UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark one)
(X) Quarterly Report
under Section 13 or
15(d) of the
Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
---------------------------------------
( ) Transition Report under Section 13 or 15(d) of the Exchange Act of 1934
for the transition period from ______________ to ______________
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Commission File Number: 000-21775
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THINK NEW IDEAS, INC.
(Exact name of small business issuer as specified in its charter)
--------------------------------------
Delaware 95-4578104
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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45 West 36th Street, 12th Floor, New York, New York 10018
(Address of principal executive offices)
(212) 629-6800
(Issuer's telephone number)
--------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 12, 1999
----- ---------------------------
Common Stock, par value $.0001 per share 10,075,570 shares
Transitional Small Business Disclosure Format (check one) Yes No X
<PAGE>
THINK NEW IDEAS, INC.
FORM 10-QSB
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999 and
June 30, 1998 (Unaudited)................................................3
Condensed Consolidated Statements of Operations for the three
and nine months ended March 31, 1999 and 1998(Unaudited).................4
Condensed Consolidated Statement of Shareholders' Equity as of
March 31, 1999 (Unaudited) ..............................................5
Condensed Consolidated Statements of Cash Flows for the nine months
ended March 31, 1999 and 1998 (Unaudited) ...............................6
Notes to Condensed Consolidated Financial Statements (Unaudited).........7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................17
Item 2. Changes in Securities and Use of Proceeds.........................18
Item 3. Defaults Upon Senior Securities...................................18
Item 4. Submission of Matters to a Vote of Security Holders...............18
Item 5. Other Information and Subsequent Events...........................19
Item 6. Exhibits and Reports on Form 8-K..................................19
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
-----------------------------------------
MARCH 31, JUNE 30,
1999 1998
-------------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,322,444 $ 7,653,576
Accounts receivable, net of allowance
for doubtful accounts of $1,041,209
and $1,019,475 17,042,143 14,431,288
Unbilled receivables 2,494,536 3,455,181
Prepaid expenses and other assets 1,034,995 715,574
--------------- ---------------
Total current assets 29,894,118 26,255,619
Property, plant and equipment, net 5,475,560 5,682,059
Software development costs, net 1,536,402 1,858,370
Goodwill, net of accumulated amortization
of $3,606,370 and $2,534,207 20,308,509 17,344,798
Other assets 1,815,170 1,112,225
--------------- ---------------
Total assets $ 59,029,759 $ 52,253,071
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,620,570 $ 9,912,683
Accrued expenses 2,126,719 3,414,977
Accrued restructuring costs - 307,482
Media payable 10,214,439 3,407,266
Income taxes payable 351,069 566,578
Bank payable 1,244,195 491,915
Due to related party 30,647 591,946
Current portion of obligations under
capital leases 334,520 693,619
--------------- ---------------
Total current liabilities 19,922,159 19,386,466
Obligations under capital leases 267,218 260,645
Other long-term liabilities - 102,548
--------------- ---------------
Total liabilities 20,189,377 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; 10,032,550
and 8,433,656 shares issued
and outstanding 1,003 843
Additional paid-in capital 78,804,586 67,731,946
Accumulated deficit (39,957,858) (35,229,377)
Accumulated other comprehensive income (7,349) -
---------------- ---------------
Total shareholders' equity 38,840,382 32,503,412
---------------- ---------------
Total liabilities and shareholders'
equity $ 59,029,759 $ 52,253,071
================ ===============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- --------------------------
1999 1998 1999 1998
-------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $12,827,035 $10,969,701 $36,568,094 $27,993,587
Operating expenses:
Salaries and related expenses 7,214,858 4,561,567 20,424,080 11,712,612
Selling, general and
administrative expenses 5,786,137 5,055,937 17,396,230 13,428,052
Depreciation and amortization 1,101,628 706,257 3,138,125 1,661,687
Stock compensation expense 180,400 - 180,400 -
-------------- ------------- ------------ ------------
Operating (loss)/profit (1,455,988) 645,940 (4,570,741) 1,191,236
Interest income and other, net 16,702 87,007 39,712 188,287
-------------- ------------- ------------ ------------
