As filed with the Securities and Exchange Commission on September 3, 1996
Registration No. 333-
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
THINKING TOOLS, INC.
(Name of small business issuer in its charter)
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<S> <C> <C>
Delaware 7372 77-0436410
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
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Thinking Tools, Inc. John Hiles, President
One Lower Ragsdale Drive, I-250 Thinking Tools, Inc.
Monterey, California 93940 One Lower Ragsdale Drive, I-250
(Address of principal executive offices and principal place Monterey, California 93940
of business) (408) 373-8688/(408) 373-7020 (Fax)
(Name, address, and telephone number of agent
for service)
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---------------
Copies to:
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<S> <C>
Stephen H. Kay, Esq. Thomas E. Constance, Esq.
Squadron, Ellenoff, Plesent & Sheinfeld, LLP Shari K. Krouner, Esq.
551 Fifth Avenue Kramer, Levin, Naftalis, & Frankel
New York, New York 10176 919 Third Avenue
Telephone: (212) 661-6500 New York, New York 10022
Telecopier: (212) 697-6686 Telephone: (212) 715-9100
Telecopier: (212) 715-8000
</TABLE>
---------------
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, please
check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering.
[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act, check the following box. [X]
---------------
CALCULATION OF REGISTRATION FEE
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Proposed
Maximum
Aggregate Amount of
Title of Each Class of Amount to be Proposed Maximum Offering Registration
Securities to be Registered Registered Offering Price Price(1) Fee
- --------------------------------------- --------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share 1,610,000 (2) $8.00 per share $12,880,000 $4,441.38
Underwriter's Options 140,000 (3) $.001 per option $140 $.05
Common Stock, par value $.001 per
share, issuable upon exercise of the
Underwriter's Options 140,000 $9.60 per share $1,344,000 $463.45
Common Stock, par value $.001 per
share, issuable upon exercise of the
Bridge Warrants(3) 456,250 $4.20 $1,916,250 $660.78
Total -- -- $16,140,390 $5,565.66
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act.
(2) Includes 210,000 shares of Common Stock issuable upon exercise of the
Over-Allotment Option.
(3) Represents warrants for the purchase of shares of Common Stock issued to
investors in August 1996.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may determine.
<PAGE>
CROSS REFERENCE SHEET
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Item Number of Form SB-2 Location or Caption in Prospectus
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1. Front of the Registration Statement and
Outside Front Cover of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Prospectus Summary; Use of Proceeds; Business
5. Determination of Offering Price Outside Front Cover Page; Underwriting
6. Dilution Risk Factors--Dilution; Dilution
7. Selling Security Holders Not Applicable
8. Plan of Distribution Outside Front Cover Page; Underwriting
9. Legal Proceedings Risk Factors; Business
10. Directors, Executive Officers, Promoters and
Control Persons Management
11. Security Ownership of Certain Beneficial
Owners and Management Principal Stockholders; Management
12. Description of Securities Outside Front Cover Page; Description of
Securities
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities Part II
15. Organization Within Last Five Years Management's Discussion and Analysis of
Financial Condition and Results of Operations
16. Description of Business Business
17. Management's Discussion and Analysis or Plan Management's Discussion and Analysis of
of Operation Financial Condition and Results of Operations
18. Description of Property Business--Property
19. Certain Relationships and Related
Transactions Certain Transactions
20. Market for Common Equity and Related Risk Factors--No Dividends; Dividend Policy;
Stockholder Matters Description of Securities
21. Executive Compensation Management--Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure Not Applicable
24. Indemnification of Directors and Officers Part II
25. Other Expenses of Issuance and Distribution Part II
26. Recent Sales of Unregistered Securities Part II
27. Exhibits Part II; Exhibits
28. Undertakings Part II
</TABLE>
ii
<PAGE>
EXPLANATORY NOTE
This Registration Statement covers the registration of (i) 1,400,000
shares of Common Stock to be offered by the Company, plus 210,000 shares
issuable upon exercise of the Over-Allotment Option (the "Offering"), (ii)
456,250 shares of Common Stock (the "Bridge Warrant Shares") issuable upon
exercise of warrants (the "Bridge Warrants") issued by the Company in August
1996, (iii) Options (the "Underwriter's Options") to purchase 140,000 shares
of Common Stock to be issued by the Company to the Underwriter in connection
with this Offering, and (iv) 140,000 shares of Common Stock purchasable upon
exercise of the Underwriter's Options (the "Underwriter's Option Shares").
The Bridge Warrant Shares, the Underwriter's Options and the Underwriter's
Option Shares are offered by certain holders of such securities (the "Selling
Securityholders") and not for the account of the Company. Following the
Prospectus included in this Registration Statement are certain pages of the
Prospectus relating to the securities being offered by the Selling
Securityholders, including alternate front and back cover pages, an alternate
"The Offering" section of the "Prospectus Summary," and sections entitled
"Concurrent Sales By Company" and "Selling Stockholders." All other sections
of the Prospectus for this Offering, other than "Underwriting," are to be
used in the Prospectus relating to the Selling Securityholders. All
references in this Prospectus to this "Offering" will be changed to the
"Company Offering" in the Prospectus relating to the Selling Securityholders.
In addition, cross-references in this Prospectus shall be adjusted in the
Prospectus for Selling Securityholders to refer to the appropriate alternate
Prospectus pages.
iii
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the Securities laws of
any such State.
PROSPECTUS
- ----------- SUBJECT TO COMPLETION, DATED SEPTEMBER 3, 1996
THINKING TOOLS, INC.
1,400,000 Shares
Common Stock
-----------------
Thinking Tools, Inc. (the "Company") hereby offers 1,400,000 shares (the
"Shares") of common stock, par value $.001 per share (the "Common Stock") of
the Company.
Prior to this Offering, there has been no public market for the Common
Stock. The Company has applied for quotation of the Common Stock on the
Nasdaq SmallCap Market ("NASDAQ") under the proposed symbol "THNK" and for
listing of the Common Stock on the Boston Stock Exchange ("BSE") and the
Pacific Stock Exchange ("PSE") under the proposed symbol TTI. It is currently
anticipated that the initial public offering price will be between $6.00 and
$8.00 per share. The initial public offering price of the Common Stock has
been determined by negotiations between the Company and Barington Capital
Group, L.P. (the "Underwriter"). See "Underwriting" for information relating
to the factors considered in determining the initial public offering price.
-----------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" ON
PAGES 8 THROUGH 13 AND "DILUTION" ON PAGES 15 AND 16.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<S> <C> <C> <C>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company (2)
- -------------------------------------------------------------------
Per Share $ $ $
Total(3) $ $ $
</TABLE>
(1) Does not reflect additional compensation to be received by the
Underwriter including (a) a non-accountable expense allowance equal to 3%
of the gross proceeds of this Offering (of which $35,000 has been paid),
(b) options entitling the Underwriter to purchase from the Company, for a
period of five years from the date of this Prospectus, up to 140,000
shares of Common Stock at an exercise price equal to 120% of the initial
public offering price (the "Underwriter's Options"), (c) a right of first
refusal with respect to certain future offerings and (d) a two- year
consulting agreement pursuant to which the Underwriter will render
non-exclusive advisory services to the Company in consideration of the
payment of a fee upon the closing of certain transactions. The Company
has also agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses payable by the Company (including the
Underwriter's non-accountable expense allowance) estimated at $794,000
($838,100, if the Over-Allotment Option (as defined below) is exercised
in full).
(3) The Company has granted an option to the Underwriter, exercisable within
45 days after the date of this Prospectus, to purchase up to an
additional 210,000 shares of Common Stock, on the same terms and
conditions set forth above, solely to cover over-allotments (the "Over-
Allotment Option"). If the Over-Allotment Option is exercised in full,
the Price to Public, Underwriting Discount and Proceeds to Company will
be $ , $ , and $ , respectively. See
"Underwriting."
-----------------
The Shares offered hereby are offered, subject to prior sale, when, as and
if delivered to and accepted by the Underwriter, and subject to approval of
certain legal matters by its counsel and to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify this Offering
and to reject any order in whole or in part. It is expected that delivery of
the certificates representing the Common Stock will be made at the offices of
Barington Capital Group, L.P., 888 Seventh Avenue, New York, New York 10019
on or about , 1996.
-----------------
Barington Capital Group, L.P.
The date of this Prospectus is , 1996.
<PAGE>
[photo]
A screen from the Company's TeleSim product, which is a simulation of a local
exchange telephone market.
[photo]
A screen from the Company's Project Challenge product, which is a simulation
of project management of information systems projects.
[photo]
The title screen from the Company's SimHealth product, which is a simulation
of the impact of various proposed reforms on the United States health care
system.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET, IN THE
OVER-THE-COUNTER MARKET, ON THE BOSTON STOCK EXCHANGE, ON THE PACIFIC STOCK
EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by independent accountants, and such other
periodic reports as the Company may deem appropriate or as may be required by
law.
SimCity(tm) is a trademark of Maxis, Inc.
<PAGE>
All references to "Thinking Tools" or the "Company" contained in this
Prospectus refer to Thinking Tools, Inc., a Delaware corporation, and its
predecessor. Unless otherwise stated, all information contained in this
Prospectus assumes that the Over-Allotment Option has not been exercised.
This Prospectus contains 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 differences include, but are not limited to, those discussed in "Risk
Factors." The Shares offered hereby involve a high degree of risk. Investors
should carefully consider the information set forth under "Risk Factors."
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus and, accordingly, should be read in
conjunction with such information, financial statements and notes. Each
prospective investor is urged to read this Prospectus in its entirety.
THE COMPANY
Thinking Tools develops powerful and flexible PC-based business simulation
software programs that enable users to simulate real life business
situations, explore complex operational problems and improve functional and
problem solving skills. The Company's agent-based, adaptive simulation
software has a broad range of potential business applications, including
strategic planning, sales and marketing, training, competitive positioning,
product marketing, operational planning, logistics and supply and demand
forecasting. The Company believes that its products are unique because they
combine user-friendly interactive interfaces used in sophisticated computer
games with its proprietary agent-based programming to produce interactive
adaptive business simulations. Agent-based, adaptive simulations can be used
to model competitive situations, simulate consumer behavior, demonstrate the
impact of management actions, seek system vulnerabilities and explore complex
operational systems. The Company's user-friendly interfaces enable persons
with no technical training to comfortably interact with complex systems.
The Company's agent-based programming enables autonomous agents in the
simulation to respond to user behaviors in unpredictable and realistic ways.
In contrast to other modelling and simulation tools in use and known to the
Company, which are generally built around a limited number of agents acting
according to pre-programmed, deterministic algorithms, the multiplicity of
autonomous agents and the results of their interactions with each other and
the user give the Company's simulations a complexity that mirrors human
behavior found in the real world.
The Company's operations to date have primarily involved developing
complex business simulation software programs for specific customers. These
projects have helped to fund the Company's research and development efforts,
led to the validation of the Company's core technology by major U.S.
companies and demonstrated the potential market for business simulation
software of the type developed by the Company.
The Company's goal is to develop and own the rights to a variety of
simulations in divergent business areas. The Company believes that it is
well-positioned to expand its business by leveraging its existing products
and technology platform to become a product-oriented, sales-driven company.
As part of its growth strategy, the Company intends to begin self-funded
development of new simulations and adaptation of previously developed
simulations for wider distribution or application to new fields. The Company
also plans, upon request, to customize these packages for specific customers.
The Company is currently developing software to simulate disaster recovery
scenarios, logistics simulation software for planning and training in the
United States Army and United States Air Force and software that could
provide access to simulations being developed by the Company for use on the
internet. The Company intends to market its products through existing
channels of its strategic partners as well as directly to customers by
establishing an in-house sales force and through value added resellers.
3
<PAGE>
Some of the Company's products developed to date include SimRefinery,
SimHealth, TeleSim and Project Challenge. SimRefinery, a demonstration
program released in late 1992, which was developed for Chevron, Inc.,
simulates the effects of users' decisions made in the running of a refinery.
SimHealth, a simulation of the impact of various proposed reforms on the
United States health care system, simulates both the supply and demand sides
of the health care industry and the impact of choices and values on the
financial health of the system and its usage and demand. TeleSim, a
simulation of a local exchange telephone market, was developed by the Company
for Coopers & Lybrand L.L.P ("Coopers"). Since its initial development in
1994, versions of TeleSim have been produced and sold through Coopers to
Sprint Corp., NYNEX Corporation, Pacific Telecom, Inc. and AT&T Corp. Project
Challenge, the development of which is being funded by SHL SystemHouse, Inc.,
a division of MCI Communications Corp. ("SystemHouse"), focuses on project
management for information systems projects. Project Challenge users create a
model of their projects, then simulate management of the projects under
benign, realistic or hostile conditions. Other customers of the Company have
included Xerox Corp., Andersen Consulting L.L.P., Texas Instruments
Corporation, Harcourt Brace College Publishers, a division of Harcourt
General, Inc., Steelcase Inc. and System Engineering Solutions Inc. (a prime
contractor for work in logistics for the U.S. Army and U.S. Air Force).
The Company's capabilities in developing highly sophisticated simulations
are built upon experience gained from developing computer games, its skill in
programming autonomous and adaptive agents and its large and growing library
of reusable simulation objects. The Company's creative control is based on
its proprietary development environment, WHITEBOARD, which supports interface
building, object creation, simulation management, object management and
application frameworks. WHITEBOARD simplifies and supports the construction
of agent-based simulations and is the core of the development of each of the
Company's simulations.
The Company was formed to purchase, on December 31, 1993, certain assets
of the Business Simulation Division (the "Division") of Maxis, Inc.
("Maxis"), a leading computer game company and creator of the simulation game
SimCity(tm). Through the purchase agreement with Maxis, the Company acquired
the Division's equipment, staff, work-in-progress, customers, licenses,
prospects, software tools, libraries and processes (the "Acquisition").
The Company's predecessor was incorporated in California on December 30,
1993. The Company was re-incorporated in Delaware on August 8, 1996, and its
principal place of business is located at One Lower Ragsdale Drive, I-250,
Monterey, California 93940, at (408) 373-8666.
4
<PAGE>
The Offering
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<S> <C>
Common Stock Offered by the Company 1,400,000 shares
Common Stock Outstanding Immediately Prior
to this Offering(1) 3,031,758 shares
Common Stock to be Outstanding
Following this Offering(1)(2) 4,431,758 shares
Risk Factors The shares of Common Stock offered hereby involve a high
degree of risk and substantial dilution and should be
purchased only by persons who can afford to sustain the
loss of their investment. See "Risk Factors" and
"Dilution."
Use of Proceeds The net proceeds of this Offering will be used (i) to fund
the Company's sales and marketing efforts, (ii) to fund
the Company's product development efforts, (iii) to fund
the retirement of the Bridge Notes and (iv) for working
capital and general corporate purposes.
Proposed NASDAQ Trading Symbol (3) "THNK"
Proposed BSE Symbol (3) "TTI"
Proposed PSE Symbol (3) "TTI"
</TABLE>
- --------------
(1) Does not include (i) 456,250 shares of Common Stock issuable upon
exercise of warrants (the "Bridge Warrants") to purchase Common Stock, at
an exercise price equal to the lesser of $4.20 or 60% of the initial
public offering price per share in this Offering, issued by the Company
to purchasers of its 10% Senior Secured Promissory Notes (the "Bridge
Notes") in connection with a debt financing consummated prior to this
Offering (the "Bridge Financing"); (ii) 468,242 shares of Common Stock
issuable upon exercise of warrants to purchase Common Stock at an
exercise price of $1.07 per share issued to Thinking Technologies, L.P.
("Technologies"), a principal stockholder of the Company (the
"Technologies Warrants"); (iii) 376,000 shares of Common Stock reserved
for issuance under the Company's 1996 Stock Option Plan (the "Plan"),
options to purchase 145,036 of which have been granted under the Plan,
including options to purchase 52,000 shares exercisable at $.79 per share
and options to purchase 52,000 shares exercisable at $5.00 per share
granted to certain of the Company's employees, and options to purchase
41,036 shares of Common Stock exercisable at $1.00 per share granted to
certain members of the Company's board of directors; (iv) 58,964 shares
of Common Stock issuable upon exercise of options granted outside of the
Plan to certain members of the Company's board of directors at an
exercise price of $0.79 per share and (v) 15,000 shares of Common Stock
issuable upon exercise of options granted outside of the Plan to a
non-affiliate of the Company at an exercise price of $1.00 per share. See
"Management--1996 Stock Option Plan", "Certain Transactions", and
"Description of Securities."
(2) Does not include (i) up to 210,000 shares of Common Stock issuable upon
exercise of the Over- Allotment Option and (ii) 140,000 shares of Common
Stock issuable upon exercise of the Underwriter's Options.
(3) There is currently no market for the Common Stock and there can be no
assurance that a market for the Common Stock will develop after this
Offering. The Company has applied for quotation of the Common Stock on
the NASDAQ, the BSE and the PSE, however, there can be no assurance that
such application for listing will be approved, or if approved, will be
maintained. See "Risk Factors-- Absence of Public Market; Negotiated
Offering Price."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial data for the Company set forth below under the
caption "Selected Statement of Operations Data" for the years ended December
31, 1994 and 1995, and under the caption "Selected Balance Sheet Data" at
December 31, 1995, are derived from the financial statements of the Company,
audited by KPMG Peat Marwick LLP, independent certified public accountants,
included elsewhere in this Prospectus. The statement of operations data for
the six months ended June 30, 1995 and 1996, and the balance sheet data at
June 30, 1996, are derived from unaudited financial statements included
elsewhere in this Prospectus, and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary for
the fair presentation of the Company's financial position and results of
operations at the end of and for such periods. Operating results for the six
months ended June 30, 1996 are not necessarily indicative of results that may
be expected for the full year. The summary financial data should be read in
conjunction with the Financial Statements and notes thereto included
elsewhere in this Prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Six Months
Ended June 30, Years Ended December 31,
-------------------------- ---------------------------
(In thousands, except per share data)
1996 1995 1995 1994
----------- ----------- ----------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Selected Statement of Operations Data:
Revenues $634 $676 $1,329 $846
Cost of revenues 354 374 708 736
Operating expenses 592 531 1,079 784
Net income (loss) (347) (280) (589) (731)
Net income (loss) per share $(0.11) $(0.09) $(0.19) $(0.23)
Shares used in computing net income (loss)
per share 3,141,000 3,141,000 3,141,000 3,141,000
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1996
----------------------------------------------
Pro Froma As
(Unaudited)
At December 31,
1995 Actual(1) Pro Forma(2) Adjusted (3)
-------------- ---------- ------------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Selected Balance Sheet Data:
Cash $ 152 $ 7 $1,100 $7,271
Working capital (deficit) (298) (617) (968) 7,028
Current assets 319 239 1,332 7,502
Total assets 432 350 1,443 7,614
Total current liabilities 617 856 2,300 474
Total long term liabilities 1,373 1,399 19 19
Stockholders' equity (deficit) (1,558) (1,905) (876) 7,121
</TABLE>
- --------------
(1) Gives effect to the merger of Thinking Tools, Inc., a California
corporation ("TTC"), with and into its wholly-owned subsidiary Thinking
Tools, Inc., a Delaware corporation (the "Merger"), including the
exchange of each share of common stock of TTC outstanding prior to the
Merger for .7462 shares of Common Stock pursuant to the Merger. See "Note
1" to "Notes to Financial Statements."
(2) Pro forma to give effect to (i) additional loan advances to the Company
from Technologies in the aggregate principal amount of $150,691 received
in July 1996; (ii) the accrual of $381,845 of interest on the Company's
indebtedness to Technologies through August 27, 1996 (including non-cash
interest expense of $350,000 resulting from the issuance of the
Technologies Warrants); (iii) the conversion by
6
<PAGE>
the Company of debt in the principal amount of approximately
$1,320,000 into an aggregate of 263,158 shares of Common Stock (the
"Conversion" and collectively with the Merger, the
"Recapitalization"), with the remaining $60,000 of note payable
reclassified as accrued expenses; (iv) non-cash compensation expense
of $200,000 resulting from the difference between the grant price and
the deemed fair value of the Common Stock underlying vested options
granted in July and August, 1996 and (v) the issuance of $1,825,000
aggregate principal amount of Bridge Notes in the Bridge Financing
(with related expenses of approximately $258,000), of which $625,000
was purchased by Technologies, and the application of the estimated
net proceeds therefrom, a portion of which was utilized to repay
$625,000 of outstanding indebtedness to Technologies. See "Certain
Transactions" and "Note 10" and "Note 13" to "Notes to Financial
Statements."
(3) Adjusted to give effect to (i) the sale by the Company of the
1,400,000 shares of Common Stock offered hereby at the assumed initial
public offering price of $7.00 per share and the application of the
estimated net proceeds therefrom and (ii) interest expense of $579,000
(including non-cash interest expense of $550,000 resulting from the
issuance of the Bridge Warrants). See "Use of Proceeds" and "Note 10"
and "Note 13" to "Notes to Financial Statements."
7
<PAGE>
RISK FACTORS
THE SHARES OFFERED HEREBY INVOLVE SUBSTANTIAL RISKS AND SHOULD BE PURCHASED
ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN THE LOSS OF THEIR INVESTMENT. THE
FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION AND FINANCIAL
DATA SET FORTH ELSEWHERE IN THIS PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY
IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE MAKING AN INVESTMENT IN THE
SHARES. THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS ARE NOT
INTENDED TO BE AN EXHAUSTIVE LIST OF THE GENERAL OR SPECIFIC RISKS INVOLVED,
BUT MERELY IDENTIFY CERTAIN RISKS THAT ARE NOW FORESEEN BY THE COMPANY. IT
MUST BE RECOGNIZED THAT OTHER RISKS, NOT NOW FORESEEN, MIGHT BECOME
SIGNIFICANT IN THE FUTURE AND THAT THE RISKS WHICH ARE NOW FORESEEN MIGHT
AFFECT THE COMPANY TO A GREATER EXTENT THAN IS NOW FORESEEN OR IN A MANNER
NOT NOW CONTEMPLATED. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER ALL
INFORMATION CONTAINED IN THIS PROSPECTUS AND SHOULD GIVE PARTICULAR
CONSIDERATION TO THE FOLLOWING RISK FACTORS BEFORE DECIDING TO PURCHASE THE
COMMON STOCK OFFERED HEREBY.
Limited Operating History; History of Losses; Uncertain Future Profitability.
The Company commenced operations in January 1994 and is still in the early
stage of developing products. Since its inception, the Company has
experienced cumulative losses of $1,650,000 and $1,997,000 as of December 31,
1995 and June 30, 1996, respectively, and has not experienced any quarter of
profitable operations. Consequently, its operations are subject to numerous
risks associated with the development of a new business. The Company expects
to continue to incur operating losses for the foreseeable future, principally
as a result of expenses associated with the Company's product development
efforts and anticipated sales, marketing and general and administrative
expenses. The Company's long-term viability and growth will depend on the
successful development, commercialization and marketing of its proposed
products. There can be no assurance that the Company will be able to develop
adequate revenue sources to successfully complete the development,
commercializing and marketing of its proposed products or that if it is
successful in doing so it will be able to achieve and maintain profitability.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Dependence on Emerging Market for Business Simulation Software.
The markets for business simulation software in general, and agent-based,
adaptive simulation software in particular, are still emerging, making it
difficult to predict with any assurance the future size of the markets. There
can be no assurance that such software will achieve broad-based market
acceptance, that markets for such software will continue to grow or that
increased sales of the Company's products will occur or continue as a result
of any such growth. There can be no assurance that alternatives to the
Company's agent-based, adaptive simulation software, such as object-oriented
tools, authoring tools or game methods will not achieve greater market
acceptance than the Company's agent-based, adaptive simulation software. Even
if agent-based, adaptive simulation achieves market acceptance and that
market grows, there can be no assurance that the Company will obtain a
significant share of that market. See "Business--Growth Strategy" and
"--Competition."
Uncertainties Related to Development of Additional Products.
Significant additional efforts will be required for the Company to develop
additional agent-based, adaptive simulation products. Any such future efforts
are subject to certain risks including, but not limited to, the risk that new
simulations will be difficult to develop into commercially viable products
free of
8
<PAGE>
competitive challenges and that any such products may fail to achieve and
sustain market acceptance. There can be no assurance that the Company's
product development efforts will be successful. See "Business -- Growth
Strategy" and "--Products."
Limited Marketing Experience; Need for Additional Personnel.
The Company has very limited marketing resources and limited experience in
marketing and selling its products and services. The Company will have to
further develop its marketing and sales force or rely principally on
value-added resellers, collaborators, licensees or others to provide for the
marketing and sales of its products and services. There can be no assurance
that the Company will be able to establish adequate marketing and sales
capabilities or make arrangements with value-added resellers, collaborators,
licensees or others to perform such activities. Achieving market penetration
will require significant efforts by the Company to create awareness of, and
demand for, its proposed products. Accordingly, the Company's ability to
expand its customer base will depend upon its marketing efforts, including
its ability to establish an effective internal sales organization or
establish strategic marketing arrangements with others. The failure by the
Company to successfully develop its marketing capabilities, internally or
through others, would have a material adverse effect on the Company's
business, financial condition and results of operations. Further, there can
be no assurance that the development of such marketing capabilities will lead
to sales of the Company's proposed products. See "Business--Personnel."
