointed in January and March 1999,
respectively, each for the purchase of 20,000 shares of Common stock at an
exercise price equal to the closing price of the shares of Common Stock on the
date of grant. Upon the grant of these non-employee stock options to directors,
the Company recognized $180,000 in stock compensation expense, equal to the fair
value of the options granted based on the Black Scholes option pricing model.
The options vest one year after the date of grant, are exercisable over a
four-year period and expire five years from the date of grant.
In fiscal 1998, the Company recorded a one-time charge of $21,700,000
as the result of the release to certain stockholders of the Company of the
shares of Common Stock owned by such stockholders, which were placed in escrow
at the time of the Initial Public Offering (the "IPO Escrow"). These shares were
subject to release upon the attainment of any one of certain performance targets
by the Company, including a market price target of $20 per share for forty
consecutive business days, which was achieved in the fourth quarter of fiscal
1998. See "Certain Relationships and Related Transactions."
In the fourth quarter of fiscal 1998, the Company reached a settlement
agreement, as amended, with Scott A. Mednick, the former Chief Executive Officer
and Chairman of the Board of Directors of the Company, in connection with his
resignation from such positions. Pursuant to the terms of the amended agreement,
the Company accelerated the exercise dates of options to purchase up to 60,000
shares of Common Stock granted to Mr. Mednick. As a result, the Company recorded
a $1,400,000 non-cash charge for the difference between the exercise price for
such options and the market price of the underlying Common Stock as of the
settlement.
RESTRUCTURING COSTS
In April 1998, the Company formalized a decision to dispose of its
traditional graphic design departments and in connection therewith recorded a
restructuring charge of $921,000 for costs associated with that closure. As part
of the restructuring plan, approximately 25 employees were terminated in the
fourth quarter of fiscal 1998. The charge included $500,000 for severance and
other related personnel costs, $421,000 for lease liabilities and other
occupancy and facilities-related costs. Through June 30, 1998 the Company paid
approximately $614,000 of the restructuring costs, and at June 30, 1998 accrued
costs of approximately $307,000 remained, relating principally to estimated
costs for the termination of equipment and facility leases. The leases were
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settled and terminated in fiscal 1999, with the difference between the amount
accrued at June 30, 1998 and the actual costs incurred in fiscal 1999 not being
material.
PURCHASED RESEARCH AND DEVELOPMENT EXPENSE
In its fiscal 1998 acquisitions of Interweb and UbiCube the Company
acquired, among other things, the research and development being conducted by
those companies on the development of certain software products. Since these
research and development projects were in process for products that had not yet
reached technological feasibility and since the efforts, except for those
products, would have no other alternative future use, the Company was required
by generally accepted accounting principles to charge a portion of the purchase
price, representing the fair value of the research to date, to expense. On such
basis, the Company charged $4,700,000 and $500,000 of the purchase prices of
Interweb and UbiCube, respectively, to research and development expense.
TAXES ON INCOME
The Company recorded income tax provisions of $259,000 in fiscal 1999
and $340,000 in fiscal 1998. The 1999 and 1998 income tax provision represents
certain state income taxes. Valuation allowances of 100% have been established
for the Company's net federal and state deferred tax assets, which result
principally for net operating loss carryforwards which have not yet been
reflected in the results of operations. The net operating loss carryforwards
differ from the Company's financial reporting losses due to the
non-deductibility of the 1999 charges for stock compensation and impairment of
capitalized software and the 1998 charges for stock compensation and purchased
research and development.
LIQUIDITY AND CAPITAL RESOURCES
In 1998, the Company financed its operations, the cash requirements of
its acquisitions and an overall reduction in its interest-bearing debt
principally through the cash generated by operations. In fiscal 1999, the
Company experienced negative cash flows from operations, which together with
additions to property and equipment were financed principally with the proceeds
of the issuance of Common Stock.
Net cash used in operating activities of $4,666,000 for fiscal 1999
reflects the net loss of $8,308,000, reduced by non-cash charges for
depreciation and amortization, bad debt expense, stock compensation expense and
the charge for impairment of software development costs aggregating $6,756,000
and the absorption of cash of $3,114,000 by operating changes in working capital
assets and liabilities. Working capital changes that absorbed cash were the
$14,920,000 increase in accounts receivable, the $1,843,000 decrease in accounts
payable and accrued expenses and the $1,182,000 decrease in other liabilities
(principally representing the 1999 payment of the restructuring costs accrued in
fiscal 1998). These uses of cash were partially offset by cash provided by the
$13,638,000 increase in media payables, and the $1,500,000 decrease in unbilled
receivables Media payables represent media placement costs paid to media
providers by the Company on behalf of clients, which are rebilled to clients and
included in accounts receivable. The level of media payables and the related
accounts
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receivable will vary with the timing of client media campaigns. Unbilled
accounts receivable will vary based on the relationship of the billing dates,
verses the progress of the work, in client assignment agreements. Net of the
increase in media payables and the decrease in unbilled receivables, the level
of accounts receivable remained essentially unchanged (a decrease of $218,000)
at June 30, 1999 as compared to June 30, 1998. At June 30, 1999 the Company had
net working capital of $8,456,000 compared with net working capital of
$6,869,000 at June 30, 1998.
The Company expended cash of $2,247,000 for investing activities in
fiscal 1999. That amount included $1,651,000 for additions to property and
equipment. Property and equipment additions were principally for the expansion
into new office space in the Company's Boston, Seattle and San Francisco
locations.
The Company financed its fiscal 1999 negative operating cash flows and
investing expenditures principally with the $7,596,000 obtained from the
issuance of shares of its Common Stock, which included net proceeds of
$5,940,000 from the sale of shares of Common Stock under the Securities Purchase
Agreement (See Note 9(f) to the Notes to Consolidated Financial Statements of
the Company) and $1,656,000 received upon the exercise of stock options. In
addition to financing the Company's negative operating cash flows and investing
activities, those proceeds allowed the Company to service its debt and increase
its cash balance by $288,000 to $7,791,000 at June 30, 1999.
The Company's operations generated cash flows of $9,899,000 in fiscal
1998 due principally to the inclusion in net loss of the non-cash charges of
$23,043,000 for stock compensation and $5,200,000 for purchased research and
development, together with the increase in media payables of $6,959,000. Media
payables increased at June 30, 1998 due to the timing and level of media
placements.
In fiscal 1998 the Company's investing activities utilized cash of
$4,938,000 including $3,442,000 used to finance portions of the BBG and
Herring/Newman acquisitions and $2,818,000 expended on equipment and software
development.
Financing activities in 1998 utilized cash of $908,000 principally to
reduce bank and related party debt by an aggregate of $1,518,000 and pay capital
lease installments of $455,000, partially funded by $1,065,000 received upon the
exercise of stock options.
On April 24, 1998, the Company established a line of credit with the
Bank of New York ("BONY"), pursuant to which BONY agreed to permit the Company
to borrow $5,000,000 through March 31,1999. Amounts outstanding from time to
time under the line of credit accrue interest at a floating rate based on the
prime lending rate of the bank and are due and payable (together with interest)
on demand. The line of credit is evidenced by a promissory note and is secured
by substantially all of the assets of the Company. In addition, amounts
outstanding under the line of credit have been guaranteed by each of the Mednick
Group and On Ramp. During April 1999, BONY agreed to permit the Company to
extend the availability of the line of credit to July 31, 1999. At June 30, 1999
the Company had borrowed $1,164,000 under its line of credit and had $3,836,000
available for borrowing. Since July 31, 1999 the Company has been in discussions
with BONY concerning the renewal of the line of credit. BONY has indicated that
it desires to await the completion of the stockholder vote on the proposed
Merger with AnswerThink before finalizing any renewal. However, in the interim
BONY has verbally agreed to allow the Company to continue to borrow under the
terms of the April 1998 agreement pending the vote on the proposed Merger.
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As of June 30, 1999 the Company has cash on hand of $7,791,000, and a
positive working capital of $8,456,000. The Company believes that cash flows
from these sources, together with cash flows generated by its operations and
borrowings available under its interim agreement with BONY will be sufficient to
fund its operations, pay required debt (including the repayment of the
outstanding BONY borrowings if the line of credit is not renewed) and capital
lease obligations, and continue the Company's growth strategy. However,
unexpected changes in operating or capital market conditions could require the
Company to seek additional external financing, and there can be no assurance
that such additional capital will be available when needed. The inability to
obtain such financing, if needed, could adversely affect the Company's ability
to achieve its business objectives.
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 markets that would have a material effect on the Company.
IMPACT OF THE YEAR 2000
During calendar 1999 the Company has been, and continues to be, engaged
in efforts to identify and remediate its exposure to the impact of the year
("Y2K") on its computer hardware and software systems. The Y2K issue is the
result of computer programs being written using two digits, rather than four, to
define the applicable year. Any of the Company's computer programs that have two
digit date sensitive software may encounter system failures or miscalculations
if date entry of "00" is recognized as the year 1900 rather than 2000. The
failure of the Company's critical computer systems to properly recognize the
year 2000 could result in the interruption of the Company's operations and have
material adverse affects on the Company's financial position and results of
operations.
The Company has studied the importance to its operations of its various
hardware and software systems, and is giving priority to the remediation of
those systems that have been deemed critical. Currently, Company personnel, with
the assistance of consultants from AnswerThink, are reviewing the Company's
critical hardware and software systems to identify those with potential Y2K
issues and develop remediation plans. In general, the Company's systems for
processing its accounting data, and for hosting the Internet functions of
clients, are the systems likely to contain Y2K issues, while the Company's other
software and hardware systems, because of the relative newness, are already Y2K
compliant. To date the Company's expenditures for the study and remediation of
its Y2K issues, which, except of the costs for the purchase of new software or
the purchase or lease of new hardware, are being expensed as incurred, have not
been material.
In some instances the remediation of a system's Y2K issue will be
accomplished by the correction of code within the software. This will be
performed by the Company's personnel with the assistance of the consultants from
AnswerThink. In other instances, the nature or degree of the Y2K non-compliance
within a system will require the replacement of the hardware or software.
The Company's initial Y2K remediation plan was revised when the Company
reached the agreement for the proposed Merger with AnswerThink. This is because,
if the Merger is completed, many of the Company's systems which may contain Y2K
issues would be replaced by software and hardware systems currently used by
AnswerThink which are more advanced than that of the Company's and which are
already Y2K compliant. Accordingly, the Company's revised Y2K plan calls for the
remediation of many of its Y2K issues through the conversion to AnswerThink
systems prior to January 1, 2000, and the Company believes that if the Merger is
approved on the schedule currently contemplated that such conversion can be
completed without material expenditures (including revenues lost due to the use
of Company and AnswerThink personnel for this internal project) prior to January
1, 2000.
In the event the proposed Merger with AnswerThink is not approved, the
Company will engage AnswerThink on a consulting basis to complete the study and
remediation of the Company's software and hardware systems. AnswerThink has
expertise in this area, and the Company believes that the remediation of it
critical systems could be completed by January 1, 2000. The Company currently
estimates that the cost of engaging AnswerThink for this purpose, and for
purchasing any required software or hardware, would approximate $500,000 to
$1,000,000.
34
<PAGE>
As a part of its Y2K project the Company has also been addressing the
Y2K readiness of vendors and other third parties deemed critical to its
operations. The Company has been, and continues to, inquire of and receive from
these vendors information on their Y2K compliance. These efforts will continue
into the fourth quarter of calender 1999. To date the Company has not identified
any critical vendor or third party that presents a material Y2K readiness issue.
If a critical vendor or third party is found to not be Y2K ready, the Company
will seek to convert to the use of an alternative vendor. In that regard, in
many instances the Company, assuming the completion of the Merger with
AnswerThink, might convert to a vendor or third party with which AnswerThink
already has a relationship.
The Company is also in the process of developing contingency plans for
Y2K issues that are not successfully identified and remediated by the efforts
described above. Those contingency plans have not yet been fully developed.
The Company believes that it will be able to successfully address all
critical Y2K issues by January 1, 2000. However there can be no assurance that
all Y2K issues will be resolved by that date, and the Company's failure to
successfully identify and remediate all Y2K issues by January 1, 2000 could lead
to an interruption of its operations and have a material adverse effect on its
financial position and results of operations.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137,
must first be applied in the first quarter of fiscal years that begin after June
15, 2000, and in general requires that entities recognize all derivative
financial instruments as assets or liabilities, measured at fair value, and
include in earnings the changes in the fair value of such assets and
liabilities. SFAS No. 133 also provides that changes in the fair value of assets
or liabilities being hedged with recognized derivative instruments be recognized
and included in earnings. The Company does not utilize derivative instruments
either for hedging or other purposes, and therefore anticipates that the
adoption of the requirements SFAS No. 133 will not have a material affect on its
financial statements.
PROPOSED MERGER WITH ANSWERTHINK
On June 24, 1999, the Company entered into an Agreement and Plan of
Merger by and among the Company, AnswerThink, and Darwin Acquisition Corp., a
wholly-owned subsidiary of AnswerThink ("Sub") pursuant to which Sub will merge
with and into the Company. The Company will survive the Merger and become a
wholly-owned subsidiary of AnswerThink. Under the terms of the Merger Agreement,
all outstanding shares of the Company will be exchanged for shares of
AnswerThink Common Stock, and all outstanding options to acquire shares of
Common Stock, will be assumed and converted into options to acquire shares of
AnswerThink Common Stock at a ratio of 0.70 shares of AnswerThink Common Stock
to one share of Common Stock. In addition, the securities issued (and issuable)
by the company pursuant to the Securities Purchase Agreement with Capital
Ventures International and Marshall Capital Management will be assumed by
AnswerThink and converted based upon the Exchange Ratio. The Merger is subject
to certain conditions, including shareholder approval
35
<PAGE>
of both companies. The Merger will be accounted for as a pooling of interests
and is intended to qualify as a tax-free reorganization.
Pursuant to the Merger Agreement, the Company has agreed to pay
AnswerThink a termination fee of $6,000,000 in the event the Merger Agreement is
terminated under certain circumstances, including; the withdrawal of the
recommendation of the Board of Directors of the Company, or the Board's
recommendation of a third party acquisition proposal. The Company has also
agreed to pay a termination fee of $3,000,000 to AnswerThink under other
termination circumstances such as the inability to obtain the requisite
shareholder approval. Pursuant to the Merger Agreement, AnswerThink has agreed
to pay the Company a termination fee of $3,000,000 for a material breach of the
Merger Agreement that has not been properly cured.
In connection with the Merger Agreement, the Company granted
AnswerThink an option to purchase up to 19.9% of the shares of the Company
Common Stock outstanding on the date of exercise of the AnswerThink Option. The
AnswerThink Option is exercisable following the execution or consummation of an
alternative business combination involving the Company and the occurrence of
certain further triggering events, none of which has occurred as of the date
hereof. The per-share exercise price under the AnswerThink Option is $18.50.
As further inducement to AnswerThink to enter into the Merger
Agreement, each director, Omnicom Group, Inc. and certain executive officers of
the Company (who, in the aggregate, beneficially own approximately 22% of the
Company's outstanding Common Stock) entered into voting agreements with
AnswerThink pursuant to which they: (i) agreed to vote their shares of Common
Stock in favor of the Merger Agreement and the Merger; and (ii) granted
irrevocable proxies to AnswerThink to vote such shares in accordance with the
voting agreements. As an inducement to the Company to enter into the Merger
Agreement, each director and certain executive officers of AnswerThink (who, in
aggregate, beneficially own approximately 39.76% of AnswerThink's outstanding
Common Stock) entered into voting agreements with the Company pursuant to which
they: (i) agreed to vote their shares of AnswerThink Common Stock in favor of
the issuance of AnswerThink Common Stock pursuant to the Merger Agreement; and
(ii) granted irrevocable proxies to the Company to vote such shares in
accordance with the voting agreements.
The Company believes that it is likely that the Merger will be
completed on the terms contained in the Merger Agreement. However, there can be
no assurance that the required stockholder approvals will be obtained, or that
the other conditions to the Merger will be fulfilled. A termination of the
Merger Agreement for a reason that requires the Company to pay AnswerThink a
termination fee, as described above, could have a material adverse effect on the
Company's liquidity, financial position and results of operations.
The completion of the proposed Merger is likely to have a material
effect on the Company's financial position and results of operations, in that,
among other things, the Company would operate as a subsidiary of AnswerThink,
and, as the Merger will be accounted for as a pooling of interests, the
Company's historical results of operations would be combined with those of
AnswerThink as if the companies had always operated on a combined basis.
Additionally, the future strategies of the two companies, operating on a
combined basis, may differ from the strategies the Company has been pursuing,
and which the Company would pursue if it continued to operate alone.
36
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial
information gives effect to the proposed Merger between AnswerThink and the
Company. The Merger will be accounted for as a pooling-of-interests, and the
historical financial position and operating results of AnswerThink and the
Company will be combined. The pro forma combined condensed financial information
reflects the combined financial position of AnswerThink and the Company as of
July 2, 1999 and the combined operating results of AnswerThink and the Company
for the years ended January 1, 1999, January 2, 1998 and December 31, 1996.
The unaudited pro forma combined condensed statements of operations
assume that the Merger occurred at the beginning of the periods presented. The
unaudited pro forma combined condensed balance sheet assumes the Merger occurred
as of July 2, 1999. The historical financial information of AnswerThink as of
July 2, 1999 and for the years ended January 1, 1999, January 2, 1998 and
December 31, 1996 has been derived from AnswerThink's historical consolidated
financial statements. The historical financial information of the Company as of
June 30, 1999 and for the twelve-month period ended December 31, 1998 and for
the years ended June 30, 1998 and June 30, 1997 have been derived from the
Company's historical consolidated financial statements. The historical financial
information of the Company has been re-classified to conform to AnswerThink's
historical presentation. The unaudited pro forma combined condensed financial
information should be read in conjunction with the historical consolidated
financial statements of AnswerThink and the Company.
AnswerThink uses a fiscal year which ends on the Friday nearest to
December 31. The Company uses a June 30 fiscal year. Accordingly, in order to
prepare the unaudited pro forma combined statements of operations, the operating
results for the Company were recast to conform with AnswerThink's fiscal year.
As a result, the operating results of the Company for the six months ended June
30, 1998 are included in both the pro forma combined operating results for the
year ended January 1, 1999 and in the pro forma combined operating results for
the year ended January 2, 1998. The Company's revenue and net loss for the six
months ended June 30, 1998 were $25,620,519 and $28,086,490, respectively. Pro
forma weighted average common shares outstanding for all periods presented
represent the historical average shares for AnswerThink combined with the
historical average shares for the Company after giving effect to the conversion
of all outstanding shares of Common Stock into AnswerThink common stock by the
Exchange Ratio contemplated in the Merger. Pro forma operating results do not
include estimated merger-related costs of $7.5 million.
The unaudited pro forma combined condensed financial information has
been included for comparative purposes only and does not purport to show what
the financial position or operating results would have been if the merger had
been consummated as of the dates indicated, nor should it be construed as
representative of future financial position or operating results.
37
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 1, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
ANSWERTHINK THINK NEW IDEAS (1) PRO FORMA
----------- ------------------- ---------
<S> <C> <C> <C>
Net revenues $118,155,676 $ 49,361,578 $167,517,254
Costs and expenses:
Project personnel and expense 71,889,880 29,610,935 101,500,815
Selling, general and administrative 38,515,933 21,646,136 60,162,069
Stock compensation expense 40,843,400 23,043,450 63,886,850
Restructuring costs -- 920,610 920,610
Purchased research and development expense -- 5,200,000 5,200,000
------------ ------------ ------------
Total costs and operating expenses 151,249,213 80,421,131 231,670,344
------------ ------------ ------------
Loss from operations (33,093,537) (31,059,553) (64,153,090)
Other income (expenses):
Litigation settlement 2,500,000 -- 2,500,000
Interest income 679,018 278,745 957,763
Interest expense (1,418,021) (170,575) (1,588,596)
------------ ------------ ------------
Loss before income taxes (31,332,540) (30,951,383) (62,283,923)
Income taxes 324,820 255,549 580,369
------------ ------------ ------------
Net loss $(31,657,360) $(31,206,932) $(62,864,292)
============ ============ ============
Basic and diluted net loss per common share $ (1.62) $ (4.17) $ (2.53)
============ ============ ============
Weighted average common shares outstanding 19,602,520 7,488,538 24,844,497
============ ============ ============
</TABLE>
(1) Pro forma operating results for the year ended January 1, 1999 include the
operating results of Think New Ideas for the 12-month period ended December 31,
1998.