Income/(loss) before provision
for income taxes (1,439,286) 732,947 (4,531,029) 1,379,523
Provision for income taxes 168,752 72,690 197,452 185,675
============== ============= ============ ============
Net (loss)/ income $(1,608,038) $ 660,257 $(4,728,481) $ 1,193,848
============== ============= ============ ============
Net (loss)/ income per share -
basic $ (0.18) $ 0.11 $ (0.56) $ 0.20
Weighted average shares outstanding 8,776,977 6,133,948 8,402,610 5,960,831
Net (loss)/ income per share -
diluted $ (0.18) $ 0.10 $ (0.56) $ 0.18
Weighted average shares outstanding 8,776,977 6,870,321 8,402,610 6,529,955
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
THINK New Ideas, Inc. and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
(UNAUDITED)
<TABLE>
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, 1998 8,433,656 $ 843 $67,731,946 $(35,229,377) $ - $32,503,412
-----------
Comprehensive income
Net (loss) - - - (4,728,481) - (4,728,481)
Foreign currency translation
adjustments (7,349) (7,349)
-----------
Comprehensive income (4,735,830)
Stock Compensation Expense - - 180,400 - - 180,400
Issuance of Common Stock on
exercise of stock options 250,750 25 1,452,375 - - 1,452,400
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
==============================================================================
Balance at March 31,1999 10,032,550 $ 1,003 $78,804,586 $(39,957,858) $ (7,349) $38,840,382
==============================================================================
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
9
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
NINE MONTHS ENDED
MARCH 31,
---------------------------------
1999 1998
--------------- ----------------
CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss)/ income $ (4,728,481) $ 1,193,848
Adjustments to reconcile net (loss)/ income to
net cash (used in) provided by
operating activities:
Depreciation and amortization 1,480,150 655,670
Amortization of intangibles and deferred
financing costs 1,657,975 1,006,017
Stock compensation expense 180,400 -
Changes in assets and liabilities:
Accounts receivable, net (2,563,531) (5,007,658)
Unbilled receivables 960,645 197,434
Accounts payable and accrued expenses (6,257,923) 854,368
Accrued restructuring (307,482) -
Media payable 6,606,697 7,230,837
Other assets and liabilities (975,314) (2,836,827)
--------------- ----------------
Net cash (used in) provided by operating
activities (3,946,864) 3,293,689
--------------- ----------------
CASH FLOW FROM INVESTING ACTIVITIES:
Payment for acquisition, net of cash acquired 44,910 (743,388)
Purchases of marketable securities - (1,123,902)
Sales of marketable securities - 1,482,394
Purchases of property and equipment (1,009,526) (1,975,766)
Other (579,263) (268,000)
--------------- ----------------
--------------- ----------------
Net cash used in investing activities (1,543,879) (2,628,662)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of promissory notes - (436,732)
Issuance of common stock 7,392,400 485,480
Net borrowings on short term debt 752,280 -
Principal payments on capital leases (423,770) (47,862)
Due to related party (561,299) 500,000
--------------- ----------------
Net cash provided by financing activities 7,159,611 500,886
--------------- ----------------
Net increase in cash and cash equivalents 1,668,868 1,165,913
Cash and cash equivalents, beginning of period 7,653,576 3,451,347
=============== ================
Cash and cash equivalents, end of period $ 9,322,444 $ 4,617,260
=============== ================
Supplemental cash flow information:
Cash paid during the period
Income taxes $ 193,696 $ 192,880
Interest 31,654 77,022
Non-cash investing and financing activities:
Additions to capital lease obligations 67,816 -
Receipt of equity securities for payment of
accounts receivable 754,200 -
Equipment recorded in connection with final
purchase price allocation of Interweb 133,333 -
Fair value of non-cash assets 4,674,363 -
Liabilities assumed (1,219,273) -
Common Stock issued (3,500,000) -
===============
Net cash acquired 44,910 -
===============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Notes to Consolidated Financial
Statements contained in the Form 10-KSB for THINK New Ideas, Inc. (the
"Company") for the fiscal year ended June 30, 1998, as filed with the Securities
and Exchange Commission (the "SEC") in September 1998. Certain items included in
these statements are based on management's estimates. In the opinion of
management, all material adjustments, which are of a normal recurring nature
necessary for a fair presentation of the results for the interim period, have
been included. The results for the nine months ended March 31, 1999, are not
necessarily indicative of the results expected for the year.