The success of the Company will also depend upon its ability to hire and
retain additional qualified management, marketing and financial personnel,
including a chief executive officer and a chief financial officer, as to
which there can be no assurance. The Company will compete with other
companies with greater financial and other resources for such personnel. See
"Management."
Risks Associated with Growth Strategy.
The Company's growth strategy is expected to place a significant strain on
its management, administrative, operational, financial and other resources.
The Company's success will be dependent upon its ability to hire additional
highly qualified personnel to support the Company's product development and
marketing efforts, including monitoring operations, controlling costs and
maintaining effective management, inventory and credit controls. The Company
has limited experience in effectuating rapid expansion and managing a broad
range of products and services and significant operations. There can be no
assurance that the Company will be able to continue to manage its operations
or that any inability to do so will not adversely affect its business,
financial condition or results of operations. See "Business--Growth
Strategy."
Anticipated Non-Cash Charges.
As a result of the issuance of warrants in connection with borrowings from
Technologies and pursuant to the Bridge Financing, the Company anticipates
that it will record approximately $900,000 of non-cash interest expenses.
These expenses are anticipated to be incurred in the third and fourth quarter
of 1996. The Company also expects to incur approximately $200,000 of non-cash
compensation expense related to the difference between the exercise price and
deemed fair value of the Common Stock underlying vested options granted in
July and August 1996. See "Note 10" and "Note 13" to "Notes to Financial
Statements."
Fluctuations in Operating Results; Substantial Revenues Derived from Limited
Customers.
The Company's operating results may vary significantly from quarter to
quarter or year to year, depending on factors such as the timing of product
development, the timing of increased research and development and sales and
marketing expenses, the timing and size of orders and the introduction of new
products by the Company. The Company's current and planned expense levels are
based in part on its
9
<PAGE>
expectations as to future revenue. Consequently, revenue or profit may vary
significantly from quarter to quarter or year to year and revenue or profit
in any period will not necessarily be predictive of results in subsequent
periods. Historically, a significant portion of the Company's revenues have
been derived from a limited number of relatively large development projects
contracted for by a small number of customers. To the extent that the
Company's business continues to be derived from a limited number of large
customer orders, any inability by the Company as it completes such orders to
obtain new orders could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company is
currently working on a limited number of customer orders. There can be no
assurance that the Company will obtain additional sources of revenue prior to
completing such projects. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Technological Change; Risk of Obsolescence; Industry Standards.
The software industry is characterized by rapid technological change,
frequent introductions of new products, changes in customer demands and
evolving industry standards. The introduction of products embodying new
technology or the adaption of products to the market and the emergence of new
industry standards often render existing products obsolete and unmarketable.
The Company believes that its success will depend on its ability to enhance
its existing products and otherwise respond and keep pace with technological
developments and emerging industry standards. There can be no assurance that
the Company will be successful in developing enhanced or new products that
respond to technological changes or evolving industry standards in a timely
manner, or at all. Additionally, there can be no assurance that technological
changes or evolving industry standards will not render the Company's products
and technologies obsolete. See "Business--Intellectual Property."
Uncertainties Regarding Intellectual Property.
The Company does not have any patents and has not filed patent
applications on its products. The Company regards the software that it owns
or licenses as proprietary and relies primarily on a combination of trade
secret laws, nondisclosure agreements and other technical copy protection
methods (such as embedded coding) to protect its rights to its products and
proprietary rights. It is the Company's policy that all employees and
third-party developers sign nondisclosure agreements; however, this may not
afford the Company sufficient protection for its know-how and its proprietary
products. Other parties may develop similar know-how and products, duplicate
the Company's know-how and products or develop patents that would materially
and adversely affect the Company's business, financial condition and results
of operations. Third parties may assert infringement claims against the
Company, and such claims may result in the Company being required to enter
into royalty arrangements, pay damages or defend litigation, any of which
could materially and adversely affect the Company's business, financial
condition and results of operations. See "Business--Intellectual Property."
Competition.
There can be no assurance that other companies will not develop programs
such as those offered by the Company or alternative software applications
which meet the same needs of customers or that potential customers will not
choose to meet their needs through in-house development rather than by
purchasing the Company's products. The Company expects to be subject to
competition from companies with substantially greater resources. There can be
no assurance that the Company will be able to respond to competitive
pressures, or that the effect of competitive pressures will not change the
demand for, or pricing of, the Company's products and services. To the extent
that competitors achieve performance, price or other selling advantages, the
Company could be adversely affected. There can be no assurance that the
Company will have the resources required to respond effectively to market or
technological changes or to otherwise compete successfully in the future. See
"Business--Competition."
10
<PAGE>
Dependence on Key Personnel.
The Company is dependent upon the continued efforts and abilities of its
senior management, particularly those of Mr. John Hiles, the Company's
President. The loss or unavailability of Mr. Hiles for any significant period
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company maintains a $5,000,000
key-man life insurance policy on Mr. Hiles. The Company's operations are also
dependent upon its ability to attract and retain qualified programmers and
software engineers. There can be no assurance that the Company will be able
to attract and retain such skilled personnel, and failure to do so could have
a material adverse effect on the business, financial condition and results of
operations of the Company. All employees of the Company are at-will
employees. See "Management."
Control by Existing Stockholders.
Upon the closing of this Offering, the Company's existing stockholders
will beneficially own approximately 72.8% of the outstanding shares of Common
Stock. As a result of such ownership, the existing stockholders of the
Company will, therefore, have the ability to control the election of the
directors of the Company and the outcome of all issues submitted to a vote of
the stockholders of the Company. See "Principal Stockholders."
Broad Discretion as to Use of Proceeds.
Approximately 20.8% of the net proceeds of this Offering has been
allocated to working capital and general corporate purposes and will be used
for such specific purposes as management may determine. Accordingly,
management will have broad discretion with respect to the expenditure of that
portion of the net proceeds of this Offering. In addition, the Company's
estimate of its allocation of the use of proceeds of this Offering is subject
to a reapportionment of proceeds among the categories set forth herein or to
new categories. The amount and timing of expenditures will vary depending
upon a number of factors, including the progress of the Company's product
development and marketing efforts, changing competitive conditions and
general economic conditions. See "Use of Proceeds."
Need For Additional Financing.
The Company anticipates that the net proceeds of this Offering together
with its existing resources, will be adequate to satisfy its operating and
capital requirements through at least the next 18 months, based on the
Company's current business plan. Such belief is based upon certain
assumptions, and there can be no assurance that such assumptions are correct.
However, the Company does not expect that it will be able to continue its
operations beyond this time without additional financing. There can be no
assurance that such additional financing will be available when needed on
terms acceptable to the Company or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Absence of Public Market; Negotiated Offering Price.
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that any trading market therefor will
develop or, if any such market develops, that it will be sustained.
Accordingly, purchasers of the Shares may experience difficulty selling or
otherwise disposing of their Shares. The public offering price of the Shares
has been established by negotiation between the Company and the Underwriter
and does not bear any relationship to the Company's book value, assets, past
operating results, financial condition or other established criteria of
value.
11
<PAGE>
NASDAQ, BSE and PSE Delisting; Low Stock Price.
The trading of the Company's Securities on NASDAQ, BSE and PSE will be
conditioned upon the Company meeting certain asset, capital and surplus
earnings and stock price tests set forth by such exchanges. For example, to
maintain eligibility for trading on NASDAQ, the Company will be required to
maintain total assets in excess of $2,000,000, capital and surplus in excess
of $1,000,000 and (subject to certain exceptions) a bid price of $1.00 per
share. Upon completion of this Offering and the receipt of the proceeds
therefrom, the Company believes that it will meet the respective asset,
capital and surplus earnings tests set forth by such exchanges. If the
Company fails any of the tests, the Common Stock may be delisted from trading
on such exchanges. The effects of delisting include the limited release of
the market prices of the Company's securities and limited news coverage of
the Company. Delisting may restrict investors' interest in the Company's
securities and materially adversely affect the trading market and prices for
such securities and the Company's ability to issue additional securities or
to secure additional financing. In addition to the risk of volatile stock
prices and possible delisting, low price stocks are subject to the additional
risks of federal and state regulatory requirements and the potential loss of
effective trading markets. In particular, if the Common Stock were delisted
from trading on such exchanges and the trading price of the Common Stock was
less than $5 per share, the Common Stock could be subject to Rule 15g-9 under
the Securities Exchange Act of 1934, as amended, which, among other things,
requires that broker/dealers satisfy special sales practice requirements,
including making individualized written suitability determinations and
receiving purchasers' written consent, prior to any transaction. If the
Company's securities could also be deemed penny stocks under the Securities
Enforcement and Penny Stock Reform Act of 1990, this would require additional
disclosure in connection with trades in the Company's securities, including
the delivery of a disclosure schedule explaining the nature and risks of the
penny stock market. Such requirements could severely limit the liquidity of
the Company's securities and the ability of purchasers in this Offering to
sell their securities in the secondary market.
Future Sales of Restricted Securities.
Upon the completion of this Offering, the Company will have 4,431,758
shares of Common Stock outstanding (4,641,758, if the Over-Allotment Option
is exercised in full). Of these shares, all of the 1,400,000 shares of Common
Stock sold in this Offering (1,610,000, if the Over-Allotment Option is
exercised in full) generally will be freely transferable by persons other
than affiliates of the Company, without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"). The
remaining 3,031,758 shares of Common Stock (the "Restricted Shares")
outstanding were sold by the Company in reliance on exemptions from the
registration requirements of the Securities Act and are "restricted
securities" as defined in Rule 144 under the Securities Act. The sale of a
substantial number of shares of Common Stock or the availability of Common
Stock for sale could adversely affect the market price of the Common Stock
prevailing from time to time. The Company, its officers, directors and
existing stockholders have entered into agreements which prohibit them from
selling stock in the Company for certain periods of time following this
Offering. See "Principal Stockholders," "Shares Eligible for Future Sale" and
"Underwriting."
Effect of Previously Issued Options, Warrants and Underwriter's Options on
Stock Price.
The Company has reserved from the authorized, but unissued, Common Stock
376,000 shares of Common Stock for issuance to key employees, officers,
directors, and consultants pursuant to the Plan, has reserved 456,250 shares
of Common Stock for issuance upon exercise of the Bridge Warrants and 468,242
shares of Common Stock issuable upon exercise of the Technologies Warrants.
The Company will also sell to the Underwriter, in connection with this
Offering, for nominal consideration, the Underwriter's Options to purchase an
aggregate of 140,000 shares of Common Stock at a price per share equal to
120% of the initial public offering price per share, subject to adjustment as
provided therein. The existence of the Bridge Warrants, the Technologies
Warrants, the Underwriter's Options, any outstanding options issued under the
Plan, and other options or warrants may prove to be a hindrance to future
financings, since the
12
<PAGE>
holders of such warrants and options may be expected to exercise them at a
time when the Company would otherwise be able to obtain additional equity
capital on terms more favorable to the Company. In addition, the holders of
such securities have certain registration rights, and the sale of the shares
issuable upon exercise of such securities or the availability of such shares
for sale could adversely affect the market price of the Common Stock.
Additionally, if the holders of the Underwriter's Options were to exercise
their registration rights to effect a distribution of the Underwriter's
Options or underlying securities, the Underwriter, prior to and during such
distribution, would be unable to make a market in the Company's securities
and would be required to comply with other limitations on trading set forth
in Rules 10b-2, 10b-6 and 10b-7 promulgated under the Securities Exchange Act
of 1934, as amended. Such rules restrict the solicitation of purchasers of a
security when a person is interested in the distribution of such security and
also limit market making activities by an interested person until the
completion of the distribution. If the Underwriter were required to cease
making a market, the market and market price for such securities may be
adversely affected and holders of such securities may be unable to sell such
securities. See "Description of Securities" and "Underwriting."
Share Prices May Be Highly Volatile.
The market prices of equity securities of computer technology and software
companies have experienced extreme price volatility in recent years for
reasons not necessarily related to the individual performance of specific
companies. Accordingly, the market price of the Common Stock following this
Offering may be highly volatile. Factors such as announcements by the Company
or its competitors concerning products, patents, technology, governmental
regulatory actions, other events affecting computer technology and software
companies generally as well as general market conditions may have a
significant impact on the market price of the Common Stock and could cause it
to fluctuate substantially.
Dilution.
The assumed initial public offering price per Share exceeds the book value
per share of the Common Stock. Investors in this Offering will therefore
incur immediate and substantial dilution of $5.39, or 77% per share from the
initial public offering price. See "Dilution."
Lack of Dividends.
The Company has not paid any dividends on the Common Stock since its
inception and does not intend to pay any dividends to its stockholders in the
foreseeable future. The Company currently intends to reinvest earnings, if
any, in the development and expansion of its business. See "Dividend Policy"
and "Description of Securities--Common Stock."
Anti-Takeover Effects of Certain Provisions of Certificate of Incorporation
and Delaware Law.
The Company's Certificate of Incorporation authorized the issuance of
3,000,000 shares of undesignated Preferred Stock with such designations,
rights and preferences as may be determined from time to time by the board of
directors. Accordingly, the board of directors is empowered, without
obtaining stockholder approval, to issue such Preferred Stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect
the voting power or other rights of the holders of the Common Stock. In the
event of issuance, the Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change
in the control of the Company. Certain provisions of Delaware law may also
discourage third party attempts to acquire control of the Company. See
"Description of Securities--Preferred Stock."
13
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby, at an
assumed initial offering price of $7.00 per share, and after deducting
underwriting discounts and commissions and other expenses of this Offering,
estimated to be, in the aggregate, $1,774,000, are estimated to be $8,026,000
($9,304,900 if the Over-Allotment Option is exercised in full).
The Company intends to use the net proceeds of this Offering (i) to fund
the Company's sales and marketing efforts, (ii) to fund the Company's product
development efforts, (iii) to fund the retirement of the Bridge Notes and
(iv) for working capital and general corporate purposes, approximately as
follows:
<TABLE>
<CAPTION>
Percentage
Approximate of
Use Amount Net Proceeds
- ---------------------------------------------- ------------- ----------------
<S> <C> <C>
Sales and marketing $3,000,000 37.4%
Product development 1,500,000 18.7%
Repayment of debt 1,855,000 23.1%
General corporate and working capital purposes 1,671,000 20.8%
----------- ---------------
$8,026,000 100.0%
=========== ===============
</TABLE>
The Company intends to use approximately $3,000,000 of the net proceeds to
fund expansion of its sales and marketing activities, including hiring a
senior sales and marketing executive, sales representatives and other sales
and marketing personnel. See "Business--Marketing and Sales Strategy."
The Company intends to use approximately $1,500,000 of the net proceeds
for research and product development, including support of existing research
and development activities and the development of new products. See
"Business--Product Development."
Approximately $1,855,000 of the net proceeds will be used to repay the
principal amount of the Bridge Notes, along with estimated accrued interest
thereon through the estimated closing date of this Offering. The Bridge Notes
bear interest at a rate of 10% per annum, compounded annually, and are due
upon the closing of this Offering. The Bridge Notes were sold as units along
with the Bridge Warrants in the Bridge Financing. The Company utilized a
portion of the net proceeds from the Bridge Financing (with related expenses
of approximately $258,000) to repay $625,000 of outstanding indebtedness to
Technologies, which amount was immediately utilized by Technologies for the
purchase of $625,000 aggregate principal amount of Bridge Notes in the Bridge
Financing. As a result, the Company realized approximately $942,000 of net
proceeds from the Bridge Financing, which funds are being used to finance the
Company's short term working capital needs and to fund expenses of the
Company in connection with this Offering. See "Certain Transactions."
The balance of the net proceeds of this Offering are intended to be used
for general corporate and working capital purposes. Any net proceeds received
by the Company from the exercise of the Over- Allotment Option or the
Underwriter's Options will be added to working capital.
The foregoing represents the Company's best estimate of its allocation of
the estimated net proceeds of this Offering and is subject to a
reapportionment of proceeds among the categories listed above or to new
categories in response to, among other things, changes in its plans,
regulations, industry conditions, and future revenues and expenditures. The
amount and timing of expenditures will vary depending on a number of factors,
including changes in the Company's contemplated operations or business plan
and changes in economic and industry conditions.
Until used, the Company intends to invest the net proceeds of this
Offering in short term, interest bearing, investment grade, debt securities,
money market accounts, certificates of deposit or direct or guaranteed
obligations of the United States government.
14
<PAGE>
DIVIDEND POLICY
The Company expects that it will retain all earnings, if any, generated by
its operations for the development and growth of its business and does not
anticipate paying any cash dividends to its stockholders in the foreseeable
future. Any future determination as to dividend policy will be made by the
board of directors of the Company in its discretion, and will depend on a
number of factors, including the future earnings, if any, capital
requirements, financial condition and business prospects of the Company and
such other factors as the board of directors may deem relevant. See "Risk
Factors--Lack of Dividends."
DILUTION
As of June 30, 1996, the Company had a pro forma net tangible book value
(deficit) of approximately ($876,000), or ($0.29) per share of Common Stock.
Without taking into account any other changes in the pro forma net tangible
book value of the Company after June 30, 1996, other than to give effect to
the sale by the Company of the Shares offered hereby at an assumed initial
offering price of $7.00 per share and the receipt and application of the
estimated net proceeds therefrom (including repayment of the Bridge Notes and
accrued cash interest thereon), the pro forma net tangible book value would
have been approximately $7,121,000, or $1.61 per share, which represents an
immediate increase in the pro forma net tangible book value of $1.90 per
share to present stockholders and an immediate dilution of $5.39 per share to
new investors. The following table illustrates this dilution:
<TABLE>
<CAPTION>
Per Share of
Common Stock
-------------
<S> <C> <C>
Assumed initial public offering price per Share (1) $7.00
Pro forma net tangible book value (deficit) before
this Offering $(0.29)
Increase attributable to purchase of Shares by
new investors 1.90
----
Pro forma net tangible book value per share after this
Offering 1.61
Dilution of net tangible book value to investors in
this Offering $5.39
===========
</TABLE>
- -------------------
(1) Represents the initial public offering price per Share, before deducting
underwriting discounts and offering expenses payable by the Company.
15
<PAGE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the differences between existing stockholders and investors in this Offering
with respect to the number and percentage of shares of Common Stock purchased
from the Company, the amount and percentage of consideration paid and the
average price paid per Share, before deduction of offering expenses and
underwriting discounts:
<TABLE>
<CAPTION>
Average
Shares Owned Consideration Price Per
-------------------------- ----------------------------- Share
Number Percentage Amount Percentage
----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders 3,031,758 68.4% $ 1,413,000 12.6% $ .47
New Investors 1,400,000 31.6% $ 9,800,000 87.4% $7.00
--------- --------- ------------ --------- ---------
Total 4,431,758 100.0% $11,213,000 100.0%
========= ========= ============ =========
</TABLE>
The foregoing table does not include (i) 456,250 shares of Common Stock
issuable upon the exercise of the Bridge Warrants at an exercise price equal
to the lesser of $4.20 or 60% of the initial public offering price per share;
(ii) 468,242 shares of Common Stock issuable upon exercise of the
Technologies Warrants, at an exercise price of $1.07 per share; (iii) 376,000
shares of Common Stock reserved for issuance under the Plan, options to
purchase 145,036 of which have been granted under the Plan, including options
to purchase 52,000 shares exercisable at $.79 per share and options to
purchase 52,000 shares exercisable at $5.00 per share granted to certain of
the Company's employees, and options to purchase 41,036 shares of Common
Stock at an exercise price of $1.00 per share granted to certain members of
the Company's board of directors; (iv) 58,964 shares of Common Stock reserved
and issuable upon exercise of options granted outside the Plan to certain
members of the Company's board of directors at an exercise price of $0.79 per
share and (v) 15,000 shares of Common Stock issuable upon exercise of options
granted outside the Plan to a non-affiliate of the Company at an exercise
price of $1.00 per share. The exercise of any of such options and warrants
will have a dilutive effect upon investors in this Offering. See
"Management--1996 Stock Option Plan," "Certain Transactions," and
"Description of Securities."
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1996, (ii) as of June 30, 1996 on a pro forma basis assuming the
issuance of $1,825,000 aggregate principal amount of Bridge Notes and the
Conversion and (iii) on a pro forma as adjusted basis to reflect the sale of
1,400,000 shares of Common Stock by the Company offered hereby at an assumed
initial public offering price of $7.00 per share and the application of the
estimated net proceeds therefrom. See "Use of Proceeds." This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements of the
Company and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------
Pro Forma
Actual(1) Pro Forma(2) As Adjusted(3)
--------- ------------- --------------
(In thousands, except share data)
<S> <C> <C> <C>
Short Term Debt, including Capital Lease Obligations $ 449 $ 1,924 $ 99
Long Term Notes Payable
and Capital Lease Obligations 1,399 19 19
Preferred Stock, $.001 par value, 3,000,000
shares authorized; no shares issued and
outstanding actual, pro forma and as adjusted -- -- --
Common Stock, $.001 par value, 20,000,000
shares authorized; 2,768,600 shares issued and
outstanding actual; 3,031,758 shares issued and
outstanding, pro forma; and 4,431,758 shares
issued and outstanding, as adjusted(4) 3 3 4
Additional Paid-in Capital 89 1,960 10,535
Accumulated Deficit (1,997) (2,839) (3,418)
--------- ------------- --------------
Total Stockholders' Equity (Deficit) (1,905) (876) 7,121
--------- ------------- --------------
Total Capitalization ($ 57) $ 1,067 $ 7,239
========= ============= ==============
</TABLE>
- ----------------
(1) Gives effect to the Merger. See "Note 1" to "Notes to Financial
Statements."
(2) Pro forma to give effect to (i) additional loan advances to the Company
from Technologies in the aggregate principal amount of $150,691 received
in July, 1996; (ii) the accrual of $381,845 of interest on the Company's
indebtedness to Technologies through August 27, 1996 (including non-cash
interest expense of $350,000 resulting from the issuance of the
Technologies Warrants); (iii) the conversion by the Company of debt in
the principal amount of approximately $1,320,000 into an aggregate of
263,158 shares of Common Stock pursuant to the Conversion, with the
remaining $60,000 of note payable reclassified to accrued expenses ; (iv)
non-cash compensation expense of $200,000 resulting from the difference
between the grant price and the deemed fair value of the Common Stock
underlying vested options granted in July and August, 1996 and (v) the
issuance of $1,825,000 aggregate principal amount of Bridge Notes (with
related expenses of approximately $258,000) of which $625,000 was
purchased by Technologies, and the application of the estimated net
proceeds therefrom, a portion of which was utilized to repay $625,000 of
outstanding indebtedness to Technologies. See "Certain Transactions" and
"Note 10" and "Note 13" to "Notes to Financial Statements."
(3) Adjusted to give effect to (i) the sale by the Company of the 1,400,000
shares of Common Stock offered hereby at an assumed initial public
offering price of $7.00 per share and the application of the estimated
net proceeds therefrom and (ii) interest expense of $579,000 (including
non-cash interest expense of $550,000 resulting from the issuance of the
Bridge Warrants). See "Use of Proceeds" and "Note 10" and "Note 13" to
"Notes to Financial Statements."
17
<PAGE>
(4) Does not include (i) 456,250 shares of Common Stock issuable upon
exercise of the Bridge Warrants at an exercise price equal to the
lesser of $4.20 or 60% of the initial public offering price per share
in this Offering; (ii) 468,242 shares of Common Stock issuable upon
exercise of the Technologies Warrants, at an exercise price of $1.07
per share; (iii) 376,000 shares of Common Stock reserved for issuance
under the Plan, options to purchase 145,036 of which have been granted
under the Plan, including options to purchase 52,000 shares
exercisable at $.79 per share and options to purchase 52,000 shares
exercisable at $5.00 per share granted to certain of the Company's
employees, and options to purchase 41,036 shares of Common Stock at an
exercise price of $1.00 per share granted to certain members of the
Company's board of directors; (iv) 58,964 shares of Common Stock
reserved and issuable upon exercise of options granted outside the
Plan to certain members of the Company's board of directors at an
exercise price of $0.79 per share and (v) 15,000 shares of Common
Stock issuable upon exercise of options granted outside the Plan to a
non-affiliate of the Company at an exercise price of $1.00 per share.
See "Management--Stock Option Plan," "Certain Transactions," and
"Description of Securities."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
accompanying financial statements and notes thereto appearing elsewhere in
this Prospectus.
Overview
Thinking Tools commenced operations in December 1993 to develop and market
business simulation software. Since its inception, the Company has been
engaged in research and development activities and organizational efforts,
including the development of its initial products, recruiting personnel,
establishing marketing and manufacturing capabilities and raising capital.
Thinking Tools commenced commercial activities in January 1994, but to
date has not generated substantial revenues from the sale of its products.
Revenues generated to date have been primarily derived from software
development projects completed under contracts with customers. Historically,
a significant portion of such revenues have been derived from a limited
number of relatively large development projects contracted for by a small
number of customers. To the extent that the Company's business continues to
be derived from a limited number of large customer orders, any inability by
the Company as it completes such orders to obtain new orders could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company is currently working on a limited number
of customer orders. There can be no assurance that the Company will obtain
additional sources of revenue prior to completing such projects. The
Company's current strategy is to change its focus from custom projects to
self-funded development of simulations for broader markets by leveraging its
existing products and technology platform to become a product-oriented,
sales-driven company. See "Business--Growth Strategy" and "Risk
Factors--Fluctuations in Operating Results; Substantial Revenues Derived from
Limited Customers."