38
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 2, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
ANSWERTHINK THINK NEW IDEAS (1) PRO FORMA
----------- ------------------- ---------
<S> <C> <C> <C>
Net revenues $ 34,499,746 $ 42,644,405 $ 77,144,151
Costs and expenses:
Project personnel and expenses 24,626,831 24,199,048 48,825,879
Selling, general and administrative 16,681,885 16,693,636 33,375,521
Settlement costs 1,902,608 -- 1,902,608
Stock compensation expense -- 23,043,450 23,043,450
Restructuring costs -- 920,610 920,610
Purchased research and development expense 4,000,000 5,200,000 9,200,000
------------ ------------ ------------
Total costs and operating expenses 47,211,324 70,056,744 117,268,068
------------ ------------ ------------
Loss from operations (12,711,578) (27,412,339) (40,123,917)
Other income (expenses):
Interest income 508,470 287,940 796,410
Interest expense (151,668) (88,666) (240,334)
------------ ------------ ------------
Loss before income taxes (12,354,776) (27,213,065) (39,567,841)
Income taxes -- 339,834 339,834
------------ ------------ ------------
Net loss $(12,354,776) $(27,552,899) $(39,907,675)
============ ============ ============
Basic and diluted net loss per common share $ (1.74) $ (4.36) $ (3.46)
============ ============ ============
Weighted average common shares outstanding 7,100,092 6,315,087 11,520,653
============ ============ ============
</TABLE>
(1) Pro forma operating results for the year ended January 2, 1998 include the
operating results of Think New Ideas for the year ended June 30, 1998.
39
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
ANSWERTHINK THINK NEW IDEAS (1) PRO FORMA
----------- ------------------- ---------
<S> <C> <C> <C>
Net revenues $ 11,492,825 $ 17,436,847 $ 28,929,672
Costs and expenses:
Project personnel and expenses 6,559,278 10,209,202 16,768,480
Selling, general and administrative 4,909,191 12,972,777 17,881,968
Restructuring costs -- 1,732,000 1,732,000
------------ ------------ ------------
Total costs and operating expenses 11,468,469 24,913,979 36,382,448
------------ ------------ ------------
Income (loss) from operations 24,356 (7,477,132) (7,452,776)
Other income (expenses):
Interest income 19,898 286,358 306,256
Interest expense (5,280) (134,489) (139,769)
------------ ------------ ------------
Income (loss) before income taxes 38,974 (7,325,263) (7,286,289)
Income taxes -- 245,900 245,900
------------ ------------ ------------
Net income (loss) $ 38,974 $ (7,571,163) $ (7,532,189)
============ ============ ============
Basic and diluted net income (loss) per common share $ 0.05 $ (1.63) $ (1.88)
============ ============ ============
Weighted average common shares outstanding 757,773 4,638,337 4,004,609
============ ============ ============
</TABLE>
(1) Pro forma operating results for the year ended December 31, 1996 include the
operating results of Think New Ideas for the year ended June 30, 1997.
40
<PAGE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET
JULY 2, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
ANSWERTHINK THINK NEW IDEAS PRO FORMA
----------- --------------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,034,567 $ 7,791,363 $ 19,825,930
Short-term investments 500,000 -- 500,000
Accounts receivable and unbilled revenue, net 45,782,096 30,749,411 76,531,507
Prepaid expenses and other current assets 1,443,124 963,133 2,406,257
-------------- -------------- --------------
Total current assets 59,759,787 39,503,907 99,263,694
Property and equipment, net 4,306,956 5,298,736 9,605,692
Other assets 3,380,732 1,782,623 5,163,355
Goodwill, net 31,497,468 20,318,499 51,815,967
------------ ----------- ------------
Total assets $ 98,944,943 $66,903,765 $165,848,708
============ =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,632,212 $ 3,310,262 $ 5,942,474
Accrued expenses and other liabilities 14,676,676 3,397,231 18,073,907
Media payable -- 23,220,723 23,220,723
Income taxes payable 2,916,050 110,472 3,026,522
Current portion of borrowings under revolving credit facility and other
debt payable 1,896,000 1,194,647 3,090,647
------------ ------------ ------------
Total current liabilities 22,120,938 31,233,335 53,354,273
Long-term liabilities -- -- --
------------ ------------ ------------
Total liabilities 22,120,938 31,233,335 53,354,273
Shareholders' equity 76,824,005 35,670,430 112,494,435
------------ ------------ ------------
Total liabilities and shareholders' equity $ 98,944,943 $ 66,903,765 $165,848,708
============ ============ ============
</TABLE>
41
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
THINK New Ideas, Inc. and Subsidiaries
Index to Consolidated Financial Statements
PAGE
----
Report of Independent Auditors, Ernst & Young, LLP........................ F-1
Consolidated Financial Statements:
Consolidated Balance Sheets......................................... F-2
Consolidated Statements of Operations............................... F-3
Consolidated Statements of Shareholders' Equity..................... F-4
Consolidated Statements of Cash Flows............................... F-5
Notes to Consolidated Financial Statements.......................... F-6
F
<PAGE>
Report of Independent Auditors
Board of Directors
THINK New Ideas, Inc.
We have audited the accompanying consolidated balance sheets of THINK New Ideas,
Inc. and subsidiaries (the "Company") as of June 30, 1999 and 1998 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. 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 audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides 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, 1999 and 1998 and the consolidated results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
New York, New York
August 13, 1999
F-1
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,791,363 $ 7,503,576
Accounts receivable, net of allowance for doubtful
accounts of $568,377 and $1,019,475 28,793,762 14,431,288
Unbilled receivables 1,955,649 3,455,181
Prepaid expenses and other assets 963,133 865,574
----------- -----------
Total current assets 39,503,907 26,255,619
Property, and equipment, net 5,298,736 5,682,059
Software development costs, net 416,788 1,858,370
Goodwill, net of accumulated amortization of
$4,010,748 and $2,534,207 20,318,499 17,344,798
Other assets 1,365,835 1,112,225
----------- -----------
Total assets $66,903,765 $52,253,071
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,310,262 $ 3,937,683
Accrued expenses 2,877,110 3,414,977
Accrued restructuring costs -- 307,482
Media payable 23,220,723 9,382,266
Income taxes payable 110,472 566,578
Bank payable 1,164,000 491,915
Due to related party 30,647 591,946
Current portion of obligations under capital leases 334,403 693,619
----------- -----------
Total current liabilities 31,047,617 19,386,466
Obligations under capital leases 185,718 260,645
Other long-term liabilities -- 102,548
----------- -----------
Total liabilities 31,233,335 19,749,659
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.0001 par value; 5,000,000 shares
authorized; none issued and outstanding -- --
Common stock, $.0001 par value; 50,000,000 shares
authorized; 10,100,326 and 8,433,656 shares
issued 1,010 843
Additional paid-in capital 79,212,908 67,731,946
Accumulated deficit (43,537,417) (35,229,377)
Accumulated other comprehensive income (6,071) --
------------ -----------
Total shareholders' equity 35,670,430 32,503,412
----------- -----------
Total liabilities and shareholders' equity $66,903,765 $52,253,071
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1999 1998
------------ -------------
<S> <C> <C>
Revenues $ 49,797,232 $ 42,644,405
Operating expenses:
Salaries and related expenses 28,521,790 16,724,943
Selling, general and administrative expenses 24,128,341 21,340,350
Depreciation and amortization 4,228,533 2,827,391
Impairment of capitalized software 988,566 --
Stock compensation expense 180,400 23,043,450
Restructuring costs -- 920,610
Purchased research and development expense -- 5,200,000
------------ ------------
Operating loss (8,250,398) (27,412,339)
Interest income and other, net 201,540 199,274
------------ ------------
Loss before taxes on income (8,048,858) (27,213,065)
Provision for income taxes 259,182 339,834
------------ ------------
Net loss $(8,308,040) $(27,552,899)
============= ============
Net loss per share-basic $ (0.94) $ (4.36)
Weighted average shares outstanding 8,844,708 6,315,087
Net loss per share-diluted $ (0.94) $ (4.36)
Weight average shares outstanding 8,844,708 6,315,087
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
-------------------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME TOTAL
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 6,536,667 $ 654 $19,050,174 $ (7,676,478) -- $11,374,350
Issuance of Common Stock for
services rendered 75,000 8 359,368 -- -- 359,376
Issuance of stock options for
consulting services -- -- 86,500 -- -- 86,500
Issuance of Common Stock in
connection with acquisitions 1,416,867 141 23,538,845 -- -- 23,538,986
Issuance of Common Stock on
exercise of stock options 181,713 18 1,065,665 -- 1,065,683
Conversion of promissory notes 79,697 8 587,958 -- -- 587,966
Issuance of Common Stock on
exercise of warrants 143,712 14 (14) -- -- --
Acceleration of stock option
vesting -- -- 1,387,200 -- -- 1,387,200
Common stock released from
escrow to founders -- -- 21,656,250 -- 21,656,250
Net loss -- -- -- (27,552,899) -- (27,552,899)
------------------------------------------------------------------------------------------------
Balance at June 30, 1998 8,433,656 $ 843 $67,731,946 $(35,229,377) $ -- $32,503,412
------------
Comprehensive income
Net loss -- -- -- (8,308,040) -- (8,308,040)
Foreign currency translation
adjustments -- -- -- -- (6,071) (6,071)
------------
Comprehensive income (8,314,111)
Stock Compensation Expense -- -- 180,400 -- -- 180,400
Issuance of Common Stock on
exercise of stock options 297,507 30 1,655,764 -- -- 1,655,794
Issuance of Common Stock in
connection with acquisition 477,002 48 3,499,952 -- -- 3,500,000
Common Stock issued, net of
issuance costs 871,142 87 5,939,913 -- -- 5,940,000
Issuance of Common Stock in
connection with contingent
payments on past acquisitions 21,019 2 204,933 -- -- 204,935
------------------------------------------------------------------------------------------------
Balance at June 30, 1999 10,100,326 $1,010 $79,212,908 $(43,537,417) $(6,071) $35,670,430
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
---------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(8,308,040) $(27,552,899)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation 2,298,976 1,341,470
Amortization of intangibles 1,929,557 1,485,921
Bad debt expense 1,358,705 534,257
Impairment of capitalized software development 988,566 --
Restructuring charges -- 920,610
Stock compensation expense 180,400 23,043,450
Purchased research and development -- 5,200,000
Changes in assets and liabilities:
Accounts receivable, net (14,919,655) 728,735
Unbilled receivables 1,499,532 (878,611)
Accounts payable and accrued expenses (1,842,841) 119,396
Accrued restructuring (307,482) (1,706,867)
Media payable 13,637,981 6,959,182
Other assets and liabilities (1,181,661) (295,730)
------------ -----------
Net cash (used in) provided by operating activities (4,665,962) 9,898,914
------------ -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to software development costs -- (577,770)
Payment for acquisition, net of cash acquired 44,910 (3,441,744)
Sales of marketable securities -- 1,321,722
Purchases of property and equipment (1,651,526) (2,240,529)
Other (640,826) --
------------ ------------
Net cash used in investing activities (2,247,442) (4,938,321)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net-repayments on operating lines of credit and short-term debt -- (203,861)
Issuance of common stock 7,595,794 1,065,683
Net borrowings on short term debt 672,085 --
Principal payments on capital leases (505,389) (455,620)
Payments on amounts due to related party (561,299) (1,314,566)
------------ -----------
Net cash provided by (used in) financing activities 7,201,191 (908,364)
------------ -----------
Net increase in cash and cash equivalents 287,787 4,052,229
Cash and cash equivalents, beginning of year 7,503,576 3,451,347
============ ===========
Cash and cash equivalents, end of year $ 7,791,363 $ 7,503,576
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 221,038 $ 264,232
Interest 89,751 74,958
Non-cash investing and financing activities:
Issuance of common stock for Acquisitions 3,500,000 23,538,986
Equipment recorded in connection with the final purchase price
allocation
of Interweb 133,333 --
Issuance of common stock for contingent payments related to past 204,935 --
acquisitions
Conversion of convertible promissory notes into common stock -- 587,966
Purchase of equipment by capital leases -- 988,645
Issuance of common stock and options as finders fee to consultant
for acquisitions -- 455,876
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company was incorporated in January 1996, and commenced operations on June
30, 1996 upon combination of the Company with the Mednick Group, On Ramp,
Creative Resources, the Goodman Group, Internet One, and NetCube, each of which
had been previously engaged in providing various marketing and communications
services. The combination of these companies into the Company was accounted for
as a pooling of interests, (with the exception of On Ramp, which was accounted
for as a purchase) and, accordingly, the consolidated financial statements of
the Company are prepared as if each of these companies had been a part of the
Company from inception of such companies. The results of operations for On Ramp
have been included since the date of acquisition. As hereinafter used, the term
"Company" shall include all the Company's subsidiaries, as the context may
require.
The Company provides "new media" advertising services including the design and
development of Internet Web sites and related tools and marketing and
communication services that include traditional services, such as advertising,
graphic design (discontinued April 1998; See Note 12). The Company considers its
operation to comprise a single business segment under Statement of Financial
Accounting Standards ("SFAS") No. 131.The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, (See Note
2 below). All intercompany balances and transactions are eliminated in
consolidation.
The Company reports on a June 30 fiscal year.
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less, to be cash equivalents.
PROPERTY AND EQUIPMENT
The Company uses the straight-line method of depreciation. Property and
equipment includes certain assets utilized pursuant to capital leases, which are
recorded at the present value of the minimum non-cancelable lease payments at
the inception of the lease. The estimated useful lives of property and equipment
are as follows:
F-6
<PAGE>
YEARS
-----
Equipment 3 to 5
Furniture and fixtures 5 to 7
Leasehold improvements are amortized on a straight-line basis over the term of
the lease or the estimated useful life of the improvement, whichever is shorter.
CAPITALIZED SOFTWARE
In accordance with SFAS No. 86, "Accounting for Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," the Company capitalizes costs incurred to
develop new software products after determination that technological feasibility
has been established for the product. Costs incurred prior to the establishment
of technological feasibility are charged to expense. Amortization of the costs
capitalized begins when the related product is available for general release and
is based on current and anticipated future revenues for each product or
enhancement, with an annual minimum charge equal to straight-line amortization
over the remaining estimated economic life of the product or enhancement. The
Company utilizes an estimated life of three years for capitalized software. It
is reasonably possible that those estimates of anticipated product revenues, the
remaining estimated economic life of the product or both will be reduced
significantly in the three-year term due to changing technologies. Consequently,
the amount of capitalized software costs may be significantly reduced.
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles are amortized on a straight-line basis ranging
from 2 to 15 years. The Company periodically assesses the recoverability of the
cost of its goodwill based upon estimated future profitability of the related
operating entities. The agreements pursuant to which the Company acquired
certain companies (See Note 2) include provisions that would require the Company
to issue additional shares if the acquired company meets certain goals. The
value of any such shares issued, as of the date issued, will be added to the
goodwill related to such acquisition and amortized over the remainder of that
goodwill's useful life.
REVENUE RECOGNITION
Revenues from the design and development of Internet Web sites and interactive
and traditional marketing services are recognized using the
percentage-of-completion method. Unbilled receivables represent time and costs
incurred on projects in progress in excess of amounts billed, and are recorded
as assets. Amounts billed in excess of time and costs incurred are recorded as
liabilities. To the extent costs incurred and anticipated costs to complete
projects in progress exceed anticipated billings, a loss is recognized in the
period such determination is made for the excess.
Payments received for subsequent maintenance of Internet Web sites are deferred
and recognized over the period during which the maintenance is provided.
F-7
<PAGE>
Revenue from advertising and related services comprises commissions and fees
derived from billings to clients for media and production activities. Commission
revenue is recognized primarily when media placements appear on television,
radio, or in print. Fee revenue is recognized when services are rendered.
STOCK COMPENSATION
The Company measures compensation expense related to the grant of stock options
and stock-based awards to employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," under which compensation expense, if any, is generally based on
the difference between the exercise price of an option, or the amount paid for
an award, and the market price or fair value of the underlying common stock at
the date of the award or at the measurement date for variable awards.
Stock-based compensation arrangements involving nonemployees are accounted for
under SFAS No. 123, under which such arrangements are accounted for based on the
fair value of the option or award. As required by SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company discloses pro forma net income and net
income per share information reflecting the effect of applying SFAS No. 123 fair
value measurement to employee arrangements.
INCOME TAXES
The Company determines its deferred tax provision under the liability method,
whereby deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts using presently enacted tax rates. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
EARNINGS PER SHARE
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share,"
effective July 1, 1997. Under SFAS No. 128 basic earnings per share excludes any
dilution for Common Stock equivalents and is computed on the basis of net income
divided by the weighted average number of common shares outstanding during the
relevant period. Diluted earnings per share reflects the potential dilution that
could occur if options or other securities or contracts entitling the holder to
acquire shares of Common Stock were exercised or converted, resulting in the
issuance of additional shares of Common Stock that would then share in earnings.
However, diluted earnings per share do not consider such dilution if its effect
would be to reduce the loss per share ("anti-dilutive").
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, marketable securities, accounts
receivables, accounts and notes payable and short-term debt approximates book
value.
CONCENTRATION OF CREDIT RISK, MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
F-8
<PAGE>
Financial instruments, which potentially subject the Company to a concentration
of credit risk, consist of cash and cash equivalents, marketable securities and
accounts receivable. 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. One customer
accounted for approximately 10% of 1999 consolidated revenues. Two customers
each separately accounted for 13% of consolidated revenues in 1998.
Concentrations of credit risk with respect to receivables are limited due to the
geographically diverse customer base. The Company routinely assesses the
financial strength of its customers and does not require collateral or other
security to support customer receivables. Credit losses are provided for in the
consolidated financial statements in the form of an allowance for doubtful
accounts.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," in the first
fiscal quarter of 1999. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components in financial statements.
Comprehensive income is a more inclusive financial reporting methodology that
includes the disclosure of certain financial information that has not been
recognized in the calculation of net income or loss, such as foreign currency
translations and changes that are recorded directly to shareholders' equity.
Accumulated other comprehensive loss comprised of foreign currency translation
adjustments of $6,071 at June 30, 1999, as a result of the Company's operations
in the United Kingdom, which the Company acquired in the fourth quarter of 1998
through its acquisition of UbiCube.
RECLASSIFICATIONS
Certain balances in prior fiscal years have been reclassified to conform with
the presentation adopted in the current fiscal year.
NEW ACCOUNTING PRONOUNCEMENT
In June, 1998 FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities. "SFAS No. 133, as amended by SFAS No. 137, must first be
applied in the first quarter of fiscal years that begin after June 15, 2000, and
in general requires that entities recognize all derivative financial instruments
as assets or liabilities, measured at fair value, and include in earnings the
changes in the fair value of such assets and liabilities. SFAS No. 133 also
provides that changes in the fair value of assets or liabilities being hedged
with recognized derivative instruments be recognized and included in earnings.
The Company does not utilize derivative instruments either for hedging or other
purposes, and therefore anticipates that the adoption of the requirements SFAS
No. 133 will not have a material affect on its financial statements.
2. BUSINESS ACQUISITIONS
FISCAL 1996 ACQUISITIONS
On June 30, 1996, the Company acquired all of the issued and outstanding shares
of capital stock of the following entities in exchange for 491,595 shares of the
Company's Common Stock:
F-9
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
ISSUED TO EFFECT
ENTITY/DATE OPERATIONS COMMENCED ACQUISITION
- - --------------------------------------------------------------- -------------------------
<S> <C>
Scott A. Mednick & Associates, Inc./October 1982 208,084
Creative Resources Agency, Inc./November 1994 3,970
The S.D. Goodman Group/July 1993 49,623
Internet One, Inc./November 1993 34,736
NetCube, Inc/ February 1978 195,182
</TABLE>
Mednick Group, Creative Resources and Goodman Group provided a wide variety of
marketing-related services. NetCube and Internet One were principally providers
of new media services. The acquisition of each of these companies was 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.
On June 30, 1996, the Company acquired all of the outstanding shares of capital
stock of On Ramp, a provider of new media services, in exchange for 231,572
shares of Common Stock. The purchase price of $1,338,000 (includes transaction
costs of approximately $750,000, including a $500,000 finder's fee paid to
Benchmark Equity Group, Inc., formerly a principal stockholder of the Company)
has been allocated to the assets purchased and the liabilities assumed based
upon their estimated fair values at the date of acquisition. The carrying
amounts of the tangible assets and liabilities acquired and assumed approximated
their fair values, and the excess $2,310,000 of the purchase price over the
carrying amounts of net assets acquired, as follows:
Goodwill $2,159,000
Purchased software and other intangible assets 251,000
Deferred income taxes (100,000)
-----------------
$2,310,000
=================
Goodwill related to this acquisition was amortized over a two-year period and
was fully amortized at June 30, 1998.