Business 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. The
acquisition was closed on March 10, 1999, at which time the Company made an
initial payment of $3,500,000 by issuing 477,002 shares of the Company's common
stock (the "Common Stock"). The terms of the purchase agreement provide that the
sellers are entitled to an additional payment, due March 1, 2000 and not to
exceed $5,500,000, equal to the amount, if any, by which 200% of Envision's
revenues for the year ended December 31, 1999 exceeds $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 over the remainder of the 15 year
period. 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).
Pro Forma Financial Data
The following unaudited pro forma information for the nine months ended
March 31, 1999, assumes the acquisition of Envision had occurred on July 1,
1998. The unaudited pro forma information for the nine months ended March 31,
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.
<PAGE>
MARCH 31,
------------------------------------
1999 1998
------------------ ---------------
Revenue $ 38,696,388 $ 40,978,751
Net (loss)/ income $ (4,954,026) $ 602,284
Net (loss)/ income per share -
basic $ (0.59) $ 0.10
Weighted average shares
outstanding - basic 8,402,610 5,960,831
Net (loss)/ income per share -
diluted $ (0.59) $ 0.09
Weighted average shares
outstanding - diluted 8,402,610 6,529,955
Securities Purchase Agreement
In March 1999 the Company entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement") whereby certain purchasers (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 plans to use the proceeds of the financing for general
working capital purposes, including the funding of its strategic growth plan. On
March 5, 1999 (the "Initial Closing Date"), the Company sold to the Purchasers
for $6,000,000: (i) 871,142 shares of Common Stock at $6.8875 per share (the
"Initial Closing Price"), calculated at ninety-five percent (95%) of the closing
bid price on the trading day immediately preceding the effective date of the
Securities Purchase Agreement; and (ii) warrants (the "Closing Warrants") to
purchase an additional 174,230 shares (20% of the number of shares sold on the
Initial Closing Date) of Common Stock at an exercise price of $10.33, calculated
at 150% of the Initial Closing Price for a five-year term. Additionally, at any
time prior to the one-year anniversary of the Initial Closing Date, the
Purchasers have the right but not the obligation to purchase, for $9.425 per
share (calculated at 130% of the market price on the Initial Closing date), up
to 530,504 additional shares (the "Optional Shares") of Common Stock, together
with a warrant for 1/5 share for each Optional Share purchased (a maximum of
106,101 warrants), exercisable at a per share price equal to 150% of the market
price of the Common Stock on the date of the purchase of the related Optional
Shares.
Related Party Transaction
The Company used a portion of the proceeds from the Securities Purchase
Agreement to repay the $500,000 principal of the loan with Omnicom Finance Inc.
("Omnicom"), a shareholder of the Company. The Company has no further
obligations to Omnicom with respect to this loan.
Bank Payable
The Company's $5,000,000 line of credit with the Bank of New York ("BONY")
expired on March 31, 1999. During April 1999, BONY agreed to permit the Company
to extend the period of availability on the line of credit to July 31, 1999. The
Company borrowed $1,164,000 under its line of credit and had $3,836,000
available for borrowing at March 31, 1999.
Shareholders' Equity
(a) Earnings Per Share
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share" requires the presentation of basic earnings per share and diluted
earnings per share. Basic earnings per share is computed as net earnings divided
by the weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur from
common shares issuable through stock options and other convertible securities.