As of June 30, 1996, the Company had experienced cumulative losses of
$1,997,000 and had not experienced any quarter of profitable operations. The
Company expects to incur additional operating losses for the foreseeable
future. The Company's operations to date have been funded primarily through
private sales of debt and equity securities.
Thinking Tools expects to incur substantial operating expenses in the
future to support its development costs, expand its sales and marketing
capabilities and organization, expand its work force and for other general
and administrative expenses. The Company's results of operations may vary
significantly from quarter to quarter during this period of development.
Results of Operations
Comparison of six months ended June 30, 1996 and June 30, 1995
Revenues. Revenues for the six months ended June 30, 1996 decreased by
$42,000, or 6%, to $634,000, from $676,000, for the six months ended June 30,
1995. During each of such periods the Company's revenues were derived
primarily from a relatively small number of development contracts. See
"Business--Customers."
Gross Margin. Gross margin for the six months ended June 30, 1996 were 44%
of revenues as compared with 45% of revenues for the six months ended June
30, 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $175,000, or 49%, for the six months
ended June 30, 1996 to $532,000, or 84% of revenues, from $357,000, or 53% of
revenues, for the six months ended June 30, 1995. Selling expenses included
costs of
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<PAGE>
preparing project proposals and software demonstrations. General and
administrative expenses consisted primarily of labor costs and consulting
expenses. The increase in selling, general and administrative expenses was
primarily due to increased consulting expenses, travel expenses, new
insurance policy premiums, recruiting fees and increased involvement by the
Company's technical development team in the preparation of Company's
proposals and presentations.
Upon completion of this Offering, the Company intends to hire additional
personnel to expand the Company's marketing and sales capabilities. See
"Business--Marketing and Sales Strategy." Additionally, the Company expects
general and administrative expenses to increase in future periods as the
Company incurs additional costs related to being a public company and expands
its staff and facilities.
Research and Development. Research and development expenses for the six
months ended June 30, 1996 decreased by $114,000, or 66%, to $60,000, or 9%
of revenues, from $174,000, or 26% of revenues, for the six months ended June
30, 1995. This decrease was primarily due to the shifting of development
efforts from initial internal software development to customer software
development contracts.
As the Company's business strategy shifts from custom development projects
to product sales, the Company expects that research and development expenses
will increase. See "Business--Growth Strategy" and "Risk Factors--Risks
Associated with Growth Strategy."
Interest Expense. Interest expense for the six months ended June 30, 1996
increased by $17,000, or 28%, to $77,000, or 12% of revenues from $60,000, or
9% of revenues, for the six months ended June 30, 1995. This increase was
primarily due to the conversion of $180,000 of accrued interest due to
Technologies into debt, borrowings of $52,100 under a bank line of credit and
an additional loan from Technologies in the amount of $352,000, which loans
bear interest at rates of 10%, prime plus 5% and prime plus 7%, respectively.
Other Income. Other income for the six months ended June 30, 1996
increased by $33,000, or 330% to $43,000, or 7% of revenues from $10,000, or
1% of revenues, for the six months ended June 30, 1995. This increase was
primarily due to an increase in fees received for assisting customers with
product presentations and demonstrations in connection with the resale by
such customers of the Company's products.
Net Loss. As a result of the foregoing, net loss for the six months ended
June 30, 1996 increased by $66,000, or 24%, to $346,000 from $280,000 for the
six months ended June 30, 1995.
Comparison of years ended December 31, 1995 and 1994
Revenues. Revenues for the year ended December 31, 1995 ("Fiscal 1995"),
increased by $483,000, or 57%, to $1,329,000 from $846,000 for the year ended
December 31, 1994 ("Fiscal 1994"). This increase was primarily due to an
increase during Fiscal 1995 in the number of contract projects. See
"Business--Customers."
Gross Margin. Gross margin for Fiscal 1995 increased to 47% of revenues
from 13% of revenues for Fiscal 1994. This increase was partially due to
improved control of project costs in Fiscal 1995 as well as more skillful
pricing and contract negotiating. Overruns on two projects in 1994 (both
incurring losses) reflected the unanticipated high level of costs involved in
developing the Company's complex agent-based simulation software.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for Fiscal 1995 increased by $356,000, or 90%, to
$751,000, or 57% of revenues, from $395,000, or 47% of revenues, for Fiscal
1994. This increase was primarily attributable to increased labor costs and
consulting expenses in connection with the Company's efforts to establish a
management team and increases in travel expenses and insurance policy
premiums.
Research and Development. Research and development expenses for Fiscal
1995 decreased by $61,000, or 16%, to $328,000, or 25% of revenues, from
$389,000, or 46% of revenues, for Fiscal 1994. This decrease reflected the
increased maturity of the Company's agent-based simulation development tools
and techniques.
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<PAGE>
Interest Expense. Interest expense for Fiscal 1995 increased by $84,000,
or 150%, to $140,000, or 11% of revenues, from $56,000, or 7% of revenues,
for Fiscal 1994. This increase was primarily due to the borrowing from
Technologies of $1,200,000 in September 1994 and, during the second half of
Fiscal 1995 borrowings under a bank line of credit with an outstanding
balance as of December 31, 1995 of $79,000 and from Technologies with an
outstanding balance as of December 31, 1995 of $122,000, which loans bear
interest at rates of 10%, prime plus 5% and prime plus 7%, respectively.
Other Income. Other income for Fiscal 1995 increased to $10,000 from none
in Fiscal 1994, which increase resulted from an insurance payment on property
losses.
Net Loss. As a result of the foregoing, net loss for Fiscal 1995 decreased
by $142,000 or 19%, to $589,000 from $731,000 for Fiscal 1994.
Liquidity and Capital Resources
Since its inception and through December 31, 1995 and June 30, 1996, the
Company has incurred cumulative losses aggregating approximately $1,650,000
and $1,997,000, respectively, and has not experienced any quarter of
profitable operations. The Company expects to continue to incur operating
losses for the foreseeable future, principally as a result of expenses
associated with the Company's product development efforts and anticipated
sales, marketing and general and administrative expenses. During the past two
fiscal years, the Company has satisfied its cash requirements principally
from advances from stockholders and private sales of equity securities and,
to a limited extent, from cash flows from operations. The primary uses of
cash have been to fund research and development and for sales, general and
administrative expenses.
At June 30, 1996, the Company had cash of approximately $7,000 and a
working capital deficit of approximately $617,000. As of the date hereof, the
Company's total debt obligations (exclusive of trade credit) consist
primarily of $1,825,000 principal amount payable to the holders of the Bridge
Notes. See "Certain Relationships and Related Transactions" and "Description
of Securities-Bridge Notes." The Bridge Notes will be repaid using net
proceeds of this Offering. See "Use of Proceeds."
Net cash used in operating activities for Fiscal 1994, Fiscal 1995 and the
six months ended June 30, 1996 totalled approximately $490,000, $297,000 and
$549,000, respectively. Net cash provided by financing activities for Fiscal
1994, Fiscal 1995 and the six months ended June 30, 1996 totalled
approximately $790,000, $195,000 and $405,000, respectively, reflecting the
proceeds from borrowings from stockholders, offset by principal repayments of
$500,000 and $27,000 in Fiscal 1994 and the six months ended June 30, 1996,
respectively.
Based on the Company's operating plan, the Company believes that the net
proceeds of this Offering, together with revenues from continuing operations,
will be sufficient to satisfy its capital requirements and finance its
operations for at least the next 18 months. Such belief is based upon certain
assumptions, and there can be no assurance that such assumptions are correct.
The Company may be required to raise substantial additional capital in the
future in order to carry out its business plan. In addition, contingencies
may arise which may require the Company to obtain additional capital.
Accordingly, there can be no assurance that such resources will be sufficient
to satisfy the Company's capital requirements for such period. The Company
anticipates that any additional financing required to meet its current plans
for expansion may take the form of the issuance of common or preferred stock
or debt securities, or may involve bank financing. There can be no assurance
that the Company will be able to obtain such additional capital on a timely
basis, on favorable terms, or at all. In any of such events, the Company may
be unable to implement its business plan.
Inflation
The impact of general inflation on the Company's business has been
insignificant to date and the Company believes that it will continue to be
insignificant for the foreseeable future.
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<PAGE>
BUSINESS
The Company
Thinking Tools develops powerful and flexible PC-based business simulation
software programs that enable users to simulate real life business
situations, explore complex operational problems and improve functional and
problem solving skills. The Company's agent-based, adaptive simulation
software has a broad range of potential business applications, including
strategic planning, sales and marketing, training, competitive positioning,
product marketing, operational planning, logistics and supply and demand
forecasting. The Company believes that its products are unique because they
combine user-friendly interactive interfaces used in sophisticated computer
games with its proprietary agent-based programming to produce interactive
adaptive business simulations. Agent-based, adaptive simulations can be used
to model competitive situations, simulate consumer behavior, demonstrate the
impact of management actions, seek system vulnerabilities and explore complex
operational systems. The Company's user-friendly interfaces enable persons
with no technical training to comfortably interact with complex systems.
The Company's agent-based programming enables autonomous agents in the
simulation to respond to user behaviors in unpredictable and realistic ways.
In contrast to other modelling and simulation tools in use and known to the
Company, which are generally built around a limited number of agents acting
according to pre-programmed, deterministic algorithms, the multiplicity of
autonomous agents and the results of their interactions with each other and
the user give the Company's simulations a complexity that mirrors human
behavior found in the real world.
The Company's capabilities in developing highly sophisticated simulations
are built upon experience gained from developing computer games, its skill in
programming autonomous and adaptive agents and its large and growing library
of reusable simulation objects. The Company's creative control is based on
its proprietary development environment, WHITEBOARD, which supports interface
building, object creation, simulation management, object management and
application frameworks. WHITEBOARD simplifies and supports the construction
of agent-based simulations and is the core of the development of each of the
Company's simulations.
The Company was formed to purchase, on December 31, 1993, certain assets
of the Division of Maxis, a leading computer game company and creator of the
simulation game SimCity(tm). Through the purchase agreement with Maxis, the
Company acquired the Division's equipment, staff, work-in-progress,
customers, prospects, software tools, libraries and processes.
Industry Overview
Simulations were among the earliest computer applications. Since the first
days of digital computers, simulations using equations have been applied to
scientific and engineering problems. Business simulations first began to
appear shortly thereafter. Companies have attempted to simulate complex
adaptive systems with models that were either fixed (deterministic) or
stochastic (probability- based). Alternatively, they have developed their own
custom systems based on executive information system (EIS) software packages.
In all cases, the models lacked the adapting and evolving characteristics of
real world systems; particularly because the most interesting business
systems are made up of elements (e.g., customers, competitors and markets)
that adapt their behaviors to each other. The elements in these systems
modify their external behavior and internal structure in order to make more
efficient use of their environments. Models based on formulae alone cannot
effectively recreate these complex, adaptive systems.
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In order to imitate these systems, models must themselves be adaptive.
Some definitions will help to explain how this is accomplished:
Object. A capsule of data and logic that are thematically related.
(bullet) Agent. An object that can act on its environment.
(bullet) Autonomous Agent. An agent that selects its behavior with the goal of
achieving a better fit to the requirements of its environment.
(bullet) Adaptive Agent. An agent that creates new behaviors in a non-random way
with the goal of achieving a progressively better fit to the
requirements of its environment.
A fusion of techniques from biology (natural selection, evolution and
genetics) and from computer science (cellular automata) led to early results
in development of adaptive agents during the 1970's and up to the late
1980's. The use of adaptive agents customizes the learning experience for
each user by allowing the simulation to discern user vulnerabilities and
confront the user with simulated events that focus on those weaknesses. This
hostile environment introduces the challenges that a particular user needs
most to understand. Simulation-based training using adaptive agents
emphasizes diagnosis, planning and problem solving skills rather than rote
learning or routine/automatic responses.
The Company believes that adaptive simulation methods are most effective
in the following applications:
(bullet) Training. Adaptive simulation-based training focusing on real time
diagnosis, planning and problem solving.
(bullet) Rehearsal. Individual and group rehearsal of responses to simulated
contingencies used to evaluate the users' ability to handle various
emergencies.
(bullet) Shared Awareness. Simulation of proposed uses of critical knowledge.
Where does each department or employee fit; what does the business
look like; what changes are necessary and why; what is the plan?
(bullet) Hypothesis Testing and Rule Finding. Simulations that apply rules
that govern the behavior of a critical system. What are the rules
that govern the behavior of individual elements (e.g., customers
within a market segment); and how do elements interact with each
other?
(bullet) Leverage Finding. Simulations that apply the present understanding
of the system's condition and the rules for its elements. Where are
the critical leverage points for creating big swings with economic
application of force? How will the system amplify applications of
force?
The adaptive business simulation software industry is in its infancy. When
computing power was prohibitively expensive, only the largest companies could
hope to gain the benefit of sophisticated business simulation. But, as
computing power has dropped in price, even small companies have come to
possess hardware capable of supporting adaptive simulations, provided that
the software is available. The market for adaptive simulation software is
expected by the Company to continue to grow dramatically as the fixed cost of
supporting hardware continues to drop.
The Company believes that the use of simulation models in the business
world will continue to increase as a result of the following:
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(bullet) Increasing use of computers to assist decision-makers with complex
strategic issues, including operational support software for problem
management and resolution.
(bullet) Increasing corporate demand for more sophisticated forecasting tools
than are provided by executive information systems and on-line
analytical processing software.
(bullet) Increasing recognition of models and simulations as cost-effective
alternatives to specialized personnel in the areas of marketing and
sales.
(bullet) Increasing use of multi-media software to support collaboration
among geographically separated workgroups.
(bullet) Increasing PC performance allowing the use of advanced graphics and
multi-media to represent business situations.
(bullet) Increasing importance of competitive product positioning and
shortening the development time for products.
The Thinking Tools Solution
The Company's approach to simulation is known as agent-based, adaptive
simulation (as distinct from equation-based simulation). Agent-based methods
involve software environments filled with many agents. As the agents interact
they individually select behavior rules that guide their actions. These
actions in turn influence the rule selections made by other agents. The
behavior that results from the application of all of these individual
behavior rules is called emergent behavior.
One example of emergent behavior is temperature. Although individual
molecules in the atmosphere of a room, have a location and velocity, they do
not have temperature. Temperature results from the interactions of all of the
molecules in the room's atmosphere. Temperature is a measure of emergent
behavior. Emergent behavior is typically far more complex than the behavior
of an individual agent particularly where the agents are adaptive. Emergent
behavior simulation developed by the Company allows the behavior of a
business process, organization or market to be simulated.
The Company combines its experience in developing agent-based simulations
with experience derived from the development of computer games and their
human interface style. Most software presents the user with an information
surface: users put information onto the surface and the software processes
it, or the software puts information onto the surface and users make use of
it. The human interface used in many computer games is an artificial
environment created by software and reflected in a multi-media format. Users
perceive and sometimes shape or manage the systems present in those places.
This style is much more closely related to film or theater than to interfaces
found in other types of software. In most of its projects to date, the
Company has combined the use of agent-based methods and computer game
interface techniques. The Company produces software products that are
accessible and adaptive. These tools make it easy for users to become
involved and assume a role in the system that they are exploring.
The Company's business process simulations treat complex management tasks
which require almost continuous use of judgment, insight and problem solving
skills, focusing on assisting users to develop these skills. The simulations
also provide operational support that helps users as they plan and solve
problems. These simulations promote the user's thinking about the complex
systems upon which their operations depend. The Company believes that the
principle competitive advantages of its products over other business process
simulations are the adaptive nature of its simulations and its proprietary
development interface, WHITEBOARD. WHITEBOARD supports interface building,
object creation, simulation management, object management and application
frameworks.
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Growth Strategy
The Company devoted its initial efforts to demonstrating the feasibility
of the use of adaptive simulation for business applications by developing
customized software programs for large clients pursuant to strategic
distribution arrangements. The Company also assembled a highly-skilled
technical team, established a growing library of reusable objects and
enhanced its WHITEBOARD technology.
The Company's success in completing major projects for industry leaders
who have validated the concept underlying the Company's technology, has
positioned it to expand the scope of its operations to include the
development of internally-funded software products and the direct marketing
of the Company's products, in addition to continuing to selectively accepting
projects funded by third parties.
The Company's goal is to develop a variety of simulations in divergent
business areas. As a part of this strategy, the Company intends to undertake
self-funded development of new simulations with broader market appeal and to
adapt certain previously developed simulations, rights to which were retained
by the Company, for sale as turnkey packages to new vertical markets. The
Company will also, upon request, customize these packages on a project basis.
The Company plans to continue to expand its custom business selectively,
while moving to invest in specific horizontal and vertical products and
distribution channels aimed at the high end corporate and professional
service markets. The Company intends to focus its custom business on projects
that either allow for further development of an important technology on a
paid basis, or facilitate the development of relationships with distribution
partners which could provide benefits to the Company beyond the custom
project. Custom projects will not be limited exclusively to the corporate
sector, but may include the military and intelligence communities, because of
their interest in leading edge technology. An important feature of the
Company's "custom" strategy is to reduce the required amount of custom
development for each product, and therefore its cost. The Company will seek
to accomplish this goal by increasing its use of semi-custom designs (design
families) and through improved development of object library creation
techniques.
In the future, the Company may occasionally agree to work with a customer
to produce a retail, shrink-wrapped product. In such cases, it is expected
the customer would pay the entire cost of development and the Company would
receive an ongoing royalty on all retail sales. The Company believes that
only in such cases would its products be brought to market through a retail
channel.
The Company intends to build management depth and breadth and expand the
Company's marketing and sales capabilities. The Company intends to hire a
chief executive officer and chief financial officer. The Company also intends
to hire a senior marketing and sales executive to further develop the product
strategy and implement and expand the Company's distribution strategy. The
Company plans to establish a small direct sales force to focus on key
products and markets and to solicit custom business. The Company intends to
utilize a substantial portion of the net proceeds of this Offering for
implementing this growth strategy. See "Risk Factors--Limited Marketing
Experience; Need for Additional Personnel", "-- Risks Associated with Growth
Strategy" and "Use of Proceeds."
Products
The Company's products are fully-graphical, interactive and provide
constant graphical feedback with a wide variety of responses to the user's
actions. To date, the Company's technology has been used to develop a variety
of such products.
SimRefinery is a demonstration program which was released by the Division
in late 1992 and purchased by the Company along with certain assets of the
Division. SimRefinery serves as the Company's
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model demonstration program. The program shows how supply and demand
conditions interact, the impact on the financial performance of the refinery
of changes in supply and demand conditions and of changes in marketplace
objectives. The user learns about refineries through taking an active role in
the simulation as the plant manager of the refinery.
SimHealth is a simulation of the impact of various proposed reforms on the
United States health care system and has some 5,000 objects. It simulates
both the supply and demand sides of health care, shows the impact of choices
and values on the financial health of the system and of its usage and demand.
The program was developed for the Markle Foundation in 1994 under a contract
negotiated by the Division, and assumed and completed by the Company.
TeleSim is a simulation of the local exchange telephone market for a
particular region and competitors in that region. The package simulates the
world of a telephone company, including the particular user's sales and
service regions and its market opportunities and vulnerabilities. The user
can actively explore the impact on the financial performance of the
corporation and the impact on its competitive environment of changes in the
conditions of supply and demand or emphasis of different corporate
objectives. Competing companies are driven by adaptive agents that base their
strategies in part on the actions taken by the user. TeleSim has some 12,000
objects. Since its initial development under a contract with Coopers in 1994,
subsequent versions of TeleSim have been produced and sold through Coopers to
Sprint Corp. and AT&T Corp.
Project Challenge, is a simulation for project management of information
systems projects. Project Challenge users create a model of their projects,
then operate the projects under benign, realistic or hostile environments. A
variety of novel displays keep the user informed about project conditions,
including scheduling, budget and human resources. This simulation program can
assist in both training and operational roles. Project Challenge is highly
sophisticated, incorporating over 15,000 objects. The development of the
simulation is being funded by SystemHouse; however, the Company retained the
rights to create variations of this specific simulation for other kinds of
project management, such as construction projects, and is currently working
on other business simulation projects. The Company anticipates that Project
Challenge will also serve as a foundation for training or performance support
applications in other occupational fields.
Product Development
The Company believes that its programming technology, resources and
experience will allow it to move beyond the current generation of simulation
products. Several advanced capabilities developed and cultivated by the
Company since its inception play a critical role in its product development
work.
The Company has developed a process for investigating, describing and
modeling complex adaptive systems. Conceptual and detailed design steps in
this process make it possible to translate an understanding of the complex
adaptive system into specifications required by programmers to build the
final product. The Company has developed and refined its ability to program
adaptive agents to produce new behaviors at run time, while remaining within
a range of realistic behavior.
The Company continues to introduce and apply newer, more powerful
techniques for programming its agents, often incorporating methods based on
biological processes.
The Company has succeeded in creating a class of "bad agents," known as
Malion, to explore vulnerabilities in systems, networks or practices so that
the user can then repair them.
The following markets are ones in which the Company is either already
pursuing, or plans to pursue, product applications. See "Risk
Factors--Dependence on Emerging Market for Business Simulation Software" and
"--Uncertainties Related to Development of Additional Products."
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<PAGE>
Business Management, Sales and Training. In these simulations, the Company
intends to focus on markets that lend themselves specifically to the
strengths of simulation, namely markets requiring simulations mirroring
circumstances involving multiple central variables amongst which tradeoffs
continually need to be made, with outcomes that are not always intuitively
obvious. An example of a business process simulation is Project Challenge,
which trains corporate employees in the art of project management. The
Company has begun development of its second product in this category which
will focus on the sales process and the interpersonal skills critical to the
sales process. Products in the business process category generally will be
designed to support easy field-modification by the training department or
student, but will not require custom programming by the Company.
Contingency and Security. These proposed simulations will provide
emergency response service providers with a means of training, rehearsing and
planning their disaster recovery procedures. The Company believes that this
field is particularly appropriate for simulation since all parts of an
organization must be involved, the actual event being prepared for happens
rarely, if at all, and the consequences of the event can be disastrous if not
handled properly. The first proposed product will treat information
technology recovery for corporations, but related products may be developed
for other forms of emergency response.
Internet and Intranet Simulations as Marketing Tools. Simulations of a
host's business would reside on its home page or intranet and combine the key
properties of adaptive and interactive simulators with the accessibility of
wide area networks. Because these proposed simulations will emulate games,
the Company believes that internet users will view them as compelling and
engaging ways to spend time. While protecting the individual consumers'
identity, the site would track and provide to the host valuable marketing
information relating to the way consumers learn, think and decide about the
hosts' products, and depending on design perhaps, competitive products as
well. In this way the host could collect valuable marketing information.
Adaptive Supply and Distribution. The Company has completed a proof of
concept simulation in the area of self-ordering distribution that the Company
believes could change the way companies think about and plan their supply,
distribution, replenishment and logistics capabilities. The Company believes
that a simulation of this type would be of substantial interest in corporate,
military and other government circles.
Thought and Decision Processes. The Company is working on a simulation
that ascribes motives, goals, thoughts and strategies to other people or
groups in order to make sense of their past behavior and to anticipate their
future behavior. The simulation provides users with a means of building and
updating models of the thought and decision processes of other individuals or
groups including, for example, the competition or other departments within an
organization. The product is intended to create a picture of this dynamic and
often very complex process that helps the user to explore what she knows or
assumes about the process. This simulation will be used to clarify
communication with others and to further understand the thought process under
examination. The first application in development is in the area of complex
strategic decision-making. Future commercial applications will be designed to
help corporate customers as they collect, organize and apply this complex and
subtle knowledge about their business decisions, or those of their
competitors and customers.
Customers
Historically, the Company has sold its products to a number of large
companies, as well as governmental agencies, foundations, text book and
traditional publishers and consulting firms. The following list identifies
certain of the Company's customers:
<TABLE>
<CAPTION>
<S> <C>
Coopers & Lybrand, L.L.P. Systems Engineering Solutions, Inc.
SHL SystemHouse, Inc. Xerox Corp.
Andersen Consulting L.L.P. Harcourt General, Inc.
</TABLE>
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Some of the Company's customers have contracted for the Company's
development of specific simulations in order to resell such simulations as a
value added component of their consulting or other services. The following
list identifies certain end-users who have purchased the Company's products
directly from customers of the Company:
<TABLE>
<CAPTION>
<S> <C>
AT&T Corp. Sprint Corp.
NYNEX Corporation Pacific Telecom, Inc.
U.S. Army U.S. Air Force
</TABLE>
Sales to three customers for the six months ended June 30, 1996 accounted
for 33%, 32% and 18%, respectively, of the Company's sales for the six months
ended June 30, 1996. Sales to three customers in Fiscal 1995 accounted for
27%, 14% and 13%, respectively, of the Company's sales in Fiscal 1995. Sales
to two customers in Fiscal 1994 accounted for 59% and 17%, respectively, of
the Company's sales in Fiscal 1994.
Marketing and Sales Strategy
To date, the Company has not devoted significant financial resources to
marketing, and customers have come through word-of-mouth or following
referrals from Maxis and others. The Company has also generated inquiries by
presentations at industry and academic forums with high level corporate
audiences. John Hiles, the founder of Thinking Tools, is a highly sought
after speaker at such events.
The Company intends to distribute its product through existing channels of
its strategic partners as well as by initiating direct sales to customers
through its proposed sales force, and through distributors and value added
resellers ("VARs"). The Company has marketing agreements with Coopers for
TeleSim and with SystemHouse for Project Challenge. The Company is also in
discussion with additional prospective VARs. As the Company moves into new
specific product areas, it intends to seek strategic alliances in such areas.