FISCAL 1997 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., a wholly-owned
subsidiary of Omnicom Group Inc. ("Omnicom"), a principal stockholder of the
Company, in exchange for 120,000 shares of the Company's Common Stock. The
F-10
<PAGE>
purchase price of $442,500 was classified as goodwill, which was amortized over
a two-year period and is fully amortized at June 30, 1999.
FISCAL 1998 ACQUISITIONS
In November 1997, the Company purchased all of the issued and outstanding
capital stock of BBG New Media, Inc., a Massachusetts corporation ("BBG") which
provides interactive marketing services. As consideration, the Company paid
$175,000 in cash and issued 303,334 shares of Common Stock to the former
stockholders of BBG, valued at $3,602,000. In addition, the Company is required
to issue additional shares of Common Stock if BBG achieves certain sales growth
rates during the period from November 1, 1998 through October 31, 1999. In the
first quarter of fiscal 2000, the Company will issue approximately $4,550,000 in
shares of Common Stock to the former stockholders of BBG due to the attainment
of such growth targets. If such shares of Common Stock are issued, such issuance
will increase goodwill. The aggregate purchase price of approximately
$4,800,000, including acquisition costs, exceeded the fair value of the net
tangible assets acquired by approximately $4,233,000 and was recorded as
goodwill and is being amortized using the straight-line method over 15 years.
In April 1998, the Company acquired all of the issued and outstanding shares of
capital stock of Herring/Newman, Inc., a Washington corporation
("Herring/Newman") engaged in the business of full service advertising. As
consideration, the Company issued an aggregate of 127,799 shares of Common
Stock, valued at $1,655,000, and paid $400,000 in cash. The Company issued into
escrow an additional 77,220 shares of Common Stock. The escrowed shares were
released to the former stockholders of Herring/Newman in the fourth fiscal
quarter of 1999, upon the occurrence of certain conditions, including retention
of Herring/Newman's largest clients. The aggregate purchase price of $3,006,000,
which excludes consideration of the escrow shares and includes acquisition
costs, exceeded the fair value of the net tangible assets acquired by $2,102,000
and was recorded as goodwill and is being amortized using the straight-line
method over 15 years.
On June 3, 1998, the Company acquired all of the issued and outstanding shares
of capital stock of Interweb, Inc., an Atlanta corporation ("Interweb") which
provided Web-based solutions to clients. As consideration for the purchase of
Interweb, the Company issued 600,000 shares of Common Stock, valued at
$11,625,000, and paid $200,000 in cash. The aggregate purchase price, including
acquisition costs, exceeded Interweb's net assets (approximately $669,000) by
$11,304,000. Of such amount, $4,700,000 was immediately charged to expense as
the fair value for software-related research and development efforts in process
at Interweb for products that had not yet reached technological feasibility and
which efforts, except for such products, would have no other alternative future
use. The remaining $6,604,000 was allocated as follows:
Software (developed) $1,149,000
Goodwill 5,165,000
Other 290,000
-----------------
$6,604,000
=================
Goodwill is being amortized using the straight-line method over 15 years.
F-11
<PAGE>
On June 29, 1998, UbiCube Acquisition Corp. ("UAC"), a wholly owned subsidiary
of the Company, acquired all of the issued and outstanding capital stock of
UbiCube Group, Inc., a Delaware interactive marketing company ("UbiCube") which
has offices in London and San Francisco. As a result of the acquisition, UbiCube
was merged with and into UAC in exchange for the issuance of 154,257 shares of
Common Stock having an aggregate value of approximately $4,000,000, and
guaranteed future payments of $2,250,000 in shares of Common Stock through
January 15, 2000. In addition, 154,257 shares of Common Stock were placed in
escrow to be released to the former stockholders of UbiCube on January 15, 1999,
January 15, 2000, and March 1, 2001 based on the attainment of certain
milestones. In the fourth fiscal quarter of 1999, 7,924 shares were released
from escrow to the former shareholders of UbiCube upon the attainment of the
milestones for the applicable period. In addition, the Company agreed to issue
additional shares to the former stockholders of UbiCube having a value of
approximately $9,000,000, subject to the attainment of certain revenue and
profit targets during the three-year period ending June 2001. During the fourth
fiscal quarter of 1999, 21,019 additional shares were issued to the former
stockholders of UbiCube upon the attainment of the targets for the applicable
period. The aggregate purchase price, which excludes shares held in escrow, but
includes acquisition costs, exceeded UbiCube's net assets (approximately
$600,000) by approximately $6,100,000. Of such amount, $500,000 was immediately
charged to expense as the fair value of software-related research and
development efforts in process for products that had not yet reached
technological feasibility and which efforts, except for such products, would
have no other alternative future use. The remaining $5,600,000 exceeded the fair
value of the net tangible assets acquired and was recorded as goodwill which is
being amortized using the straight-line method over 15 years.
FISCAL 1999 ACQUISITION
In March 1999 the Company entered into a purchase agreement to acquire the
assets and operations of Envision Group ("Envision"), a California-based
partnership that provides Internet marketing and web-based solutions. As
consideration, the Company issued 477,002 shares of Common Stock valued at
$3,500,000. In addition, the former partners of Envision are entitled to an
additional payment, on March 1, 2000 of up to $5,500,000 based on the amount, if
any, by which 200% of Envision's revenues for the year ended December 31, 1999
exceed $3,500,000. The additional payment will be made by the issuance of shares
of Common Stock, valued using the average price per share of Common Stock for
the five trading days preceding March 1, 2000, provided, however, that the
sellers may elect to receive up to $500,000 of any additional payment in cash.
The acquisition has been accounted for as a purchase, with the assets recorded
on the basis of the initial purchase price of $3,551,247, which includes
acquisition costs but excludes any possible future contingent payments. The
initial purchase price exceeded the fair value of the net (of liabilities
assumed) tangible assets acquired by approximately $3,738,000, which has been
recorded as goodwill and is being amortized using the straight-line method over
15 years. The results of Envision have been included in the consolidated results
of operations from February 23, 1999, representing the effective date specified
in the purchase agreement (the results of Envision's operations for the period
February 23, 1999 to March 10, 1999 were not material).
Each of the acquisitions of Fathom, On Ramp, BBG, Herring/Newman, Interweb,
UbiCube and Envision have been accounted for using the purchase method of
accounting. Accordingly, the results of operations of these companies are
included in the consolidated financial statements from their respective dates of
acquisition.
F-12
<PAGE>
The following unaudited pro forma information for the year ended June 30, 1999,
assumes the acquisition of Envision had occurred on July 1, 1998. The unaudited
pro forma information for the twelve months ended June 30, 1998 assumes the
Company had completed the acquisition of Envision, along with the fiscal year
1998 acquisitions of BBG New Media, Inc. ("BBG"), Herring Newman, Inc. ("Herring
Newman"), Interweb, Inc. ("Interweb"), and UbiCube Group, Inc. ("UbiCube") as of
July 1, 1997. The pro forma information has been prepared for informational
purposes only and is not necessarily indicative of the results of operations
that would have occurred had the transactions taken place on the basis assumed
above.
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------
<S> <C> <C>
Revenue $51,925,526 $57,806,118
Net loss $(8,533,585) $(28,583,329)
Net loss per common shares-basic and diluted $(.96) $(4.53)
Weighted-average common shares outstanding $8,844,708 $6,315,087
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------
<S> <C> <C>
Equipment $7,565,626 $6,176,440
Furniture and fixtures 1,600,601 1,307,047
Leasehold improvements 2,307,695 1,963,924
------------------- -------------------
11,473,922 9,447,411
Less accumulated depreciation
and amortization 6,175,186 3,765,352
------------------- -------------------
Property and equipment, net $5,298,736 $5,682,059
=================== ===================
</TABLE>
Included in equipment is capital leases of $1,484,308 and $1,353,145 with
accumulated depreciation of $1,254,188 and $503,175 under capital leases as of
June 30, 1999 and June 30, 1998, respectively.
4. CAPITALIZED SOFTWARE
Capitalized software costs included the following at June 30:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------
<S> <C> <C>
Capitalized software costs $ 624,922 $ 1,950,769
Less accumulated amortization 208,134 92,399
-------------------- --------------------
Capitalized software costs, net $ 416,788 $ 1,858,370
==================== ====================
</TABLE>
F-13
<PAGE>
At June 30, 1998 capitalized software costs consist of $1,200,000 relating to
software acquired on June 3, 1998 in connection with the Interweb acquisition.
The remaining $658,000 was for various software products developed during the
fiscal year ended June 30, 1998.
In accordance with SFAS No. 86, "Accounting for the Costs of Computer Software
to Be Sold, Leased or Otherwise Marketed" and SFAS No. 121, "Accounting for the
Impairment of Long Lived Assets and Long Lived Assets to be Disposed Of" the
Company recognizes the impairment on long-lived assets used in operations when
indicators of impairment are present and undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amounts.
Accordingly, in the fourth fiscal quarter of 1999, the Company recognized a
non-cash pre-tax charge of $989,000 related to the write-off of developed
software of the Interweb acquisition. There was no such loss recognized in
fiscal 1998.
5. CONVERTIBLE PROMISSORY NOTES
During fiscal 1996, Dan Carlisle, the father of the former stockholder of
NetCube, extended credit to NetCube. In connection with the Company's
combination with NetCube in June 1996, the Company issued a convertible
promissory note for the repayment of the principal amount of $515,760 with
accrued interest at 8% per annum. The principle and interest on the note was
convertible into shares of Common Stock at a conversion price of $7.00 per share
with respect to principal and $12.00 per share with respect to accrued interest
on the note. Principal and interest on the note, which was due on March 31,
1998, was converted into 73,680 shares of Common Stock (for principal) and 6,017
shares of Common Stock (for interest).
6. BANK PAYABLES
On April 24, 1998, the Company established a line of credit with the Bank of New
York ("BONY"), pursuant to which BONY agreed to permit the Company to borrow
$5,000,000 through March 31,1999. Amounts outstanding from time to time under
the line of credit accrue interest at a floating rate based on the prime lending
rate of the bank and are due and payable (together with interest) on demand. The
line of credit is evidenced by a promissory note and is secured by substantially
all of the assets of the Company. In addition, amounts outstanding under the
line of credit have been guaranteed by each of the Mednick Group and On Ramp.
During April 1999, BONY agreed to permit the Company to extend the availability
on the line of credit to July 31, 1999. At June 30, 1999 the Company had
borrowed $1,164,000 under this line of credit and had $3,836,000 available for
borrowing. Since July 31, 1999 the Company has been in discussions with BONY
concerning the renewal of the line of credit. BONY has indicated that it desires
to await the completion of the stockholder vote on the proposed Merger with
AnswerThink before finalizing any renewal. However, in the interim BONY has
verbally agreed to allow the Company to continue to borrow under the terms of
the April 1998 agreement pending the vote on the proposed Merger.
In the second quarter of fiscal 1999, the Company's London office obtained a
100,000 (POUNDS) overdraft line of credit with Barclays Bank PLC. Amounts
outstanding from time to time under the line of credit accrue interest at a
floating rate based on the bank's base rate. The overdraft facility is repayable
on demand but is subject to review in November 1999. Amounts outstanding under
the line of credit have been guaranteed by the Company. As of June 30, 1999
there was 33,200 (POUNDS) outstanding on this line of credit.
In November 1997, in connection with its acquisition of BBG, the Company entered
into an agreement with Medford Bank, which agreement provides for repayment of a
loan of $117,000. Amounts outstanding on the loan accrue interest at a rate of
10% per annum and were paid on May 13, 1999, when the line was due. The balance
of $91,915 outstanding at June 30, 1998 was repaid in fiscal 1999.
F-14
<PAGE>
7. INCOME TAXES
Taxes on income consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------
<S> <C> <C>
Current:
Federal $ -- $ --
State 259,182 339,834
----------------- -----------------
259,182 339,834
----------------- -----------------
Deferred:
Federal -- --
State -- --
----------------- -----------------
-- --
----------------- -----------------
Taxes on income $259,182 $339,834
================= =================
</TABLE>
The difference between the Federal statutory tax rate and the effective tax rate
resulted from the following:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------
<S> <C> <C>
% %
Federal statutory tax rate (34.0) (34.0)
Nondeductible compensation and
research and development expense 10.7 38.3
State income taxes, net of
federal tax benefit 3.2 1.2
Change in valuation allowance 23.6 (4.3)
Other items, net (0.3) -
------------------- -------------------
Effective tax rate 3.2 1.2
=================== ===================
</TABLE>
F-15
<PAGE>
Temporary differences which gave rise to the deferred tax assets (liabilities)
consisted of the following at June 30:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------
<S> <C> <C>
Current:
Accounts receivable $ -- $ --
Allowance for doubtful accounts 234,000 235,000
Accounts payable -- --
Nondeductible reserves 126,000 178,000
Accrued compensation 738,000 572,000
Other 6,500 --
--------------------------------------
Total current 1,104,500 985,000
--------------------------------------
Noncurrent:
Depreciation 235,000 168,000
Software development costs and other
intangibles (588,000) (697,000)
Net operating loss carryfowards 3,963,000 1,745,000
--------------------------------------
Total noncurrent 3,610,000 1,216,000
--------------------------------------
Net deferred tax assets before valuation
allowance 4,714,500 2,201,000
Deferred tax asset valuation allowance (4,714,500) (2,201,000)
--------------------------------------
Net deferred tax asset $ -- $ --
======================================
</TABLE>
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 and 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, 1999, the Company had federal net operating loss carryforwards of
approximately $9,603,000. 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. The Company's pending Merger with
AnswerThink as described in Note 13 may further limit the utilization of these
net operating loss carryforwards.
F-16
<PAGE>
8. 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, consist of
the following at June 30, 1999:
<TABLE>
<CAPTION>
OPERATING LEASES CAPITAL LEASES TOTAL
---------------------------------------------------------
<S> <C> <C> <C>
2000 $2,680,547 $367,159 $3,047,706
2001 2,686,693 102,352 2,789,045
2002 2,623,008 79,040 2,702,048
2003 1,936,763 30,612 1,967,375
2004 1,664,665 -- 1,664,665
Thereafter 5,025,486 -- 5,025,486
---------------------------------------------------------
Total minimum lease payments $16,617,162 579,163 $17,196,325
==================== ==============
Amount representing interest 59,042
--------------------
Present value of net minimum lease payments
520,121
Less current portion 334,403
--------------------
Long term portion $185,718
====================
</TABLE>
Total rent expense under operating leases amounted to $1,945,922 and $990,019
for fiscal 1999 and 1998, respectively.
(B) CONSULTING AGREEMENTS
On June 30, 1997, the Company entered into a one year consulting agreement (the
"Consulting Agreement") pursuant to which the Company was obligated to issue up
to 200,000 shares of Common Stock, and options to acquire up to 150,000 shares
of common stock, to the consultant in exchange for rendering certain consulting
services to the Company, including acquisitions, investor relations and market
analysis.
In fiscal 1998, the Consulting Agreement was terminated, thereby eliminating the
issuance of any remaining shares of Common Stock or stock options due under the
original Consulting Agreement. In connection therewith, the Company agreed to
pay the consultant finder's fees for successful acquisitions introduced to the
Company by the consultant. Fees of $1,520,000 were paid to the consultant in
fiscal 1998 and have been recorded as acquisition costs.
In December 1998, the Company entered into an oral consulting agreement with Dan
Nicholas to provide investor relations and public relations advice and services
for a fee of $20,000 per month. Fees of approximately $140,000 were paid to Mr.
Nicholas in fiscal 1999. The consulting agreement was terminated in August 1999
upon Mr. Nicholas' appointment as the Company's Chief Financial Officer.
(C) EMPLOYMENT AGREEMENTS
The Company is a party to employment agreements with certain of its officers.
The agreements have terms for one to three years and include, among other
things, noncompete agreements and salary and benefits continuation. Some
employment agreements provide for bonuses based on division profitability and
other milestones. Minimum salary commitments under the agreements equal in the
aggregate approximately $2,330,000 as of June 30, 1999.
F-17
<PAGE>
(D) LITIGATION
On September 25, 1998, Michael R. Farrell, a shareholder of the Company, filed a
putative class action suit, styled Farrell v. Think New Ideas, Inc., Scott
Mednick, Melvin Epstein and Ronald Bloom, No. 98 Civ. 6809, against the Company,
Ronald Bloom (an officer of the Company) Melvin Epstein and Scott Mednick (both
former officers of the Company) (the "Farrell complaint"). The suit was filed in
the United States District Court for the Southern District of New York on behalf
of all persons who purchased or otherwise acquired shares of the Company's
common stock in the class period from November 14, 1997, through September 21,
1998.
On various dates in October, 1998, six additional putative class action suits
were filed in the same court against the same parties by six different
individuals, each purporting to represent a class of purchasers of Think New
Ideas, Inc. Common Stock. These subsequent suits claimed substantially similar
class periods (one alleged a class period starting on November 5, 1997, rather
than November 14, 1997) and made similar allegations as those made in the
Farrell complaint. All seven of these lawsuits were ultimately transferred to
Judge Sidney H. Stein of the United States District Court for the Southern
District of New York and consolidated by order of the Court dated December 15,
1998, into one action styled In Re: Think New Ideas, Inc., Consolidated
Securities Litigation, No. 98 Civ. 6809 (SHS).
Pursuant to an order of the Court, the plaintiffs filed a Consolidated and
Amended Class Action Complaint on February 10, 1999 (the "consolidated
complaint"). The consolidated complaint supersedes all prior complaints in all
of the cases and shall serve as the operative complaint in the consolidated
class action. The consolidated complaint names fourteen individual plaintiffs
and purports to be filed on behalf of a class of individuals who purchased Think
New Ideas, Inc., common stock from November 5, 1997, through September 21, 1998.
The consolidated complaint makes substantially similar allegations as the
Farrell complaint. Like the Farrell complaint, the consolidated complaint
alleges that the Company and certain of its current and former officers and
directors disseminated materially false and misleading information about the
Company's financial position and results of operations through certain public
statements and in certain documents filed by the company with the SEC. The
consolidated complaint alleges that these statements and documents caused the
market price of the Company's common stock to be artificially inflated. The
plaintiffs further allege that they purchased shares of common stock at such
artificially inflated prices and suffered damages as a result. The relief sought
in the consolidated complaint is unspecified, but includes a plea for
compensatory damages and interest, punitive damages where appropriate,
reasonable costs and expenses associated with the action (including attorneys'
fees and experts' fees) and such other relief as the court deems just and
proper.
Management believes that the Company has meritorious defenses to the
consolidated complaint and intends to contest it vigorously. The Company has
filed a motion to dismiss the consolidated complaint on a number of grounds and
the plaintiffs have opposed the motion. The motion is currently pending before
the court and the court has not yet determined whether oral arguments will be
heard. Although there can be no assurance as to the outcome of these matters,
unfavorable resolution could have a material adverse effect on the results of
operations and/or financial condition of the Company in the future.
Additionally, in the normal course of business, the Company is subject to
certain other claims and litigation, which the Company is of the opinion that,
based on information presently available, such legal
F-18
<PAGE>
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
9. SHAREHOLDERS' EQUITY
(A) EARNINGS PER SHARE
The following sets forth information concerning the number of shares of Common
Stock used in the computations of basic and diluted earnings per share.
<TABLE>
<CAPTION>
JUNE 30,
1999 1998
-------------------------------------------------
<S> <C> <C>
Weighted-average shares outstanding used in
computation of basic and diluted earnings
per share 8,844,708 6,315,087
Incremented common shares issuable -- --
Shares assuming dilution 8,844,708 6,315,087
</TABLE>
Incremental common shares were not included in the computation for fiscal 1999
and 1998 since their inclusion in periods when the Company reported a net loss
would be anti-dilutive.
Shares of Common Stock held in escrow related to acquisitions are not included
in the calculation of weighted average shares outstanding for the periods
presented, as the conditions required to release escrow shares for these
acquisitions were not fulfilled at the end of the applicable periods presented.
(B) COMMON STOCK ISSUANCE
In connection with the Initial Public Offering, the Company issued to the
underwriters of the Initial Public Offering warrants to purchase 215,000 shares
of Common Stock. Such warrants, which became exercisable in November 1997 at an
exercise price of $9.80 per share, contain "cashless exercise" provisions,
whereby the holders thereof, in lieu of paying the exercise price in cash, may
exercise the warrants with shares issuable thereunder as consideration for part
or all of the remaining shares issuable under the warrants. During fiscal 1998,
warrants to purchase approximately 203,000 shares of Common Stock were
exercised. During fiscal 1999, no warrants to purchase shares of Common Stock
were exercised.