Shares of common stock held in escrow related to the Company's acquisitions are
not included in the calculation of weighted-average shares outstanding for the
periods presented, as the conditions required to release escrow shares for these
acquisitions were not fulfilled at the end of the applicable periods presented.
A reconciliation of weighted-average common shares outstanding to
weighted-average common shares outstanding assuming dilution follows:
<PAGE>
MARCH 31,
---------------------------
1999 1998
----------- -------------
Weighted-average common shares
outstanding 8,402,610 5,960,831
Incremental common shares issuable - 569,124
Weighted-average common shares assuming
dilution 8,402,610 6,529,955
Incremental common shares were not included in the computation for the
three and nine months ended March 31, 1999 since their inclusion in periods when
the Company reported a net loss would be anti-dilutive.
(b) Stock Compensation Expense
During the third quarter ended March 31, 1999, the Compensation Committee
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 share of Common Stock on the
date of grant. As required by SFAS No.123, "Accounting for Stock Based
Compensation," upon the grant of these non-employee stock options 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.
<PAGE>
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 was comprised of foreign currency
translation adjustments of $7,349 at March 31, 1999, as a result of the
Company's operations in the United Kingdom, which the Company acquired in the
fourth quarter 1998 through its acquisition of UbiCube.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
presentation adopted in the current period.
Legal Proceedings
On September 25, 1998, a shareholder of the Company filed a putative class
action suit against the Company and current and former officers of the Company
in the United States District Court for the Southern District of New York.
During October 1998, six additional complaints were filed against the same
parties making substantially the same allegations. These seven suits have been
consolidated by the Court and the plaintiffs filed a Consolidated and Amended
Class Action Complaint on February 10, 1999. This 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 Common Stock to be artificially inflated. The plaintiffs further allege that
they purchased their shares of Common Stock at such artificially inflated prices
and suffered damages as a result. The relief sought by the consolidated
complaint is unspecified, but includes claims for compensatory damages with
interest, punitive damages where appropriate, and reasonable costs (including
attorneys' and experts' fees). 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 oral argument
has not yet been scheduled. See Part II, Item 1: "Legal Proceedings."
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Revenues
Consolidated revenues for the three months ended March 31, 1999, increased
seventeen percent (17%) or $1,857,000 to $12,827,000 as compared with
$10,970,000 for the three months ended March 31, 1998. The growth in the
Company's revenues reflects increases in 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 to an emphasis on
interactive assignments.
The Company achieved the growth in interactive services revenues from both
the acquisition of companies engaged in the interactive market, and the addition
of new clients and competencies at its existing offices. Interactive services
revenues increased approximately $3,720,000 for the three months ended March 31,
1999, as compared to the quarter ended March 31, 1998. Assignments performed by
Interweb, UbiCube, and Envision (the "Interactive Acquisitions") accounted for
approximately $3,481,000 of this increase. These Interactive Acquisitions were
completed in the fourth quarter (for Interweb and UbiCube) of fiscal 1998 and
the third quarter (for Envision) of fiscal 1999. Offsetting this increase was a
decrease of $1,429,000 in revenue from traditional marketing and communications,
and a decrease of $434,000 which represents a loss of revenues resulting from
the Company's fourth quarter fiscal 1998 closure of its Atlanta graphic design
department.
Consolidated revenues for the nine month period ended March 31, 1999
increased thirty-one percent (31%) or $8,575,000 to $36,568,000 as compared with
$27,993,000 for the nine months ended March 31, 1998. Revenues from interactive
services increased by $12,057,000 which increase was comprised of revenues of
$9,119,000 generated by the Interactive Acquisitions, and an increase in
revenues of $2,938,000 from new interactive services and competencies.
Offsetting this increase was a decrease of $1,986,000 in revenues from
traditional marketing and communications, and a decrease of $1,496,000
reflecting the loss of revenues resulting from the Company's fourth quarter
fiscal 1998 closure of its Atlanta graphic design department.