The Company plans to continue making presentations and appearances at
academic forums and corporate-sponsored events.
Proceeds from this Offering will be used to implement the Company's
marketing and sales efforts. The Company expects to hire a direct sales force
following this Offering. A senior marketing and sales executive is expected
to be hired to further develop the product strategy and implement and expand
the Company's distribution strategy. See "Risk Factors--Limited Marketing
Experience; Need for Additional Personnel" and "Use of Proceeds."
Intellectual Property
The Company does not have any patents and has not filed patent
applications on its products because patents are often insufficient to
protect software. The Company regards the software that it owns or licenses
as proprietary and relies primarily on a combination of trade secret laws,
nondisclosure agreements and other protection methods to protect its rights
to its products and proprietary rights.
It is the Company's policy that all employees and third-party developers
sign nondisclosure agreements. This may not afford the Company sufficient
protection for its know-how and its proprietary products, and other parties
may develop similar know-how and products, duplicate the Company's know- how
and products or develop patents that would materially and adversely affect
the Company's business. See "Risk Factors--Uncertainties Regarding
Intellectual Property."
The Company believes that its products and services do not infringe the
rights of third parties. However, there can be no assurance that third
parties may not assert infringement claims against the Company, with such
claims resulting in the Company being required to enter into royalty
arrangements, pay other damages or defend against litigation, any of which
could materially and adversely affect the Company's business.
28
<PAGE>
The Core Technology Asset-WHITEBOARD
WHITEBOARD is a collection of technologies that allows the software
developer to build a business simulation for any type of company or industry.
WHITEBOARD incorporates in the simulations all major variables for situations
defined by the programmer. The Company's simulation development process
allows the programmer to change variables and to see the effect of any other
combination of variables. WHITEBOARD is comprised of four main components:
(bullet) An object-oriented database engine to manage and access thousands of
objects while a simulation is running.
(bullet) A library of predefined business simulation objects and tools to enable
the developer to edit these objects and to build customized objects.
(bullet) An object integration component to allow users to import and use
objects from other technical environments, including other Company
simulations.
(bullet) The technical capability to add multi-media effects and approaches.
WHITEBOARD is a powerful tool for building simulations of complex adaptive
systems critical for simulating business environments. WHITEBOARD was
developed to provide programmers with a tool for easily building realistic
business simulations with a capacity for adaptive behavior, realistic
duplication of crisis or chaos situations and animation and graphical
displays. While incorporating advanced object- oriented concepts, it also
focuses on the graphics area and is designed for visual analysis. WHITEBOARD
allows developers to add full multi-media effects including sound, graphics
and digital video. This permits the designer to approach simulations in the
most realistic way possible. WHITEBOARD runs on an IBM PC on Windows. It is
written in the widely used language C and it runs with Novell software in a
workgroup environment. It is unique in its ability to run in the PC
environment.
The object-oriented database allows developers to build complex
applications by importing existing objects from other of the Company's
applications--both finished products and work-in- progress. The developer can
also edit existing simulation objects or add new types of simulation objects
to simulate new types of situations. In effect, the engine is a specialized
tool for rapidly building business simulations. For example, a family of
performance support or training applications for related occupations could be
developed substantially faster than Project Challenge--the foundation upon
which they could be based.
The Company plans to enhance WHITEBOARD to include tools that will allow
the developer to build customized simulation objects based on library objects
or other objects. The library of objects built into WHITEBOARD can be further
extended so that generic situations and processes can be highly customized to
the precise application required by the developer.
The WHITEBOARD technology has been validated through use in the
development of the Company's products. Developers have been able to carry out
design, simulation and testing that would have otherwise been inordinately
time consuming and expensive at a fraction of the cost and the time spent.
Use of WHITEBOARD has reduced the time required for prototyping the
simulation and testing the marketing and launch of a product to a few months.
The ability of WHITEBOARD to contribute to reductions in cycle time and to
model strategic choices provides a significant competitive factor to the
Company.
Competition
The market for business simulation software is highly competitive, subject
to rapid technological change and emerging industry standards. The Company
believes that the principal competitive factors in its markets are product
performance, product maintenance, support and price. The software industry in
general is highly competitive and most established companies in the business
software field are substantially larger and have greater financial resources
than the Company. See "Risk Factors--Technological Change; Risk of
Obsolescence; Industry Standards" and "--Competition"
29
<PAGE>
Presently, internal development of business simulations by companies
seeking simulation capability represents the main source of competition to
the Company's products and services. However, because it generally is not
economical for a business to develop and continually upgrade such a product
for its own needs alone, the Company believes that internal development
produces a less cost effective solution to the developer's needs.
Internal developers are currently limited to using equation-based
simulation tools for their simulation program development. Equation-based
models will not duplicate the adaptive or chaotic behavior of systems
available from the Company. No generally available sources of tools will help
corporate technical staff to design models of complex adaptive systems
competitive with those of the Company. Even with programming tools for
agent-based simulations, design know-how like that refined and practiced at
the Company would still be required to create rich and effective tools and
are unlikely to be available in an in- house setting.
Authoring tools such as MacroMedia's Director and Asymmetrix' Toolbook can
be used to develop parts of the user interface for simulations. Authoring
tools are developing a rich suite of multimedia effects and are optimal for
building interesting graphic user interfaces and interactive applications.
However, these tools cannot match the extensive customized and specialized
agent-based, adaptive simulation objects possessed by the Company.
The Company believes that the following companies constitute the principal
participants in the business simulation software market at this time:
Aspen Technologies, Inc. ("Aspen") supplies computer-aided chemical
engineering software products to the process manufacturing industries.
Aspen's software allows chemical engineers to create mathematical models of
manufacturing processes and to predict the performance of such procedures
under varying equipment configurations and conditions.
GSE Systems, Inc. ("GSE") designs, develops and supplies high fidelity,
real time simulation software, systems and services for the energy and
manufacturing industries. GSE develops simulation products for nuclear power
plants, fossil fuel plants, petroleum refineries, chemical processing plants
and other industrial manufacturing plants.
Integrated Systems, Inc. provides software development tools in several
industries. Its products help manufacturers develop and simulate dynamic
systems.
IntelliCorp, Inc. ("IntelliCorp.") develops and markets computer software
that helps in creating knowledge-based computer systems, solving difficult
problems and distributing information. IntelliCorp.'s software is aimed at
the mainstream business market.
Legacy Software, Inc. develops entertainment and education software
products for homes and schools.
Meta-Software, Inc. develops, markets and supports simulation and library
generation software products for use in integrated circuit design.
MPSI Systems, Inc. ("MPSI") develops and markets proprietary computer
application software and related databases used by multi-outlet retailers.
MPSI's product constructs a mathematical model of a retail market, allowing
clients to simulate various market changes.
PRI Automation, Inc. manufactures factory automation systems used in the
fabrication of integrated circuits by semi-conductor manufacturers.
30
<PAGE>
Games developers may also choose to enter the business simulation software
market in the future and become competitors of the Company.
The Company believes that its combination of computer game interfaces,
agent-based programming and design of complex adaptive system models
differentiates its products from those of its competitors.
Personnel
As of August 1, 1996, the Company had a total of 15 full-time employees,
including Mr. John Hiles, Mr. Bruce Skidmore, seven software engineers, two
designers, two artists and two administrative personnel. None of the
Company's employees is represented by a labor union and the Company has not
experienced any work stoppages. The Company considers its relations with its
employees to be good.
The market for qualified personnel, especially that for software engineers
and programmers, is highly competitive. The Company believes that its future
success will depend, in part, on its continued ability to hire, assimilate
and retain qualified personnel including management, sales and marketing,
executive and direct sales force personnel. See "Business--Marketing and
Sales Strategy."
Facilities
The Company's principal offices are located at One Lower Ragsdale Drive,
I-250, Monterey, California 93940. The Company leases approximately 3,776
square feet of office space at this location. Annual lease payments are
expected to be $104,716.14 in the year ended December 31, 1996.
Legal Proceedings
The Company is not a party to any legal proceedings.
31
<PAGE>
MANAGEMENT
Officers, Directors, Key Employees and Consultants
The executive officers, directors, key employees and consultants of the
Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
---------------------- ---- ---------------------------------
Mr. John Hiles 50 Founder, President, Director
Mr. Fred Knoll 41 Chairman of the Board, Director
Ms. Esther Dyson 45 Director
Mr. Frederick Gluck 61 Director
Dr. Ted Prince 49 Director
Mr. Fran Saldutti 48 Director
Mr. Bruce Skidmore 37 Vice President of Engineering
Mr. Greg Rossi 40 Architect, WHITEBOARD
Mr. Rick Rosenbaum 49 Senior Applications Engineer
Mr. Mort Meyerson 57 Advisory Committee Member
</TABLE>
John Hiles is the founder and has been President of the Company and a member
of its board of directors, since its inception. Mr. Hiles' career spans 24
years in the software industry. From 1992 to 1993, he served in various
positions with Maxis Business Simulations, including that of General Manager.
While with Maxis, Mr. Hiles directed the development of SimHealth and
developed a means of transferring the key human interface properties of
entertainment games to business and government simulations. From 1986 to
1992, Mr. Hiles was President and co-founder of Delta Logic, Inc. From 1984
to 1986, Mr. Hiles served as Senior Vice President of product development at
Digital Research. From 1976 to 1983, Mr. Hiles was employed by Amdahl where
he lead the development of software products. In 1984, Mr. Hiles was in
charge of leading software development at Mead Data Central. Two of the many
products that have been produced by organizations that he directed were GEM,
one of the first graphical user interfaces for the PC, and UTS, Amdahl's
highly successful mainframe-compatible UNIX operating system which
foreshadowed the open systems movement by several years. Mr. Hiles holds an
A.B. from the University of California at Santa Barbara and took several
additional undergraduate and graduate courses in Computer Science at the
University of California at Los Angeles and the University of California at
Irvine.
Fred Knoll has been Chairman of the Board and a member of the board of
directors since September 1994. From 1987 to the present, Mr. Knoll has been
the principal of Knoll Capital Management, L.P., a venture capital firm
specializing in the information technology industry. From 1985 to 1987, Mr.
Knoll was an investment manager for General American Investors, responsible
for the technology portfolio, and served as the United States representative
on investments in leveraged buy-outs and venture capital for Murray
Johnstone, Ltd. of Glasgow, Scotland. From 1983 to 1985, Mr. Knoll served as
manager of venture investments for Robert Fleming, Inc., a U.K. merchant bank
in New York and was responsible for managing a venture capital fund as well
as managing a team whose responsibility was to identify public investment
opportunities. Mr. Knoll also held investment positions with the Capital
Group (Capital Research/Capital Guardian) from 1982 to 1983 and General
American Investors. During the 1970's, Mr. Knoll worked in sales and
marketing management for Data General and Wang Laboratories, Inc. Mr. Knoll
is a director of numerous companies including Spradling Holdings, US
Envirosystems and Lamar Signal Processing, Ltd., and is a principal of Valor
Capital Management, L.P., a private investment limited partnership. Mr. Knoll
holds a B.S. in Computer Science from M.I.T. and an M.B.A. from Columbia
University in Finance and International Business.
Esther Dyson has been a member of the board of directors since October 1994.
Since 1983, Ms. Dyson has served as president of EDventure Holdings, a
diversified company focusing on emerging information technology worldwide,
and on the emerging computer markets of Central and Eastern Europe. Since
1994,
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<PAGE>
Ms. Dyson has been chairman of the Electronic Frontier Foundation and has
been a member of the US Nation Information Infrastructure Advisory Council,
where she co-chairs the Information Privacy and Intellectual Property
Subcommittee. Ms. Dyson is a member of the board of directors of the Global
Business Network, ComputerLand Poland and Cygnus Support, and she is a member
of the advisory board of Perot Systems. She is a limited partner in the
Maryland Software Fund. Ms. Dyson has also written articles on industry
topics for the Harvard Business Review, The New York Times, The New York
Times Magazine, WIRED Magazine and Forbes Magazine, among others.
Frederick W. Gluck has been a member of the board of directors since October
1994. Mr. Gluck has also served as vice-chairman and a director of Bechtel
Group, Inc. since 1995 and as a member of the Board of Directors of Bechtel
Enterprises, Inc. He also serves as a member of both companies' executive
committees. Prior to joining Bechtel, Mr. Gluck spent more than 25 years with
McKinsey & Company, and was ultimately the managing director of the Company.
Mr. Gluck serves on the Harvard Business School board of directors of the
Associates, the Management Education Council of the Wharton School, the U.S./
Hong Kong Economic Cooperation Committee, the Council on Foreign Relations
and the Board of the International Executive Service Corps.
Ted Prince has been a member of the board of directors since October 1994.
Since 1995, Dr. Prince has been the Chairman and CEO of INSCI Corporation.
Since 1992, Dr. Prince has been the President and founder of Perth Ventures,
Inc., an investment banking and public relations firm which specializes in
the emerging information technology area. Dr. Prince is also an author,
publisher and speaker in the area of emerging information technologies and
market trends. He is the author and publisher of The Technology
Fundamentalist, a national newsletter focusing on emerging computer
technologies and market trends. Dr. Prince has started up several information
technology companies including CP International, a company specializing in
text retrieval software, and Harwell Computer Power, a startup in the same
field. From 1984 to 1992, he served as President and CEO of several
companies, including the national computer services company, Computer Power
Group. From 1979 to 1984, Dr. Prince was the Chief Information Officer of the
Australian Social Security Agency where he was responsible for designing the
new national social welfare system.
Fran Saldutti has been a member of the board of directors since October 1994.
Mr. Saldutti has been, since 1995, a managing general partner of Ardent
Research Partners, L.P., a limited partnership founded in 1992 to invest
exclusively in the information technology markets. From 1990 through February
1995, Mr. Saldutti served as senior technology analyst for Amerindo
Investment Advisers. From 1984 through 1986 he served as Senior Vice
President and Director of Research for Gartner Securities and from 1986 to
1988 as Director of Technology Research for L.F. Rothschild. Mr. Saldutti
moved to the buy side in 1989 as senior technology analyst with Merrill Lynch
Asset Management's Sci/Tech Fund. From 1975 to 1989 Mr. Saldutti either
produced, sold or directed technology research for several leading technology
brokerage firms. Mr. Saldutti maintains board directorships in other
technology companies, including Kraft Kennedy, Lesser, a LAN industry systems
integrator and Meta Group, a market research firm specializing in information
technology. He is a member of the Software and Services Splinter Group of the
New York Society of Securities Analysts.
Bruce Skidmore has been Vice President of Engineering of the Company since
1993. Mr. Skidmore has 14 years of experience in the software development
industry as, among other things, a Project Manager, Engineering Manager and
Director of Engineering. His technical experience is in the areas of
operating system development and design, networks and application
architectures. From 1992 to 1993 he worked for Maxis as Director of Product
Development. From 1986 through 1992, he worked for Poquet and Delta Logic as
Manager of Communications and Systems Software. From 1981 to 1986, he worked
for Digital Research as a Network Project Manager. Mr. Skidmore holds a B.S.
in Computer Science from California Polytechnic State University, San Luis
Obispo.
Greg Rossi is the architect of WHITEBOARD and has been employed by the
Company as a programmer since 1994. Mr. Rossi has 12 years of experience in
the software industry focusing on object data bases and
33
<PAGE>
graphic user interfaces. From 1992 to 1993 he worked for Maxis as Senior
Member of the Technical Staff. From 1986 to 1992 he worked for Poquet and
Delta Logic as principal programmer. From 1985 to 1988 he worked for Digital
Research as a senior software engineer and from 1982 to 1984 for Dialogic
Systems as programmer. Mr. Rossi has a B.A. in Chemistry and Computer Science
from the University of California at Santa Cruz.
Rick Rosenbaum has served as the Company's Senior Applications Engineer since
its inception. Mr. Rosenbaum has 25 years of experience in the software
industry specializing in computer languages and simulation applications.
Prior to working at the Company, from 1992 to 1993, he served as Senior
Member of the Technical Staff of Maxis and, in 1986, as Manager of the Core
Languages Group of Sun Microsystems, and from 1987 to 1992 as Project Manager
of Digital Research and Bank of America. Mr. Rosenbaum holds a B.S. in
Electrical Engineering and an M.S. in computer science from the Georgia
Institute of Technology.
The Company has agreed for the five-year period commencing upon consummation
of this Offering, to nominate and use its best efforts (including the
solicitation of proxies) to elect one designee of the Underwriter to the
board of directors of the Company. No designee has been chosen as of the date
hereof. See "Underwriting."
Advisory Committee
The board of directors of the Company has formed an advisory committee to
provide it with industry and technology advice. The advisory committee
currently consists of one member.
Mort Meyerson has been Chairman and CEO of Perot Systems since 1992. From
1979 to 1986 he was President and Chief Executive Officer of EDS Information
Systems. Mr. Meyerson has had extensive experience in the software industry,
in running large technology companies and in investing in, growing and
capitalizing emerging technology companies.
Arrangements with Directors and Executive Officers
John Hiles, President of the Company, is employed by the Company under an
employment agreement (the "Employment Agreement") that is subject to
automatic annual renewals unless terminated by the Company or Mr. Hiles upon
90 days' prior written notice. Pursuant to the Employment Agreement, Mr.
Hiles receives a salary of $132,000 per year, which salary may be increased
at the discretion of the board of directors, and may be supplemented by
certain bonuses at the discretion of the board of directors of the Company.
The Company believes the terms of the arrangement are no less favorable to
the Company than the terms that it could have obtained from an unaffiliated
third party.
Fred Knoll, the Chairman of the Board of the Company, has provided, and
continues to provide certain executive and related consulting services to the
Company as requested by the Company including serving as Chairman of the
Board, consulting on various aspects of the Company's business and
negotiating certain contractual and employment arrangements. To date, Mr.
Knoll has not been compensated for such services, however, Mr. Knoll may, in
the future, be compensated for such services at the discretion of the board
of directors in an amount which is not anticipated to be in excess of
$150,000 per annum. Mr. Knoll is also entitled to reimbursement of any
expenses which he incurs in connection with providing services to the
Company. To date, Mr. Knoll has incurred unreimbursed expenses of
approximately $70,000, which expenses are expected to be reimbursed from the
proceeds of this Offering. Mr. Knoll, through certain affiliates, controls
Thinking Technologies, L.P.
All directors are elected for a term of one year and hold office until the
earlier of their resignation, removal from office or the next annual meeting
of stockholders and until their successors have been elected and qualified.
34
<PAGE>
Executive Compensation
The following table sets forth the annual and long-term compensation for
services in all capacities to the Company for the fiscal year ended December
31, 1995 of Mr. Hiles, the President of the Company. Mr. Hiles (the "Named
Executive Officer") was the only executive officer of the Company who
received over $100,000 in compensation in the form of salary and bonus for
the year ended December 31, 1995.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------
Annual Compensation Awards Payouts
------------------------------
Long-
Term
Other Restricted Incentive
Name and Annual Stock Options Plan All Other
Principal Position Year Salary Bonus Compensation Award(s) SARs Payout Compensation
- ---------------------- --- ------- ---- ----------- -------- ----- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John Hiles, 1995 $132,000 -- -- -- -- -- --
President 1994 $132,000 -- -- -- -- -- --
</TABLE>
1996 Stock Option Plan
The Thinking Tools, Inc. 1996 Stock Option Plan (the "Plan") was adopted by
the board of directors and approved by the Company's stockholders in August
1996.
The purpose of the Plan is to attract and retain key personnel. The Plan
provides for the grant of options to acquire a maximum of 376,000 shares of
Common Stock of which options to purchase 145,036 shares have been granted under
the Plan, including (i) options to purchase 41,036 shares of Common Stock
granted to certain members of the Company's board of directors under the Plan,
at an exercise price of $1.00 per share, (ii) options to purchase 52,000 shares
of Common Stock granted to certain of the Company's employees at an exercise
price of $.79 per share and (iii) options to purchase 52,000 shares of Common
Stock granted to certain of the Company's employees at an exercise price of
$5.00 per share. The Plan permits the granting of incentive stock options
("ISOs") or non-qualified stock options ("NSOs") at the discretion of the
administrator of the Plan (the "Plan Administrator"). The board of directors
acts as the Plan Administrator. Subject to the terms of the Plan, the Plan
Administrator determines the terms and conditions of options granted under the
Plan. Options granted under the Plan are evidenced by written agreements which
contain such terms, conditions, limitations and restrictions as the Plan
Administrator deems advisable and which are not inconsistent with the Plan. ISOs
may be granted to individuals who, at the time of grant, are employees of the
Company or its affiliates. NSOs may be granted to directors, employees,
consultants and other agents of the Company or its affiliates. The Plan provides
that the Plan Administrator must establish an exercise price for ISOs that is
not less than the fair market value per share of the Common Stock at the date of
grant. Each ISO must expire within ten years of the date of grant. However, if
ISOs are granted to a person owning more than 10% of the voting stock of the
Company, the Plan provides that the exercise price may not be less than 110% of
the fair market value per share at the date of grant and that the term of such
ISOs may not exceed five years. The Plan Administrator has the authority to
establish vesting periods for options granted under the Plan, or to grant
options which are fully vested at the time.
An optionee whose relationship with the Company or any related corporation
ceases for any reason (other than termination for cause, death or total
disability, as such terms are defined in the Plan) may exercise options in the
three-month period following such cessation (unless such options terminate or
expire sooner by their terms), or in such longer period determined by the Plan
Administrator in the case of
35
<PAGE>
NSOs. Unexercised options granted under the Plan terminate upon a merger
(other than a stock merger), reorganization or liquidation of the Company;
however, immediately prior to such a transaction, optionees may exercise such
options without regard to whether the vesting requirements have been
satisfied.
Options granted under the Plan convert into options to purchase shares of
another corporation involved in a stock merger with the Company, unless the
Company and such other corporation, in their sole discretion, determine that
such options terminate. Such converted options become fully vested without
regard to whether the vesting requirements in the option agreement for such
options have been satisfied, unless the board of directors determines
otherwise.
The option exercise price may be paid in full at the time the notice of
exercise of the option is delivered to the Company and must be paid in cash,
by bank certified or cashier's check or by personal check. Options are
nontransferable with certain exceptions. The board of directors has certain
rights to suspend, amend or terminate the Plan provided stockholder approval
is obtained.
Options Granted Outside the Plan
In addition to the ISOs and NSOs which may be granted under the Plan, as at
June 30, 1996 the Company has granted options to purchase an aggregate of (i)
58,964 shares of Common Stock outside of the Plan at an exercise price of $.79
per share, to certain of its directors in connection with the directors joining
the Company's board of directors and (ii) 15,000 shares of Common Stock outside
of the Plan at an exercise price of $1.00 per share, to a non-affiliate of the
Company.
36
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's voting securities as of
the date of this Prospectus, and as adjusted to reflect the sale of shares
offered hereby by (i) each person who is known by the Company to own of
record or beneficially more than 5% of the outstanding Common Stock, (ii)
each of the Company's directors and the Named Executive Officer, and (iii)
all directors and executive officers of the Company as a group. Except as
otherwise indicated, the stockholders listed in the table have sole voting
and investment powers with respect to the shares indicated.
<TABLE>
<CAPTION>
Percentage of Class(1)
-----------------------------------
Name and Address Number of Shares
of Beneficial Owner Beneficially Owned Before Offering After Offering
- ------------------------------------------------- ------------------- --------------- ----------------
<S> <C> <C> <C>
Thinking Technologies, L.P.(2) 2,579,573 70.6% 51.0%
Mr. Fred Knoll(2)(3) 2,579,573 70.6% 51.0%
Mr. John Hiles(4) 1,076,677 35.5% 24.3%
Ms. Esther Dyson(5)(6) 25,000 * *
Mr. Frederick Gluck(6)(7) 25,000 * *
Dr. Ted Prince(6)(8) 25,000 * *
Mr. Fran Saldutti(6)(9) 25,000 * *
All directors and executive officers
as a group (6 persons)(2)(3)(4)(5)(6) 3,756,250 100.0% 72.8%
</TABLE>
*Less than one percent.
(1) Percentage of ownership before this Offering is based on 3,031,758 shares
of Common Stock outstanding as of the date of this Prospectus. For each
beneficial owner, shares of Common Stock subject to convertible
securities exercisable within 60 days of the date of this Prospectus are
deemed outstanding for computing the percentage of such beneficial owner.
(2) Includes 468,242 shares of Common Stock issuable upon exercise of the
Technologies Warrants and 156,250 shares of Common Stock issuable upon
exercise of Bridge Warrants issued as part of the Bridge Units purchased
by Technologies. Does not include 75,454 shares of Common Stock which may
be purchased by Technologies from John Hiles upon the exercise of an
outstanding option, for $5.00 per share. See "Certain Transactions" and
"Description of Securities." The address of Thinking Technologies, L.P.
is 200 Park Avenue, Suite 3900, New York, New York 10166.
(3) Includes shares beneficially owned by Thinking Technologies, L.P. a
limited partnership indirectly controlled by Mr. Knoll. The address of
Mr. Knoll is c/o Knoll Capital Management, 200 Park Avenue, Suite 3900,
New York, NY 10166.
(4) Includes 75,454 shares of Common Stock which may be purchased by
Technologies from John Hiles upon the exercise of an outstanding option
for $5.00 per share. The address of Mr. Hiles is c/o Thinking Tools,
Inc., One Lower Ragsdale Drive, I-250, Monterey, California 93940.