(C) ESCROW SHARES
In connection with the Initial Public Offering, certain stockholders placed an
aggregate of 825,000 shares into escrow (the "Escrow Shares") to be released
upon the Company's attainment of any one of certain performance targets (the
"Targets") pursuant to an escrow agreement (the "Escrow Agreement") between such
holders and Continental Stock Transfer & Trust Company, as escrow agent.
Pursuant to the Escrow Agreement, the Escrow Shares were not transferable or
assignable, but could be voted by the holders thereof. During the fourth quarter
of fiscal 1998, one of the Targets (a closing price of at least $20 per share of
Common Stock for forty consecutive business days from November 1996 to November
1999 as quoted by Nasdaq) was fulfilled and the Escrow Shares were released. The
Company, therefore, recorded a non-cash charge to earnings of approximately
$21,700,000, equal to the fair market value of the Escrow Shares on April 24,
1998, the date of release.
F-19
<PAGE>
(D) ACCELERATED STOCK OPTIONS
In the fourth quarter of fiscal 1998, the Company reached a settlement
agreement, as amended, with Scott A. Mednick, the Company's former Chief
Executive Officer and Chairman of the Board of Directors, who left the Company.
Pursuant to the terms of the amended agreement, the Company agreed to accelerate
the exercise dates of Mr. Mednick's options to acquire 60,000 shares of Common
Stock. The acceleration of Mr. Mednick's options resulted in the recognition of
a charge of $1,400,000 for the difference between the exercise price of the
options and the market value of the underlying Common Stock on the date of the
settlement.
(E) DIRECTORS' STOCK OPTIONS
During fiscal 1999, the compensation committee approved the grant of options to
two directors, each for the purchase of 20,000 shares of Common Stock at an
exercise price equal to the closing price of the shares of Common Stock on the
date of grant. Upon the grant of these non-employee stock options to directors,
the Company recognized $180,000 in stock compensation expense equal to the fair
value of the options granted based on the Black-Scholes option pricing model.
The options vest one year after the date of grant, are exercisable after a
four-year period and expire five years from the date of grant.
(F) SECURITIES PURCHASE AGREEMENT
In March 1999, the Company entered into a Securities Purchase Agreement with
Capital Ventures International and Marshall Capital Management, Inc. ("the
Purchasers") whereby the Purchasers agreed to purchase (i) shares of Common
Stock, and (ii) warrants to acquire shares of Common Stock, for an aggregate
purchase price of up to $11,000,000. The Company used the proceeds of the
financing for general working capital purposes, including the funding of its
strategic growth plan. Pursuant to the Securities Purchase Agreement, on March
5, 1999 (the "Initial Closing Date") the Company issued, for proceeds of
$6,000,000 (i) 871,142 shares of its Common Stock at $6.8875 per share (the
"Initial Closing Price"), representing 95% of the closing bid price on the
trading day immediately preceding the date of the Securities Purchase Agreement
and (ii) warrants to purchase an additional 174,230 shares (representing 20% of
the number of shares issued on the Initial Closing Date) of Common Stock
exercisable for a five-year term, at an exercise price of $10.33, representing
as 150% of the Initial Closing Price.
At any time prior to March 5, 2000 the Purchasers have the right but not the
obligation to purchase (i) 530,504 additional shares (the "Optional Shares") of
Common Stock at $9.425 per share, calculated as 130% of the market price on the
date of the Securities Purchase Agreement, together with warrants (the "Optional
Warrants") for 1/5 share for each Optional Share purchased (a maximum of 106,101
warrants) execrable at an exercise price of 150% of the market price on the date
the related Optional Shares are purchased.
F-20
<PAGE>
In connection with the issuance of the Common Stock and Warrants, the Company
and the Purchasers entered into a Registration Rights Agreement (the
"Registration Rights Agreement") relating to the shares of Common Stock issued
to the Purchasers on the Initial Closing Date and any subsequent shares of
Common Stock to be issued to the Purchasers pursuant to the Securities Purchase
Agreement (including shares issuable upon exercise of the Closing Warrants and
the Optional Warrants) (collectively, the "Registrable Securities"). Pursuant to
the Registration Rights Agreement, the Company agreed to prepare and file with
the SEC a registration statement covering the Registrable Securities not later
than June 30, 1999. The Purchasers were also afforded certain "piggyback"
registration rights. The Securities Purchase Agreement also provides that the
Company will issue additional shares of Common Stock if the market price on the
date the registration statement covering the Registrable Securities is declared
effective by the SEC (or, if such registration statement is not declared
effective by the SEC on or before March 5, 2000, any date selected by the
Purchasers prior to June 30, 2000), is less than $6.8875 per share. The exact
number of Adjustment Shares is to be determined pursuant to a formula set forth
in the Securities Purchase Agreement. The Company has the right, pursuant to the
Securities Purchase Agreement, at any time prior to the date the registration
statement covering the Registrable Securities is declared effective, to
repurchase all of the shares sold to the Purchasers at a price equal to the
greater of (i) $9.6425, representing 140% of the Initial Closing Price or the
then-current market price. In connection with the Securities Purchase Agreement
and the Registration Rights Agreement, the Company filed a registration
statement on Form S-3 on June 30, 1999. As of September 9, 1999, the
registration statement on Form S-3 has not been declare effective by the SEC.
10. EMPLOYEE COMPENSATION PLANS
(A) 401(K) PLAN
The Company sponsors a defined contribution retirement plan, which covers all
employees meeting minimum service requirements. Employees of the companies
acquired by the Company become eligible to join the plan over a period not
exceeding one year from the date of acquisition. The Plan qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
The Company's contributions to the plan are based on percentages of the
employees' contributions. The charge to operations for the Company's matching
contribution was approximately $200,000 and $86,000 for the fiscal years ended
June 30, 1999 and 1998, respectively.
(B) STOCK COMPENSATION PLAN
In June 1996, the stockholders of the Company authorized adoption of stock
option plans. In July 1996, the Board of Directors adopted 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 to officers, directors,
employees and consultants of the Company. A total of 966,667 shares of Common
Stock were reserved for issuance under the 1996 Plan. 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 generally were to vest in
F-21
<PAGE>
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 to officers, directors,
employees and consultants of the Company. All of the persons entitled to
participate in the 1996 Plan were given the opportunity to participate in the
1997 Plan and, in exchange for the cancellation of the outstanding 1996 Plan
options, 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.
In June 1998, the Board of Directors adopted the 1998 Stock Option Plan (the
"1998 Plan") which provides for the grant of options to new employees of the
Company to acquire up to 1,500,000 shares of Common Stock.
The stock options granted under the 1997 Plan and the 1998 Plan are generally
intended to be "incentive" stock options under the Internal Revenue Code. Such
options are granted with an exercise price equal to the market price of the
underlying Common Stock on the date of grant and vest ratably over four years.
As of June 30, 1999, there were outstanding options exercisable to purchase up
to 2,466,939 shares of Common Stock under both the 1997 and 1998 Plan.
A summary of the activity in the Company's stock option plans for fiscal 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning
of year 2,204,907 $ 9.99 1,137,796 $ 3.97
Granted 1,057,269 7.67 1,576,216 12.68
Exercised 297,508 6.03 181,713 4.07
Forfeited/canceled 497,729 12.50 327,392 5.09
----------------- -----------------
Options outstanding at end of
year 2,466,939 9.06 2,204,907 9.99
================= =================
Options exercisable at end of
year 704,260 8.42 411,650 5.39
================= =================
</TABLE>
Pro forma information regarding net income and earnings per share required by
SFAS No. 123 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 assumptions for vested and non-vested
options:
F-22
<PAGE>
PERIOD ENDED JUNE 30
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------
<S> <C> <C>
ASSUMPTIONS
Risk-free interest rate 4.72% 6.12%
Volatility 1.07 0.55
Average life 3 years 2 years
</TABLE>
For purpose of pro forma disclosures, the estimated fair value of the options is
amortized over the vesting period of the options. The pro forma net loss and
loss per share is as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------
<S> <C> <C>
Pro forma net loss $10,166,664 $28,298,355
Pro forma net loss per common
share, basic $1.15 $4.48
</TABLE>
The following table summarizes information about stock options outstanding at
June 30, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- - -----------------------------------------------------------------------------------------------------
EXERCISE PRICE NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
OUTSTANDING REMAINING EXERCISABLE EXERCISE PRICE
CONTRACTUAL LIFE
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3.69 207,400 7.9 144,900 3.69
4.05 375,524 7.6 202,814 4.05
6.00 1,000 8.2 250 6.00
6.19 40,108 8.1 11,250 6.19
6.38 186,169 9.3 9,625 8.25
7.32 409,347 9.7 52,500 8.88
7.88 233,000 9.7 20,000 9.22
8.25 55,500 8.5 40,000 9.77
8.88 90,000 8.6 99,000 11.88
9.22 20,000 9.5 20,000 12.75
9.77 80,000 8.6 500 18.00
11.00 20,500 9.8 98,871 18.69
11.88 376,500 8.4 4,550 20.00
12.75 20,000 9.7
18.00 500 8.9
</TABLE>
F-23
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
18.69 318,991 8.9
18.94 16,000 9.1
20.0 16,400 8.9
--------- ---------
2,466,939 704,260 8.42
========= =========
</TABLE>
11. RELATED PARTY TRANSACTIONS
In March 1996, the Company entered into a two year consulting agreement with
Benchmark Equity Group, Inc., a founding and former significant stockholder of
the Company. Under the agreement, the Company was required to pay Benchmark
$35,000 upon execution and a monthly fee of $7,000. The Company paid $56,000 for
the fiscal year ended June 30, 1997 to Benchmark in connection with the
agreement. During fiscal 1998, Benchmark ceased performing services under the
agreement and, as a result thereof, the Company discontinued payment thereunder.
On August 5, 1999, the Company paid Benchmark $54,000 in satisfaction of all
unpaid fees for services Benchmark had rendered pursuant to its consulting
agreement with the Company.
On March 17, 1998, the Company entered into a loan agreement with Omnicom, a
shareholder of the Company, whereby the Company borrowed $500,000 payable
January 31, 1998 together with interest at the rate of 8% per annum. The loan,
together with interest of $42,789, was repaid in fiscal 1999. During fiscal
1998, the Company recorded revenues of $600,000 from Omnicom for certain
consulting services. Such amounts were included in accounts receivable at June
30, 1998, and collected in August 1998.
12. RESTRUCTURING COSTS
As part of the Company's strategic focus on providing interactive marketing and
business solutions, the Company in April 1998 formalized a decision to dispose
of its traditional graphic design departments. The Company recorded a charge of
$921,000 in order to reflect the anticipated costs to dispose of the graphic
design departments. The charge recorded pursuant to EITF 94-3 included
severance and other personnel-related costs of $500,000 and lease and other
occupancy and facilities-related costs of $421,000.
Through June 30, 1998, the Company had paid approximately $614,000 of the
restructuring costs, and at June 30, 1998 there remained accrued costs of
approximately $307,000 remained relating principally to estimated costs for the
termination of equipment and facility leases. The leases were settled and
terminated in fiscal 1999, with the difference between the amount accrued at
June 30, 1998 and the actual cost incurred in fiscal 1999 not being material.
F-24
<PAGE>
13. PROPOSED MERGER WITH ANSWERTHINK
On June 24, 1999, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") by and among the Company, AnswerThink Consulting Group, Inc.
("AnswerThink") and Darwin Acquisition Corp., a wholly-owned subsidiary of
AnswerThink ("Sub") pursuant to which Sub will merge with and into the Company
(the "Merger"). The Company will survive the Merger and become a wholly-owned
subsidiary of AnswerThink. Under the terms of the Merger Agreement, all
outstanding shares of the Company will be exchanged for shares of common stock,
par value $.001 per share, of AnswerThink ("AnswerThink Common Stock") and all
outstanding options to acquire shares of Common Stock will be assumed and
converted into options to acquire shares of AnswerThink Common Stock, at a ratio
of 0.70 shares of AnswerThink Common Stock to one share of Common Stock (the
"Exchange Ratio"). In addition, the securities issued (and issuable) by the
Company pursuant to the Securities Purchase Agreement with Capital Ventures
International and Marshall Capital Management (See Note 9(f)) will be assumed by
AnswerThink and converted based upon the Exchange Ratio. The Merger is subject
to certain conditions, including shareholder approval of both companies. The
Merger will be accounted for as a pooling of interests and is intended to
qualify as a tax-free reorganization.
Pursuant to the Merger Agreement, the Company has agreed to pay AnswerThink a
termination fee of $6,000,000 in the event the Merger Agreement is terminated
under certain circumstances, including the withdrawal of the recommendation of
the Board of Directors of the Company, or the Board of Director's recommendation
of a third party acquisition proposal. The Company has also agreed to pay a
termination fee of $3,000,000 to AnswerThink under other termination
circumstances such as the inability to obtain the requisite shareholder
approval. Pursuant to the Merger Agreement, AnswerThink has agreed to pay the
Company a termination fee of $3,000,000 for a material breach of the Merger
Agreement that has not been properly cured.
In connection with the Merger Agreement, the Company granted AnswerThink an
option to purchase up to 19.9% of shares of the Company's Common Stock (the
"AnswerThink Option") outstanding on the date of exercise of the AnswerThink
Option. The AnswerThink Option is exercisable following the execution or
consummation of an alternative business combination involving the Company and
the occurrence of certain further triggering events, none of which has occurred
as of August 13, 1999. The per-share exercise price under the AnswerThink Option
is eighteen dollars and fifty cents ($18.50).
As further inducement to AnswerThink to enter into the Merger Agreement, each
director, Omnicom Group, Inc. and certain executive officers of the Company
(who, in the aggregate, beneficially own approximately 22% of the Company's
outstanding Common Stock) entered into voting agreements with AnswerThink
pursuant to which they: (i) agreed to vote their shares of Common Stock in favor
of the Merger Agreement and the Merger; and (ii) granted irrevocable proxies to
AnswerThink to vote such shares in accordance with the voting agreements. As an
inducement to the Company to enter into the Merger Agreement, each director and
certain executive officers of AnswerThink (who, in aggregate, beneficially own
approximately 39.76% of AnswerThink's outstanding Common Stock) entered into
voting agreements with the Company pursuant to which they: (i) agreed to vote
their shares of AnswerThink Common Stock in favor of the issuance of AnswerThink
Common Stock pursuant to the Merger Agreement; and (ii) granted irrevocable
proxies to the Company to vote such shares in accordance with the voting
agreements.
F-25
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
During the fiscal year ended June 30, 1998 the Company changed its
independent auditors from BDO Seidman, LLP to Ernst & Young, LLP as previously
reported on Form 8-K/A filed with the Securities and Exchange Commission on May
27, 1998 (File No. 000-21775). There were no disagreements with any of the
Company's independent accountants during the fiscal year ended June 30, 1999.
42
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth, as of June 30, 1999, certain information with
respect to the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
----- --- -------------------------
<S> <C> <C>
Ronald Bloom 46 Chairman and Chief Executive Officer
Melvin Epstein 53 Chief Financial Officer and Secretary
(resigned August, 1999)
Adam Curry 35 Chief Technology Officer and Director
(terminated as of July 1, 1999)
Larry Kopald 45 Chief Creative Officer and Director
Joseph Nicholson 40 Chief Operating Officer
James Carlisle 52 Executive Vice President
(terminated as of July 1, 1999)
Susan Goodman 44 Executive Vice President
Richard Char 40 Director
Barry Wagner 59 Director
Scott Metcalf 48 Director
Ken Orton 48 Director
Dan Nicholas 41 Chief Financial Officer (commencing
August 1999)
</TABLE>
RONALD BLOOM has been a Director since June 1996. He served as
President and Chief Operating Officer of the Company from June 1996 until May
1998, when he was appointed Chairman of the Board and Chief Executive Officer.
Previously, Mr. Bloom was Chief Operating Officer and General Manager of On
Ramp, succeeding Scott Mednick, from 1995 to 1996. Prior to joining On Ramp, Mr.
Bloom founded and served as President of MediaTime Advertising and
Communications, Chicago, Illinois from 1979 to 1981; President of Prototype
Computer Aided Design from 1980 to 1983; Vice President and Creative Director of
Jeffrey Nemetz and Associates Advertising, Chicago, Illinois from 1983 to 1985;
President of TMF Communications, Los Angeles, California from 1986 to 1989;
President of Ron
43
<PAGE>
Bloom Productions, a production company and consulting firm founded by Mr.
Bloom, from 1989 to 1994.
MELVIN EPSTEIN was the Chief Financial Officer of the Company from
August 1996 until August 1999. From 1994 to August 1996, Mr. Epstein was
Managing Director of TN Services, a unit of True North Communications, and 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 and is a Certified Public Accountant. Mr. Epstein's last day as Chief
Financial Officer of the Company was August 20, 1999, and the Company has been
advised that he has taken the position as Chief Financial Officer of another
company.
ADAM CURRY was a Director of the Company from June 1996 until July 1999
and the Chief Technology Officer of the Company from June 1996 until June 1999.
Mr. Curry founded and was Chairman of the Board of Directors of On Ramp since
1994 and was its President from March 1996. Mr. Curry hosted and produced the
nationally broadcast radio program "Count Down" from 1983 to 1987. From 1987 to
1992, Mr. Curry served as an On Air Personality for MTV Networks in New York.
Mr. Curry's employment agreement with the Company expired pursuant to its terms
on June 30,1999 and was not renewed. Subsequently, Mr. Curry resigned from the
Board of Directors on July10, 1999.
LARRY KOPALD has been a Director and the Chief Creative Officer 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, Cone & 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 University and a Masters Degree in Journalism from
Northwestern University.
JOSEPH NICHOLSON has been Chief Operating Officer of the Company since
October 1998. In 1985, Mr. Nicholson founded and was an officer of BBG , which
was acquired by the Company in November 1997.
SUSAN GOODMAN has been Executive Vice President of the Company since
June 1996. Ms. Goodman founded the Goodman Group, one of the Subsidiaries,
primarily engaged in the provision of strategic marketing and corporate and
brand positioning services, in 1993 as a strategic marketing consultancy
specializing in direct marketing and new media. Previously she was Director of
Client Services at Chiat Day Direct Marketing from February 1992 through July
1992. Prior to that time, she spent 10 years in merchandising in the apparel
industry with companies such as IZOD and Merona Sport (a division of Oxford
Industries). 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 was an Executive Vice President of the Company from June
1996 through June 1999. In 1978, Mr. Carlisle founded NetCube Corporation, which
was acquired by the Company in June 1996 and was primarily engaged in the
provision of database and information management and
44
<PAGE>
utilization services. Mr. Carlisle's employment agreement with the Company
expired pursuant to its terms on June 30, 1999 and was not renewed.
RICHARD CHAR has been a Director of the Company since August 1997. Mr.
Char has been Managing Director, Head of Global Execution--Technology Group at
CS First Boston since April 1999. Prior to joining CS First Boston Mr. Char was
a Managing Director and Head of Technology Investment Banking at Cowen & Company
from May 1997 until March 1999. In July 1998, Cowen & Company merged with
Societe Generale and became SG Cowen Securities Corporation ("SG Cowen"). Prior
to joining SG Cowen, Mr. Char was an attorney with Wilson Sonsini Goodrich &
Rosati for thirteen years. Mr. Char holds an A.B. from Harvard University and
J.D. from Stanford University.
BARRY WAGNER Has been a Director of the Company since September 1996.
Mr. Wagner has been an employee of Omnicom and its predecessor companies 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.
SCOTT METCALF has been a Director of the Company since November 1998
and an independent consultant since June 1998. From January 1997 to June 1998,
he was Chairman and Chief executive Officer of Digitivity, Inc., which was
acquired by Citrix, Inc. From 1991 to 1996, Mr. Metcalf was the President of Hal
Computer Systems, which was acquired by Fujitsu Ltd. Previously, Mr. Metcalf was
the President and Chief Executive Officer of Dynabook, Inc. and held a number of
senior executive positions at Sun Microsystems, Inc.
KEN ORTON has been a Director of the Company since March 1999. Mr.
Orton has been the Chief Strategist, e-business of Cognitiative since March
1999. He was President and Chief Executive officer of Preview Travel, Inc. from
June 1997 to February 1999. Mr. Orton is also on the board of directors of
Onsale.com, Autobytel.com, and Virtualvineyard.com.
DAN NICHOLAS served as a consultant to the Company from December 1998
until August 1999. As a consultant for the Company, Mr. Nichols provided
investor relations and public relations, advice and services. On August 27,1999,
Mr. Nicholas was appointed to act as Chief Financial Officer to succeed Mr.