Operating Results
The operating loss of $1,456,000 for the three months ended March 31,1999,
reflects a $2,102,000 change from an operating profit of $646,000 in the
corresponding prior year period. The decrease in operating results for the three
months ended March 31, 1999 is due to the $1,857,000 increase in revenue being
more than offset by increases in all components of operating expenses, totaling
$3,959,000, for the three months ended March 31, 1999. The operating loss of
$4,571,000 for the nine months ended March 31, 1999, reflects a $5,762,000
change from an operating profit of $1,191,000 in the corresponding prior year
period. The decrease in operating results for the nine months ended March 31,
1999, is primarily due to the $8,575,000 increase in revenue being more than
offset by increases in all components of operating expenses, totaling
$14,337,000 for the nine month period ended March 31, 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 internal growth the Company has added personnel with
certain specialized competencies, and to support both the acquisition and
internally generated growth, the Company has added personnel in senior
management, finance and administrative positions. As a result, operating
expenses, relative to revenues, have been at levels above the Company's
long-term goals.
The operating losses the Company has experienced throughout fiscal 1999
have been due, in part, to these higher level of expenses. Additionally,
although the Company's revenues have increased, the level of the growth in
revenues has, especially in the most recently completed quarter, been lower than
planned in determining operating expense budgets. 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 and competencies to be more sporadic, and slower than
management initially expected. As a result, projecting short-term revenues and
adjusting operating expenses accordingly has been more difficult, leading to the
operating losses.
The Company now plans to shift its focus to internal growth and improved
matching of revenue and expense levels. Personnel additions will be slowed until
revenues from new clients and competencies increase, and net personnel
reductions will be undertaken if such revenue levels are not achieved. While the
Company may, but not necessarily will, examine selected highly attractive
acquisitions, in general acquisition activities will be discontinued until the
Company has completed the process of aligning its current revenues and expenses
to produce operating profits.
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
fifty-eight percent (58%) or $2,653,000 in the three months ended March 31, 1999
to $7,215,000 from $4,562,000 for the corresponding prior year period. The
Interactive Acquisitions and the acquisition of Herring/Newman (a provider of
traditional marketing and communication services) in the third quarter of fiscal
1998 (collectively the "Acquisitions") accounted for approximately $2,313,000 of
the overall increase in salaries and related costs. The remaining $340,000
increase includes the effect of savings of $182,000 from the fourth quarter
fiscal 1998 closure of the Atlanta graphic design department. The increase,
excluding this saving of $522,000 was due to the addition of personnel in
finance and administration, marketing, and production. Additionally, bonuses and
awards were paid to certain employees during the quarter ended March 31, 1999.
Salaries and related expenses for the nine months ended March 31, 1999,
increased seventy-four percent (74%) or $8,711,000 to $20,424,000 from
$11,713,000 for the nine months ended March 31, 1998. The Acquisitions accounted
for approximately $7,519,000 of the overall increase. The remaining increase of
$1,192,000 includes $487,000 of savings resulting from the closure of the
Atlanta graphic design department. The increase in salaries and related expenses
for the nine months ended March 31, 1999 reflects the addition of finance and
administrative, marketing and production discussed above, and additions during
the first quarter of fiscal 1999 to executive management, consistent with the
growth strategy discussed above.
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, and management information systems. In addition,
selling, general and administrative expenses include direct expenses such as
contract labor, travel and production expenses associated with providing
services to clients. Selling, general and administrative expenses increased
fourteen percent (14%) or $730,000 to $5,786,000 for the three months ended
March 31, 1999 compared with $5,056,000 for the corresponding prior year period
ended March 31, 1998. The Acquisitions caused selling, general and
administrative expenses to increase by $1,745,000. That increase was offset by a
net decrease of $1,015,000 in the expenses of the Company's other operations
compared to the prior period, reflecting a decrease of $190,000 from the closure
of the Atlanta graphic design department, and a net decrease of $825,000 from
the decline in traditional marketing and communication assignments.