(5) The address of Ms. Esther Dyson is c/o Edventure Holdings, Inc., 104
Fifth Avenue, 20th Floor, New York, NY 10011-6987.
(6) Includes an aggregate of 25,000 shares of Common Stock issuable to each
non-affiliated director of the Company upon exercise of outstanding
options. See "Management--1996 Stock Option Plan" and "-- Options Granted
Outside the Plan."
(7) The address of Mr. Gluck is c/o Bechtel, Inc., 50 Beal Street, San
Francisco, CA 94105.
(8) The address of Dr. Prince is c/o Perth Ventures, 342 Madison Avenue,
#716, New York, NY 10173.
(9) The address of Mr. Saldutti is c/o Ardert Research Partners, 200 Park
Avenue, 39th floor, New York, NY 10166.
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<PAGE>
CERTAIN TRANSACTIONS
In connection with its purchase of certain assets from Maxis, and in order
to fund its continuing operations, the Company entered into a stock purchase
and loan agreement, dated September 28, 1994 between and among Technologies
and the Company (the "Technologies Agreement"). Technologies was formed by
Knoll Capital Management, L.P. in order to purchase Common Stock of the
Company and to advance the funds provided for under the Technologies
Agreement. The general partner of Technologies is Knoll Capital Management,
L.P., an affiliate of Mr. Fred Knoll, the Company's Chairman of the Board.
Mr. Mort Meyerson, a member of the advisory board of the Company, is a
limited partner in Technologies.
Pursuant to the Technologies Agreement, Technologies purchased 61.11% of
the Company's authorized and issued Common Stock, for the purchase price of
$100,000 and loaned to the Company $1,200,000 (the "Loan"). The Loan was
evidenced by a promissory note (the "Technologies Note") due and payable on
September 27, 1999. The Technologies Note provides for the semi-annual
payment of interest at ten percent (10%) per annum beginning when and if the
Company realized $2,000,000 in gross income during any fiscal year. No
interest has been paid on the Loan. In connection with the Technologies
Agreement, Mr. Hiles executed an irrevocable proxy authorizing Knoll Capital
Management, L.P. to vote his shares of Common Stock, which proxy is effective
until the Company (i) is acquired through a merger or acquisition; or (ii)
effects an initial public offering in the aggregate amount of $2,500,000. On
and before July 29, 1996, Technologies made additional loans to the Company
in an aggregate principal amount of $502,000, with interest at a rate of 10%
per annum, which loans were due and payable on December 31, 1996 (the
"Additional Loan"), but were repaid in connection with the Bridge Financing.
In connection with the Additional Loan, Technologies received warrants to
purchase 468,242 shares of Company Common Stock at an exercise price of $1.07
per share. See "Description of Securities--Technologies Warrants."
Pursuant to the Technologies Agreement, as long as Technologies owns 20%
of the Company's Common Stock, the Company may not take certain actions
without the approval of the Company's board of directors. Technologies has
entered into a Consent, Waiver and Amendment dated as of August 28, 1996 (the
"Consent & Waiver") with the Company in connection with the Bridge Financing
providing that these covenants shall terminate upon consummation of this
Offering.
In connection with the Technologies Agreement, the Company and Mr. Hiles
agreed to certain co-sale rights and registration rights. Pursuant to the
Consent and Waiver, these rights will terminate upon consummation of this
Offering.
In addition, in connection with the Bridge Financing, pursuant to the
Consent and Waiver, the following transactions were consummated:
Thinking Tools, Inc., a California corporation ("TTI"), was merged with
and into its wholly-owned subsidiary Thinking Tools, Inc., a Delaware
corporation. Pursuant to the Merger, each share of common stock of TTI
outstanding prior to the Merger was exchanged for .7462 shares of Common
Stock.
Pursuant to a plan of recapitalization adopted by the Company's board of
directors, Technologies converted $1,200,000 aggregate principal amount of
outstanding indebtedness and $120,310 of accrued interest into an aggregate
of 263,158 shares of Common Stock issued to Technologies.
Technologies purchased $625,000 aggregate principal amount of Bridge Notes
in the Bridge Financing immediately following repayment by the Company of
$502,000 aggregate principal amount of outstanding indebtedness and $123,000
of accrued interest due to Technologies from the proceeds of the Bridge
Financing.
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DESCRIPTION OF SECURITIES
The following summary description of the Company's capital stock is
qualified in its entirety by reference to the Company's Certificate of
Incorporation. The following summary description of the securities of the
Company is qualified in its entirety by reference to the Certificate of
Incorporation, the Technologies Warrants, the Bridge Notes and the Bridge
Warrants, forms of which have been filed as exhibits to the Registration
Statement on Form SB-2 of which this Prospectus forms a part.
Common Stock
The Company is authorized to issue up to 20,000,000 shares of Common
Stock, par value $.001 per share, of which 3,031,758 shares are outstanding
as of the date hereof. Holders of Common Stock are entitled to one vote for
each share held of record on each matter submitted to a vote of stockholders.
There is no cumulative voting for election of directors. Subject to the prior
rights of any series of preferred stock which may from time to time be
outstanding, holders of Common Stock are entitled to receive ratably,
dividends when, as, and if declared by the board of directors out of funds
legally available therefor and, upon the liquidation, dissolution, or winding
up of the Company, are entitled to share ratably in all assets remaining
after payment of liabilities and payment of accrued dividends and liquidation
preferences on any preferred stock. See "Risk Factors--Lack of Dividends" and
"Dividend Policy." Holders of Common Stock have no preemptive rights and have
no rights to convert their Common Stock into any other securities. The
outstanding Common Stock is validly authorized and issued, fully paid, and
nonassessable.
Preferred Stock
The Company is authorized to issue up to 3,000,000 shares of preferred
stock, par value $.001 per share, of which no shares are outstanding as of
the date hereof. The preferred stock may be issued in one or more series, the
terms of which may be determined at the time of issuance by the board of
directors, without further action by stockholders, and may include voting
rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion rights, redemption
rights, and sinking fund provisions. The issuance of any such preferred stock
could adversely affect the rights of the holders of Common Stock and,
therefore, reduce the value of the Common Stock. The ability of the board of
directors to issue preferred stock could discourage, delay, or prevent a
takeover of the Company. See "Risk Factors--Anti-Takeover Effects of Certain
Provisions of Certificate of Incorporation and Delaware Law."
Technologies Warrants
The Company currently has outstanding Technologies Warrants to purchase up
to 468,242 shares of Common Stock at an exercise price of $1.07 per share at
any time until December 31, 2006. The Technologies Warrants contain
anti-dilution provisions providing for adjustment of the exercise price and
the number of shares of Common Stock underlying the Technologies Warrants
upon the occurrence of certain events, including stock dividends, stock
splits and recapitalizations. The Technologies Warrants also entitle the
holders to certain "piggyback" registration rights with respect to the shares
issuable upon exercise thereof at any time that the Company files a
registration statement other than one relating solely to the sale of
securities to participants in a Company employee benefit plan, one not
including substantially the same information as would be required to be
included in a registration statement covering the sale of such Common Stock,
or one only registering Common Stock issuable upon conversion of convertible
debt securities which are also being registered.
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Bridge Units
The Bridge Units consist of the Bridge Notes and the Bridge Warrants. Each
Bridge Unit consists of a Bridge Note issued by the Company in the principal
amount of $100,000 and a Bridge Warrant to purchase up to 25,000 shares of
Common Stock at an exercise price equal to the lesser of $4.20 per share or
60% of the initial public offering price per share in this Offering. The
Bridge Notes and the Bridge Warrants are separately transferable, subject to
certain restrictions upon transferability.
Bridge Notes
The Bridge Notes bear interest at the rate of 10% per annum with interest
to accrue from the date of issuance and payable in four quarterly
installments on the first day of each December, March, June and September
commencing on December 1, 1996 and at maturity. Principal of, and any accrued
and unpaid interest on the Bridge Notes will be due and payable in full on
the earlier of (i) the consummation of this Offering, (ii) one year from the
date on which the Bridge Notes were issued, and (iii) the date of the closing
of a sale (or the closing of the last of a series of sales) of securities by
the Company or any subsidiary or affiliate thereof (other than the Bridge
Notes and Bridge Warrants), the gross proceeds of which, in the aggregate,
equal or exceed $1,825,000. The principal balance of the Bridge Notes, and
accrued interest thereon, will be repaid with the net proceeds of this
Offering. See "Use of Proceeds."
The Company has the right, at its option, to extend the maturity date of
the Bridge Notes for up to one year. In the event that (A) the Company elects
to extend such maturity date for six months, then the number of shares
issuable upon the exercise of each Bridge Warrant shall automatically
increase by an additional 5% for each month that the Bridge Notes continue to
remain outstanding during such initial six-month period; and (B) the Company
elects to extend the maturity date for an additional six months thereafter,
then (i) the number of shares issuable upon the exercise of each Bridge
Warrant shall automatically increase by an additional 10% for each month that
the Bridge Notes continue to remain outstanding during such additional
six-month period; and (ii) the Underwriter shall have the right to designate
a number of directors constituting a majority of the board of directors until
such time as the Bridge Notes and any accrued interest thereon are paid in
full.
The Bridge Notes rank senior in right of payment to all Junior Debt of the
Company, which is defined as all existing and future indebtedness other than
(i) the indebtedness represented by the Bridge Notes; (ii) capital lease
obligations; and (iii) certain other indebtedness permitted by the Bridge
Notes. See "Certain Transactions." The Bridge Notes are secured by a lien on
certain assets of the Company.
Bridge Warrants
The Bridge Warrants entitle the holders thereof to purchase, in the
aggregate, up to 456,250 shares of Common Stock at an exercise price equal to
the lesser of $4.20 per share or 60% of the aggregate initial public offering
price per share of Common Stock in this Offering, subject to adjustment. The
Bridge Warrants may be exercised at any time after issuance and expire on
August 28, 2001. The shares underlying the Bridge Warrants are being
registered in this Offering, and shall be subject to a two-year lock-up with
the placement agent of the Private Placement. In addition, the holders of the
Bridge Warrants are entitled to certain "piggyback" registration rights with
respect to such shares except in connection with the registration of
securities issuable under an employee benefit plan or in connection with
certain other registration statements filed by the Company.
The number of shares issuable upon exercise of the Bridge Warrants and the
exercise price thereof may be adjusted in the event of the occurrence of
certain events, including stock dividends, stock splits, combinations or
reclassifications involving or in respect of the Common Stock of the Company,
or an extension by the Company of the maturity date of the Bridge Notes. If
the Company extends the maturity
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<PAGE>
date of the Bridge Notes for a period of six months, the exercise price per
share shall be decreased to the lesser of $3.50 per share or 50% of the
initial public offering price per share.
Stockholder Reports
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other periodic reports as
the Company may deem appropriate or as may be required by law.
Transfer Agent and Registrar
The Company has appointed Continental Stock Transfer & Trust Company as
transfer agent for the Common Stock.
Directors' Limitation of Liability and Indemnification
The Company's Certificate of Incorporation includes provisions which (a)
eliminate the personal liability of directors for monetary damages resulting
from breaches of their fiduciary duty (except for liability for breaches of
the duty of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, violations under
Section 174 of the Delaware General Corporation Law ("DGCL"), or for any
transaction from which the director derived an improper personal benefit) and
(b) indemnify the directors and officers to the fullest extent permitted by
the DGCL, including under circumstances under which indemnification is
otherwise discretionary. The Company believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
Section 145 of the Delaware General Corporation Law permits
indemnification by a corporation of certain officers, directors, employees
and agents. Consistent therewith, the Company's Certificate of incorporation
requires that the Company indemnify all persons who it may indemnify pursuant
thereto to the fullest extent permitted by Section 145.
The Company's Certificate of Incorporation and Bylaws provide that the
Company will indemnify each of its directors and officers to the fullest
extent permitted by law with respect to all liability and loss suffered and
expenses incurred by such person in any action, suit or proceeding in which
such person was or is made or threatened to be made a party or is otherwise
involved by reason of the fact that such person is or was a director or
officer of the Company. The Company is also obligated to pay the expenses of
the directors and officers incurred in defending such proceedings, subject to
reimbursement if it is subsequently determined that such person is not
entitled to indemnification.
In addition, the Company's Certificate of Incorporation provides that the
Company's directors shall not be liable to the Company or its stockholders
for monetary damages for breaches of their fiduciary duties to the Company
and its stockholders except to the extent such exemption from liability or
limitation thereof is not permitted under the DGCL. This provision in the
Certificate of Incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctive or other
forms of non- monetary relief will remain available under the DGCL. In
addition, each director will continue to be subject to liability for monetary
damages for misappropriation of any corporate opportunity in violation of the
director's duties, for acts or omissions involving intentional misconduct,
for knowing violations of law, for actions leading to improper personal
benefit to the director, and for distributions (including payment of
dividends or stock repurchases or redemptions) that are unlawful under the
DGCL. The provision does not affect a director's responsibilities under any
other law, such as the federal securities laws. The Certificate of
Incorporation further provides that if the DGCL is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors then the liability of a director of the Company shall be eliminated
or limited to the fullest extent permitted by the DGCL as amended or
supplemented.
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The Company maintains a policy of insurance under which the directors and
officers of the Company will be insured, subject to the limits of the policy,
against certain losses arising from claims made against such directors and
officers by reason of any acts or omissions covered under such policy in
their respective capacities as directors or officers, including liabilities
under the Securities Act. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Delaware Anti-Takeover Law
The Company is subject to Section 203 of the DGCL ("Section 203") which,
subject to certain exceptions and limitations, prohibits a Delaware
corporation from engaging in any "business combination" with any "interested
stockholder" for a period of three years following the date that such
stockholder became an interested stockholder, unless: (i) prior to such date,
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (for the
purposes of determining the number of shares outstanding at the time the
transaction commenced (for the purposes of determining the number of shares
outstanding under the DGCL, those shares owned (x) by persons who are
directors and also officers and (y) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer are
excluded from the calculation); or (iii) on or subsequent to such date, the
business combination is approved by the board of directors and authorized at
an annual or special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66-2/3% of the outstanding voting stock
which is not owned by the interested stockholder.
For purposes of Section 203, "a business combination" includes (i) any
merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or
more of the assets of the corporation involving the interested stockholder;
(iii) subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder; (iv) any transaction involving the corporation
which has the effect of increasing the proportionate share of the stock of
any class or series of the corporation beneficially owned by the interested
stockholder; or (v) the receipt by the interested stockholder of the benefit
of any loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation. Section 203 defines an "interested
stockholder" as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 4,431,758 shares
of Common Stock outstanding (4,641,758 shares of Common Stock outstanding if
the Over-Allotment Option is exercised in full). Of these shares, the
1,400,000 Shares offered hereby (1,610,000 shares if the Over-Allotment
Option is exercised in full) will be freely tradeable without further
registration under the Securities Act. With respect to the remainder of such
shares, all officers and directors of the Company and current stockholders
have agreed not to publicly sell, or otherwise dispose of any securities of
the Company for a period of 12 months from the date of this Prospectus
without the Underwriter's prior written consent except (i) shares issued
pursuant to the Over-Allotment Option, (ii) the Underwriter's Options and the
Common Stock underlying such options, (iii) the issuance of Common Stock
underlying warrants and options outstanding
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prior to this Offering, (iv) the issuance of shares of Common Stock
underlying the Bridge Warrants, (v) the issuance of shares of Common Stock or
options to purchase shares of Common Stock under the Plan and the issuance of
shares of Common Stock upon exercise of such options, and (vi) the issuance
of any securities in connection with any acquisition which is approved by a
majority of the independent directors of the Company. Notwithstanding the
foregoing, up to 30% of the shares of Common Stock of each stockholder may be
sold by such stockholders at any time commencing six months from the date of
this Prospectus without the Underwriter's consent in the event that the last
sales price for the Common Stock on its principal exchange has been at least
200% of the initial public offering price for a period of 20 consecutive
trading days ending within five days of the date of such sale, and such sale
is completed at a price in excess of 200% of the initial public offering
price. See "Underwriting."
All of the presently outstanding 3,031,758 shares of Common Stock are, and
the 456,250 shares of Common Stock issuable upon exercise of the Bridge
Warrants and the 468,242 shares issuable upon exercise of the Technologies
Warrants will be, "restricted securities" within the meaning of Rule 144 and,
if held for at least two years, would be eligible for sale in the public
market in reliance upon, and in accordance with, the provisions of Rule 144
following the expiration of such two-year period. In general, under Rule 144
as currently in effect, a person or persons whose shares are aggregated,
including a person who may be deemed to be an "affiliate" of the Company as
that term is defined under the Securities Act, would be entitled to sell
within any three-month period a number of shares beneficially owned for at
least two years that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock, or (ii) the average weekly trading volume
in the Common Stock during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain requirements as to the manner of
sale, notice and the availability of current public information about the
Company. However, a person who is not deemed to have been an affiliate of the
Company during the 90 days preceding a sale by such person and who has
beneficially owned shares of Common Stock for at least three years may sell
such shares without regard to the volume, manner of sale, or notice
requirements of Rule 144. Beginning 90 days after the date of this
Prospectus, approximately 2,768,600 shares will be available for sale in
reliance upon Rule 144.
Prior to this Offering, there has been no public market for the Company's
securities. Following this Offering, the Company cannot predict the effect,
if any, that sales of shares of Common Stock pursuant to Rule 144 or
otherwise, or the availability of such shares for sale, will have on the
market price prevailing from time to time. In addition, sales by the current
stockholders of a substantial number of shares of Common Stock in the public
market could materially adversely affect prevailing market prices for the
Common Stock. The availability for sale of a substantial number of shares of
Common Stock acquired through the exercise of the Underwriter's Options, the
Warrants or any options under the Plan could also materially adversely affect
prevailing market prices for the Common Stock. See "Risk Factors--Future
Sales of Restricted Securities."
Up to 140,000 additional shares of Common Stock may be purchased by the
Underwriter through the exercise of the Underwriter's Options during the
period commencing on the date of the closing of this Offering and terminating
on the fifth anniversary of such date. The Holders of the Underwriter's
Options have certain demand and "piggyback" registration rights as to such
options and the underlying shares of Common Stock. Such options and any and
all shares of Common Stock purchased upon the exercise of the Underwriter's
Options may be freely tradeable, provided that the Company satisfies certain
securities registration and qualification requirements in accordance with the
terms of the Underwriter's Options. See "Underwriting."
Up to 456,250 shares of Common Stock may be purchased by the holders of
the Bridge Warrants. Such holders have certain "piggyback" registration
rights as to such shares commencing two years after the date of this
Offering. Such shares will be freely tradeable upon such registration.
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UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of the
Underwriting Agreement (the form of which has been filed as an exhibit to the
Registration Statement), to purchase from the Company all of the Shares
offered. The Underwriting Agreement provides that the obligations of the
Underwriter are subject to certain conditions precedent and that the
Underwriter shall be obligated to purchase all of the Shares if any are
purchased by the Underwriter.
The Underwriter has advised the Company that the Underwriter proposes to
offer the Shares offered hereby to the public at the offering price set forth
on the cover page of this Prospectus and that the Underwriter may allow to
certain dealers, who are members of the National Association of Securities
Dealers (the "NASD"), concessions of not in excess of $ per Share, of which
not in excess of $ may be reallowed to other dealers who are members of the
NASD. After the commencement of this Offering, the public offering price, the
concessions and the reallowance may be changed.
The Company has granted an option to the Underwriter, exercisable during
the 45-day period after the effective date of this Prospectus, to purchase up
to an aggregate of 210,000 additional Shares at the public offering price,
less the underwriting discounts and commissions. The Underwriter may exercise
such option only for the purpose of covering Over-Allotments made in
connection with the sale of the Common Stock offered hereby.
The Company has agreed to indemnify the Underwriter against certain
liabilities in connection with the Registration Statement, including
liabilities under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to the
Underwriter, the Underwriter has been advised that, in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore unenforceable.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of 3% of the aggregate offering price of the Shares offered hereby
(including any Shares purchased pursuant to the Over- Allotment Option), of
which $35,000 has been paid to date.
The Company has also agreed to sell to the Underwriter, or its designees,
Underwriter's Options to purchase 140,000 shares at a price of $.001 per
option. The Underwriter's Options will be exercisable for a period of five
years, commencing on the date of this Prospectus, at an initial per share
exercise price equal to 120% of the initial public offering price per share.
The Underwriter's Options cannot be transferred, assigned or hypothecated for
one year from the date of their issuance, except that they may be assigned,
in whole or in part, to any successor, officer or partner of the Underwriter
or its partners or members of the underwriting group. The Underwriter's
Options may be exercised as to all or a lesser number of shares and will
contain certain registration rights and antidilution provisions providing for
appropriate adjustment of the exercise price and number of shares which may
be purchased upon exercise, upon the occurrence of certain events. See "Risk
Factors--Effect of Previously Issued Options, Warrants and Underwriter's
Options on Stock Price."
The Company has agreed that it will, on any two occasions, register the
securities underlying the Underwriter's Options, the first time at the
Company's expense. The Company has also agreed, during the seven year period
commencing on the date of the closing of this Offering, to register on a
"piggyback" basis, on an unlimited number of occasions, the securities
underlying the Underwriter's Options whenever the Company files a
registration statement. Notwithstanding these registration rights, the
Company will not be required to register the securities underlying the
Underwriter's Options if it delivers to the holders of the Underwriter's
Options an opinion of counsel from counsel reasonably acceptable to such
holders in form and substance reasonably acceptable to such holders that such
securities are freely transferable without registration.
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The Company has granted to the Underwriter a right of first refusal with
respect to any sale of securities to be made by the Company, its subsidiaries,
affiliates or successors or any of the Company's stockholders owning at least 4%
of the Company's capital stock outstanding as of the date of this Offering,
within three years after the effective date of this Offering. In addition, the
Underwriter will provide financial advisory services with respect to possible
future financings or acquisitions by the Company and related matters. The
Company has also agreed to pay the Underwriter a fee with respect to any merger,
acquisition, joint venture, sale of securities or other business transaction,
with certain exceptions, to which the Company is a party during such two-year
period. Such fee will be equal to a percentage of the consideration paid or
received by the Company in connection with such transaction.
The Company has also agreed for the five-year period commencing upon
consummation of this Offering, to nominate and use its best efforts
(including the solicitation of proxies) to elect one designee of the
Underwriter to the board of directors of the Company. No designee has been
chosen as of the date hereof.
The foregoing discussion of the material terms and provisions of the
Underwriting Agreement is qualified in its entirety by reference to the
detailed provisions of the Underwriting Agreement, the form of which has been
filed as an exhibit to the Registration Statement on Form SB-2, of which this
Prospectus forms a part.
The Underwriter acted as placement agent in connection with the Bridge
Financing. In connection therewith, the Underwriter received sales
commissions of $182,500 in the aggregate, was reimbursed a total of $34,000
for certain expenses (including attorneys' fees) and was issued a total of
45,625 warrants which are identical to the Bridge Warrants (the "Placement
Agent's Warrants"). The Underwriter has agreed to relinquish the Placement
Agent's Warrants upon the consummation of this Offering.
The Company and its directors, officers and the holders of all of the
Company's outstanding Common Stock have agreed with the Underwriter not to
sell, contract to sell or otherwise dispose of any of the Company's
securities held by them for a period of 12 months following the date of this
Prospectus without the prior written consent of the Underwriter, except for
certain exceptions and under certain circumstances. See "Shares Eligible For
Future Sale."
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the public Offering price of the Shares has been
determined by arms-length negotiation between the Company and the Underwriter
and does not necessarily bear any relationship to the Company's book value,
assets, past operating results, financial condition, or other established
criteria of value. Factors considered in determining such price included an
assessment of the Company's recent financial results and current financial
condition, future prospects of the Company, the qualifications of the
Company's management, and other relevant factors.
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LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other legal
matters will be passed upon for the Company by Squadron, Ellenoff, Plesent &
Sheinfeld, LLP, New York, New York. Certain legal matters in connection with
the Offering will be passed upon for the Underwriter by Kramer, Levin,
Naftalis & Frankel, New York, New York. Squadron, Ellenoff, Plesent &
Sheinfeld, LLP, has, from time to time, rendered legal advisory services to
the Underwriter.
EXPERTS
The financial statements of Thinking Tools, Inc. as of December 31, 1995
and for each of the fiscal years ended December 31, 1994 and December 31,
1995, have been included herein and in the Registration Statement of which
this Prospectus forms a part in reliance on the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein,
given on the authority of that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington D.C. 20549, a registration
statement on Form SB-2 (the "Registration Statement") under the Securities
Act with respect to the securities offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and
the exhibits thereto, as permitted by the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement and to the exhibits filed therewith. Statements contained in this
Prospectus as to the contents of any contract or other document which has
been filed as an exhibit to the Registration Statement are qualified in their
entirety by reference to such exhibits for a complete statement of their
terms and conditions. The Registration Statement and the exhibits thereto may
be inspected without charge at the offices of the Commission and copies of
all or any part thereof may be obtained from the Commission's Public
Reference Section at 450 Fifth Street, N.W., Washington D.C. 20549 or at
certain of the regional offices of the Commission located at 7 World Trade
Center, 13th Floor, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, upon payment of the fees prescribed by
the Commission. The Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. In addition, following approval of the
Common Stock for quotation on the NASDAQ, reports and other information
concerning the Company may be inspected at the offices of the NASD, 1735 K
Street, N.W., Washington D.C. 20006.