Epstein. Prior to joining the Company, Mr. Nicholas was a Senior Managing
Director and Director of Research at Gaines Berlind Inc. from November 1997 to
November 1998. From November 1996 to November 1997, Mr. Nicholas was a Managing
Director at Dominick & Dominick, Inc. From 1988 to November 1996, Mr. Nicholas
was a partner at W.H. Reaves & Company.
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.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities 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 of the Company with the
45
<PAGE>
Commission. 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.
Based solely upon a review of Forms 3, Forms 4 and Forms 5 furnished to
the Company pursuant to Rule 16a-3 under the Securities 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 Securities Exchange Act were filed, as
necessary, by the officers, directors and security holders required to file the
same.
A Form 4 covering the sale of 42,600 shares of Common Stock in March
1999 was not filed timely by Larry Kopald, an executive officer and director of
the Company. The transaction was reported on Form 4 on April 14, 1999. Forms 4
covering the grant of 20,000 shares of Common Stock to each of Scott Metcalf and
Ken Orton, directors of the Company appointed in November 1998 and March 1999,
respectively were not filed timely.
46
<PAGE>
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 three
fiscal years by each person who served as the Company's chief executive officer
during the Company's fiscal year ended June 30, 1999 and the four other most
highly compensated executive officers of the Company whose salary and bonus for
fiscal 1999 was in excess of $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
NAME AND YEAR SALARY BONUS OTHER ANNUAL RESTRICTED SECURITIES LTIP ALL OTHER
PRINCIPAL POSITION ($) ($) COMPENSATION STOCK UNDERLYING COMPENSATION ($)
($) AWARDS($) OPTIONS
SARS(#)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ronald E. Bloom(1) 1999 273,000 0(2) 4,800(9)
Chairman of the 1998 192,375 67,125 80,000(3) 764(9)
Board and Chief 1997 125,000 69,696 20,000(4) 237(9)
Executive Officer
Adam C. Curry(5) 1999 273,000 0(2) 4,800(9)
Chief Technology 1998 192,375 67,125 80,000(3) 3,676(9)
Officer 1997 125,000 81,480 20,000(4)
Melvin Epstein(6) 1999 215,000 25,000 0 4,800(9)
Chief Financial 1998 180,000 25,000(3) 2,521(9)
Officer 1997 156,923 133,333(4)
Susan Goodman(7) 1999 240,000 91,460 0 4,800(9)
Executive Vice 1998 203,330 25,000(3) 5162(9)
President 1997 195,000 46,825 36,667(4)
Larry Kopald(8) 1999 350,000 200,000(10) 0(2) 4,800(9)
Chief Creative 1998 304,166 150,000(10) 0
Officer 1997 25,000 250,000(4)
</TABLE>
(1) Mr. Bloom commenced his employment with the Company in June 1996, was
appointed Chairman in July 1996 and was appointed Chief Executive Officer on May
24, 1998 upon the resignation of Scott A. Mednick.
(2) Does not include 20,000 shares of Common Stock issuable upon the exercise of
options, for service on the Company's Board of Directors in fiscal 1999, which
have not yet been granted.
(3) Represents shares of Common Stock issuable upon exercise of options granted
to the noted officers pursuant to the 1997 Stock Option Plan at an exercise
price of $8.88 per share for each individual, other than Mr. Bloom, who owned in
excess of 10% of the outstanding Common Stock on the date of grant and whose
options, therefore, have an exercise price of 9.77 per share.
(4) Represents shares of Common Stock issuable upon exercise of options granted
to the noted officers pursuant to the 1997 Stock Option Plan at an exercise
price of $4.05 per share for each individual, other than (a) Mr. Bloom, who
owned in excess
47
<PAGE>
of 10% of the outstanding Common Stock on the date of grant and whose options,
therefore have an exercise price of $4.46 per share; and (b) Mr. Kopald, whose
options, therefore, have an exercise price of $3.69 per share.
(5) Mr. Curry commenced his employment with the Company and was appointed Chief
Technology Officer in June 1996. Mr. Curry's employment contract with the
Company expired pursuant to its terms on June 30, 1999, and was not renewed by
the Company.
(6) Mr. Epstein commenced his employment with the Company in August 1996 and
served his last day as Chief Financial Officer on August 20,1999. Mr. Epstein
was replaced by Dan Nicholas. See Item 9. "Directors, Executive Officers,
Promoter and Control Persons; Compliance with Section 16(a) of the Exchange
Act."
(7) Ms. Goodman commenced her employment with the Company in June 1996.
(8) Mr. Kopald commenced his employment with the Company effective as of May 31,
1997. Consequently, prior to the end of the fiscal 1997, Mr. Kopald received
approximately $25,000 of the salary noted above.
(9) Represents contributions to the Company's 401(k) plan on behalf of the named
individual.
(10) Represents a bonus earned pursuant to Mr. Kopald's employment agreement.
See "Employment and Related Agreements".
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR (1999)
No stock options were granted to the Named Executive Officers during
the year. No stock appreciation rights ("SARs") have been granted by the
Company.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR; FISCAL YEAR-END OPTION/SAR
VALUES
Set forth below is the number of options exercised by the Named
Executive Officers during the fiscal year ended June 30, 1999 and the number and
value of exercisable and unexercisable options as of June 30, 1999. No SARs have
been granted by the Company.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUED UNEXERCISED IN-THE-
UNEXERCISED OPTIONS/SAR'S AT MONEY OPTIONS/SAR'S AT FY-
NAME SHARES VALUE FY-END (#) END($)(1)
---- ACQUIRED REALIZED -------------------------------- -----------------------------
ON ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
EXERCISED(#) ------------ ----------- ------------- ----------- -------------
-----------
<S> <C> <C> <C> <C> <C> <C>
Ronald Bloom 0 0 60,000 40,000 476,950 241,700
Adam Curry 0 0 60,000 40,000 512,550 277,300
Melvin Epstein 0 0 139,583 18,750 1,611,658 129,984
Susan Goodman 9,167 93,412 6,250 37,084 43,328 345,638
Larry Kopald 42,600 437,500 144,900 62,500 1,756,550 757,656
</TABLE>
EMPLOYMENT AND RELATED AGREEMENTS
In June 1996, the Company entered into employment agreements with Scott
Mednick, Ronald Bloom, Adam Curry, Susan Goodman, James Grannan and James
Carlisle. Each of the Company's agreements with Messrs. Mednick, Curry and Bloom
provided for an initial term of three years, subject
- - --------
(1) The calculations of the value of unexercised options are based on the
difference between the closing sales price of the $15.8125 as quoted by Nasdaq,
of the Common Stock on June 30, 1999 and the exercise price of each option
multiplied by the number of shares of Common Stock covered by such option.
48
<PAGE>
to automatic extension for a period of two years in the absence of notice to the
contrary at the option of the Company.
In connection with Mr. Mednick's resignation as Chairman and Chief
Executive Officer of the Company in May 1998, the Company entered into a
settlement agreement with Mr. Mednick in May 1998, as amended in July 1998,
thereby terminating Mr. Mednick's employment agreement. Under the terms of the
settlement agreement, as amended, the Company agreed to accelerate the exercise
dates of the options to acquire up to 60,000 shares of Common Stock granted to
and owned by Mr. Mednick in exchange for Mr. Mednick's agreement to be bound by
the non-compete and confidentiality provisions of such agreement. Although the
original terms of the settlement agreement provided for payment to Mr. Mednick
of $936,130 over a 24 month period, payment of such amount was eliminated by
amendment to the agreement. Acceleration of Mr. Mednick's options resulted in
recognition of a charge of $1,400,000 for the difference between the exercise
price of the options and the market value of the underlying shares of Common
Stock on the date of settlement. See Note 9 to the Consolidated Financial
Statements of the Company and "Certain Relationships and Related Transactions."
Pursuant to the terms of their respective employment agreements, as
amended, each of Messrs. Bloom and Curry were entitled to receive an annual
salary of $260,000 and bonuses as determined by the Board of Directors. In a
letter agreement dated May 24, 1999, the Company agreed to extend the term of
Mr. Bloom's employment with the Company for a period of one-year commencing July
1, 1999, at an increased annual salary of $350,000. Mr. Curry's employment with
the Company terminated when the term of his employment agreement expired
unrenewed on June 30, 1999.
The employment agreement with Ms. Goodman provided for an initial term
of three years and entitled Ms. Goodman to receive an annual salary of $215,000
and bonuses as determined by the Board of Directors. In a letter agreement dated
May 24, 1999, the Company agreed to extend the term of Ms. Goodman's employment
with the Company for a period of one-year commencing July 1, 1999 at an
increased annual salary of $350,000.
The employment agreement with Mr. Grannan provided for an initial term
of one year, with the option to renew for successive one-year periods. Mr.
Grannan's employment agreement was renewed on June 30, 1997 and June 30, 1998.
Under the terms of the agreement, as amended, Mr. Grannan was entitled to
receive an annual salary of $125,000 and bonuses as determined by the Board of
Directors. Mr. Grannan's left the Company in January 1999 prior to the
expiration of the term of his employment agreement.
The employment agreement with Dr. Carlisle provided for an initial term
of three years, with the option to renew for a two-year period. Under the terms
of the agreement, as amended, Dr. Carlisle was entitled to receive an annual
salary of $195,000 and bonuses as determined by the Board of Directors. Dr.
Carlisle's employment agreement expired unrenewed on June 30, 1999.
In August 1996, the Company entered into an employment letter with
Melvin Epstein. Pursuant to the terms of such letter, Mr. Epstein was entitled
to receive an annual salary of $180,000, subject to annual review and
evaluation. The contract provided for termination by either party upon prior
notice. Mr.Epstein's employment as Chief Financial Officer of the Company ended
on August 20,1999.
49
<PAGE>
In May 1997, in connection with the Fathom Acquisition, 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. Mr. Kopald: (i) earned a bonus of
$150,000 in the first year of his employment based upon a significant client's
agreement to enter into an advertising services agreement with the Company; and
(ii) received 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 on the date of grant. In
addition, in the second year of his employment, Mr. Kopald earned a bonus of
$200,000 based on the profits on billings on the account of a significant client
in excess of $20 million dollars. In a letter agreement dated May 24, 1999 the
Company agreed to extend the term of Mr. Kopald's employment with the Company
for a period of one-year commencing June 1, 1999.
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, other than Mr. Epstein's, 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 a consulting agreement with
Benchmark Equity Group, Inc. ("Benchmark") pursuant to which the Company paid
Benchmark $35,000 upon execution and agreed to pay Benchmark $7,000 per month in
consulting fees. Frank DeLape, formerly a principal stockholder and director of
the Company, is a principal and director of Benchmark. The consulting agreement
expired by its terms on March 28, 1998. Benchmark ceased providing services to
the Company prior thereto, at which time the Company discontinued payment to
Benchmark. Subsequently, in August 1999 Benchmark and the Company reached an
agreement pursuant to which the Company paid amounts previously owed to
Benchmark for services provided prior to termination of Benchmark's services
under the agreement. See Note 11 to the Consolidated Financial Statements of the
Company.
In June 1997, the Company entered into a consulting agreement, pursuant
to which the consultant 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 therefore,
the Company agreed to issue an aggregate of up to 150,000 shares of Common Stock
and options to acquire up to 150,000 shares of Common Stock, at an exercise
price per share ranging from $8.64 to $11.56, based upon the closing transaction
price of the Common Stock at the end of each month that the corresponding
options were issued.
Pursuant to an agreement to terminate the consulting agreement, the
Company agreed to pay the consultant finder's fees upon consummation of
transactions with companies introduced to the Company by the consultant. Such
fees are to be negotiated on a case-by-case basis. To date, the Company has paid
$1,520,000 in fees pursuant to this agreement.
In December 1998, the Company entered into an oral consulting agreement
with Dan Nicholas to provide investor relations and public relations advice and
services for a fee of $20,000 per month. Fees
50
<PAGE>
of approximately $140,000 were paid to Mr. Nicholas in fiscal 1999. The
consulting agreement between the Company and Mr. Nicholas was terminated in
August 1999 upon Mr. Nicholas' appointment as the Company's Chief Financial
Officer.
DIRECTOR COMPENSATION
Employee directors of the Company receive no cash compensation for
acting as directors or attending meetings of the Board. Nonemployee directors
receive $1,000 per year for each year such director serves on the Board and
$2,500 per meeting attended. All directors are entitled to reimbursement of
reasonable expenses related to attending meetings of the directors.
In addition, on June 30 of each year each director is entitled to
receive an option to purchase an aggregate of up to 20,000 shares of Common
Stock. The exercise price of each such option is the last transaction price of
the Common Stock as quoted on Nasdaq on the date of grant or on the day
immediately preceding the date of grant. The options are generally exercisable
one year after the date of grant, and are exercisable over a four-year period
and expire five years from the date of grant. Notwithstanding the Company's
general practice of annually granting options to directors, based on agreements
between the Company and each director, no options were granted to any director
for fiscal 1998. In fiscal 1999, the Company granted options for the purchase of
20,000 shares of Common Stock to each of Scott Metcalf and Ken Orton, directors
of the Company appointed in November 1998 and March 1999, respectfully. In
addition, all directors are eligible to receive options under the 1997 Plan (as
defined below).
STOCK OPTION PLANS
In June 1996, the stockholders of the Company authorized the Company's
implementation of stock option plans to compensate management and other
employees. In July 1996, the Board of Directors adopted and the stockholders of
the Company ratified the THINK New Ideas, Inc. 1996 Stock Option Plan (the "1996
Plan"). Subsequently, in February 1997, by resolution of the Board, the 1996
Plan was terminated and the participants therein were granted options (identical
to those held in the 1996 Plan) in the THINK New Ideas, Inc. Amended and
Restated 1997 Stock Option Plan (the "1997 Plan"), which was adopted by
resolution of the Board in September 1997 and ratified by the stockholders of
the Company in December 1997.
The 1997 Plan provides for the grant of options that qualify as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1986, as amended ("Code"), to officers and employees of the
Company (and its Subsidiaries) and options that do not so qualify
("Non-Qualified Options") to officers, directors, employees and consultants of
the Company (and its Subsidiaries). Pursuant to the terms of the 1997 Plan, the
Company may grant options exercisable to purchase up to 2,000,000 shares of
Common Stock. As of June 30, 1999, the Company had granted options to purchase
up to 1,304,182 shares of Common Stock, which options had an aggregate market
value, based on the closing sales price of the Common Stock underlying such
options as quoted by Nasdaq on such date, of $20,622,378. Such options become
exercisable one year after the date of grant and are exercisable over a
four-year period in equal annual increments. Options to purchase an aggregate of
565,389 shares of Common Stock are currently exercisable. The exercise prices of
the options granted to date range from $3.69 to $20.00.
51
<PAGE>
Pursuant to its terms, the 1997 Plan is administered by the
Compensation Committee. The Compensation Committee determines the persons to
whom options are granted, the number of shares of stock subject to an option,
the period during which options may be exercised and the exercise price thereof.
Under the 1997 Plan, the exercise price for any Incentive Option may not be less
than the "fair market value" of the shares of Common Stock at the time of grant.
In addition, if an Incentive Option to purchase shares of Common Stock is
granted to an optionee who owns more than 10% of the voting power of the capital
stock of the Company, the minimum exercise price of such option may be not less
than 110% of the "fair market value" of the shares of Common Stock on the date
of grant.
In May 1998, the Board adopted the THINK New Ideas, Inc. 1998 New
Employee Stock Option Plan which was later amended and called the THINK New
Ideas Amended and Restated 1998 Stock Option Plan (the "1998 Plan"). The 1998
Plan was approved and ratified by the Stockholders at the Company's annual
meeting held January 7, 1999. The 1998 Plan provides for the grant of options
that qualify as incentive stock options ("Incentive Options") under the Code and
options that do not so qualify ("Non-Qualified Options") to officers, directors,
existing employees and consultants of the Company. Pursuant to the terms of the
1998 Plan, the Company may grant options exercisable to purchase up to 1,500,000
shares of Common Stock. As of June 30, 1999, the Company had granted options to
purchase up to 1,022,757 shares of Common Stock, which options had an aggregate
market value, based on the closing sales price of the Common Stock underlying
such options as quoted by Nasdaq on such date, of $16,172,345. Such options
become exercisable one year after the date of grant and are exercisable over a
four-year period in equal annual increments. Options to purchase an aggregate of
$98,871 shares of Common Stock are currently exercisable. The exercise prices of
the options granted to date range from $6.38 to $18.69.
Pursuant to its terms, the 1998 Plan is administered by the
Compensation Committee. The Compensation Committee determines the persons to
whom options are granted, the number of shares of stock subject to an option,
the period during which options may be exercised and the exercise price thereof.
Pursuant to the 1998 Plan, the exercise price for any Incentive Option may not
be less than the "fair market value" of the shares of Common Stock at the time
of grant. In addition, if an Incentive Option to purchase shares of Common Stock
is granted to an optionee who owns more than 10% of the voting power of the
capital stock of the Company, the minimum exercise price of such option may be
not less than 110% of the "fair market value" of the shares of Common Stock on
the date of grant.
LIMITATION ON LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation limits the personal liability of
directors to the fullest extent permitted by Section 102(b)(7) of the Delaware
General Corporation Law. Section 145 of the Delaware General Corporation Law
provides that a corporation's certificate of incorporation may limit the
personal liability of its directors for monetary damages for breach of their
fiduciary duties as directors except for liability: (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) arising under Section 174 of the Delaware
General Corporation Law; or (iv) for any transaction from which the director
derived an improper personal benefit.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of
52
<PAGE>
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 30, 1999
with respect to the beneficial ownership of the Company's Common Stock by: (i)
each of the Company's directors; (ii) each of the Named Executive Officers;
(iii) each person or entity who is known to the Company to beneficially own 5%
or more of the outstanding Common Stock; and (iv) all directors and executive
officers of the Company as a group.
53
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES PERCENTAGE OF OUTSTANDING
BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
------------------------------------- ------------------ --------------------------
<S> <C> <C>
Ronald Bloom 486,433(1) 4.82%
45 West 36th Street
New York, New York 10018
Adam Curry 97,890(2) *
45 West 36th Street
New York, New York 10018
James Carlisle 228,515(3) 1.93%
45 West 36th Street
New York, New York 10018
Susan Goodman 65,039(4) *
45 West 36th Street
New York, New York 10018
Melvin Epstein 159,333(5) 1.56%
45 West 36th Street
New York, New York 10018
Joseph Nicholson 136,951(6) 1.36%
45 West 36th Street
New York, New York 10018
Larry Kopald 144,900(7) 1.43%
45 West 36th Street
New York, New York 10018
</TABLE>
- - --------------
(1) Includes 60,000 shares of Common Stock issuable upon exercise of options
that are presently exercisable within 60 days of June 30, 1999. ("Presently
Exercisable"). Also included are 5,000 shares owned by the Ronald Bloom
charitable Foundation. Does not include 40,000 shares of Common Stock issuable
upon exercise of options that are not Presently Exercisable. Does not include
20,000 shares of Common Stock issuable upon exercise of options, for service on
the Company's Board of Directors in fiscal 1999, which have not yet been
granted.
(2) Includes 60,000 shares of Common Stock, issuable upon exercise of options
that are Presently Exercisable. Does not include 20,000 shares of Common Stock,
issuable upon exercise of options for service on the Company's Board of
Directors in fiscal 1999, which have not yet been granted.
(3) Includes 33,333 shares of Common Stock, issuable upon exercise of options
that are Presently Exercisable.
(4) Includes 6,250 shares of Common Stock, issuable upon exercise of options
that are Presently Exercisable. Does not include 37,084 shares of Common Stock,
issuable upon exercise of options that are not Presently Exercisable.
(5) Includes 139,583 shares of Common Stock issuable upon exercise of options
that are Presently Exercisable. Does not include 18,750 shares of Common Stock,
issuable upon exercise of options that are not Presently Exercisable.
(6) Includes 25,000 shares of Common Stock issuable upon exercise of options
that are Presently Exercisable. Does not include 75,000 shares of Common Stock,
issuable upon exercise of options that are not Presently Exercisable, which such
shares will immediately vest upon a change of control.
(7) Includes 144,900 shares of Common Stock issuable upon exercise of options
that are Presently Exercisable. Does not include 62,500 shares of Common Stock,
issuable upon exercise of options that are not Presently Exercisable. Does not
include 20,000 shares of Common Stock issuable upon exercise of options, for
service on the Company's Board of Directors in fiscal 1999, which have not yet
been granted.
