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 DECEMBER 31, 1998
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( ) 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)
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DELAWARE 95-4578104
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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45 WEST 36TH STREET, 12TH FLOOR, NEW YORK, NEW YORK 10018
(Address of principal executive offices)
(212) 629-6800
(Issuer's telephone number)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 8, 1999
- ----- -------------------------------
Common Stock, par value $.0001 per share 8,591,650 shares
Transitional Small Business Disclosure Format (check one) Yes No X
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THINK NEW IDEAS, INC.
FORM 10-QSB
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31,
1998 (Unaudited) and June 30, 1998............................ 3
Condensed Consolidated Statements of Operations for the
three and six months ended December 31, 1998 and 1997
(Unaudited)................................................... 4
Condensed Consolidated Statement of Shareholders' Equity as
of December 31, 1998 (Unaudited).............................. 5
Condensed Consolidated Statements of Cash Flows for the six
months ended December 31, 1998 and 1997 (Unaudited).......... 6
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................. 15
Item 2. Changes in Securities......................................... 16
Item 3. Defaults Upon Senior Securities............................... 16
Item 4. Submission of Matters to a Vote of Security Holders........... 16
Item 5. Other Information and Subsequent Events....................... 16
Item 6. Exhibits and Reports on Form 8-K.............................. 16
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
---------------------------- -- --------------------------
DECEMBER 31, JUNE 30,
1998 1998
---------------------------- --------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,964,709 $ 7,653,576
Accounts receivable, net of allowance for doubtful accounts
of $1,202,717 and $1,019,475 19,929,307 14,431,288
Unbilled receivables 1,933,338 3,455,181
Prepaid expenses and other assets 1,331,060 715,574
-------------------- --------------------
Total current assets 30,158,414 26,255,619
Property, plant and equipment, net 5,326,215 5,682,059
Software development costs, net 1,698,558 1,858,370
Goodwill, net of accumulated amortization of $3,229,390 and
$2,534,207 17,054,504 17,344,798
Other assets 1,696,218 1,112,225
-------------------- --------------------
Total assets $ 55,933,909 $ 52,253,071
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,688,186 $ 9,912,683
Accrued expenses 1,596,656 3,414,977
Accrued restructuring costs 93,781 307,482
Media payable 12,092,466 3,407,266
Income taxes payable 169,997 566,578
Bank payable 1,776,868 491,915
Due to related party 612,866 591,946
Current portion of obligations under capital leases 491,386 693,619
-------------------- --------------------
Total current liabilities 25,522,206 19,386,466
Obligations under capital leases 7,560 260,645
Other long-term liability 28,578 102,548
-------------------- --------------------
Total liabilities 25,558,344 19,749,659
-------------------- --------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.0001 par value; 5,000,000 shares
authorized; none issued and outstanding - -
Common stock, $.0001 par value; 50,000,000 shares
authorized; 8,572,984 and 8,433,656 shares issued
and outstanding 857 843
Additional paid-in capital 68,728,555 67,731,946
Accumulated deficit (38,349,819) (35,229,377)
Accumulated other comprehensive income (4,028) -
Total shareholders' equity 30,375,565 32,503,412
-------------------- --------------------
Total liabilities and shareholders' equity $ 55,933,909 $ 52,253,071
==================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues $ 12,371,317 $ 10,067,406 $ 23,741,059 $ 17,023,886
Operating expenses:
Salaries and related expenses 6,758,871 4,006,771 13,209,222 7,151,047
Selling, general and administrative expenses 6,260,851 5,054,116 11,610,091 8,372,113
Depreciation and amortization 1,029,513 527,835 2,036,498 955,430
------------ ------------ ------------ ------------
Operating profit/(loss) (1,677,918) 478,684 (3,114,752) 545,296
Interest income/(expense) and other, net 1,692 102,478 23,010 101,280
------------ ------------ ------------ ------------
Income/(loss) before provision for taxes (1,676,226) 581,162 (3,091,742) 646,576
Provision for income taxes 8,700 108,406 28,700 112,985
============ ============ ============ ============
Net (loss) income $ (1,684,926) $ 472,756 $ (3,120,442) $ 533,591
============ ============ ============ ============