Selling, general and administrative expenses increased thirty percent
(30%) or $3,968,000 to $17,396,000 for the nine months ended March 31, 1999 as
compared with $13,428,000 for the corresponding prior year period ended March
31, 1998. The Acquisitions caused selling, general and administrative expenses
to increase by $4,549,000. This increase was combined with an increase of
$184,000 in the expenses of the Company's other operations, offset by a decrease
of $765,000 from the closure of the Atlanta graphic design department.
Also included in operating expenses at March 31, 1999 is $180,000 of stock
compensation expense related to Common Stock options granted to Directors of the
Company. This amount was valued using the Black Scholes option pricing model and
is consistent with the application of SFAS No. 123, "Accounting for Stock Based
Compensation."
Depreciation and amortization for the three and nine months ended March 31
1999 increased $395,000 and $1,476,000 to $1,102,000 and $3,138,000,
respectively, as compared with the three and nine month periods ended March 31,
1998. These increases primarily relate to the increase in amortization of
goodwill related to the Acquisitions.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities of $3,947,000 for the nine months
ended March 31, 1999 reflects the net loss of $4,728,000, reduced by non-cash
charges for depreciation and amortization of $3,138,000 and stock compensation
expense of $180,000, and the absorption of cash of $2,537,000 by changes in
working capital assets and liabilities. The significant changes in working
capital, which absorbed cash, were an increase in accounts receivable of
$2,564,000 and a decrease in accounts payable and accrued expenses of
$6,258,000. Cash provided from an increase in media payables and a decrease in
unbilled receivables of $6,607,000 and $961,000, respectively, partially offset
the cash absorbed by those changes. The increases in media payables, and in
accounts receivable because such balance includes the rebilling of media
placement costs to clients, is consistent with the seasonal nature of client
advertising expenditures (generally higher in the fall and winter months
preceding March 31, than in the spring months preceding June 30). Unbilled
receivables decreased as a result of the timing and execution of client
projects. Accrued restructuring costs represent the charges recorded in fiscal
1998 related to the Company's disposition of its traditional graphic design
departments. The reduction of the accrued restructuring charge reflects the
payment of certain severance and other costs included in the fiscal 1998
accrual, and the adjustment of $167,000 reflecting the cancellation of equipment
and facility leases. The Company financed the negative operating cash flow for
the nine months ended March 31, 1999 through the use of cash on hand at June 30,
1998, amounts drawn under the line of credit with BONY and with a portion of the
net proceeds of $5,940,000 received from the Securities Purchase Agreement
Net cash provided by operating activities for the nine months ended March
31, 1998 of $3,294,000 reflects net income of $1,194,000 adjusted by non-cash
charges of $1,662,000 for depreciation and amortization, combined with cash
provided from increases in media payables and accounts payable and accrued
expenses of $7,231,000 and $854,000, respectively, offset by an increase in
accounts receivable of $5,008,000. The increase in media payables and accounts
receivable reflects increases in the level of media placement costs being paid
by the Company on behalf of and then rebilled to clients, which increase
resulted from the May 1997 acquisition of Fathom Advertising. Accounts payable
and accrued expenses increased primarily due to the timing of vendor payments.
Net cash used in investing activities totaled $1,544,000 for the nine
months ended March 31, 1999 as compared with $2,629,000 for the nine months
ended March 31, 1998. Net cash used in investing activities for the nine months
ended March 31, 1999 includes the net cash acquired in connection with the
acquisition of Envision of $45,000, additions to property and equipment of
$1,010,000 combined with additions to other assets, including capitalized
software development costs, of $148,000. Net cash used in investing activities
for the nine months ended March 31, 1998 includes capital expenditures of
$1,976,000, net cash paid in connection with the merger with BBG of $744,000,
additions to software development costs of $268,000, offset by net sales of
marketable equity securities of $359,000.