54
<PAGE>
<TABLE>
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES PERCENTAGE OF OUTSTANDING
BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
------------------------------------- ------------------ --------------------------
<S> <C> <C>
Omnicom Group 1,183,333 11.71%
437 Madison Avenue
New York, New York 10022
Barry Wagner 20,000(8) *
437 Madison Avenue
New York, New York 10022
Scott Metcalf 0(9) *
45 West 36th Street
New York, New York 10018
Richard Char 20,000(10) *
45 West 36th Street
New York, New York 10018
Ken Orton 0(11) *
45 West 36th Street
New York, New York 10018
Heights Capital Management 840,989(12) 8.33%
425 California Avenue, Suite 1100
San Francisco, California 94104
Marshall Capital Management, Inc. 840,989(12) 8.33%
227 Monroe Street, 42 floor
Chicago, Illinois 60606
All Directors and Executive Officers as 1,359,061 13.45%
a Group (11 persons)
</TABLE>
* denotes less than one percent.
- - -------------
(8) Includes 20,000 shares of Common Stock issuable upon exercise of options
that are Presently Exercisable. Does not include 20,000 shares of Common
Stock issuable upon exercise of options, for service on the Company's Board of
Directors in fiscal 1999, which have not yet been granted.
(9) Does not include 20,000 shares of Common Stock, issuable upon exercise of
options, for service on the Company's Board of Directors in fiscal 1999, which
have not yet been granted.
(10) Does not include 20,000 shares of Common Stock, issuable upon exercise of
options that are not Presently Exercisable. Does not include 20,000 shares of
Common Stock issuable upon exercise of options, for service on the Company's
Board of Directors in fiscal 1999, which have not yet been granted.
(11) Does not include 20,000 shares of Common Stock, issuable upon exercise of
options, for service on the Company's Board of Directors in fiscal 1999, which
have not yet been granted.
(12) Includes 405,418 shares of Common Stock issuable upon the exercise of
warrants that are Presently Excercisable.
55
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended June 30, 1998, Ronald Bloom received
advances for expenses of $68,340, for which approximately $18,000 had been
offset by expense reports as of June 30, 1998. As of the date hereof,
approximately $15,000 remains outstanding. To the extent the same remains
outstanding, Mr. Bloom is responsible to reimburse the Company.
In November 1996, in connection with the Initial Public Offering,
certain stockholders placed an aggregate of 825,000 shares into the IPO Escrow
pursuant to an escrow agreement (the "Escrow Agreement") between such holders
and Continental Stock Transfer & Trust Company, as escrow agent. Pursuant to the
Escrow Agreement, the Escrow Shares were not transferable or assignable, but
could be voted by the holder thereof. During the fourth quarter of fiscal 1998,
one of the Targets (a closing price of $20 per share of Common Stock for forty
consecutive business day from November 1996 to November 1999 as quoted by
Nasdaq) was achieved and the Escrow Shares were released. Upon release of the
IPO Escrow, the stockholders received their Escrow Shares as follows: Benchmark
- - - 204,645 shares; Christopher Efird - 27,906 shares; Scott Mednick - 188,043
shares; Ronald Bloom - 261,256 shares; Adam Curry - 59,774 shares; Susan Goodman
- - - 14,801 shares; David Hieb - 10,360 shares; and James Carlisle - 58,215 shares.
See Note 9 to the Consolidated Financial Statements of the Company and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
On March 17, 1998, the Company entered into a loan agreement with
Omnicom pursuant to which Omnicom agreed to lend $500,000 to the Company.
Amounts outstanding from time to time under the loan accrue interest at 8% per
annum and are due and payable (together with interest) on January 31, 1999. As
of September 3, 1998 there was outstanding $500,000 under the loan agreement
with Omnicom. See Note 11 to the Consolidated Financial Statements of the
Company and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
On April 24, 1998, the Company established a line of credit with the
Bank of New York ("BONY"), pursuant to which BONY agreed to make available to
the Company $5,000,000 through April 28, 1999. On April 21, 1999 BONY agreed to
extend the availability of the line of credit through July 31, 1999. Amounts
outstanding from time to time under the line of credit accrue interest at a
floating rate based on the prime lending rate of the bank and are due and
payable (together with interest) on demand. The line of credit is evidenced by a
promissory note and is secured by the assets of the Mednick Group and On Ramp.
In addition, amounts outstanding under the line of credit have been guaranteed
by each of the Mednick Group and On Ramp. As of September 9, 1999, the Company
had borrowed $1,164,000 under the line of credit with BONY and had $3,836,000
available for borrowing. Since July 31, 1999 the Company has been in discussions
with BONY concerning the renewal of the line of credit. BONY has indicated that
it desires to await the completion of the stockholder vote on the proposed
Merger with AnswerThink before finalizing any renewal. However, in the interim
BONY has verbally agreed to allow the Company to continue to borrow under the
terms of the April 1998 agreement pending the vote on the proposed Merger. See
Note 6 to the Consolidated Financial Statements of the Company and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In connection with Mr. Mednick's resignation as Chairman and Chief
Executive Officer of the Company in May 1998, the Company entered into a
settlement agreement with Mr. Mednick in May 1998, as amended in July 1998,
thereby terminating Mr. Mednick's employment agreement. Under the terms of the
settlement agreement, as amended, the Company agreed to accelerate the exercise
dates of the options to acquire up to 60,000 shares of Common Stock granted to
Mr. Mednick in exchange for Mr. Mednick's agreement to be bound by the
non-compete and confidentiality provisions of such agreement. Although the
original terms of the settlement agreement provided for payment to Mr.
56
<PAGE>
Mednick of $936,130 over a 24 month period, payment of such amount was
eliminated by amendment to the agreement. See Note 9 to the Consolidated
Financial Statements of the Company and "Executive Compensation."
In December 1998, the Company entered into an oral agreement with Dan
Nicholas to provide investor relations and public relations advice and services
for a fee of $20,000 per month. Fees of approximately $140,000 were paid to Mr.
Nicholas in fiscal 1999. The consulting agreement between the Company and Mr.
Nicholas was terminated in August 1999 upon Mr. Nicholas' appointment as the
Company's Chief Financial Officer.
57
<PAGE>
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.
2.2 Agreement and Plan of Merger dated June 27, 1998 between THINK New
Ideas, Inc., UbiCube Group, Inc., Ubicube Acquisition Corp. and the
Stockholders of UbiCube Group, Inc., filed with the Securities and
Exchange Commission on September 11, 1998 as an exhibit to the
Company's Form 8-K/A (File No. 000-21775) and incorporated herein by
reference.
2.3 Agreement and Plan of Merger dated June 2, 1998 between THINK New
Ideas, Inc., Interweb, Inc. and the Stockholders of Interweb, Inc.,
filed with the Securities and Exchange Commission on August 14,1998 as
an exhibit to the Company's Form 8-K/A (File No. 000-21775) and
incorporated herein by reference.
2.4 Agreement and Plan of Merger dated April 1, 1998 between THINK New
Ideas, Inc., Herring/Newman, Inc., Phil Herring, and Daniel Gross,
filed with the Securities and Exchange Commission as an exhibit to the
Company's Annual Report on Form 10-KSB (File No. 000-21775) for the
fiscal year ended June 30, 1998 and incorporated herein by reference.
2.5 Agreement and Plan of Merger dated November 11, 1997 between THINK New
Ideas, Inc., BBG New Media, Inc., Daniel McCartney, and Joseph
Nicholson, filed with the Securities and Exchange Commission on
January 16, 1998 as an exhibit to the Company's Form 8-K/A (File No.
000-21775) and incorporated herein by reference.
2.6 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 Statement on Form SB-2 (File No. 333-12795) and
incorporated herein by reference.
2.7 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.
2.8 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.
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2.9 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.
2.10 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.
2.11 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.
2.12 Asset Purchase Agreement by and among THINK New Ideas, Inc., Envision
Group, James Hartley and Paul Ashcraft, filed with the Securities and
Exchange Commission on March 29, 1999 as an exhibit to the Company's
Current Report on Form8-K (File No.000-21775) and incorporated herein
by reference.
2.13 Merger Agreement by and among AnswerThink Consulting Group, Inc.,
THINK New Ideas, Inc. and Darwin Acquisition Corp., filed with the
Securities and Exchange Commission on June 30, 1999 as an exhibit to
the Company's Current Report on Form 8-K (File No. 000-21775) and
incorporated herein by reference.
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 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.
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.
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4.4 Amended and Restated THINK New Ideas, Inc. 1997 Stock Option Plan,
filed with the Securities and Exchange Commission as an exhibit to the
Company's Annual Report on Form 10-KSB (File No. 000-21775) for the
fiscal year ended June 30, 1998 and incorporated herein by reference.
4.5* Amended and Restated THINK New Ideas, Inc. 1998 Stock Option Plan.
4.6 Securities Purchase Agreement by and among THINK New Ideas, Inc.,
Capital Ventures International and Marshall Capital Management, Inc.
filed with the Securities and Exchange Commission as an exhibit to the
Company's Current report on Form 8-K (File No. 000-21775) and
incorporated herein by reference.
4.7 Registration Rights Agreement by and among THINK New Ideas, Inc.,
Capital Ventures International and Marshall Capital Management, Inc.
filed with the Securities and Exchange Commission as an exhibit to the
Company's Current report on Form 8-K on March 12,1999 (File No.
000-21775) and incorporated herein by reference.
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 (File No. 333-12795),
dated September 26, 1996 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 (File No. 333-12795),
dated September 26, 1996 and incorporated herein by reference.
10.2(a) Amendment to Ron Bloom Employment Agreement dated October 28, 1996,
filed with the Securities and Exchange Commission as an exhibit to the
Company's Registration Statement on Form SB-2 (File No. 333-12795),
dated September 26, 1996 and incorporated herein by reference.
10.2(b) Amendment to Ron Bloom Employment Agreement dated October 23, 1997,
filed with the Securities and Exchange Commission as an exhibit to the
Company's Quarterly Report on Form 10-QSB (File No. 000-21775) for the
quarter ended March 31, 1998 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 (File No. 333-12795),
dated September 26, 1996 and incorporated herein by reference.
10.3(a) Amendment to Adam Curry Employment Agreement dated October 28, 1996,
filed with the Securities and Exchange Commission as an exhibit to the
Company's Registration Statement on Form SB-2 (File No.333-12795),
dated September 26, 1996 and incorporated herein by reference.
60
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10.3(b) Amendment to Adam Curry Employment Agreement dated October 23, 1997,
filed with the Securities and Exchange Commission as an exhibit to the
Company's Quarterly Report on Form 10-QSB (File No.000-21775) for the
quarter ended March 31, 1998 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 (File No.333-12795),
dated September 26, 1996 and incorporated herein by reference.
10.4(a) Amendment to Susan Goodman Employment Agreement dated October 23,
1997, filed with the Securities and Exchange Commission as an exhibit
to the Company's Quarterly Report on Form 10-QSB (File No. 000-21775)
for the quarter ended March 31, 1998.
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 (File No. 333-12795),
dated September 26, 1996 and incorporated herein by reference.
10.5(a) Amendment to James Carlisle Employment Agreement dated October 28,
1996, filed with the Securities and Exchange Commission as an exhibit
to the Company's Registration Statement on Form SB-2 (File No.
333-12795), dated September 26, 1996 and incorporated herein by
reference.
10.5(b) Amendment to James Carlisle Employment Agreement dated March 18, 1998,
filed with the Securities and Exchange Commission as an exhibit for
the Company's Annual Report on Form 10-KSB (File No. 000-21775) for
the fiscal year ended June 30, 1998 and incorporated herein by
reference.
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 (File No. 333-12795),
dated September 26, 1996 and incorporated herein by reference.
10.6(a) Letter Amendment to Employment Agreement of James Grannan dated July
30, 1997, filed with the Securities and Exchange Commission as an
exhibit to the Company's Annual Report on Form 10-KSB (File No.
000-21775) for the fiscal year ended June 30, 1997 and incorporated
herein by reference.
10.7 Employment Agreement between THINK New Ideas, Inc. and Melvin Epstein,
filed with the Securities and Exchange Commission as an exhibit to the
Company's Registration Statement on Form SB-2 (File No. 333-12795),
dated September 26, 1996 and incorporated herein by reference.
10.8(a) Employment Letter between THINK New Ideas, Inc. and Larry Kopald,
filed with the Securities and Exchange Commission as an exhibit to the
Company's Annual Report on
61
<PAGE>
Form 10-KSB (File No. 000-21775) for the fiscal year ended June 30,
1997 and incorporated herein by reference.
10.8(b) Employment Agreement between THINK New Ideas, Inc. and Larry Kopald,
filed with the Securities and Exchange Commission as an exhibit to the
Company's Annual Report on Form 10-KSB/A (File No. 000-21775) for the
fiscal year ended June 30, 1997 and incorporated herein by reference.
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 (File No. 333-31511) filed with the Commission on July 17,
1997 and incorporated herein by reference.
10.10 Termination Agreement between THINK New Ideas, Inc. and David Hieb,
dated May 20, 1997, filed with the Securities and Exchange Commission
as an exhibit to the Company's Annual Report on Form 10-KSB (File No.
000-21775) for the fiscal year ended June 30, 1997 and incorporated
herein by reference.
10.11 Settlement Agreement, dated as of May 15, 1998, by and between the
Company and Scott Mednick, filed with the Securities and Exchange
Commission as an exhibit for the Company's Annual Report on Form
10-KSB (File No. 000-21775) for the fiscal year ended June 30, 1998
and incorporated herein by reference.
10.12 Settlement Agreement, dated as of July 28, 1998, by and between the
Company and Scott Mednick, filed with the Securities and Exchange
Commission as an exhibit to the Company's Annual Report on Form 10-KSB
(File No. 000-21775) for the fiscal year ended June 30, 1998 and
incorporated herein by reference.
10.13 Letter Agreement between the Company and Scott Mednick dated May 15,
1998, filed with the Securities and Exchange Commission as an exhibit
to the Company's Quarterly Report on Form 10-QSB (File No. 000-21775)
for the quarter ended March 31, 1998 and incorporated herein by
reference.
10.14(a) Loan Agreement by and between Omnicom Finance Inc. and THINK New
Ideas, Inc., dated March 17, 1998, filed with the Securities and
Exchange Commission as an exhibit to the Company's Annual Report on
Form 10-KSB (File No. 000-21775) for the fiscal year ended June 30,
1998 and incorporated herein by reference.
10.14(b) Promissory Note in favor of Omnicom Finance Inc, filed with the
Securities and Exchange Commission as an exhibit to the Company's
Annual Report on Form 10-KSB (File No. 000-21775) for the fiscal year
ended June 30, 1998 and incorporated herein by reference.
10.15(a) Letter Agreement by and between the Bank of New York and THINK New
Ideas, Inc., dated April 24, 1998, filed with the Securities and
Exchange Commission as an exhibit to the Company's Annual Report on
Form 10-KSB (File No. 000-21775) for the fiscal year ended June 30,
1998 and incorporated herein by reference.
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<PAGE>
10.15(b) Promissory Note in favor of the Bank of New York, filed with the
Securities and Exchange Commission as an exhibit to the Company's
Annual Report on Form 10-KSB (File No. 000-21775) for the fiscal year
ended June 30, 1998 and incorporated herein by reference.
10.16 Form of General Guarantee to Bank of New York Loan Agreement provided
by On Ramp, Inc. and Scott A. Mednick & Associates, Inc, filed with
the Securities and Exchange Commission as an exhibit to the Company's
Annual Report on Form 10-KSB (File No. 000-21775) for the fiscal year
ended June 30, 1998 and incorporated herein by reference.
10.17 Form of Security Agreement to Bank of New York Loan Agreement provided
by On Ramp, Inc., Scott A. Mednick & Associates, Inc. and THINK New
Ideas, Inc, filed with the Securities and Exchange Commission as an
exhibit to the Company's Annual Report on Form 10-KSB (File No.
000-21775) for the fiscal year ended June 30, 1998 and incorporated
herein by reference.
10.18* Employment Agreement, dated October 31,1997 between THINK New Ideas,
Inc. and Joseph Nicholson.
10.19* Letter Amendment to the Employment Agreement of Ronald Bloom dated May
24, 1999.
10.20* Letter Amendment to the Employment Agreement of Susan Goodman dated
May 24, 1999.
10.21* Letter Amendement to the Employment Agreement of Larry Kopald dated May
24, 1999.
10.22* Letter Agreement by and between Bank of New York and THINK New Ideas,
Inc. dated April 21, 1999.
13.1 Quarterly Report on Form 10-QSB for quarter ended March 31, 1999,
filed with the Securities and Exchange Commission on May 14, 1999 and
incorporated herein by reference.
16.1 Letter Certifying Change of Accountants, filed with the Securities and
Exchange Commission as an exhibit to the Company's Current Report on
Form 8-K (File No. 000-21775), filed on February 27, 1998 and
incorporated herein by reference.
27* Financial Data Schedule.
* Denotes documents filed herewith. Other documents are incorporated herein by
reference as noted above.
(B) REPORTS ON FORM 8-K
On June 30, 1999 the Company filed a Current Report on Form 8-K to
report the merger with AnswerThink Consulting Group, Inc.
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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: September 14, 1999 By: /s/ Ronald E. Bloom
------------------------
Ronald E. Bloom, Chairman
and Chief Executive Officer
In Accordance with the Securities 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>
SIGNATURE TITLE DATE
- - --------- ----- ----
<S> <C> <C>
/s/ Ronald E. Bloom Chief Executive Officer, September 14, 1999
- - ----------------- Chairman of the Board and Director
Ronald E. Bloom
/s/ Dan Nicholas Chief Financial Officer September 14, 1999
- - -----------------
Dan Nicholas
/s/ Barry Wagner Director September 14, 1999
- - -----------------
Barry Wagner
/s/ Richard Char Director September 14, 1999
- - -----------------
Richard Char
/s/ Scott Metcalf Director September 14, 1999
- - -----------------
Scott Metcalf
/s/ Ken Orton Director September 14, 1999
- - -------------
Ken Orton
/s/ Larry Kopald Chief Creative Officer and Director September 14, 1999
- - ----------------
Larry Kopald
</TABLE>
64
EXHIBIT 4.5
THINK NEW IDEAS, INC.
AMENDED AND RESTATED
1998 STOCK OPTION PLAN
<PAGE>
THINK NEW IDEAS, INC.
AMENDED AND RESTATED
1998 STOCK OPTION PLAN
ARTICLE I
ESTABLISHMENT AND PURPOSE
Section 1.1. THINK New Ideas, Inc., a Delaware corporation (the
"Company"), hereby establishes a stock option plan to be named the THINK New
Ideas, Inc. Amended and Restated 1998 Stock Option Plan (the "Plan").
Section 1.2. The purpose of this Plan is to induce persons who are
officers, directors, employees and consultants of the Company (or any of its
subsidiaries) who are in a position to contribute materially to the Company's
prosperity to remain with the Company, to offer said persons incentives and
rewards in recognition of their contributions to the Company's progress, and to
encourage said persons to continue to promote the best interests of the Company.
This Plan provides for the grant of options to purchase shares of common stock
of the Company, par value $.0001 per share (the "Common Stock") which qualify as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), to persons who are employees, as
well as options which do not so qualify ("Non-Qualified Options") to be issued
to persons, including those who are not employees. Incentive Options and
Non-Qualified Options may be collectively referred to hereinafter as the
"Options" as the context may require. Persons granted Options hereunder may be
referred to hereinafter as the "Optionees."
Section 1.3. All Options granted on or after the date that this Plan
has been approved and adopted by the Company's board of directors (the "Board of
Directors") shall be governed by the terms and conditions of this Plan unless
the terms of any such Option specifically indicate that it is not to be so
governed.
Section 1.4. Any Option granted hereunder which is intended to qualify
as an Incentive Option which, for any reason whatsoever, fails to so qualify,
shall be deemed to be a Non-Qualified Option granted hereunder.
ARTICLE II
ADMINISTRATION
Section 2.1. All determinations hereunder concerning the selection of
persons eligible to receive awards under this Plan and determinations with
respect to the timing, pricing and amount of an award hereunder (other than
pursuant to a non-discretionary formula hereinafter set forth) shall be made by
an administrator (the "Administrator"). The Administrator shall be either: (a)
the Board of Directors, or (b) in the discretion of the Board of Directors, a
committee of not less than two (2) members of the Board of Directors (the
"Committee"), each of whom is a
1
<PAGE>
"Non-Employee" Director as such term is defined in Rule 16b-3 (as such rule may
be amended from time to time, "Rule 16b-3") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). In the event this Plan is administered by
the Committee, the Committee shall select one (1) of its members to serve as the
chairman thereof and shall hold its meetings at such times and places as it may
determine. In such case, a majority of the total number of members of the
Committee shall be necessary to constitute a quorum; and (i) the affirmative act
of a majority of the members present at any meeting at which a quorum is
present, or (ii) the approval in writing by a majority of the members of the
Committee, shall be necessary to constitute action by the Committee.