Net income (loss) per share - basic $ (0.20) $ 0.07 $ (0.38) $ 0.08
Weighted average shares outstanding 8,229,612 6,819,819 8,217,380 6,703,608
Net income per share - diluted $ -- $ 0.06 $ -- $ 0.07
Weighted average shares outstanding -- 7,469,069 -- 7,245,809
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED OTHER
--------------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME TOTAL
--------------------------------------------------------------------------------------------
<S> <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 - - - (3,120,442) - (3,120,442)
Foreign currency translation
adjustments (4,028) (4,028)
-------------
Comprehensive income - - - - - (3,124,470)
Issuance of common stock on exercise
of stock options 139,328 14 996,609 - - 996,623
============================================================================================
Balance at December 31, 1998 8,572,984 $857 $68,728,555 $(38,349,819) $ (4,028) $ 30,375,565
============================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income $(3,120,442) $ 533,591
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation and amortization 956,316 287,049
Amortization of intangibles and deferred financing costs 1,080,181 668,381
Consulting fees -- 38,000
Changes in assets and liabilities:
Accounts receivable, net (6,092,220) (6,223,750)
Unbilled receivables 1,521,843 (21,783)
Accounts payable and accrued expenses (3,042,818) 2,903,098
Accrued restructuring (213,701) --
Media payable 8,685,200 6,981,612
Other assets and liabilities (1,157,173) (994,889)
----------- -----------
Net cash (used in) provided by operating activities (1,382,814) 4,171,309
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Payment for acquisition, net of cash acquired -- (743,888)
Purchases of marketable securities -- (1,123,902)
Sales of marketable securities -- 1,586,784
Purchases of property and equipment (600,472) (1,039,856)
Other (552,759) --
=========== ===========
Net cash used in investing activities (1,153,231) (1,320,862)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of promissory notes -- (548,404)
Issuance of common stock 996,623 122,052
Net borrowings on short term debt 1,284,953 --
Proceeds from related party 20,920 --
Principal payments on capital leases (455,318) (84,533)
----------- -----------
Net cash provided by (used in) financing activities 1,847,178 (510,885)
----------- -----------
Net (decrease) increase in cash and cash equivalents (688,867) 2,339,562
Cash and cash equivalents, beginning of period 7,653,576 3,451,347
=========== ===========
Cash and cash equivalents, end of period $ 6,964,709 $ 5,790,909
=========== ===========
Supplemental cash flow information:
Cash paid during the period
Income taxes $ 66,413 $ 9,880
Interest 67,172 40,022
Non-cash investing and financing activities:
Issuance of common stock to settle long-term liability 206,250
Issuance of common stock to consultant 359,268
Issuance of common stock related to acquisition 3,602,091
Additions to capital lease obligations 465,000
Receipt of unregistered shares for payment of accounts receivable 594,201
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Notes to Consolidated Financial
Statements contained in the Company's Form 10-KSB for the fiscal year ended June
30, 1998, as filed with the Securities and Exchange Commission (the "SEC") in
September 1998. Certain items included in these statements are based on
management's estimates. In the opinion of management, all material adjustments,
which are of a normal recurring nature necessary for a fair presentation of the
results for the interim period, have been included. The results for the six
months ended December 31, 1998, are not necessarily indicative of the results
expected for the year.
PRO FORMA FINANCIAL DATA
The following unaudited pro forma information for the six months ended
December 31, 1997 is presented as if the Company had completed the acquisitions
of BBG New Media, Inc. ("BBG"), Herring/Newman, Inc. ("Herring/Newman"),
Interweb, Inc. ("Interweb"), UbiCube Group, Inc. ("UbiCube") as of July 1, 1997.
These acquisitions were completed in the Company's fiscal year 1998.
Revenue $ 23,868,000
Net Loss $ (184,000)
Net Loss per share - basic $ (0.03)
Weighted average shares
Outstanding - basic 6,703,608
The pro forma information for the six months ended December 31, 1997,
above, is not necessarily indicative of the results of operations that would
have occurred had the transactions actually been made as of July 1, 1997.
EARNINGS PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" requires the presentation of basic earnings per share and diluted
earnings per share. Basic earnings per share is computed as net earnings divided
by the weighted-average number of common shares outstanding for the period.