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THINKING TOOLS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Page
------
Independent Auditors' Report F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Deficit F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Thinking Tools, Inc.:
We have audited the accompanying balance sheet of Thinking Tools, Inc.
(the Company) as of December 31, 1995, and the related statements of
operations, stockholders' deficit, and cash flows for each of the years in
the two-year period ended December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Thinking Tools, Inc. as
of December 31, 1995, and the results of its operations and its cash flows
for each of the years in the two-year period ended December 31, 1995 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in
regard to these matters are described in Note 13. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
KPMG Peat Marwick LLP
San Jose, California
August 16, 1996, except as to
Note 13, which is as of
August 28, 1996
F-2
<PAGE>
THINKING TOOLS, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1996
December 31, Pro forma
1995 Historical (Note 13)
--------------- --------------- ----------
(Unaudited)
ASSETS
<S> <C> <C> <C>
(Principally Pledged)
Current assets:
Cash $ 152 $ 7 $ 1,100
Accounts receivable 146 165 165
Costs in excess of billings on uncompleted contracts 11 24 24
Prepaid expenses and other current assets 10 43 43
------------- ------------- --------
Total current assets 319 239 1,332
Property and equipment, net 102 101 101
Other assets 11 10 10
------------- ------------- --------
Total assets $ 432 $ 350 $ 1,443
============= ============= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 5 $ 47 $ 47
Due to related party 34 42 42
Accrued expenses 124 247 216
Billings in excess of costs on uncompleted contracts 210 71 71
Deferred revenue 30 -- --
Notes payable 201 431 81
Current portion of capital lease obligations 13 18 18
Bridge notes payable -- -- 1,825
------------- ------------- --------
Total current liabilities 617 856 2,300
Long-term liabilities:
Note payable 1,200 1,380 --
Interest payable 155 -- --
Long-term portion of capital lease obligations 18 19 19
------------- ------------- --------
Total liabilities 1,990 2,255 2,319
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $.001 par value; 3,000,000 shares
authorized; no shares issued and outstanding -- -- --
Common stock, $.001 par value; 20,000,000 shares
authorized; 2,768,600 shares issued and outstanding,
actual; 3,031,758 shares issued and outstanding,
pro forma 3 3 3
Additional paid-in capital 89 89 1,960
Accumulated deficit (1,650) (1,997) (2,839)
------------- ------------- --------
Total stockholders' deficit (1,558) (1,905) (876)
------------- ------------- --------
Total liabilities and stockholders' deficit $ 432 $ 350 $ 1,443
============= ============= ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
THINKING TOOLS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years ended Six months ended
December 31, June 30,
---------------- ------------------
1994 1995 1995 1996
------ ------ ------ --------
(Unaudited)
<S> <C> <C> <C> <C>
Contract revenues $ 846 $1,329 $ 676 $ 634
Contract costs 736 708 374 354
---- ---- ---- ------
Gross profit 110 621 302 280
---- ---- ---- ------
Operating expense:
Selling, general, and administrative 395 751 357 532
Research and development 389 328 174 60
--- --- --- -----
784 1,079 531 592
--- --- --- -----
Operating loss (674) (458) (229) (312)
--- --- --- -----
Interest expense (56) (140) (60) (77)
Other income, net -- 10 10 43
------ ------ ------ --------
Total other expenses (56) (130) (50) (34)
------ ------ ------ --------
Loss before income taxes (730) (588) (279) (346)
Income tax expense 1 1 1 1
------ ------ ------ --------
Net loss $ (731) $ (589) $ (280) $ (347)
====== ====== ====== ========
Net loss per share $(0.23) $(0.19) $(0.09) $(0.11)
====== ========
Shares used in calculating per share
data 3,141 3,141 3,141 3,141
========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
THINKING TOOLS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(In thousands)
<TABLE>
<CAPTION>
Common stock Additional Total
------------------ paid-In Accumulated stockholders'
Shares Amount capital deficit deficit
------- ------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1993 -- $- $-- $ (330) $ (330)
Issuance of common stock 2,769 3 89 -- 92
Net loss -- -- -- (731) (731)
------ ------ --------- -------- ------------
Balances as of December 31, 1994 2,769 3 89 (1,061) (969)
Net loss -- -- -- (589) (589)
------ ------ --------- -------- ------------
Balances as of December 31, 1995 2,769 3 89 (1,650) (1,558)
Net loss (unaudited) -- -- -- (347) (347)
------ ------ --------- -------- ------------
Balances as of June 30, 1996 (unaudited) 2,769 $3 $89 $(1,997) $(1,905)
====== ====== ========= ======== ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
THINKING TOOLS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended Six months ended
December 31, June 30,
-------------- ----------------
1994 1995 1995 1996
----- ----- ----- -------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (731) $(589) $(280) $(347)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 9 20 10 13
Loss on disposal of assets 4 -- -- --
Changes in operating assets and liabilities:
Accounts receivable (104) (43) 5 (19)
Prepaid expenses and other current assets (16) 7 (1) (33)
Costs in excess of billings on
uncompleted contracts 79 25 (3) (13)
Other assets (5) -- -- 1
Due to related party 1 34 18 8
Accounts payable 11 (6) 53 42
Accrued expenses 98 179 35 (32)
Billings in excess of costs on uncompleted
contracts and deferred revenue 164 76 (124) (169)
--- --- --- -----
Net cash used in operating activities (490) (297) (287) (549)
--- --- --- -----
Cash flows from investing activities:
Purchase of equipment (26) (14) (14) --
Organizational costs (6) -- -- --
--- --- --- -----
Net cash used in investing activities (32) (14) (14) --
--- --- --- -----
Cash flows from financing activities:
Proceeds from issuance of short-term notes
payable -- 201 50 257
Principal payments on capital leases (2) (6) (1) (6)
Proceeds from issuance of long-term debt 1,200 -- -- 180
Proceeds from issuance of common stock 92 -- -- --
Principal payment on short-term notes payable (500) -- -- (27)
--- --- --- -----
Net cash provided by financing activities 790 195 49 404
--- --- --- -----
Net increase (decrease) in cash 268 (116) (252) (145)
Cash at beginning of year -- 268 268 152
----- ----- ----- -------
Cash at end of year $ 268 $ 152 $ 16 $ 7
===== ===== ===== =======
Supplemental disclosures of cash flow information:
Cash paid during the year:
Income taxes $ 1 $ 1 $ 1 $ 1
===== ===== ===== =======
Interest $ 26 $ 16 $ 1 $ 196
===== ===== ===== =======
Noncash investing and financing activities:
Equipment acquired under capital leases $ 11 $ 28 $ 10 $ 12
===== ===== ===== =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information as of June 30, 1996 and for the six months
ended June 30, 1995 and 1996 is unaudited)
(1) Summary of Significant Accounting Policies
Thinking Tools, Inc. (the Company) was incorporated in California in 1993 and
develops agent-based, adaptive PC-based business simulation software that has a
broad range of potential applications. A majority of the Company's outstanding
common stock is held by Thinking Technologies, L.P. In June 1996, the Board of
Directors authorized a 4.1225-for-1 stock split for all outstanding shares of
the Company's common stock.
In August 1996, the Company reincorporated in the state of Delaware by
merging with and into a wholly-owned subsidiary which was incorporated in
Delaware in August 1996, with authorized capital consisting of 20,000,000
shares of $0.001 par value common stock and 3,000,000 shares of $0.001 par
value preferred stock. Pursuant to such merger each outstanding share of the
Company's common stock was exchanged for .7462 shares of common stock.
The accompanying financial statements and notes have been restated to give
effect to the stock splits and reincorporation.
Basis of Presentation
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses from operations and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 13.
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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant
estimates made by management include the stage of completion and the amount
of costs yet to be incurred on contracts in process.
Revenue and Cost Recognition
Revenues from fixed-price contracts are recognized using the
percentage-of-completion method, measured by input measures. Contract costs
include primarily direct labor and other direct costs. Provisions for
estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions, and
estimated profitability may result in revisions to costs and revenues and are
recognized in the period in which the revisions are determined. Revenues from
time and materials contracts are recognized as costs are incurred.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is provided using the straight-line method
over the estimated useful lives of the assets.
F-7
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1996 and for the six months
ended June 30, 1995 and 1996 is unaudited)
(1) Summary of Significant Accounting Policies--(Continued)
Leasehold improvements are amortized over the shorter of the estimated useful
lives or the underlying lease term.
Research and Development
Research and development costs are charged to expense as incurred. The
Company capitalizes software development costs incurred subsequent to the
establishment of technological feasibility (generally the working model).
Amounts capitalized to date, net of related valuation allowances, have not
been material.
Net Loss Per Share
Net loss per share is computed based on the weighted average number of
shares of common stock outstanding, dilutive common equivalent shares from
stock options and warrants using the treasury stock method and convertible
debt using the if-converted method. In accordance with certain Securities and
Exchange Commission (SEC) Staff Accounting Bulletins, such computations
include all common equivalent shares (using the treasury stock method) issued
within one year of filing of the Company's initial public offering (IPO) as
if they were outstanding for all periods presented using the anticipated IPO
price.
Unaudited Interim Results
The accompanying unaudited financial statements as of June 30, 1996, and
for the six months ended June 30, 1995 and 1996 have been prepared on
substantially the same basis as the audited financial statements and, in the
opinion of the Company's management, include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial information set forth therein.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 will be effective for fiscal years beginning after
December 15, 1995, and will require that the Company either recognize in its
financial statements costs related to its employee stock-based compensation
plans, such as stock option and stock purchase plans, or make pro forma
disclosures of such costs in a footnote to the financial statements.
The Company expects to continue to use the intrinsic value method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to
account for all of its employee stock-based compensation plans. Therefore, in
its financial statements for fiscal 1996, the Company will make the required
pro forma disclosures in a footnote. SFAS No. 123 is not expected to have a
material effect on the Company's results of operations or financial position.
(2) Accounts Receivable
A summary of accounts receivable follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 June 30, 1996
------------ -------------
(Unaudited)
<S> <C> <C>
Completed contract billings $ 28 $ 18
Contracts in progress billings 118 92
Other receivables -- 55
------------- ---------------
Total $146 $165
============= ===============
</TABLE>
F-8
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1996 and for the six months
ended June 30, 1995 and 1996 is unaudited)
(3) Property and Equipment
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 June 30, 1996
--------------- ----------------
(Unaudited)
<S> <C> <C>
Leased equipment $ 39 $ 51
Equipment 79 79
Furniture and fixtures 7 7
Leasehold improvements 6 6
------------- ---------------
131 143
Less accumulated depreciation and amortization 29 42
------------- ---------------
Total $102 $101
============= ===============
</TABLE>
(4) Accrued Expenses
A summary of accrued expenses follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 June 30, 1996
--------------- ----------------
(Unaudited)
<S> <C> <C>
Payroll and employee benefits $ 72 $ 94
Legal 31 36
Interest -- 35
Other 21 82
------------- ---------------
Total $124 $247
============= ===============
</TABLE>
(5) Uncompleted Contracts
Costs, estimated earnings, and billings on uncompleted fixed fee contracts
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 June 30, 1996
--------------- ----------------
(Unaudited)
<S> <C> <C>
Costs incurred on uncompleted contracts $ 249 $231
Estimated earnings 309 208
------------- ---------------
558 439
Less billings to date 757 486
------------- ---------------
Total $(199) $(47)
============= ===============
</TABLE>
F-9
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1996 and for the six months
ended June 30, 1995 and 1996 is unaudited)
(5) Uncompleted Contracts--(Continued)
They are included in the accompanying balance sheets under the following
captions (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 June 30, 1996
--------------- ----------------
(Unaudited)
<S> <C> <C>
Costs in excess of billings on uncompleted contracts $ 11 $ 24
Billings in excess of costs on uncompleted contracts (210) (71)
------------- ---------------
Total $(199) $(47)
============= ===============
</TABLE>
(6) Leases
The Company leases office space in Monterey, California, under a
noncancelable operating lease expiring in 1998, which was assumed from
SimBusiness, Inc. dba Maxis. Total rent expense under operating leases was
approximately $13,000, $91,000, $43,000, and $52,000, for the years ended
December 31, 1994 and 1995, and the six months ended June 30, 1995 and 1996,
respectively.
The Company leases certain office equipment under noncancelable leases
expiring in 2000, which were assumed from SimBusiness, Inc. dba Maxis. The
leases are accounted for as capital leases.
The following is a summary of future minimum lease payments as of December
31, 1995 (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Year ending December 31, leases lease
- ------------------------ --------- ---------
<S> <C> <C>
1996 $14 $ 95
1997 14 98
1998 7 25
1999 1 --
2000 1 --
----- -----
Future minimum lease payments 37 $218
=====
Less amounts representing interest 6
-----
Present value of future minimum lease payments 31
Less current installments under capital lease obligation 13
-----
Long-term portion of capital lease obligations $18
=====
</TABLE>
F-10
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1996 and for the six months
ended June 30, 1995 and 1996 is unaudited)
(7) Income Taxes
The components of income tax expense for each of the years ended December
31, 1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
Current Deferred Total
-------- --------- --------
<S> <C> <C> <C>
Federal $-- $-- $--
State 1 -- 1
------ ------- ------
$1 $-- $1
====== ======= ======
</TABLE>
The provision for income taxes differs from the amount obtained by
applying the statutory federal income tax rate to income before taxes as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1994 1995
------------ ------------
<S> <C> <C>
Computed "expected" tax benefit $(248) $(200)
State franchise tax, net of federal income benefit 1 1
Losses not utilized 248 200
------------- ---------------
$ 1 $ 1
------------- ---------------
</TABLE>
Significant components of deferred tax assets and liabilities as of
December 31, 1994 and December 31, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1994 1995
------------ ------------
<S> <C> <C>
Deferred tax asset:
Federal and state net operating loss carryforwards $ 130 $ 369
Acquired intangible assets 160 149
Various accruals and reserves -- 8
Total gross deferred tax assets 290 526
Less valuation allowance (286) (515)
Net deferred tax assets 4 11
Total gross deferred tax liabilities (4) (11)
Net tax assets and liabilities $ --
$ --
</TABLE>
As of December 31, 1995, the Company has net operating loss carryforwards
of $920,000 which expire for federal and state tax purposes in 2010 and 2000,
respectively. Federal and California tax laws impose significant restrictions
on the utilization of net operating loss carryforwards in the event of a
shift in the ownership of the Company, which constitutes an "ownership
change" as defined by the Internal Revenue Code, Section 382. The Company
does not believe an ownership change has occurred.
F-11
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1996 and for the six months
ended June 30, 1995 and 1996 is unaudited)
(8) Line of Credit
On November 1, 1995, the Company entered into an agreement with a bank to
borrow up to $500,000 under a revolving line of credit secured by the
Company's accounts receivable. Advances on this line accrued interest at the
bank's prime rate plus 1.75% (8.75% as of December 31, 1995), until April
1996, when the rate was increased to the bank's prime rate plus 5% following
a default by the Company. Amounts outstanding as of December 31, 1995 and
June 30, 1996 were approximately $79,000 and $52,000, respectively. The bank
agreement requires the Company, among other things, to maintain minimum
levels of earnings, tangible net worth, and certain minimum financial ratios.
The agreement expires September 30, 1996.
As of July 31, 1996, the Company was in default of certain provisions of
the credit agreement. The bank has agreed to waive the exercise of its rights
under the agreement in return for the Company's commitment to repay the
entire principal balance by August 31, 1996. No future borrowings will be
available under the agreement. The amounts outstanding under the agreement
were repaid as of the closing of the bridge financing. (See Note 13).
(9) Long-Term Debt
The Company has a note payable to Thinking Technologies, L.P., a related
party, with a balance of $1,200,000 and $1,380,000 as of December 31, 1995
and June 30, 1996, respectively. The note bears interest at 10% annually, due
on September 27, 1999, collateralized by all company assets and the Company's
common stock owned by its President. Interest is payable semiannually if
specified gross profit levels are realized; otherwise, interest accrues for
18 months and is added to principal if not paid within 30 days as of March
30, 1996. Interest payable of $180,000 was converted to note payable in March
1996. The note provides for payment if specified debt or equity financing is
obtained prior to maturity; fair value is not practicable to estimate because
of the uncertainty of the ultimate results of the terms of the note and the
lack of available similar financing. Approximately $1,320,000 of the note
balance was converted into an aggregate of 263,158 shares of Common Stock in
July 1996. The remaining balance was reclassified to accrued expenses. (See
Note 13).
(10) Stockholder's Options
As of June 30, 1996, the Company has granted options, outside of the stock
option plan (See Note 13), to purchase 58,964 shares of common stock at an
exercise price of $0.79 per share to certain of its directors. In August
1996, the Company issued to a nonaffiliate options to purchase 15,000 shares
of the common stock at an exercise price of $1.00 per share. The options
vested immediately.
(11) Concentrations of Credit Risk
The Company's business is dependent on a few customers, the loss of which
could have a material effect on the Company. The following schedule
summarizes past distribution of sales by major customer:
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
------------------------ --------------------
1994 1995 1995 1996
------------- ------- ------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Customer A 17% 14% 25% 0%
Customer B 59 6 6 0
Customer C 0 27 15 32
Customer D 9 13 15 18
Customer E 4 5 10 0
Customer F 0 3 0 33
</TABLE>
F-12
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1996 and for the six months
ended June 30, 1995 and 1996 is unaudited)
(12) Related Party Transactions
The Company had a note payable outstanding with Thinking Technologies,
L.P., a related party, of approximately $122,000 and $352,000 as of December
31, 1995 and June 30, 1996, respectively. The note bears interest at 7%
annually, collateralized by the Company's accounts receivable. The original
due date was December 31, 1995. The note was paid in full in August 1996 in
the bridge financing (Note 13).
(13) Subsequent Events and Pro Forma Financial Information
On July 1, 1996, in connection with a series of short-term loans from
Thinking Technologies, L.P., the Company issued warrants to Thinking
Technologies, L.P. to purchase 468,242 shares of common stock at an exercise
price of $1.07 per share, expiring on December 31, 2006. The Company expects
to record a non-cash interest expense of approximately $350,000 in the
quarter ending September 30, 1996, in connection with the issuance of these
warrants.
Under the Company's 1996 Stock Option Plan (the Plan), options to purchase
up to an aggregate of 376,000 shares of common stock may be granted to
officers, directors, employees or consultants. The Plan provides for issuing
both incentive stock options, which must be granted at fair market value at
the date of grant, as determined by the Plan Administrator, and nonqualified
stock options. Options granted under the Plan are generally immediately
exercisable, vest over a period determined at the time of grant by the Plan
Administrator, and must be exercised within 10 years.
In August 1996, the Company granted options to purchase 52,000 shares of
common stock to employees at $.79 per share which vested immediately. The
Company also granted options to purchase 52,000 shares of common stock at
$5.00 per share which vest over two years. In addition, the Company granted
options to purchase 41,036 shares of common stock to members of the Company's
board of directors at an exercise price of $1.00 per share which vested
immediately. The Company has recorded non-cash compensation expenses of
approximately $200,000 in July and August 1996 related to the difference
between the deemed fair value of the common stock and the exercise price of
the options at the grant date.
On August 28, 1996, the Company closed a bridge financing which provided
gross proceeds of $1,825,000 to the Company from the issuance of promissory
notes and warrants to purchase 456,250 shares of common stock. The Company
repaid $502,000 plus $123,000 of accrued interest related to loans from
Thinking Technologies, L.P. from a portion of such proceeds. Thinking
Technologies, L.P. purchased $625,000 aggregate principal amount of such
notes, which remain outstanding.
The warrants to purchase 456,250 shares of the Company's common stock are
exercisable at a price equal to the lesser of $4.20 per share or 60% of the
initial public offering price per share, expiring August 2001. In addition,
the Company issued warrants to purchase 45,625 shares of common stock to the
Placement Agent at an exercise price equal to the lesser of $4.20 per share
or 60% of the initial public offering price per share.
The Company expects to record a non-cash interest expense of approximately
$550,000 in connection with the issuance of the warrants issued in the bridge
financing which will be amortized over the term of the loan, which is
expected to be repaid out of the proceeds of the proposed public offering.
F-13
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1996 and for the six months
ended June 30, 1995 and 1996 is unaudited)
(13) Subsequent Events and Pro Forma Financial Information--(Continued)
Pursuant to a plan of reorganization, in August 1996, Thinking
Technologies, L.P. converted $1,200,000 aggregate principal amount of
outstanding indebtedness, plus an aggregate of approximately $120,000 of
accrued interest (see Note 9), into an aggregate of 263,158 shares of common
stock.
The effect of the above transactions has been reflected in the
accompanying pro forma balance sheet as of June 30, 1996. (See below).
On August 28, 1996, the Company's Board of Directors approved the filing
of a registration statement with the SEC for the proposed public offering of
1,400,000 shares of the Company's common stock. A portion of the proceeds of
the proposed public offering will be used to repay amounts outstanding under
the bridge financing. In connection with the proposed public offering, the
Company has agreed to sell, to its underwriter, options to purchase 140,000
common shares for $.001 per option. The options are exercisable for a period
of five years, at an exercise price equal to 120% of the initial public
offering price.
The following table reflects the unaudited pro forma adjustments in the
accompanying balance sheet (in thousands):
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------------
Historical Adjustments Pro forma
--------- ----------- ---------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash $ 7 $ 1,093(a,c) $ 1,100
Other current assets 232 232
------- --------- -------
Total current assets 239 1,332
Other non-current assets 111 111
------- --------- -------
Total assets $ 350 $ 1,443
======= ========= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 431 (350)(a,c) $ 81
Bridge notes payable -- 1,825(c) 1,825
Other current liabilities 425 (31)(a,b,c) 394
------- --------- -------
Total current liabilities 856 2,300
Long-term liabilities:
Note payable 1,380 (1,380)(b) --
Other long-term liabiliites 19 19
------- --------- -------
Total liabilities 2,255 2,319
------- --------- -------
Stockholders' deficit:
Common stock 3 3
Additional paid-in capital 89 1,871(b,d) 1,960
Accumulated deficit (1,997) (839)(a,c,d) (2,839)
------- --------- -------
Total stockholders' deficit (1,905) (876)
------- --------- -------
Total liabilities and stockholders'
deficit $ 432 $ 1,443
======= ========= =======
</TABLE>
F-14
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1996 and for the six months
ended June 30, 1995 and 1996 is unaudited)
(13) Subsequent Events and Pro Forma Financial Information--(Continued)
(a) Gives effect to additional advances from Technologies of $151,000 and
additional accrued interest of $32,000.
(b) Gives effect to the conversion by the Company of debt in the principal
amount of approximately $1,320,000 into an aggregate of 263,158 shares of
common stock with the remaining $60,000 of note payable reclassified to
accrued expenses.
(c) Gives effect to the application of the estimated net proceeds from the
private placement of $1,825,000 less $258,000 of related expenses, and
the repayment of $123,000 and $502,000 of accrued expenses and notes
payable, respectively.
(d) Represents a non-cash compensation expense of $200,000 resulting from the
difference between the exercise price and the deemed fair value of common
stock underlying vested options granted in July and August, and a
non-cash interest expense of $350,000 resulting from the issuance of
warrants on the Technologies advances.
F-15
<PAGE>
(photo)
A screen from the Company's SimHealth product, which simulates the impact of
choices and values on the financial health of the health care system and its
usage and demand.
<PAGE>
===============================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the Offering made hereby, and, if given or
made, such information or representations must not be relied upon as having
been authorized by the Company or the Underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such an offer or solicitation in such jurisdiction. Neither
the delivery of this Prospectus nor any sale made hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information
contained herein is correct as of any time subsequent to the dates as of
which such information is furnished.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Prospectus Summary 3
Risk Factors 8
Use of Proceeds 14
Dividend Policy 15
Dilution 15
Capitalization 17
Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Business 22
Management 32
Principal Stockholders 36
Certain Transactions 37
Description of Securities 39
Shares Eligible for Future Sale 42
Underwriting 44
Legal Matters 46
Experts 46
Available Information 46
Index to Financial Statements F-1
</TABLE>
Until , 1996 (25 days after the date hereof, all dealers effecting
transactions in the registered securities, whether or not participating in
this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
Underwriter and with respect to their unsold allotments of subscriptions.
===============================================================================
1,400,000 Shares
THINKING TOOLS, INC.
Common Stock
---------------
PROSPECTUS
---------------
BARINGTON CAPITAL GROUP, L.P.
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors.
Article Ninth of the Certificate of Incorporation of Thinking Tools, Inc.
(the "Registrant") eliminates the personal liability of directors to the
Registrant or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such elimination of the personal liability
of a director of the Registrant does not apply to (a) any breach of the
director's duty of loyalty to the Registrant or its stockholders, (b) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) actions prohibited under Section 174 of the
Delaware General Corporation Law, or (d) any transaction from which the
director derived an improper personal benefit.
Item. 25 Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses which will be paid by
the Registrant in connection with the issuance and distribution of the
securities being registered. With the exception of the registration fee, all
amounts shown are estimates.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee $ 5,565.66
NASD Registration Fee 2,114.04
Blue Sky Fee 25,000.00
Boston Stock Exchange Fee 10,000.00
Pacific Stock Exchange Fee 10,000.00
Printing and Engraving 75,000.00
Legal fees and expenses 150,000.00
Accounting fees and expenses 100,000.00
Transfer Agent fees and expenses 5,000.00
Listing and NASDAQ SmallCap Market fees 25,000.00
Underwriter's Non-Accountable Expense
Allowance 294,000.00
Miscellaneous expenses 92,320.30
Total $794,000.00
=========
</TABLE>
- ------------------------
(1) Assuming an initial public offering price of $7.00 per Share.