Section 2.2. The provisions hereof relating to Incentive Options are
intended to comply in every respect with Section 422 of the Code ("Section 422")
and the regulations promulgated thereunder. In the event that any future statute
or regulation shall modify Section 422, this Plan shall be deemed to incorporate
by reference such modification. Any agreement relating to the grant of any
Incentive Option hereunder, which Option is outstanding and unexercised at the
time that any modifying statute or regulation becomes effective, shall also be
deemed to incorporate by reference such modification and no notice of such
modification need be given to the Optionee. Any agreement relating to an
Incentive Option granted hereunder shall provide that the Optionee hold the
stock received upon exercise of such Incentive Option for a minimum of two (2)
years from the date of grant of the Incentive Option and one (1) year from the
date of exercise of such Incentive Option, absent the written approval, consent
or waiver of the Administrator.
Section 2.3. If any provision of this Plan is determined to disqualify
the shares of Common Stock purchasable upon exercise of an Incentive Option
granted hereunder from the special tax treatment provided by Section 422, such
provision shall be deemed to incorporate by reference the modification required
to qualify such shares of Common Stock for said tax treatment.
Section 2.4. The Company shall grant Options hereunder in accordance
with determinations made by the Administrator pursuant to the provisions hereof.
All Options granted pursuant hereto shall be clearly identified as Incentive
Options or Non-Qualified Options. The Administrator may from time to time adopt
(and thereafter amend or rescind) such rules and regulations for carrying out
this Plan and take such action in the administration of this Plan, not
inconsistent with the provisions hereof, as it shall deem proper. The Board of
Directors or, subject to the supervision of the Board of Directors, the
Committee, as the Administrator, shall have plenary discretion, subject to the
express provisions of this Plan, to determine which officers, directors,
employees and consultants shall be granted Options, the number of shares subject
to each Option, the time or times when an Option may be exercised (whether in
whole or in installments), the terms and provisions of the respective agreements
relating to the grant of Options (which need not be identical), including such
terms and provisions which may be amended from time to time as shall be
required, in the judgment of the Administrator, to conform to any change in any
law or regulation applicable hereto, and to make all other determinations deemed
necessary or advisable for the administration of this Plan. The interpretation
and construction of any provision of this Plan by the Administrator (unless
otherwise determined by the Board of Directors) shall be final, conclusive and
binding upon all persons.
2
<PAGE>
Section 2.5. No member of the Administrator shall be liable for any
action or determination made in good faith with respect to administration of
this Plan or the Options granted hereunder. Members of the Board of Directors
and/or the Committee, as the Administrator, shall be indemnified by the Company,
pursuant to the Company's bylaws, for any expenses, judgments or other costs
incurred as a result of a lawsuit filed against such member claiming any rights
or remedies arising out of such member's participation in the administration of
this Plan.
ARTICLE III
TOTAL NUMBER OF SHARES TO BE OPTIONED
Section 3.1. There shall be reserved for issuance or transfer upon
exercise of the Options granted from time to time hereunder an aggregate of
1,500,000 shares of Common Stock (subject to adjustment as provided in Article
VIII hereof). The shares of Common Stock issued upon exercise of any Option
granted hereunder may be shares of Common Stock previously issued and reacquired
by the Company at any time or authorized but unissued shares of Common Stock, as
the Board of Directors from time to time may determine.
Section 3.2. In the event that any Options outstanding under this Plan
for any reason expire or are terminated without having been exercised in full,
the unpurchased shares of Common Stock subject to such Option and any such
surrendered shares of Common Stock may again be available for transfer
hereunder.
Section 3.3. No Options shall be granted pursuant hereto to any
Optionee after the tenth anniversary of the earlier of: (a) the date that this
Plan is adopted by the Board of Directors, or (b) the date that this Plan is
approved by the stockholders of the Company.
ARTICLE IV
ELIGIBILITY
Section 4.1. Non-Qualified Options may be granted hereunder to
officers, directors, employees and consultants of the Company (or any of its
subsidiaries) selected by the Administrator, and Incentive Options may be
granted hereunder only to employees (including officers and directors who are
employees) of the Company (or any of its subsidiaries) selected by the
Administrator. For purposes of determining who is an employee with respect to
eligibility for Incentive Options, the provisions of Section 422 of the Code
shall govern. The Administrator may determine (in its sole discretion) that any
person who would otherwise be eligible to be granted Options shall, nonetheless,
be ineligible to receive any award under this Plan.
Section 4.2. The Administrator shall (in its discretion) determine the
persons to be granted Options, the time or times at which Options shall be
granted, the number of shares of
3
<PAGE>
Common Stock subject to each Option, the terms of a vesting or forfeiture
schedule, if any, the type of Option issued, the period during which such
Options may be exercised, the manner in which Options may be exercised and all
other terms and conditions of the Options; provided, however, that no Option
shall be granted which has terms or conditions inconsistent with those stated in
Articles V and VI hereof. Relevant factors in making such determinations may
include the value of the services rendered by the respective Optionee, his or
her present and potential contributions to the Company, and such other factors
which are deemed relevant by the Administrator in accomplishing the purpose of
this Plan.
ARTICLE V
TERMS AND CONDITIONS OF OPTIONS
Section 5.1. Each Option granted under this Plan shall be evidenced by
a stock option certificate and agreement (the "Option Agreement") in a form
consistent with this Plan, provided that the following terms and conditions
shall apply:
(a) The price at which each share of Common Stock covered by
an Option may be purchased shall be set forth in the Option Agreement and shall
be determined by the Administrator, provided that the option price for any
Incentive Option shall not be less than the "fair market value" of the shares of
Common Stock at the time of grant determined. Notwithstanding the foregoing, if
an Incentive Option to purchase shares of Common Stock is granted hereunder to
an Optionee who, on the date of the grant, directly or indirectly owns more than
ten percent (10%) of the voting power of all classes of capital stock of the
Company (or its parent or subsidiary), not including the shares of Common Stock
obtainable upon exercise of the Option, the minimum exercise price of such
Option shall be not less than one hundred ten percent (110%) of the "fair market
value" of the shares of Common Stock on the date of grant determined in
accordance with Section 5.1(b) below.
(b) The "fair market value" shall be determined by the
Administrator, which determination shall be binding upon the Company and its
officers, directors, employees and consultants. The determination of the "fair
market value" shall be based upon the following: (i) if the Common Stock is not
listed and traded upon a recognized securities exchange and there is no report
of stock prices with respect to the Common Stock published by a recognized stock
quotation service, on the basis of the recent purchases and sales of the Common
Stock in arms_length transactions; (ii) if the Common Stock is not then listed
and traded upon a recognized securities exchange or quoted on the NASDAQ
National Market System, and there are reports of stock prices by a recognized
quotation service, upon the basis of the last reported sale or transaction price
of the Common Stock on the date of grant as reported by a recognized quotation
service, or, if there is no last reported sale or transaction price on that day,
then upon the basis of the mean of the last reported closing bid and closing
asked prices for the Common Stock on that day or on the date nearest preceding
that day; or (iii) if the Common Stock shall then be listed and traded upon a
recognized securities exchange or quoted on the NASDAQ National Market System,
upon the basis of the last reported sale or transaction price at which shares of
Common Stock were traded on such recognized securities exchange on the date of
grant
4
<PAGE>
or, if the Common Stock was not traded on such date, upon the basis of the last
reported sale or transaction price on the date nearest preceding that date. The
Administrator shall also consider such other factors relating to the "fair
market value" of the Common Stock as it shall deem appropriate.
(c) For the purpose of determining whether an Optionee owns
more than ten percent (10%) of the voting power of all classes of stock of the
Company, an Optionee shall be considered to own those shares of stock which are
owned directly or indirectly through brothers and sisters (including
half_blooded siblings), spouse, ancestors and lineal descendants; and
proportionately as a shareholder of a corporation, a partner of a partnership,
and/or a beneficiary of a trust or an estate that owns shares of capital stock
of the Company.
(d) Notwithstanding any other provision hereof, in accordance
with the provisions of Section 422(d) of the Code, to the extent that the
aggregate "fair market value" (determined at the time the Option is granted) of
the shares of Common Stock with respect to which Incentive Options (without
reference to this provision) are exercisable for the first time by any
individual in any calendar year under any and all stock option plans of the
Company (and its subsidiary corporations and its parent, if any) exceeds
$100,000, such Options shall be treated as Non-Qualified Options.
(e) An Optionee may, in the Administrator's discretion, be
granted more than one (1) Incentive Option or Non-Qualified Option during the
duration of this Plan, and may be issued a combination of Non-Qualified Options
and Incentive Options; provided, however, that non-employees are not eligible to
receive Incentive Options.
(f) The duration of any Option shall be within the sole
discretion of the Administrator; provided, however, that any Incentive Option
granted to a ten percent (10%) or less stockholder or any Non-Qualified Option
shall, by its terms, be exercised within ten (10) years after the date the
Option is granted and any Incentive Option granted to a greater than ten percent
(10%) stockholder shall, by its terms, be exercised within five (5) years after
the date the Option is granted.
(g) An Option shall not be transferable by the Optionee other
than by will, or by the laws of descent and distribution. An Option may be
exercised during the Optionee's lifetime only by the Optionee.
(h) At least six (6) months shall elapse from the date on
which an Option is granted to an officer, director, or beneficial owner of more
than ten percent (10%) of the outstanding shares of Common Stock of the Company
under this Plan by the Administrator to the date on which any share of Common
Stock underlying such Option is sold, unless the Administrator otherwise
consents in writing.
5
<PAGE>
ARTICLE VI
EMPLOYMENT OR SERVICE OF OPTIONEE
Section 6.1. If the employment or service of an Optionee is terminated
for cause, the option rights of such Optionee, both accrued and future, under
any then outstanding Non-Qualified or Incentive Option shall terminate
immediately, subject to the provisions of any employment agreement between the
Company (or any subsidiary) and an Optionee which, by its terms, provides
otherwise. In the event that an employee who is an Optionee hereunder has
entered into an employment agreement with the Company (or a subsidiary), "cause"
shall have the meaning attributed thereto in such employment agreement;
otherwise, "cause" shall mean incompetence in the performance of duties,
disloyalty, dishonesty, theft, embezzlement, unauthorized disclosure of patents,
processes or trade secrets of the Company, individually or as an employee,
partner, associate, officer or director of any organization. The determination
of the existence and the proof of "cause" shall be made by the Administrator
and, subject to the review of any determination made by the Administrator, such
determination shall be binding on the Optionee and the Company.
Section 6.2. Subject to the provisions of any employment agreement
between the Company (or a subsidiary) and an Optionee, if the employment or
service of an Optionee is terminated by either the Optionee or the Company for
any reason other than cause, death, or for disability (as defined in Section
22(e)(3) of the Code or pursuant to the terms of such an employment agreement),
the option rights of such Optionee under any then outstanding Non-Qualified or
Incentive Option shall, subject to the provisions of Section 5.1(h) hereof, be
exercisable by such Optionee at any time prior to the expiration of the Option
or within three (3) months after the date of such termination, whichever period
of time is shorter, but only to the extent of the accrued right to exercise an
Option at the date of such termination.
Section 6.3. Subject to the provisions of any employment agreement
between the Company (or a subsidiary) and an Optionee, in the case of an
Optionee who becomes disabled (as defined by Section 22(e)(3) of the Code or
pursuant to the terms of such an employment agreement), the option rights of
such Optionee under any then outstanding Non-Qualified or Incentive Option
shall, subject to the provisions of Section 5.1(h) hereof, be exercisable by
such Optionee at any time prior to the expiration of the Option or within one
(1) year after the date of termination of employment or service due to
disability, whichever period of time is shorter, but only to the extent of the
accrued right to exercise an Option at the date of such termination
Section 6.4. In the event of the death of an Optionee, the option
rights of such Optionee under any then outstanding Non-Qualified or Incentive
Option shall be exercisable by the person or persons to whom these rights pass
by will or by the laws of descent and distribution, at any time prior to the
expiration of the Option or within three (3) years after the date of death,
whichever period of time is shorter, but only to the extent of the accrued right
to exercise an Option at the date of death. If a person or estate acquires the
right to exercise a Non-Qualified or Incentive Option by bequest or inheritance,
the Administrator may require reasonable evidence as to the ownership of such
Option, and may require such consents and releases of taxing authorities as the
Administrator may deem advisable.
6
<PAGE>
Section 6.5. The Administrator may also provide that an employee must
be continuously employed by the Company for such period of time as the
Administrator, in its discretion, deems advisable before the right to exercise
any portion of an Option granted to such employee will accrue, and may also set
such other targets, restrictions or other terms relating to the employment of
the Optionee which targets, restrictions, or terms must be fulfilled or complied
with, as the case may be, prior to the exercise of any portion of an Option
granted to any employee.
Section 6.6. Options granted hereunder shall not be affected by any
change of duties or position, so long as the Optionee continues in the service
of the Company.
Section 6.7. Nothing contained in this Plan or in any Option granted
pursuant hereto shall confer upon any Optionee any right with respect to
continuance of employment or service by the Company nor interfere in any way
with the right of the Company to terminate the Optionee's employment or service
or change the Optionee's compensation at any time.
ARTICLE VII
PURCHASE OF SHARES
Section 7.1. Except as provided in this Article VII, an Option shall be
exercised by tender to the Company of the full exercise price of the shares of
Common Stock with respect to which an Option is exercised and written notice of
the exercise. The right to purchase shares of Common Stock shall be cumulative
so that, once the right to purchase any shares of Common Stock has accrued, such
shares or any part thereof may be purchased at any time thereafter until the
expiration or termination of the Option. A partial exercise of an Option shall
not affect the right of the Optionee to subsequently exercise his or her Option
from time to time, in accordance with this Plan, as to the remaining number of
shares of Common Stock subject to the Option. The purchase price payable upon
exercise of an Option shall be in United States dollars and shall be payable in
cash or by certified bank check. Notwithstanding the foregoing, in lieu of cash,
an Optionee may, with the approval of the Administrator, exercise his or her
Option by tendering to the Company shares of Common Stock owned by him or her
having an aggregate fair market value at least equal to the aggregate purchase
price. The "fair market value" of any shares of Common Stock so surrendered
shall be determined by the Administrator in accordance with Section 5.1(b)
hereof.
Section 7.2. Except as provided in Article VI above, an Option may not
be exercised unless the holder thereof is an officer, director, employee, or
consultant of the Company at the time of exercise.
Section 7.3. No Optionee or Optionee's executor, administrator,
legatee, or distributee or other permitted transferee, shall be deemed to be a
holder of any shares of Common Stock subject to an Option for any purpose
whatsoever unless and until such Option has been exercised and a stock
certificate or certificates for the shares of Common Stock purchased by the
Optionee
7
<PAGE>
are issued to the Optionee in accordance with the terms of this Plan. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date that any such stock certificate is issued,
except as provided in Article VIII hereof.
Section 7.4. If: (i) the listing, registration or qualification of the
Options issued hereunder or of any securities issuable upon exercise of such
Options (the "Subject Securities") upon any securities exchange or quotation
system or under federal or state law is necessary as a condition of or in
connection with the issuance or exercise of the Options; or (ii) the consent or
approval of any governmental regulatory body is necessary as a condition of or
in connection with the issuance or exercise of the Options, the Company shall
not be obligated to deliver the certificates representing the Subject Securities
or to accept or to recognize an Option exercise unless and until such listing,
registration, qualification, consent or approval shall have been effected or
obtained. The Company will take reasonable action to so list, register, or
qualify the Options and the Subject Securities, or effect or obtain such consent
or approval, so as to allow for issuance and/or exercise.
Section 7.5. An Optionee may be required to represent to the Company as
a condition of his or her exercise of Options issued under this Plan that: (i)
the Subject Securities acquired upon exercise of his or her Option are being
acquired by him or her for investment purposes only and not with a view to
distribution or resale, unless counsel for the Company is then of the view that
such a representation is not necessary and is not required under the Securities
Act of 1933, as amended (the "Securities Act"), or any other applicable statute,
law, regulation or rule; and (ii) that the Optionee shall make no exercise or
disposition of an Option or of the Subject Securities in contravention of the
Securities Act, the Exchange Act of 1934, or the rules and regulations
thereunder. Optionees may also be required to provide (as a condition precedent
to exercise of an Option) such documentation as may be reasonably requested by
the Company to assure compliance with applicable law and the terms and
conditions of this Plan and the subject Option.
Section 7.6. An Option may be exercised by tender to the Administrator
of a written notice of exercise together with advice of the delivery of an order
to a broker to sell part or all of the shares of Common Stock subject to such
exercise notice and an irrevocable order to such broker to deliver to the
Company (or its transfer agent) sufficient proceeds from the sale of such shares
to pay the exercise price and any withholding taxes. All documentation and
procedures to be followed in connection with such a "cashless exercise" shall be
approved in advance by the Administrator.
ARTICLE VIII
CHANGE IN NUMBER OF OUTSTANDING SHARES OF
STOCK, ADJUSTMENTS, REORGANIZATIONS, ETC.
Section 8.1. In the event that the outstanding shares of Common Stock
of the Company are hereafter increased or decreased or changed into or exchanged
for a different number of shares or kind of shares or other securities of the
Company or of another corporation by reason of
8
<PAGE>
reorganization, merger, consolidation, recapitalization, reclassification, stock
split, combination of shares, or a dividend payable in capital stock,
appropriate adjustment shall be made by the Administrator in the number and kind
of shares for the purchase of which Options may be granted under this Plan,
including the maximum number that may be granted to any one (1) person. In
addition, the Administrator shall make appropriate adjustments in the number and
kind of shares as to which outstanding Options, or portions thereof then
unexercised, shall be exercisable, to the end that the Optionee's proportionate
interest shall be maintained as before the occurrence to the unexercised portion
of the Option and with a corresponding adjustment in the option price per share.
Any such adjustment made by the Administrator shall be conclusive.
Section 8.2. The grant of an Option hereunder shall not affect in any
way the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge or
to consolidate or to dissolve, liquidate or sell, or transfer all or any part of
its business or assets.
Section 8.3. Upon the dissolution or liquidation of the Company, or
upon a reorganization, merger or consolidation of the Company as a result of
which the outstanding securities of the class then subject to Options hereunder
are changed into or exchanged for cash or property or securities not of the
Company's issue, or upon a sale of substantially all the property of the Company
to an association, person, party, corporation, partnership, or control group as
that term is construed for purposes of the Exchange Act, this Plan shall
terminate, and all Options theretofore granted hereunder shall terminate, unless
provision be made in writing in connection with such transaction for the
continuance of this Plan and/or for the assumption of Options theretofore
granted, or the substitution for such Options of options covering the stock of a
successor employer corporation, or a parent or a subsidiary thereof, with
appropriate adjustments as to the number and kind of shares and prices, in which
event this Plan and options theretofore granted shall continue in the manner and
under the terms so provided. If this Plan and unexercised Options shall
terminate pursuant to the foregoing sentence, all persons owning any unexercised
portions of Options then outstanding shall have the right, at such time prior to
the consummation of the transaction causing such termination as the Company
shall designate, to exercise the unexercised portions of their Options,
including the portions thereof which would, but for this Section 8.3 not yet be
exercisable.
ARTICLE IX
DURATION, AMENDMENT AND TERMINATION
Section 9.1. The Board of Directors may at any time terminate this Plan
or make such amendments hereto as it shall deem advisable and in the best
interests of the Company, without action on the part of the stockholders of the
Company unless such approval is required pursuant to Section 422 of the Code or
the regulations thereunder; provided, however, that no such termination or
amendment shall, without the consent of the individual to whom any Option shall
theretofore have been granted, affect or impair the rights of such individual
under such Option. Pursuant to ss. 422(b) of the Code, no Incentive Option may
be granted pursuant to this Plan after
9
<PAGE>
ten (10) years from the date this Plan is adopted or the date this Plan is
approved by the stockholders of the Company, whichever is earlier.
ARTICLE X
RESTRICTIONS
Section 10.1. Any Options and shares of Common Stock issued pursuant
hereto shall be subject to such restrictions on transfer and limitations as
shall, in the opinion of the Administrator, be necessary or advisable to assure
compliance with the laws, rules and regulations of the United States government
or any state or jurisdiction thereof. In addition, the Administrator may in any
Option Agreement impose such other restrictions upon the disposition or exercise
of an Option or upon the sale or other disposition of the shares of Common Stock
deliverable upon exercise thereof as the Administrator may, in its sole
discretion, determine. By accepting the grant of an Option or SAR pursuant
hereto, each Optionee shall agree to any such restrictions.