Diluted earnings per share 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:
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<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Weighted-average common shares
outstanding 8,217,380 6,703,608
Incremental common shares issuable -- 542,201
Weighted-average common shares
assuming dilution 8,217,380 7,245,809
</TABLE>
Incremental common shares were not included in the computation for the
three and six months ended December 31, 1998 since their inclusion in periods
when the Company reported a net loss would be anti-dilutive.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," in the first fiscal quarter of 1998.
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in the financial statements. Comprehensive income is a
more inclusive financial reporting methodology that includes the disclosure of
certain financial information that has not been recognized in the calculation of
net income or loss, such as foreign currency translations and changes which are
recorded directly to shareholders' equity. Accumulated other comprehensive loss
was comprised of foreign currency translation adjustments of $4,028 at December
31, 1998 as a result of the Company's operations in the United Kingdom, which
were acquired in the fourth quarter 1998 acquisition of UbiCube.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
presentation adopted in the current period.
LEGAL PROCEEDINGS
On September 25, 1998, a shareholder of the Company filed a putative class
action suit against the Company and current and former officers of the Company
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 Company's 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,
8
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and reasonable costs (including attorneys' and experts' fees). See Part II:
"Item 1. Legal Proceedings."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
Consolidated revenues for the three months ended December 31, 1998
increased twenty-three percent (23%) or $2,304,000 to $12,371,000 as compared
with $10,067,000 for the three months ended December 31, 1997. This total
increase was comprised of the following components: (a) Services provided by
BBG, Herring/Newman, Interweb and UbiCube (the "1998 Acquisitions") caused a
$4,111,000 increase in revenues. That amount excluded the pre-acquisition
revenues for the 1998 Acquisitions for the comparable fiscal 1997 period,
reflecting growth at those operations achieved by cross-selling and other
synergies between the 1998 Acquisitions and the Company's other operations. (b)
Revenues from the Company's existing interactive services increased $1,280,000
for the quarter ended December 31, 1998 compared with the corresponding prior
year period. (c) Offsetting that increase was a decrease of $2,580,000 derived
from the portion of client services relating to traditional marketing and
communications, which was the result of reduced business with clients.
Additionally, revenues decreased by $507,000 reflecting the loss of revenues
resulting from the Company's fourth quarter fiscal 1998 closure of its Atlanta
graphic design department.
Consolidated revenues for the six month period ended December 31, 1998
increased thirty-nine percent (39%) or $6,717,000 to $23,741,000 as compared
with $17,024,000 for the six months ended December 31, 1997. The services
provided by the 1998 Acquisitions generated a $8,441,000 increase, again
representing a level of revenues higher than that generated by the operations in
the comparable 1997 period before their acquisition by the Company. Revenues
from the Company's existing interactive services increased $1,581,000 for the
six months ended December 31, 1998 as compared with the corresponding prior year
period. Offsetting this increase was a decrease of $2,243,000 in revenues from
the portion of clients services relating to traditional marketing and
communications, and a decrease of $1,062,000 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 for the three months ended December 31, 1998 of
$1,678,000 reflects a $2,157,000 change from an operating profit of $479,000 in
the corresponding prior year period. The decrease in operating results for the
three months ended December 31, 1998 is due to the $2,304,000 increase in
revenue being more than offset by increases in salaries and related expenses,
selling, general and administrative expenses and depreciation and amortization
totaling $4,461,000 for the three months ended December 31, 1998. The operating
loss for the six months ended December 31, 1998 of $3,115,000 reflects a
$3,660,000 change from an operating profit of $545,000 in the corresponding
prior year period. The decrease in operating results for the six months ended
December
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31, 1998 is primarily due to the $6,717,000 increase in revenue being more than
offset by increases in salaries and related expenses, selling, general, and
administrative expenses and depreciation and amortization totaling $10,377,000
for the six month period ended December 31, 1998. For both the three and six
month periods ended December 31, 1998, the growth in the Company's operating
expenses reflects the effect of higher revenues and expenses incurred in
anticipation of and preparation for future growth in revenues.