(2) If the Over-Allotment Option is exercised in full, the Underwriter's
Non-Accountable Expense Allowance and the Total would be $338,100 and
$838,100, respectively.
Item 26. Recent Sales of Unregistered Securities.
In the past three years, the Registrant has made the following sales of
unregistered securities, all of which sales were exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof or as
otherwise indicated herein.
In August 1996, the Company, through Barington Capital Group, L.P., acting
as placement agent, issued and sold 18.25 Units of its securities, each
consisting of one $100,000 principal amount 10% Senior Note and a 5-year
Warrant to purchase 25,000 shares of Common Stock at an exercise price equal
to the lesser of $4.20 per share or 60% of the initial public offering price
per share, at $100,000 per Unit ($1,825,000, total) solely to accredited
investors. The Company believes that each issuance and sale of such
securities was exempt from registration pursuant to Section 4(2) of the
Securities Act and/or Rule 506 promulgated thereunder. Barington Capital
Group, L.P. received, for its services, a placement fee of 10% of the gross
proceeds from the sale of the Units and reimbursement of certain other
expenses.
In August 1996, the Company issued options under its Stock Option Plan.
The Company believes that the issuance of these options was exempt from
registration pursuant to Sections 3(b) and 4(2) of the Securities Act and
Rule 701 promulgated thereunder.
II-1
<PAGE>
In September 1994, pursuant to the Technologies Agreement, Technologies
purchased 61.11% of the Company's authorized and issued Common Stock for the
purchase price of $100,000, and loaned to the Company $1,200,000. In August
1996, such loan, including accrued interest thereon, was converted to 263,158
shares of Common Stock. In July 1996, Technologies made additional loans to
the Company in an aggregate principal amount of $502,000 and received the
Technologies Warrants to purchase 468,242 shares of Common Stock. In August
1996, upon the repayment by the Company of such loan, including accrued
interest thereon, Technologies purchased 6.25 units in the Bridge Financing.
The Company believes that each such transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act and/or Rule 506 promulgated
thereunder.
The Company has granted options to purchase an aggregate of 73,964 shares
of Common Stock to certain members of the Company's board of directors and to
employees. The Company believes that the issuance of such options was exempt
from registration pursuant to Sections 3(b) and 4(2) of the Securities Act.
Item 27. Exhibits
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit No.
- ------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Thinking Tools, Inc.
3.2 By-Laws of Thinking Tools, Inc.
4.1 Form of Underwriter's Option Agreement
4.2 1996 Stock Option Plan
4.3* Form of Stock Certificate
4.4 Form of Private Placement Investors' Warrant
4.5* Technologies Warrant
4.6 Form of Private Placement Note
5.1* Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP
10.1* Employment Agreement between the Company and John Hiles
10.2 Form of Consulting Agreement
11.1 Computation of Net Loss Per Share
23.1 Consent of KPMG Peat Marwick LLP
23.2* Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP
(contained in the Opinion filed as Exhibit 5.1).
24.1 Power of Attorney (Included on page II-5)
</TABLE>
- ------------
* To be filed by amendment.
Item 28. Undertakings
(a) The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement:
II-2
<PAGE>
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or high
end of the estimated maximum Offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in the volume and price represent no more than a 20%
change in the maximum aggregate Offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material information on the plan of
distribution;
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the Offering of the securities at that time to be the initial
bona fide Offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the Offering.
(b) The Registrant hereby undertakes to provide the Underwriter at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(d) The Registrant hereby undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A under the Securities Act
and contained in a form of prospectus filed by the Registrant under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this
registration statement as of the time the Securities and Exchange Commission
declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement relating to the securities offered in the
registration statement, and that Offering of the securities at that time as
the initial bona fide Offering of those securities.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in The City of Monterey, California on September
3, 1996.
THINKING TOOLS, INC.
By:/s/ John Hiles
-------------------------
John Hiles
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John Hiles and Fred Knoll, or any one of them,
his true and lawful attorneys-in- fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead,
in any and all capacities, to sign and file (i) any and all pre- or
post-effective amendments to this Registration Statement, with all exhibits
hereto, relating to the Offering covered therewith, and (ii) any registration
statement, and any and all amendments thereto, relating to the Offering
covered hereby pursuant to Rule 462(b) under the Securities Act of 1933, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as full to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them or their or his substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------- ------------------------------- -------------------
<S> <C> <C>
/s/ John Hiles President (Principal Executive, September 3, 1996
- ---------------------- Accounting and Financial
John Hiles Officer) and Director
/s/ Fred Knoll Chairman of the Board and September 3, 1996
- ---------------------- Director
Fred Knoll
/s/ Esther Dyson Director September 3, 1996
- ----------------------
Esther Dyson
/s/ Frederick Gluck Director September 3, 1996
- ----------------------
Frederick Gluck
/s/ Ted Prince Director September 3, 1996
- ----------------------
Ted Prince
/s/ Fran Saldutti Director September 3, 1996
- ----------------------
Fran Saldutti
</TABLE>
II-4
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION DATE ________________, 199_
- ---------- THINKING TECHNOLOGIES, INC.
This Prospectus relates to the Offering (the "Offering") by certain
selling stockholders (the "Selling Stockholders") of 596,250 shares (the
"Shares") of Common Stock, par value $.001 per share which may be sold from
time to time by the Selling Stockholders, or by transferees, on or after the
date of this Prospectus, subject to contractual restrictions which provide
that such securities may not be sold for a period of 12 months after the
closing of the Company Offering (defined below) without the prior written
consent of Barington Capital Group, L.P., the underwriter of the Company
Offering (the "Underwriter"). See "Certain Transactions," "Risk Factors--
Shares Eligible for Future Sale; Registration Rights--and Potential Adverse
Effects from Sales of Selling Stockholder Securities", "Description of
Securities," "Selling Stockholders" and "Concurrent Sales By Selling
Stockholders."
No underwriting arrangements have been entered into by the Selling
Stockholders. The distribution of the Shares by the Selling Stockholders may
be effected from time to time in transactions on the Nasdaq SmallCap Market,
the Boston Stock Exchange or the Pacific Stock Exchange in negotiated
transactions, through the writing of options on the Shares, or a combination
of such methods of sale, at fixed prices that may be changed, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, or at negotiated prices. The Selling Stockholders may effect
such transactions by the sale of the Shares to or through broker-dealers, and
such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders and/or the
purchasers of the Shares for whom such broker-dealers may act as agent or to
whom they may sell as principal, or both. Usual and customary or specifically
negotiated brokerage fees or commission may be paid by the Selling
Stockholders in connection with sales of the Shares. No underwriting
arrangements have been entered into by the Selling Stockholders.
The Selling Stockholders and intermediaries through whom the Shares are
sold may be deemed "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Act"), with respect to the securities offered and any
profits realized or commissions received may be deemed underwriting
compensation.
The Company will not receive any proceeds from sales of the Shares. See
"Selling Stockholders."
A registration statement under the Act has been filed with the Securities
and Exchange Commission with respect to an underwritten public offering on
behalf of the Company of 1,400,000 shares of Common Stock, plus up to 210,000
shares which may be offered pursuant to the exercise of the Underwriter's
over-allotment option (the "Company Offering"). See "Concurrent Sales By
Company."
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED CAREFULLY
AND ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE
"RISK FACTORS" BEGINNING ON PAGE 8 HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Alt-1
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Securities Offered 596,250 shares of Common Stock, $.001 par value per share.
See "Description of Securities." See "Certain Transaction"
"Risk Factors--Shares Available for Future Sale and Potential
Adverse Effects from Sales of Selling Stockholder Securities"
and "Description of Securities." No underwriting arrangements
have been entered into by the Selling Stockholders. See "Selling
Stockholders."
Common Stock Outstanding after the Company
Offering(1)(2) 4,431,758
Shares of Common Stock to be Outstanding
After this Offering(1)(2) 5,058,008
Use of Proceeds The Company will not receive any proceeds from the sale of
the Shares.
Risk Factors An investment in the securities offered hereby involves certain
risks and immediate substantial dilution. Prospective
investors should consider carefully the factors set forth
under "Risk Factors."
Trading Symbol The Common Stock is traded on the Nasdaq SmallCap Market under
the symbol THNK and the Boston Stock Exchange and the Pacific
Stock Exchange under the symbol TTI.
</TABLE>
- -------------------
(1) Does not include (i) 456,250 shares of Common Stock issuable upon
exercise of warrants (the "Bridge Warrants") to purchase Common Stock at
an exercise price equal to the lesser of $4.20 or 60% of the initial
public offering price per share in the Company Offering issued by the
Company to purchasers of its 10% Senior Secured Promissory Notes (the
"Bridge Notes") in connection with a debt financing consummated prior to
the Company Offering (the "Bridge Financing"); (ii) 468,242 shares of
Common Stock issuable upon exercise of warrants to purchase Common Stock
at an exercise price of $1.07 per share issued to Thinking Technologies,
L.P. ("Technologies"), a principal stockholder of the Company (the
"Technologies Warrants"); (iii) 376,000 shares of Common Stock reserved
for issuance under the Company's 1996 Stock Option Plan (the "Plan"),
options to purchase 145,036 of which have been granted under the Plan,
including options to purchase 52,000 shares exercisable at $.79 per share
and options to purchase 52,000 shares exercisable at $5.00 per share
granted to certain of the Company's employees, and options to purchase
41,036 shares of Common Stock at an exercise price of $1.00 per share
granted to certain members of the Company's board of directors; (iv)
58,964 shares of Common Stock issuable upon exercise of outstanding
options granted to certain members of the Company's board of directors
outside of the Plan at an exercise price of $0.79 per share; and (v)
15,000 shares of Common Stock issuable upon exercise of options granted
outside of the Plan to a non-affiliate of the Company at an exercise
price of $1.00 per share. See "Management--1996 Stock Option Plan",
"Certain Transactions", and "Description of Securities."
(2) Does not include (i) up to 210,000 shares of Common Stock issuable upon
exercise of the Over- Allotment Option and (ii) 140,000 shares of Common
Stock issuable upon exercise of the Underwriter's Options.
Alt-2
<PAGE>
CONCURRENT SALES BY COMPANY
A registration statement under the Securities Act of 1933 (the "Act") has
been filed by the Company with the Securities and Exchange Commission with
respect to an underwritten public offering by the Company of 1,400,000 shares
of Common Stock, plus 210,000 shares which may be offered pursuant to
exercise of the Underwriter's over-allotment option.
Concurrent sales of securities by both the Company and by the Selling
Stockholders would likely have an adverse effect on the market price of the
Common Stock. The Shares are subject to contractual restrictions upon resale
with the Underwriter. See "Selling Stockholders--Lock-Up Arrangements", "Risk
Factors--Shares Eligible for Future Sale; Registration Rights--and Potential
Adverse Effects from Sales of Selling Stockholder Securities" and
"Description of Securities."
Alt-3
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the name of each person who is a Selling
Stockholder, the number of Selling Stockholder Securities owned by each
person's account, the percentage or outstanding shares of Common Stock of the
Company owned by such person prior to this Offering, the number of shares
being sold by such person, the number of shares of Common Stock such person
will own after the completion of this Offering, and the percentage of
outstanding shares of Common Stock of the Company owned by such person after
the completion of this Offering.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Offering Number of After Offering
---------------------- Shares -----------------------
Shares Percentage Being Sold Shares Percentage
------- ----------- ----------- ------- -------------
<S> <C>
</TABLE>
- ------------------
* less than 1%
Lock-Up Arrangements
The Selling Stockholders have agreed prior to the closing of the Company
Offering that they will not publicly sell, offer to sell, contract to offer
to sell, transfer, assign or pledge any of the Shares which are being
registered on their behalf by the Registration Statement of which this
Prospectus forms a part, for a period of 12 months from the closing of the
Company Offering without the prior written consent of the Underwriter. See
"Risk Factors--Shares Available for Future Sale and Potential Adverse Effects
from Sales of Selling Stockholder Securities", "Description of Securities",
and "Certain Relationships and Related Transactions."
Plan of Distribution
The distribution of the Shares by the Selling Stockholders may be effected
from time to time in transactions on the Nasdaq, the Boston Stock Exchange or
the Pacific Stock Exchange, in negotiated transactions, through the writing
of options on the Shares, or a combination of such methods of sale, at fixed
prices that may be changed, at market prices prevailing at the time of the
sale, at prices related to such prevailing market prices or at negotiated
prices. The Selling Stockholders may effect such transactions by the sale of
the Shares to or through broker- dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders and/or the purchasers of the Shares for whom such
broker-dealers may act as agent or to whom they may sell as principal, or
both. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Stockholders in connection with sales
of the Shares. No underwriting arrangements have been entered into by the
Selling Stockholders.
Alt-4
<PAGE>
The Selling Stockholders and intermediaries through whom the Shares are
sold may be deemed "underwriters" without the meaning of the Act with respect to
the securities offered and any profits realized or commissions received may be
deemed underwriting compensation. The Company has agreed to indemnify the
Selling Stockholders against certain liabilities, including liabilities under
the Act.
Alt-5
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Sequentially
Exhibit No. Exhibit Numbered Page
<S> <C> <C> <C>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Thinking Tools, Inc.
3.2 By-Laws of Thinking Tools, Inc.
4.1 Form of Underwriters Warrant
4.2 1996 Stock Option Plan
4.3* Form of Stock Certificate
4.4 Form of Bridge Warrant
4.5* Technologies Warrant
4.6 Form of Bridge Note
5.1* Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP
10.1* Employment Agreement between the Company and John Hiles
10.2 Form of Consulting Agreement
11.1 Statement re: Computation of Per Share Earnings
23.1 Consent of KPMG Peat Marwick
23.2* Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP
(contained in the Opinion filed as Exhibit 5.1).
24.1 Power of Attorney (Included on page II-5)
</TABLE>
- -------------------
* To be filed by amendment.
- 4 -
1,400,000 Shares of Common Stock
THINKING TOOLS, INC.
UNDERWRITING AGREEMENT
August __, 1996
Barington Capital Group, L.P.
888 Seventh Avenue
New York, New York 10019
Dear Sirs:
The undersigned, Thinking Tools, Inc., a Delaware corporation (the
"Company"), hereby confirms its agreement with you (the "Underwriter") in
connection with the proposed offering of certain of its securities to the public
(the "Offering") as follows:
1. Introductory. The Company proposes to issue and sell to the Underwriter
1,400,000 shares of Common Stock par value $.001 per share, of the Company (the
"Common Stock"). In addition, solely for the purpose of covering
over-allotments, the Company proposes to grant the Underwriter the option to
purchase from it up to an additional 210,000 shares of Common Stock (the
"Additional Stock") identical to the Common Stock. The Common Stock is more
fully described in the Prospectus referred to below.
2. Representations and Warranties of the Company. The
Company represents and warrants to, and agrees with, the
Underwriter that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933 , as
amended (the "Act"), a registration statement, and may have filed one or
more amendments thereto, on Form SB-2 (Registration No. 333-_____),
including in such registration statement and each such amendment and
related Preliminary Prospectus (as hereinafter defined) the registration
of (i) the 1,400,000 shares of Common Stock (the "Firm Stock"), (ii) the
Additional Stock, (iii) the Common Stock purchase options referred to in
Section 5(v) (the "Underwriter's Options"), (iv) the shares of Common
Stock (the "Underwriter's Stock") issuable upon exercise of the
Underwriter's Options and (v) the shares of Common Stock (the "Bridge
Stock") issuable upon exercise of the warrants issued to investors in
connection with the
<PAGE>
bridge financing in which the Underwriter acted as placement agent (the
Firm Stock, the Additional Stock, the Underwriter's Options, the
Underwriter's Stock and the Bridge Stock are collectively referred to as
the "Securities"). As used in this Agreement, the term "Registration
Statement" means such registration statement, as amended, on file with the
Commission at the time such registration statement becomes effective
(including the prospectus, financial statements, exhibits, and all other
documents filed as a part thereof), provided that such Registration
Statement, at the time it becomes effective, may omit such information as
is permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A of the General Rules and Regulations
promulgated under the Act (the "Regulations"), which information ("Rule
430A Information") shall be deemed to be included in such Registration
Statement when a final prospectus is filed with the Commission in
accordance with Rules 430A and 424(b)(1) or (4) of the Regulations; the
term "Preliminary Prospectus" means each prospectus included in the
Registration Statement, or any amendments thereto, before it becomes
effective under the Act, the form of prospectus omitting Rule 430A
Information included in the Registration Statement when it becomes
effective, if applicable (the "Rule 430A Prospectus"), and any prospectus
filed by the Company with your consent pursuant to Rule 424(a) of the
Regulations; and the term "Prospectus" means the final prospectus included
as part of the Registration Statement, except that if the prospectus
relating to the securities covered by the Registration Statement in the
form first filed on behalf of the Company with the Commission pursuant to
Rule 424(b) of the Regulations shall differ from such final prospectus,
the term "Prospectus" shall mean the prospectus as filed pursuant to Rule
424(b) from and after the date on which it shall have first been used.
(b) When the Registration Statement becomes effective, and at all
times subsequent thereto to and including the Closing Date (as defined in
Section 3) and each Additional Closing Date (as defined in Section 3), and
during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Underwriter or a dealer, and
during such longer period until any post-effective amendment thereto shall
become effective, the Registration Statement (and any post-effective
amendment thereto) and the Prospectus (as amended or as supplemented if
the Company shall have filed with the Commission any amendment or
supplement to the Registration Statement or the Prospectus) will contain
all statements which are required to be stated therein in accordance with
the Act and the Regulations, will comply with the Act and the Regulations,
and will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not
-2-
<PAGE>
misleading, and no event will have occurred which should have been set
forth in an amendment or supplement to the Registration Statement or the
Prospectus which has not then been set forth in such an amendment or
supplement; if a Rule 430A Prospectus is included in the Registration
Statement at the time it becomes effective, the Prospectus filed pursuant
to Rules 430A and 424 (b) (1) or (4) will contain all Rule 430A
Information and all statements which are required to be stated therein in
accordance with the Act or the Regulations, will comply with the Act and
the Regulations, and will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading; and each
Preliminary Prospectus, as of the date filed with the Commission, did not
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; except that no representation or
warranty is made in this Section 2(b) with respect to statements or
omissions made in reliance upon and in conformity with written information
furnished to the Company as stated in Section 8(b) with respect to the
Underwriter by or on behalf of the Underwriter expressly for inclusion in
any Preliminary Prospectus, the Registration Statement, or the Prospectus,
or any amendment or supplement thereto.
(c) Neither the Commission nor the "blue sky" or securities
authority of any jurisdiction has issued an order (a "Stop Order")
suspending the effectiveness of the Registration Statement, preventing or
suspending the use of any Preliminary Prospectus, the Prospectus, the
Registration Statement, or any amendment or supplement thereto, refusing
to permit the effectiveness of the Registration Statement, or suspending
the registration or qualification of any of the Securities, nor has any of
such authorities instituted or threatened to institute any proceedings
with respect to a Stop Order.
(d) Any contract, agreement, instrument, lease, or license required
to be described in the Registration Statement or the Prospectus has been
properly described therein. Any contract, agreement, instrument, lease, or
license required to be filed as an exhibit to the Registration Statement
has been filed with the Commission as an exhibit to the Registration
Statement.
(e) The Company has no subsidiaries (as defined in the Regulations).
The Company is a corporation duly organized, validly existing, and in good
standing under the laws of Delaware, with full corporate power and
authority, and all necessary consents, authorizations, approvals, orders,
licenses, certificates, and permits of and from, and declarations and
filings with, all federal, state, local,
-3-
<PAGE>
and other governmental authorities and all courts and other tribunals, to
own, lease, license, and use its properties and assets and to carry on the
business in the manner described in the Prospectus. The Company is duly
qualified to do business and is in good standing in every jurisdiction in
which its ownership, leasing, licensing, or use of property and assets or
the conduct of its business makes such qualification necessary except
where the failure to be so qualified does not now have and will not in the
future have a material adverse effect on the operations, business,
properties, or assets of the Company.
(f) As of the Closing of the sale of the Firm Stock,
the authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, of which [3,031,758] shares are outstanding, and
3,000,000 shares of undesignated Preferred Stock, $.001 par value (the
"Undesignated Preferred Stock") of which [no] shares are outstanding. Each
outstanding share of Common Stock is validly authorized, validly issued,
fully paid, and nonassessable, without any personal liability attaching to
the ownership thereof has not been issued and is not owned or held in
violation of any preemptive rights of stockholders. There is no
commitment, plan, or arrangement to issue, and no outstanding option,
warrant, or other right calling for the issuance of, any share of capital
stock of the Company or any security or other instrument which by its
terms is convertible into, exercisable for, or exchangeable for, capital
stock of the Company except as may be properly described in the
Prospectus. There is outstanding no security or other instrument which by
its terms is convertible into or exchangeable for capital stock of the
Company, except for (i) options to purchase no more than 376,000 shares of
Common Stock pursuant to the Company's 1996 Stock Option Plan (the
"Plan"), which is properly described in the Prospectus, (ii) options to
purchase no more than 15,000 shares of Common Stock granted outside the
Plan to a non-affiliate of the Company; (iii) warrants to purchase 456,250
shares of Common Stock pursuant to the bridge financing in which the
Underwriter acted as placement agent; (iv) warrants to purchase 468,242
shares of Common Stock issued to Thinking Technologies, L.P.; all of which
have been properly described in the Prospectus. There is outstanding no
indebtedness other than (i) trade payables incurred in the ordinary course
of business, (ii) certain capital lease obligations and (iii) an aggregate
principal amount of $1,825,000 currently outstanding on 10% Senior Secured
Promissory Notes issued pursuant to a bridge financing entered into as of
August __, 1996, all as properly described in the Prospectus.
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<PAGE>
(g) The financial statements of the Company included in the
Registration Statement and the Prospectus fairly present the financial
position, the results of operations, and the other information purported
to be shown therein at the respective dates and for the respective periods
to which they apply. Such financial statements have been prepared in
accordance with generally accepted accounting principles (except to the
extent that certain footnote disclosures regarding any stub period may
have been omitted in accordance with the applicable rules of the
Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) consistently applied throughout the periods involved, are
correct and complete, and are in accordance with the books and records of
the Company. The accountants whose report on the audited financial
statements is filed with the Commission as a part of the Registration
Statement are, and during the periods covered by their report(s) included
in the Registration Statement and the Prospectus were, independent
certified public accountants within the meaning of the Act and the
Regulations. No other financial statements are required by Form SB-2 or
otherwise to be included in the Registration Statement or the Prospectus.
There has at no time been a material adverse change in the financial
condition, results of operations, business, properties, assets,
liabilities, or future prospects of the Company from the latest
information set forth in the Registration Statement or the Prospectus,
except as may be properly described in the Prospectus.
(h) There is no litigation, arbitration, claim, governmental or
other proceeding (formal or informal), or investigation pending,
threatened, or, to the knowledge of the Company, in prospect (or any basis
therefor) with respect to the Company, or any of its operations,
businesses, properties, assets, liabilities or future prospects, except as
may be properly described in the Prospectus or such as individually or in
the aggregate do not now have and will not in the future have a material
adverse effect upon the operations, business, properties, or assets of the
Company. The Company is not in violation of, or in default with respect
to, any law, rule, regulation, order, judgment, or decree except as may be
properly described in the Prospectus or such as in the aggregate do not
now have and will not in the future have a material adverse effect upon
the operations, business, properties, assets, liabilities or future
prospects, of the Company; nor is the Company required to take any action
in order to avoid any such violation or default.
(i) The Company has good and marketable title in fee simple to all
real properties and good title to all other properties and assets which
the Prospectus indicates are owned by it, free and clear of all liens,
security interests, pledges, charges, encumbrances, and mortgages
-5-
<PAGE>
(except as may be properly described in the Prospectus). No real property
owned, leased, licensed, or used by the Company lies in an area which is,
or to the knowledge of the Company will be, subject to zoning, use, or
building code restrictions which would prohibit, and no state of facts
relating to the actions or inaction of another person or entity or his or
its ownership, leasing, licensing, or use of any real or personal property
exists or will exist which would prevent, the continued effective
ownership, leasing, licensing, or use of such real property in the
business of the Company as presently conducted or as the Prospectus
indicates it contemplates conducting (except as may be properly described
in the Prospectus).
(j) The Company is not, nor to the knowledge of the Company is any
other party, now or expected by the Company to be in violation or breach
of, or in default with respect to, complying with any material provision
of any contract, agreement, instrument, lease, license, arrangement, or
understanding which is material to the Company, and each such contract,
agreement, instrument, lease, license, arrangement, and understanding is
in full force and is the legal, valid, and binding obligation of the
parties thereto and is enforceable as to them in accordance with its
terms. The Company enjoys peaceful and undisturbed possession under all
leases and licenses under which it is operating. The Company is not a
party to or bound by any contract, agreement, instrument, lease, license,
arrangement, or understanding, or subject to any charter or other
restriction, which has had or may in the future have a material adverse
effect on the financial condition, results of operations, business,
properties, assets, liabilities, or future prospects of the Company. The
Company is not in violation or breach of, or in default with respect to,
any term of its certificate of incorporation (or other charter document)
or by-laws.