Section 10.2. Any certificate evidencing shares of Common Stock issued
pursuant to exercise of an Option shall bear such legends and statements as the
Administrator, the Board of Directors or counsel to the Company shall deem
advisable to assure compliance with the laws, rules and regulations of the
United States government or any state or jurisdiction thereof. No certificate
evidencing shares of Common Stock shall be delivered pursuant to exercise of the
Options granted under this Plan until the Company has obtained such consents or
approvals from such regulatory bodies of the United States government or any
state or jurisdiction thereof as the Administrator, the Board of Directors or
counsel to the Company deems necessary or advisable.
ARTICLE XI
FINANCIAL ASSISTANCE
Section 11.1 The Company is vested with the authority hereunder to
assist any employee to whom an Option is granted hereunder (including any
officer or director of the Company or any of its subsidiaries who is also an
employee) in the payment of the purchase price payable upon exercise of such
Option, by lending the amount of such purchase price to such employee on such
terms and at such rates of interest and upon such security (or unsecured) as
shall have been authorized by or under authority of the Board of Directors. Any
such assistance shall comply with the requirements of Regulation G promulgated
by the Board of the Federal Reserve System, as amended from time to time, and
any other applicable law, rule or regulation.
ARTICLE XII
APPLICATION OF FUNDS
Section 12.1. The proceeds received by the Company from the issuance
and sale of Common Stock upon exercise of Options granted pursuant to this Plan
are to be added to the
10
<PAGE>
general funds of the Company and used for its corporate purposes as determined
by the Board of Directors.
ARTICLE XIII
EFFECTIVENESS OF PLAN
Section 13.1 This Plan shall become effective upon adoption by the
Board of Directors, and Options may be issued hereunder from and after that date
subject to the provisions of Section 3.3 above. This Plan must be approved by
the Company's stockholders in accordance with the applicable provisions
(relating to the issuance of stock or options) of the Company's governing
documents and state law or, if no such approval is prescribed therein, by the
affirmative vote of the holders of a majority of the votes cast at a duly held
stockholders meeting at which a quorum representing a majority of all the
Company's outstanding voting stock is present and voting (in person or by proxy)
or, without regard to any required time period for approval, by any other method
permitted by Section 422 of the Code and the regulations thereunder. If such
stockholder approval is not obtained within one (1) year of the adoption of this
Plan by the Board of Directors or within such other time period required under
Section 422 of the Code and the regulations thereunder, this Plan shall remain
in force; provided however, that all Options issued and issuable hereunder shall
automatically be deemed to be Non-Qualified Options.
IN WITNESS WHEREOF, pursuant to the approval of this Plan by the Board
of Directors, this Plan is executed and adopted this 4th day of November, 1998.
THINK NEW IDEAS, INC.
[CORPORATE SEAL]
By: /s/ Ronald E. Bloom
----------------------------------------
Ronald E. Bloom, Chief Executive Officer
ATTEST:
By: /s/ Melvin Epstein
----------------------------
Melvin Epstein, Secretary
11
Exhibit 10.18
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of this
31st day of October 1997, between THINK New Ideas, Inc., a Delaware corporation
(the "Company"), and Joseph Nicholson an individual resident of Winchester,
Massachusetts (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
Company and the Employee, collectively, referred to as the "Parties", 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"). Nothing set forth herein
shall be construed to give the Company the right to require the Employee to
relocate or be based in any place other than the Boston, Massachusetts area.
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 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: (a) specifically include any extensions permitted hereunder or
provided herein; 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 Monthly Compensation to the Employee pursuant to
Subsections 9(b) and 9(c) hereof.
3. Office and Duties. During the Period of Employment:
(a) the Employee shall be employed as the head of the Company's
New England division in the event that the Company does not continue to operate
BBG as a separate subsidiary. Such position shall have the responsibilities
reasonably prescribed by the board of
<PAGE>
directors ("Board of Directors") of the Company (as the sole stockholder of BBG)
in accordance with the bylaws of the Company (the "Bylaws"); and
(b) the Employee shall devote substantially all of his time to
the business and affairs of the Company (which phrase shall hereinafter include
BBG) 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.
(c) the Employee shall be entitled to vacation time based upon
the cumulative number of years the Employee is or has been employed by the
Company (deemed for this purpose to include a predecessor, successor, subsidiary
or other affiliate of the Company) as follows:
Weeks of Vacation Full Years of Service
------------------------------------------------------
Two (2) One (1) through Six (6)
Three (3) Seven (7) through Nine (9)
Four (4) Ten (10) through Fourteen (14)
Five (5) Fifteen (15) and Beyond
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
<PAGE>
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:
(a) Compensation. The Company shall pay the Employee
compensation equal to at least One Hundred Twenty-Five Thousand Dollars
($125,000) per annum at a rate of Ten Thousand Four Hundred Sixteen Dollars and
Sixty-Seven Cents ($10,416.67) per month (such monthly amount as the same may be
increased from time to time by virtue of the adjustments set forth herein below
shall be defined as the "Monthly Compensation"). Such salary shall be payable in
accordance with the customary payroll practices of the Company.
(b) Options. The Company shall grant the Employee options to
purchase 200,000 shares of common stock of the Company, $.0001 par value per
share (the "Common Stock") pursuant to and in accordance with the THINK New
Ideas, Inc. Amended and Restated 1997 Stock Option Plan (the "Plan"). The
exercise price of the Options shall be the market price of the Common Stock, as
provided in the Plan, and the Options shall vest and become exercisable
commencing one (1) year from the date of the grant for a period of four (4)
years in equal annual increments, subject to acceleration if by the second
anniversary of the Effective Date, the Measurement Period Sales, as defined in
the definitive Stock Purchase Agreement (the "Purchase Agreement") between THINK
New Ideas, Inc. and BBG at the end of the Measurement Period, as defined in the
Purchase Agreement, reflect revenue growth of thirty percent (30%) per year
over Base Sales, as defined in the Purchase Agreement.
(c) Profitability Bonus. 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.
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 $600 per month as an
automobile allowance, which amount shall include all expenses related to
maintenance of such an automobile and 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 for similar employees.
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
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
<PAGE>
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 set forth) 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; and (ii) "cause" as the same is construed for
employment purposes under the laws of the State of Delaware. 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 three hundred sixty-five day (365-day)
period. A majority vote of the Board of Directors (or such vote as is then
prescribed by the Company's then effective Bylaws or by applicable law) shall
determine whether and when the Disability of the Employee has occurred or when
the Employee shall be subject to a Just Cause determination 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 deemed in Section 4(a) hereof) multiplied by the sum
of the number of months remaining during the Period of Employment (the
"Termination Formula"); or
(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; (ii) upon any material change in the
nature of the Company's business, without the Employee's prior
<PAGE>
consent; and (iii) 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.
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 a 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)
and 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 payments hereunder.
10. Non-Competition. Notwithstanding any earlier termination, during the
Period of Employment 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 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 thereto in writing), 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, 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/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 in connection with
the business 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, firm, corporation, business organization
or other entity.
<PAGE>
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 the
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,
programs, designs, products, processes or technologies 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 relating to any of the foregoing and, as to copyrightable material,
to obtain copyright thereon; and
(b) Notwithstanding any earlier termination, during the Period
of Employment 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 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, programs,
engineering designs and standards, design specification, analytical techniques,
technical information, customer, client, vendor or supplier information,
employee information, and any and all other confidential
<PAGE>
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. Notwithstanding the foregoing, in
the event that a court of competent jurisdiction determines that the
non-compete 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, or 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 the 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 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, 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.
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.
<PAGE>
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 be binding upon such resulting or surviving
transferree 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 and 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 provisions 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
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. 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:
<PAGE>
(a) To the Company: THINK New Ideas, Inc.
45 West 36th Street, 12th Floor
New York, New York 10018
Attention: President
(b) To the Employee: Mr. Joseph Nicholson
c/o BBG New Media, Inc.
92 Montvale
Stoneham, Massachusetts 02180
(c) With an additional copy Kirkpatrick & Lockhart LLP
by like means to: 1800 Massachusetts Ave., N.W.
Second Floor
Washington, D.C. 20036
Attn: Victoria A. Baylin, Esq.
and
Mintz, Levin, Cohn, Ferris, Glovsky
and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
Attn: Steven P. Rosenthal, Esq.
Mary-Laura Greely, 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 successor 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.
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 of conditions or any other term or condition hereof, nor
shall any failure to enforce any provision hereof operate as a waiver of such
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.
<PAGE>
25. Vesting. In the event of a Change in Control (as hereinafter
defined), any and all options, rights or other securities which are exercisable
into shares of Common Stock of the Company granted to the Employee pursuant
hereto shall vest and become immediately exercisable to the extent permitted by
applicable law. The Term "Change in Control", for purposes hereof, shall mean:
(i) the sale of all or substantially all of the assets of the Company; (ii) the
acquisition of capital stock of the Company by any person or group of persons
resulting in ownership by such person or group of more than forty percent (40%)
of the issued and outstanding shares of capital stock of the Company; (iii) any
plan for the liquidation or dissolution of the Company; or (iv) any merger or
consolidation of the Company in which the Company is not the surviving company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
THINK NEW IDEAS, INC., the Company
By: /s/ Ron Bloom, President
-------------------------
Ron Bloom, President
THE EMPLOYEE
By: /s/ Joseph Nicholson
-------------------------
Joseph Nicholson
EXHIBIT 10.19
THINK NEW IDEAS, INC.
45 WEST 36TH STREET, 12TH FLOOR
NEW YORK, NEW YORK 10018
May 24, 1999
VIA FEDERAL EXPRESS
Mr. Ronald Bloom
250 Mercer Street, #D203
New York, New York 10012
Re: Employment Agreement of June 30, 1996 (the "Employment Agreement")
Dear Ron:
This is to confirm to you that, pursuant to Section 2 of that certain
Employment Agreement, dated June 30, 1996, between you and THINK New Ideas, Inc.
(the "Company"), the Company has agreed to extend your employment with the
Company for a period of one year (the "Extension Period") commencing upon
expiration of the current term of your employment at the close of business one
June 30, 1999 at an increased annual salary of $350,000 (representing the
aggregate of $29,167 in Monthly Compensation, as defined in Section 4(a) of the
Employment Agreement). The Company has further agreed that, should the Company
terminate your employment prior to expiration of the Extension Period for other
than "Just Cause" (as such term is defined in Section 9(a) of the Employment
Agreement), you shall be entitled to receive a payment equal to the product of:
(a) the Monthly Compensation multiplied by (b) the number of months remaining in
the Extension Period plus twelve months and the Non-Competition provision set
forth in Section 10 of the Employment Agreement shall automatically terminate.
The Employment Agreement shall remain in effect for the Extension Period
unmodified except as set forth herein.
Please know that your service and contribution to the Company is sincerely
appreciated.
Very truly yours,
/s/ Kenneth Orton
Kenneth Orton on behalf
of the Compensation Committee
cc: Mr. Melvin Epstein
Cindi Lefari, Esq.
Victoria A. Baylin, Esq.
EXHIBIT 10.20
THINK NEW IDEAS, INC.
45 WEST 36TH STREET, 12TH FLOOR
NEW YORK, NEW YORK 10018
May 24, 1999
VIA FEDERAL EXPRESS
Ms. Susan Goodman
225 West 86th Street
New York, New York 10024
Re: Employment Agreement of June 30, 1996 (the "Employment Agreement")
Dear Susan:
This is to confirm to you that, pursuant to Section 2 of that certain
Employment Agreement, dated June 30, 1996, between you and THINK New Ideas, Inc.
(the "Company"), the Company has agreed to extend your employment with the
Company for a period of one year (the "Extension Period") commencing upon
expiration of the current term of your employment at the close of business on
June 30, 1999 at an increased annual salary of $350,000 (representing the
aggregate of $29,167 in Monthly Compensation, as defined in Section 4(a) of the
Employment Agreement). The Company has further agreed that you shall continue to
be a member of executive management, with such title and any other form of
compensation as may be determined by management. The Employment Agreement will
remain in effect for the Extension Period unmodified except as specifically set
forth herein.
Please know that your service and contribution to the Company is sincerely
appreciated.
Very truly yours,
/s/ Kenneth Orton
Kenneth Orton on behalf
of the Compensation Committee
cc: Mr. Ronald Bloom
Mr. Melvin Epstein
Cindi Lefari, Esq.
Victoria A. Baylin, Esq.
EXHIBIT 10.21
THINK NEW IDEAS, INC.
45 WEST 36TH STREET, 12TH FLOOR
NEW YORK, NEW YORK 10018
May 24, 1999
VIA FEDERAL EXPRESS
Mr. Larry Kopald
1161 Amherst
Unit 304
Los Angeles, CA 90049
Re: Employment Agreement of June 30, 1996 (the "Employment Agreement")
Dear Larry:
This is to confirm to you that THINK New Ideas, Inc. (the "Company") has
agreed to renew your employment with the Company for a period of one year (the
"Extension Period") commencing upon expiration of the current term of your
employment at the close of business on May 31, 1999. Your annual salary shall be
$350,000 (representing Monthly Compensation, as defined in the Employment
Agreement, of $29,167). The the Company has further agreed that you shall
continue to be a member of executive management, with such title and any other
form of compensation as may be determined by management. The Employment
Agreement shall remain in effect for the Extension Period unmodified except as
specifically set forth herein.
Your service and contribution to the Company is sincerely appreciated.
Very truly yours,
/s/ Kenneth Orton
Kenneth Orton on behalf
of the Compensation Committee
cc: Mr. Ronald Bloom
Mr. Melvin Epstein
Cindi Lefari, Esq.
Victoria A. Baylin, Esq.
EXHIBIT 10.22
THE BANK OF NEW YORK
NEW YORK'S FIRST BANK - FOUNDED 1784 BY ALEXANDER HAMILTON
1290 AVENUE OF THE AMERICAS, NEW YORK, N.Y. 10104
April 21, 1999
THINK New Ideas, Inc.
45 West 36th Street
12th Floor
New York, New York 10018
Attention: Melvin L. Epstein
Chief Financial Officer
Re: Line of Credit to THINK New Ideas, Inc. (the "Company")
Gentlemen/Ladies:
The Bank of New York (the "Bank") is pleased to confirm that it has
extended the period of availability of the secured line of credit that the Bank
holds available to the Company.
The line of credit shall be held available until July 31, 1999 unless
canceled earlier as provided in the last sentence of this paragraph. During the
period the line of credit is held available, the line of credit may be used for
direct borrowings by the Company for working capital provided that the aggregate
amount of all extensions of credit under the line of credit at any one time
outstanding (including all extensions of credit, i8f any, which were made under
the line of credit prior to the date of this letter and are outstanding as of
the date of this letter) shall not exceed the lesser of $5,000,000 or the
Borrowing Base, in each case minus the undrawn face amount of Letter of Credit
No. S00038414 issued by the Bank for the account of the Company in the original
face amount of $264,000. The line of credit may be canceled by either party at
any time for any reason.
"Borrowing Base" shall mean an amount (as determined by the Bank an based
upon the information set forth in the most recent borrowing base certificate
delivered by the Company to the Bank) equal to 80% of each of the accounts
receivable of the Company in respect of which each of the following is
satisfied:
(i) The Bank has a perfected first priority security interest in
such account receivable;
(ii) Such account receivable has no amounts unpaid for more than
90 days past the date of the related invoice;
<PAGE>
(iii) The account debtor on such amount receivable is located in
the United States of America; and
(iv) The amount of such account receivable does not include
amounts for which the Company may be liable to the account debtor on
such account receivable for goods sold or services rendered by such
account debtor to the Company.
The making of any extension of credit under the line of credit is in the
Bank's sole and absolute discretion and is subject to the Bank's satisfaction
with the condition (financial and otherwise), business, prospects, properties,
assets, ownership, management and operations of each of the Company, On Ramp,
Inc. ("On Ramp") and Scott Mednick & Associates, Inc. ("Mednick"), the
collateral for the obligations of the Company, On Ramp and Mednick, and the
purpose of each extension of credit.
All extensions of credit under the line of credit (including all such
extensions of credit, if any, made under the line of credit prior to the date of
this letter and outstanding as of the date of this letter) shall be evidenced by
the Master Promissory Note (Alternate Base Rate/LIBOR) dated April 28, 1998 made
by the Company to the order of the Bank in the principal amount of $5,000,000.00
and shall be payable and bear interest as provided therein.
The obligations of the Company with respect to the line of credit and all
extensions of credit under the line of credit shall be jointly and severally
guaranteed by On Ramp and Mednick pursuant to the General Guarantees (Secured),
each dated April 29, 1998, executed by them. In addition, (a) the obligations of
the Company with respect to the line of credit and all extensions of credit
under the line of credit shall be secured, pursuant to the terms of the Security
Agreement dated April 28, 1998, executed by the Company in favor of the Bank, as
amended, by a security interest in or lien on all personal property of the
Company (other than any and all copyrights, trademarks, service marks, patents
and other similar rights and interests of the Company, all equipment which is
leased by the Company and the Company's interest as lessee under the leases for
such equipment) and (b) the obligations of each of On Ramp and Mednick with
respect to the line of credit shall be secured, pursuant to the terms of the
Security Agreements dated April 28, 1998, executed by them in favor of the Bank,
each as amended, by a security interest in or lien on all personal property of
On Ramp and Mednick (other than any and all copyrights, trademarks, service
marks, patents and other similar rights and interests of On Ramp and Mednick,
all equipment which is leased by On Ramp and Mednick and the On Ramp's and
Mednick's interests as lessee under the leases for such equipment).
As long as the line of credit is held available, the Company shall pay to
the Bank, quarterly in arrears on the first day of each January, April, July and
October, commencing April 30, 1999, and administrative fee of 1/4% per annum on
the average daily unused amount of the line of credit during the preceding
quarter (or shorter period commencing with the date of this letter), which fee
shall be calculated on the basis of the actual number of days elapsed in a year
of 360 days.
For so long as the line of credit is held available or the Company has any
obligations outstanding under the line of credit, there shall be delivered to
the Bank the following, each in form and content satisfactory to the Bank:
A. Within 15 days after the filing thereof, a copy of the Forms
10-K and 10-Q filed by the Company with the Securities and Exchange
Commission;
<PAGE>
B. Within 15 days after the end of each calendar month, an aging
schedule of the Company's accounts receivable (including a segregation
of the pre-billed media accounts receivable of the Company) as of the
last business day of such calendar month; and
C. Promptly, such other information as the Bank may reasonably
request from time to time.
Prior to the making of any extension of credit under the line of credit,
the Bank shall have received the enclosed copy of this letter, amendments of the
security agreements referred to above, and such other instruments, certificates
and related documents as the Bank shall consider necessary or desirable in
connection with the line of credit and the extensions of credit to be made under
the line of credit, in each case duly executed by the appropriate persons and in
form and substance satisfactory to the Bank.
This letter may not be amended, and compliance with its terms may not be
waived, orally or by course of dealing, but only by a writing signed by an
authorized officer of the Bank.
The Company agrees to pay all costs and expenses incurred by the Bank
incidental to or in any way relating to endorsement of the Company's obligations
under this letter or the protection of the Bank's rights in connection with this
letter, including, without limitation, reasonable attorneys' fees and expenses,
whether or not litigation is commenced.
THE COMPANY AND THE BANK WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BASED UPON, ARISING OUT OF OR IN ANY WAY CONNECTED TO THIS LETTER.
Please acknowledge the agreement of the Company with the foregoing by
executing both copies of this letter in the space below and returning one copy
to the Bank.
Very truly yours,
THE BANK OF NEW YORK
By: /s/ A. Alan Ackbarali
--------------------
A. Alan Ackbarali
Vice President
Acknowledged and Agreed to:
THINK NEW IDEAS, INC.
By: /s/ Melvin Epstein
--------------------------------
Name: Melvin Epstein
------------------------
Title: Chief Financial Officer
------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME FOR THE TWELVE MONTHS JUNE 30, 1999 AND THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0001014462
<NAME> THINK NEW IDEAS, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 7,791
<SECURITIES> 0
<RECEIVABLES> 29,362
<ALLOWANCES> 568
<INVENTORY> 0
<CURRENT-ASSETS> 39,504
<PP&E> 11,474
<DEPRECIATION> 6,175
<TOTAL-ASSETS> 66,904
<CURRENT-LIABILITIES> 31,048
<BONDS> 186
0
0
<COMMON> 1
<OTHER-SE> 35,669
<TOTAL-LIABILITY-AND-EQUITY> 66,904
<SALES> 0
<TOTAL-REVENUES> 49,797
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,397
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,049)
<INCOME-TAX> 259
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,308)
<EPS-BASIC> (0.94)
<EPS-DILUTED> (0.94)
</TABLE>