Salaries and related expenses consist primarily of wages and associated
payroll costs and benefits for all employees, including finance and
administrative wages, as well as associated payroll costs and benefits. Salaries
and related expenses increased sixty-nine percent (69%) or $2,752,000 in the
three months ended December 31, 1998 to $6,759,000 from $4,007,000 for the
corresponding prior year period. The 1998 Acquisitions accounted for
approximately $2,352,000 of the overall increase in salaries and related costs.
The remaining $400,000 increase includes the effect of savings of $157,000 from
the fourth quarter fiscal 1998 closure of the Atlanta graphic design department.
The increase, excluding this saving, of $557,000 was due to the addition of
personnel in marketing, production, and client service areas to undertake new
business development.
Salaries and related expenses for the six months ended December 31, 1998
increased eighty-five percent (85%) or $6,058,000 to $13,209,000 from $7,151,000
for the six months ended December 31, 1997. The 1998 Acquisitions accounted for
approximately $5,234,000 of the overall increase. The remaining increase of
$824,000 includes $157,000 of savings resulting from the closure of the Atlanta
graphic design department. The increase in salaries and related expenses for the
six months ended December 31, 1998 reflects the addition of marketing,
production and client service personnel discussed above, and additions during
the first quarter of fiscal 1999 to executive management and finance and
administrative personnel required to support the Company's expanded operations
which occurred as the result of its acquisitions.
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. Also included in
selling, general and administrative expenses are direct expenses such as
contract labor, travel and production expenses associated with providing
services to clients. Selling, general and administrative expenses increased
twenty-four percent (24%) or $1,207,000 to $6,260,851 for the three months ended
December 31, 1998 compared with $5,054,000 for the corresponding prior year
period ended December 31, 1997. Of the increase $1,562,000 is the result of the
1998 Acquisitions.
Selling, general and administrative expenses increased thirty-nine percent
(39%) or $3,238,000 to $11,610,000 for the six months ended December 31, 1998 as
compared with $8,372,000 for the corresponding prior year period ended December
31, 1997. The increase for the six months ended December 31, 1998 includes
$2,177,000 for the 1998 Acquisitions. The remaining increase reflects
expenditures necessary to support the Company's higher revenues.
Depreciation and amortization for the three and six months ended December
31, 1998 increased $502,000 and $1,081,000 to $1,030,000 and $2,036,000,
respectively, as compared with the three and six month periods ended December
31, 1997. These increases primarily relate to the amortization of goodwill
related to the 1998 Acquisitions.
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INCOME TAXES
The effective tax rate for 1998 on income before income taxes is lower than
the United States federal statutory rate of thirty-four percent (34%) as a
result of the Company's net operating loss carryforwards. The Company did not
record an income tax benefit in the six months ended December 31, 1998 because
the realization of available net operating loss carryforwards was not assured.
The Company recorded $28,700 of income tax expense for the six months ended
December 31, 1998 relating to state and local taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities of $1,003,000 for the six months
ended December 31, 1998 principally reflects the net loss of $3,120,000, reduced
by $2,036,000 of non-cash depreciation and amortization. The significant changes
in working capital, assets and liabilities, which absorbed cash were an increase
in accounts receivable of $5,712,000 and a decrease in accounts payable and
accrued expenses of $3,043,000. The cash absorbed by those changes was offset by
cash provided from an increase in media payables and a decrease in unbilled
receivables of $8,685,000 and $1,522,000, respectively. The increase in accounts
receivable is due to an increase in the billings to pass through to clients the
costs of media placements, particularly from the Company's traditional marketing
services group, which vary with the timing and volume of client media
advertising expenditures. Comparable to the change in accounts receivable, the
increase in media payables reflects increased media placements which vary with
the volume and timing of client media advertising expenditures. 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. The Company financed the negative operating cash flow for the six
months ended December 31, 1998 through the use of cash on hand at June 30, 1998
and amounts drawn under the line of credit with Bank of New York. The Company
borrowed $1,464,000 under its line of credit and had $3,536,000 available for
borrowing at December 31, 1998.
Net cash provided by operating activities for the six months ended December
31, 1997 of $4,171,000 reflects net income of $534,000 adjusted by non-cash
charges of $955,000 for depreciation and amortization, combined with cash
provided from increases in media payables and accounts payable and accrued
expenses of $6,982,000 and $2,903,000, respectively, offset by an increase in
accounts receivable of $6,224,000. The increase in accounts receivable and media
payables 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 $1,553,000 for the six months
ended December 31, 1998 as compared with $1,321,000 for the six months ended
December 31, 1997. Net cash used in investing activities for the six months
ended December 31, 1998 is comprised
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of additions to property and equipment of $600,000 combined with additions to
other investing activities, including software development costs, of $148,000.