Net cash provided by financing activities was $7,160,000 for the nine
months ended March 31, 1999 as compared with $501,000 for the nine months ended
March 31, 1998. Cash provided by financing activities for the nine months ended
March 31, 1999 includes the net proceeds of $5,940,000 from the Securities
Purchase Agreement, $752,000 in net borrowings on short term debt, and proceeds
of $1,452,000 from the exercise of stock options during the period. Offsetting
these cash inflows was a payment of $500,000 to Omnicom, a shareholder of the
Company, in connection with a loan agreement entered into during March 1998 and
principal payments on capital leases of $424,000. These net financing cash
inflows allowed the Company to finance its negative operating cash flows, its
acquisition and capital expenditures, and increase its cash reserves by
$1,669,000 to $9,322,000 as of March 31, 1999. At March 31, 1999 the Company has
net working capital of $9,972,000 and a current ratio of 1.5 to 1.
Net cash provided by financing activities for the nine months ended March
31, 1998 is comprised of $500,000 in borrowings from Omnicom and proceeds of
$485,000 from exercised stock options during the period, offset by, loan
repayments of $437,000 in connection with the acquisition of BBG and payments on
long-term capital leases of $48,000.
In addition to the cash and positive working capital positions at March
31, 1999, the Company has at March 31, 1999 $3,836,000 of unused borrowing
capacity under its $5,000,000 line of credit with BONY. The unused borrowing
capacity is subject to a borrowing base limitation. The Company believes that
cash generated from its operations in fiscal 1999 or available through its
existing borrowing facilities will be sufficient to fund its operations, pay
required debt 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.
IMPACT OF YEAR 2000
The Year 2000 ("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 date sensitive software may cause
system failures or miscalculations if data entry of "00" is recognized as the
year 1900 rather than 2000. The Company has instituted a plan to assess its
state of readiness for Y2K, to remediate those systems that are non-compliant
and to ensure that material third parties will be Y2K compliant.
State of Readiness
The Company has assessed all mainframe, operating and application systems
for Y2K readiness, giving highest priority to those information technology
("IT") systems that are considered critical to its business operations. At
present, approximately eighty percent of the IT systems have been remediated.
The Company's primary focus is the state of readiness of the Internet
infrastructure and is working with the Internet Engineering Task Force (of which
the Company is a member), Cisco Systems and Worldcom to ensure mitigation of
risk with redundant and Y2K compliant infrastructure. The Company's assessment
of its systems will be completed during fiscal 1999. Extensive testing of the
remediated systems will be performed throughout 1999 for implementation during
the year.
The Company is presently compiling an inventory of its non-IT systems,
which include those systems containing embedded chip technology commonly found
in buildings and equipment connected with a building's infrastructure. Once the
inventory is complete, the systems will be prioritized and assessed for
compliance. Preliminary investigations of the embedded chip systems indicate
that Y2K will not effect systems such as heating, ventilation, and security.
On-going testing and implementation of any remediation required for the non-IT
systems will be performed throughout 1999.
Material Third Parties
Key vendors and service providers have been identified, and management has
provided its vendors with the tools needed to perform their Y2K compliance
initiatives. Because the Company's computer systems are state of the art, no
hardware upgrade will be required. In addition, the Company is working with and
seeking Y2K compliance statements from its key vendors.
Y2K Costs
The Company is utilizing both internal and external resources to address
the Y2K issue. Internal resources reflect the reallocation of IT personnel to
the Y2K project from other IT projects. In the opinion of management, the
deferral of such other projects will not have a significant adverse affect on
continuing operations. The Company estimates the total direct cost to remediate
the Y2K issue to be immaterial to the Company's results of operations or
financial condition because of the current state of readiness of most of the
Company's IT systems. All costs will be expensed as incurred, unless new
software is purchased that will be capitalized.
Contingency Plan/Risks
The Company is in the process of developing contingency plans for those
areas that might be affected by Y2K. Although the full consequences are unknown,
the failure of either the Company's critical systems or those of its material
third parties to be Y2K compliant would result in the interruption of its
business, which could have a material adverse affect on the results of
operations or financial condition of the Company.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contain forward-looking statements within the meaning of the federal
securities laws. All statements of historical facts, which address activities,
events or developments that the Company expects or anticipates will or may occur
in the future, including such things as expansion, strategic plans, growth of
the Company's business and operations, Y2K related actions, and other such
matters are forward-looking statements. The forward-looking statements are based
on many assumptions and factors including effects of consumer preferences and
economic conditions worldwide, which affect the timing and amount of projects
undertaken by the Company's clients and can affect client project expenditures.