Net cash used in investing activities for the six months ended December 31, 1997
includes capital expenditures of $1,040,000, net cash paid in connection with
the merger with BBG of $744,000 offset, in part, by net sales of marketable
equity securities of $463,000.
Net cash provided by financing activities was $1,847,000 for the six months
ended December 31, 1998 as compared with cash used in financing activities of
$511,000 for the six months ended December 31, 1997. Cash provided by financing
activities for the six months ended December 31, 1998 includes a net increase of
$1,285,000 in borrowings on short term debt which was used to finance capital
expenditures and the negative operating cash flow, as well as proceeds of
$997,000 from the exercise of stock options during the period, offset by
payments on capital leases of $455,000. Net cash used in financing activities
for the six months ended December 31, 1997 resulted from loan repayments of
$548,000 in connection with the acquisition of BBG and principal payments on
long-term capital leases of $85,000, offset by proceeds of $122,000 from
exercised stock options during the six months ended December 31, 1997.
Cash on hand at December 31, 1998 was $6,965,000. In addition, the Company
has available a $5,000,000 line of credit with the Bank of New York, of which
$3,536,000 is available. 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 through acquisitions.
However, there can be no assurance that operations and the funding required for
any acquisitions that cannot be structured solely with common stock or deferred
payments can be fully financed by these sources. The Company may be required to
seek additional sources of capital to facilitate transactions that require
significant cash payments. There can be no assurance that such additional
capital will be available when needed, and the inability to obtain such
financing 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.
Accordingly, any of the Company's computer programs that have date sensitive
software may cause system failures or miscalculations if data entry of "00" is
recognized as the year 1900 rather than 2000. The Company has instituted a plan
to assess its state of readiness for Y2K, to remediate those systems that are
non-compliant and to assure 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
applications ("IT") systems that are considered critical to its business
operations. At present, approximately 80 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
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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 buildings' 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. Due to the Company having state of the art computer systems, no
hardware upgrade will be required. However, the Company is working with and
seeking Y2K compliance statements from its software vendors, such as Microsoft,
Sun Microsystems and Apple.
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 amount to
remediate the Y2K issue to be immaterial to the Company's results of operations
or financial condition. All costs will be expensed as incurred, unless new
software is purchased which will be capitalized.
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
13
<PAGE>
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, which can affect client project expenditures. In
addition, 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.
14
<PAGE>
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
the Company's common stock, (the "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 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 filed in
all of these cases and will 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
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 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. 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.
15
<PAGE>
ITEM 2. CHANGES IN SECURITIES
There have been no changes in the securities of the Company required to be
disclosed pursuant to this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There have been no material defaults with respect to any indebtedness of
the Company required to be disclosed pursuant to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of security holders during
the period ended December 31, 1998.
ITEM 5. OTHER INFORMATION AND SUBSEQUENT EVENTS
There is no other information or subsequent events to report at December
31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
Exhibit 27, Financial Data Schedule.
(b) Reports on Form 8-K. The Company did not file a current report on Form 8-K
during the quarter ended December 31, 1998.
16
<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.
February 12, 1999 THINK New Ideas, Inc.
By: /s/ Melvin Epstein
------------------------------------
Melvin Epstein, Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS DECEMBER 31, 1998 AND THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 6,965
<SECURITIES> 0
<RECEIVABLES> 19,929
<ALLOWANCES> 1,203
<INVENTORY> 0
<CURRENT-ASSETS> 30,158
<PP&E> 0
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<TOTAL-ASSETS> 55,934
<CURRENT-LIABILITIES> 25,522
<BONDS> 8
0
0
<COMMON> 1
<OTHER-SE> 30,376
<TOTAL-LIABILITY-AND-EQUITY> 55,934
<SALES> 0
<TOTAL-REVENUES> 23,741
<CGS> 0
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<OTHER-EXPENSES> 2,036
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (3,092)
<INCOME-TAX> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,120)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
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