In addition, forward-looking statements are based on the cost and availability
of capital for the Company, and the effect of foreign currency exchange rates
and the ability of the Company to implement, in a timely manner, the programs
and actions related to the Y2K issue. Any changes in such assumptions or factors
could produce significantly different results.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 25, 1998, Michael R. Farrell, a shareholder of the Company,
filed a putative class action suit, styled Farrell v. Think New Ideas, Inc.,
Scott Mednick, Melvin Epstein and Ronald Bloom, No. 98 Civ. 6809, against the
Company, Ronald Bloom and Melvin Epstein (both officers of the Company) and
Scott Mednick (a former officer of the Company) (the "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
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. 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 oral argument has not yet been scheduled. 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
There have been no changes in the securities of the Company required to be
disclosed pursuant to this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There have been no material defaults with respect to any indebtedness of
the Company required to be disclosed pursuant to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on January 7, 1999
(the "Annual Meeting"). Three proposals were submitted to a vote of the
stockholders at the Annual Meeting: (i) to elect seven (7) directors to serve
for a period of one year or until their successors have been duly elected and
qualified; (ii) to approve and ratify the adoption of the THINK New Ideas, Inc.
Amended and Restated 1998 Stock Option Plan, which provides for the issuance of
Qualified Incentive Stock Options and Non-Qualified Stock Options (the "1998
Stock Option Plan"); and (iii) to ratify the selection of Ernst & Young, LLP as
independent accountants for the Company. At the Annual Meeting each of the
following persons were elected to serve as directors of the Company for a term
of one (1) year: Ronald Bloom, Adam Curry, Barry Wagner, Larry Kopald, Richard
Char, Scott Metcalf and Howard Tullman. Ronald Bloom received 6,448,328 votes
cast in favor of election, with 157,254 shares against. Adam Curry received
5,884,448 votes cast in favor of election, with 721,134 shares against. Barry
Wagner received 6,576,598 votes cast in favor of election, with 28,984 shares
against. Larry Kopald received 6,050,568 votes cast in favor of election, with
555,014 shares against. Richard Char received 6,576,633 votes cast in favor of
election, with 28,949 shares against. Scott Metcalf received 6,569,831 votes
cast in favor of election, with 35,751 shares against. Howard Tullman received
6,576,198 votes cast in favor of election, with 29,384 shares against. The
stockholders approved the adoption of the 1998 Stock Option Plan with 3,269,320
votes cast in favor of the proposal, 107,367 votes against, 52,217 votes
abstaining and 3,176,768 votes not voted. The stockholders approved the
selection of Ernst & Young, LLP as independent accountants for the Company with
6,583,227 votes cast in favor of the proposal, with 9,361 votes against and
12,994 votes abstaining. No other matters were submitted to the stockholders for
a vote.
ITEM 5. OTHER INFORMATION AND SUBSEQUENT EVENTS
There is no other information or subsequent events to report at March 31,
1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
Exhibit 27, Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated March 12, 1999,
relating to a Securities Purchase Agreement where the Company sold shares of
Common Stock and Warrants to acquire shares of Common Stock.
The Company filed a Current Report on Form 8-K dated March 29, 1999,
relating to the acquisition of Envision on February 23, 1999.
<PAGE>
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, as
amended, the Issuer has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
May 13, 1999 THINK New Ideas, Inc.
By: /s/ Melvin Epstein
----------------------------------------
Melvin Epstein, Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS MARCH 31, 1999 AND THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> Think New Ideas
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<FISCAL-YEAR-END> JUN-30-1999
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<RECEIVABLES> 18,084
<ALLOWANCES> 1,041
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