(k) All patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, franchises, and
other intangible properties and assets (all of the foregoing being herein
called "Intangibles") that the Company owns or has pending, or under which
it is licensed, are in good standing and uncontested. The "Thinking Tools"
and "WHITEBOARD", names and their related logos are trademarks and service
marks used by the Company to identify its products, and such trademarks
and service marks are protected by registration in the name of the Company
on the principal register in the United States Patent and Trademark
Office. There is no right under any Intangible necessary to the business
of the Company as presently conducted or as the Prospectus indicates it
contemplates conducting (except as may be so described in the Prospectus).
The Company has not infringed, is not infringing, and has not received
notice of
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<PAGE>
infringement with respect to asserted Intangibles of others. To the
knowledge of the Company, there is no infringement by others of
Intangibles of the Company. To the knowledge of the Company, there is no
Intangible of others which has had or may in the future have a materially
adverse effect on the financial condition, results of operations,
business, properties, assets, liabilities, or future prospects of the
Company.
(l) Neither the Company, nor any director, officer, agent, employee,
or other person associated with or acting on behalf of the Company has,
directly or indirectly, used any corporate funds for unlawful
contributions, gifts, entertainment, or other unlawful expenses relating
to political activity; made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political
parties or campaigns from corporate funds; violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended; or made any bribe,
rebate, payoff, influence payment, kickback, or other unlawful payment.
(m) The Company has all requisite corporate power and authority to
execute, deliver, and perform its obligations under each of (i) this
Agreement, (ii) the certificate evidencing the Underwriter's Options (the
"Underwriter's Option Agreement"), and (iii) the proposed financial
advisory and consulting agreement to be entered into between the Company
and the Underwriter in connection with the consummation of the offering
contemplated hereby (the "Consulting Agreement" and, collectively with
this Agreement and the Underwriter's Option Agreement, the "Company
Documents"). All necessary corporate proceedings of the Company have been
duly taken to authorize the execution, delivery and performance of each of
the Company Documents by the Company. This Agreement has been duly
authorized, executed, and delivered by the Company, is the legal, valid,
and binding obligation of the Company, and is enforceable as to the
Company in accordance with its terms, subject to applicable bankruptcy,
insolvency and other laws affecting the enforceability of creditors'
rights generally. Each of the other Company Documents has been duly
authorized by the Company, and is or, when executed and delivered by the
Company, will be the legal, valid, and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency and other laws affecting the
enforceability of creditors' rights generally. No consent, authorization,
approval, order, license, certificate, or permit of or from, or
declaration or filing with, any federal, state, local, or other
governmental authority or any court or other tribunal is required by the
Company for the execution, delivery, or performance by the Company of any
of the Company Documents (except filings under the Act and the Exchange
Act which
-7-
<PAGE>
have been or will be made before the Closing Date and such consents
consisting only of consents under "blue sky" or state securities laws). No
consent of any party to any contract, agreement, instrument, lease,
license, arrangement, or understanding to which the Company is a party, or
to which any of its properties or assets are subject, is required for the
execution, delivery, or performance of the Company Documents; and the
execution, delivery, and performance of any of the Company Documents will
not violate, result in a breach of, conflict with, or (with or without the
giving of notice or the passage of time or both) entitle any party to
terminate or call a default under any such contract, agreement,
instrument, lease, license, arrangement, or understanding, or violate or
result in a breach of any term of the certificate of incorporation (or
other charter document) or by-laws of the Company or violate, result in a
breach of, or conflict with any law, rule, regulation, order, judgment, or
decree binding on the Company or to which any of its operations,
businesses, properties, or assets are subject.
(n) The Firm Stock and the Additional Stock are validly authorized
and, when issued and delivered in accordance with this Agreement, will be
validly issued, fully paid, and nonassessable, without any personal
liability attaching to the ownership thereof, and will not be issued in
violation of any preemptive rights of stockholders. The Underwriter will
receive good title to the Firm Stock and any Additional Stock purchased by
it, free and clear of all liens, security interests, pledges, charges,
encumbrances, stockholders' agreements and voting trusts.
(o) The Underwriter's Stock is validly authorized and reserved for
issuance and, when issued and delivered upon exercise of the Underwriter's
Options in accordance with the Underwriter's Option Agreement, will be
validly issued, fully paid and nonassessable, without any personal
liability attaching to ownership thereof, and will not be issued in
violation of any preemptive rights of stockholders; and the holders of the
Underwriter's Options will receive good title to the securities purchased
by them, respectively, free and clear of all liens, security interests,
pledges, charges, encumbrances, stockholders' agreements, and voting
trusts.
(p) The Securities conform to all statements relating thereto
contained in the Registration Statement or the Prospectus.
(q) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as may
otherwise be properly described in the Prospectus, the Company has not (i)
issued any securities or incurred any liability or obligation,
-8-
<PAGE>
primary or contingent, for borrowed money, (ii) entered into any
transaction not in the ordinary course of business, or (iii) declared or
paid any dividend on its capital stock.
(r) Neither the Company nor any of its officers, directors, or
affiliates (as defined in the Regulations), has taken or will take,
directly or indirectly, prior to the termination of the underwriting
syndicate contemplated by this Agreement, any action designed to stabilize
or manipulate the price of any security of the Company, or which has
caused or resulted in, or which might in the future reasonably be expected
to cause or result in, stabilization or manipulation of the price of any
security of the Company, to facilitate the sale or resale of any of the
Firm Stock or Additional Stock.
(s) The Company has obtained from each of its directors, officers
and affiliates (as defined in the Regulations), and from each other person
or entity who beneficially owned as of the effective date of the
Registration Statement, any unregistered shares (an "Original
Stockholder") an enforceable written agreement, in form and substance
satisfactory to counsel for the Underwriter, that for a period of 12
months from the Closing Date he will not, without your prior written
consent, offer, pledge, issue, sell, contract to sell, grant any option
for the sale of, or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any security of the Company or other instrument
which by its terms is convertible into, exercisable for, or exchangeable
for shares of Common Stock or other securities of the Company, including,
without limitation, any shares of Common Stock issuable under any
outstanding stock options. Such agreements may provide that commencing 6
months after the offering is completed, in the event that the last sales
price for the Common Stock on ____________, its principal exchange has
been at least 200% of the initial public offering price per share
hereunder for a period of 20 consecutive trading days ending within 5 days
of the date of such sale, and such sale is completed at a price in excess
of 200% of such initial public offering price.
(t) Except as may have been registered in the Registration Statement
or already been exercised or waived, no person or entity has the right to
require registration of shares of Common Stock or other securities of the
Company because of the filing or effectiveness of the Registration
Statement.
(u) Except as may be set forth in the Prospectus, the
Company has not incurred any liability for a fee,
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<PAGE>
commission, or other compensation on account of the employment of a broker
or finder in connection with the transactions contemplated by this
Agreement.
(v) Neither the Company nor any of its affiliates is presently doing
business with the government of Cuba or with any person or entity located
in Cuba. If, at any time after the date that the Registration Statement is
declared effective with the Commission or with the Florida Department of
Banking and Finance (the "Florida Department"), whichever date is later,
and prior to the end of the period referred to in the first clause of
Section 2(b), the Company commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba, the
Company will so inform the Florida Department within ninety days after
such commencement of business in Cuba, and during the period referred to
in Section 2(b) will inform the Florida Department within ninety days
after any change occurs with respect to previously reported information.
(w) The Securities have been approved for quotation on NASDAQ,
subject to official notice of issuance.
(x) The Securities have been approved for listing on the ______
Stock Exchange, subject to official notice of issuance.
(y) Except as contemplated herein or therein or as may have been
waived, no person or entity has any right of first refusal, preemptive
right, right to any compensation, or other similar right or option, in
connection with the Offering, this Agreement, the Underwriter's Options or
the Consulting Agreement, or any of the transactions contemplated hereby
or thereby.
3. Purchase, Sale, and Delivery of the Firm Stock and the Additional
Stock. On the basis of the representations, warranties, covenants, and
agreements of the Company herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell to the Underwriter, and
the Underwriter agrees to purchase from the Company all of the shares of Firm
Stock.
The purchase price per share of Firm Stock to be paid by the Underwriter
shall be _______. The initial public offering price per share of Firm Stock
shall be _______.
Payment for the Firm Stock by the Underwriter shall be made by certified
or official bank check in New York Clearing House funds payable to the order of
the Company at the offices of Barington Capital Group, L.P., 888 Seventh Avenue,
New York, New York 10019, or at such other place in the New York City
Metropolitan Area as you shall determine and advise the Company by at least two
full days' notice in writing, upon delivery of
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<PAGE>
the Firm Stock to you for the account of the Underwriter. Such delivery and
payment shall be made at 10:00 A.M., New York City Time, on the third business
day following the commencement of the initial public offering, as defined in
Section 11(a), or at such other time as shall be agreed upon between you and the
Company. The time and date of such delivery and payment are herein called the
"Closing Date."
Certificates for the Firm Stock shall be registered in such name or names
and in such authorized denominations as you may request in writing at least one
full business day prior to the Closing Date. The Company shall permit you to
examine and package such certificates for delivery at least one full business
day prior to the Closing Date.
In addition, the Company hereby grants to the Underwriter the option to
purchase all or a portion of the Additional Stock as may be necessary to cover
over-allotments, at the same purchase price per share to be paid by the
Underwriter to the Company for the Firm Stock as provided for in this Section 3.
This option may be exercised only to cover over-allotments in the sale of shares
of Common Stock by the Underwriter. This option may be exercised by you on the
basis of the representations, warranties, covenants, and agreements of the
Company herein contained, but subject to the terms and conditions herein set
forth, at any time and from time to time on or before the forty-fifth day
following the effective date of the Registration Statement, by written notice by
you to the Company. Such notice shall set forth the aggregate number of
Additional Stock as to which the option is being exercised and the time and
date, as determined by you, when such Additional Stock are to be delivered (such
time and date are herein called an "Additional Closing Date"); provided,
however, that no Additional Closing Date shall be earlier than the Closing Date
nor earlier than the second business day after the date on which the notice of
the exercise of the option shall have been given nor later than the eighth
business day after the date on which such notice shall have been given.
Payment for the Additional Stock by the Underwriter shall be made by
certified or official bank check in New York Clearing House funds payable to the
order of the Company at the offices of Barington Capital Group, L.P., 888
Seventh Avenue, New York, New York 10019, or at such other place in the New York
City Metropolitan Area as you shall determine and advise the Company by at least
one full day's notice in writing, upon delivery of the Additional Stock to you
for the accounts of the Underwriter.
Certificates for the Additional Stock shall be registered in such name or
names and in such authorized denominations as you may request in writing at
least one full business day prior to the Additional Closing Date with respect
thereto. The Company shall permit you to examine and package such certificates
for
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<PAGE>
delivery at least one full business day prior to the Additional Closing Date
with respect thereto.
4. Offering. The Underwriter is to make a public offering of the Firm
Stock as soon, on or after the effective date of the Registration Statement, as
you deem it advisable so to do. The Firm Stock is to be initially offered to the
public at the initial public offering price as provided for in Section 3 (such
price being herein called the "public offering price"). After the initial public
offering, you may from time to time increase or decrease the public offering
price, in your sole discretion, by reason of changes in general market
conditions or otherwise.
5. Covenants of the Company. The Company covenants that it
will:
(a) Use its best efforts to cause the Registration Statement to
become effective as promptly as possible. If the Registration Statement
has become or becomes effective with a form of prospectus omitting Rule
430A information, or filing of the Prospectus is otherwise required under
Rule 424(b), the Company will file the Prospectus, properly completed,
pursuant to Rule 424(b) within the time period prescribed and will provide
evidence satisfactory to you of such timely filing.
(b) Notify you immediately, and confirm such notice in writing, (i)
when the Registration Statement and any post-effective amendment thereto
become effective, (ii) of the receipt of any comments from the Commission
or the "blue sky" or securities authority of any jurisdiction regarding
the Registration Statement, any post-effective amendment thereto, the
Prospectus, or any amendment or supplement thereto, and (iii) of the
receipt of any notification with respect to a Stop Order or the initiation
or threatening of any proceeding with respect to a Stop Order. The Company
will use its best efforts to prevent the issuance of any Stop Order and,
if any Stop Order is issued, to obtain the lifting thereof as promptly as
possible.
(c) During the time when a prospectus relating to the Firm Stock and
the Additional Stock is required to be delivered hereunder or under the
Act or the Regulations, comply so far as it is able with all requirements
imposed upon it by the Act, as now existing and as hereafter amended, and
by the Regulations, as from time to time in force, so far as necessary to
permit the continuance of sales of or dealings in the Firm Stock or the
Additional Stock, as the case may be, in accordance with the provisions
hereof and the Prospectus. If, at any time when a prospectus relating to
the Firm Stock and the Additional Stock is required to be delivered
hereunder or under the Act or the Regulations, any event shall have
occurred as a result of which, in the reasonable opinion of counsel for
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<PAGE>
the Company or counsel for the Underwriter, the Registration Statement or
the Prospectus as then amended or supplemented contains any untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, or if, in the opinion of either of such counsel, it is
necessary at any time to amend or supplement the Registration Statement or
the Prospectus to comply with the Act or the Regulations, the Company will
immediately notify you and promptly prepare and file with the Commission
an appropriate amendment or supplement (in form and substance satisfactory
to you) which will correct such statement or omission or which will effect
such compliance and will use its best efforts to have any such amendment
declared effective as soon as possible.
(d) Deliver without charge to the Underwriter such number of copies
of each Preliminary Prospectus as may reasonably be requested by the
Underwriter and, as soon as the Registration Statement, or any amendment
thereto, becomes effective or a supplement is filed, deliver without
charge to you two signed copies of the Registration Statement, including
exhibits, or such amendment thereto, as the case may be, and two copies of
any supplement thereto, and deliver without charge to the Underwriter such
number of copies of the Prospectus, the Registration Statement, and
amendments and supplements thereto, if any, without exhibits, as you may
request for the purposes contemplated by the Act.
(e) Endeavor in good faith, in cooperation with you, at or prior to
the time the Registration Statement becomes effective, to qualify the Firm
Stock and any Additional Stock for offering and sale under the "blue sky"
or securities laws of such jurisdictions as you may designate; provided,
however, that no such qualification shall be required in any jurisdiction
where, as a result thereof, the Company would be subject to service of
general process or to taxation as a foreign corporation doing business in
such jurisdiction to which it is not then subject. In each jurisdiction
where such qualification shall be effected, the Company will, unless you
agree in writing that such action is not at the time necessary or
advisable, file and make such statements or reports at such times as are
or may be required by the laws of such jurisdiction.
(f) Use its best efforts to keep the Prospectus and the Registration
Statement current and effective by filing post-effective amendments, as
necessary.
(g) Make generally available (within the meaning of Section 11(a) of
the Act and the Regulations) to its security holders as soon as
practicable, but not later than __________, 1997, an earnings statement
(which need not be
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<PAGE>
certified by independent certified public accountants unless required by
the Act or the Regulations, but which shall satisfy the provisions of
Section 11(a) of the Act and the Regulations) covering a period of at
least twelve months beginning after the effective date of the Registration
Statement.
(h) For a period of twelve months after the date of the Prospectus,
not, without your prior written consent, offer, issue, sell, contract to
sell, grant any option for the sale of, or otherwise dispose of, directly
or indirectly, any shares of Common Stock or other securities of the
Company (or any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for shares of Common
Stock or other securities of the Company) except as provided in Section 3
and except for (i) the grant of options to purchase no more than 376,000
shares of Common Stock pursuant to the Plan, which is properly described
in the Prospectus, (ii) the grant of options to purchase no more than
15,000 shares of Common Stock to be granted outside of the Plan to a
non-affiliate of the Company; (1) (iii) the issuance of Common Stock
issuable upon the exercise of stock options and warrants outstanding on
the date hereof and fully and properly described in the Prospectus and
pursuant to the Plan described in clause (i) hereof, (iv) the issuance of
the Securities, and (v) the sale of Common Stock, commencing 6 months
after the completion of the offering contemplated hereunder, provided that
the last sales price for the Common Stock on The Nasdaq Small-Cap Market
("NASDAQ") has been at least 200% of the initial public offering price
hereunder for a period of 20 consecutive trading days ending within 5 days
of the date of such sale, and such sale is completed at a price in excess
of 200% of such initial public offering price.
(i) For a period of five years after the effective date of the
Registration Statement, furnish you, without charge, the following:
(i) within 90 days after the end of each fiscal year, three
copies of financial statements certified by independent certified
public accountants, including a balance sheet, statement of income,
and statement of cash flows of the Company and its then existing
subsidiaries, with supporting schedules, prepared in accordance with
generally accepted accounting principles, as at the end of such
fiscal year and for the 12 months then ended, which may be on a
consolidated basis;
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(1) Number (ii) to be removed if such options are granted
prior to the IPO.
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<PAGE>
(ii) as soon as practicable after they have been sent to
stockholders of the Company or filed with the Commission, three
copies of each annual and interim financial and other report or
communication sent by the Company to its stockholders or filed with
the Commission;
(iii) as soon as practicable, two copies of every press
release and every material news item and article in respect of the
Company or its affairs which was released by the Company; and
(iv) such additional documents and information with respect to
the Company and its affairs and the affairs of any of its
subsidiaries as you may from time to time reasonably request.
(j) Apply the net proceeds received by it from the offering in the
manner set forth under "Use of Proceeds" in the Prospectus.
(k) Furnish to you as early as practicable prior to the Closing Date
and any Additional Closing Date, as the case may be, but no less than two
full business days prior thereto, a copy of the latest available unaudited
interim consolidated financial statements of the Company and its
consolidated subsidiaries which have been read by the Company's
independent certified public accountants, as stated in their letters to be
furnished pursuant to Section 7(e).
(l) File no amendment or supplement to the Registration Statement or
Prospectus at any time, whether before or after the effective date of the
Registration Statement, unless such filing shall comply with the Act and
the Regulations and unless you shall previously have been advised of such
filing and furnished with a copy thereof, and you and counsel for the
Underwriter shall have approved such filing in writing.
(m) Comply with all registration, filing, and reporting requirements
of the Exchange Act which may from time to time be applicable to the
Company.
(n) Comply with all provisions of all undertakings
contained in the Registration Statement.
(o) Prior to the Closing Date or any Additional Closing Date, as the
case may be, issue no press release or other communication, directly or
indirectly, and hold no press conference with respect to the Company, the
financial conditions, results of operations, business, properties, assets,
liabilities of the Company, or this offering, without your prior written
consent.
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<PAGE>
(p) File timely with the Commission an appropriate form to register
the Common Stock pursuant to Section 12(b) under the Exchange Act.
(q) File timely and accurate reports on Form SB with the Commission
in accordance with Rule 463 of the Regulations or any successor provision.
(r) Use its best efforts to cause the application for quotation of
the Firm Stock and any Additional Stock on NASDAQ to be approved as soon
as possible.
(s) Use its best efforts to complete the listing of
the Securities on the _____________ Stock Exchange.
(t) On or prior to the Closing Date, enter into the Consulting
Agreement with Barington Capital Group, L.P., in the form set forth as an
exhibit to the Registration Statement, which will include, among other
things, a provision granting a right of first refusal to the Underwriter
in connection with certain sales of securities by the Company or its
subsidiaries.
(u) On or prior to the Closing Date, sell to the Underwriter (or its
designees) the Underwriter's Options to purchase an aggregate of 140,000
shares of Common Stock, which Underwriter's Options shall be evidenced by
the Underwriter's Option Agreement in the form set forth as an exhibit to
the Registration Statement.
(v) Until expiration of the Underwriter's Options, keep reserved
sufficient shares of Common Stock for issuance upon exercise of the
Underwriter's Options.
(w) Until the expiration of five years from the Closing Date, if you
shall so indicate in writing to the Company, use its best efforts,
including, without limitation, the solicitation of proxies, to cause one
individual selected from time to time by Barington Capital Group, L.P. to
be elected director of the Company.
(x) Deliver to you, without charge, within a reasonable period after
the last Additional Closing Date or the expiration of the period in which
the Underwriter may exercise the over-allotment option, three bound
volumes of the Registration Statement and all related materials.
(y) For a period of five years after the Closing Date, supply to the
appropriate parties such information as may be necessary or desirable, and
otherwise use its best efforts, so that the Company will be registered and
will maintain its registration in one or more of the securities manuals
published by Standard & Poor's Corporation and that at all times such
listing will, at a minimum, contain the names of
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the Company's officers and directors, a balance sheet as of a date not
more than 18 months prior to such time, and a statement of operations for
either the fiscal year preceding such date or the most recent fiscal year
of operations.
(z) Use its best efforts to maintain the quotation on NASDAQ and the
_________ Stock Exchange of price information for the Common Stock issued
hereunder.
(aa) Procure prior to, and make effective as of the date the
Registration Statement becomes effective, and maintain until one year from
the Closing Date Director and Officer liability insurance with a reputable
insurance carrier.
(bb) From the Closing Date and until five years from the date the
Registration Statement becomes effective, retain a transfer agent
acceptable to the Underwriter. Upon the Underwriter's request, the Company
shall provide the Underwriter with copies of the Company's daily stock
transfer sheets and lists of the beneficial and record holders of the
Company's securities, from such transfer agent and from the Depository
Trust Company, at the Company's sole cost and expense.
(cc) From the date the Registration Statement becomes effective and
until five years from such date, the Company shall retain an investor
relations firm or engage an in-house investor relations officer, in either
case reasonably acceptable to the Underwriter.
6. Payment of Expenses. The Company hereby agrees to pay all expenses
(other than fees of counsel for the Underwriter, except as provided in Sections
6(c) and 6(e)) in connection with (a) the preparation, printing, filing,
distribution, and mailing of the Registration Statement and the Prospectus and
the printing, filing, distribution, and mailing of this Agreement, any Agreement
among Underwriters, any selected dealers agreement, any Blue Sky Surveys, and if
appropriate, any Underwriter's Questionnaire and Power of Attorney, and related
documents, including the cost of all copies thereof and of the Preliminary
Prospectuses and of the Prospectus and any amendments or supplements thereto
supplied to the Underwriter in quantities as hereinabove stated, (b) the
issuance, sale, transfer, and delivery of the Firm Stock and any Additional
Stock, including any transfer or other taxes payable thereon, (c) the
qualification of the Firm Stock and any Additional Stock under state or foreign
"blue sky" or securities laws, including the costs of printing and mailing the
preliminary and final "Blue Sky Survey" and the fees of counsel for the
Underwriter and the disbursements in connection therewith, (d) the filing fees
payable to the Commission, the NASD, and the jurisdictions in which such
qualification is sought, (e) the reasonable fees and disbursements of the
Underwriter relating to all filings with the
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NASD, (f) the quotation of the Common Stock on NASDAQ and the listing of the
Common Stock on the ________ Stock Exchange, (g) the fees and expenses of the
Company's transfer agent and registrar, (h) the fees and expenses of the
Company's legal counsel and accountants, (i) the fees of an investigative search
firm designated by the Underwriter to conduct a background check of the
principals of the Company, (j) the costs of placing "tombstone" advertisements
in the national edition of The Wall Street Journal and other publications
selected by the Underwriter which shall not exceed $10,000, and (k) the costs of
preparing a reasonable number of transaction "bibles" or "mementos." In
addition, the Company hereby agrees to pay to the Underwriter a non-accountable
expense allowance equal to 3% of the aggregate gross proceeds received by the
Company from the sale of the Firm Stock and any Additional Stock which amounts
(less $35,000 previously paid to you in respect of such non-accountable expense
allowance) shall be paid to you on the Closing Date (with respect to Common
Stock sold by the Company on the Closing Date) and, if applicable, on the
Closing Date and any Additional Closing Date (with respect to Additional Stock
sold by the Company on the Closing Date or such Additional Closing Date).
7. Conditions of Underwriter's Obligations. The obligations of the
Underwriter to purchase and pay for the Firm Stock and any Additional Stock, as
provided herein, shall be subject, in your discretion, to the continuing
accuracy of the representations and warranties of the Company contained herein
and in each certificate and document contemplated under this Agreement to be
delivered to you, as of the date hereof and as of the Closing Date (or the
Additional Closing Date, as the case may be), to the performance by the Company
of its obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective not later
than 6:00 P.M., New York City Time, on the date of this Agreement or such
later date and time as shall be consented to in writing by you.
(b) At the Closing Date and any Additional Closing Date, as the case
may be, you shall have received the favorable opinion of Squadron,
Ellenoff, Plesent & Sheinfeld, L.L.P., counsel for the Company, dated the
date of delivery, addressed to the Underwriter, and in form and scope
satisfactory to counsel for the Underwriter, with such number of
reproduced copies or signed counterparts thereof as shall be satisfactory
to the Underwriter, to the effect that:
(i) the Company is a corporation, duly incorporated, validly
existing, and in good standing under the laws of Delaware with full
corporate power and authority, and all consents, authorizations,
approvals, orders, certificates, and permits of and from, and
declarations and filings with, all federal,
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state, local, and other governmental authorities and all courts and
other tribunals necessary, to own, lease, license, and use its
properties and assets and to conduct its business in the manner
described in the Prospectus. The Company is duly qualified to do
business and is in good standing in every jurisdiction in which its
ownership, leasing, licensing, or use of property and assets or the
conduct of its business makes such qualification necessary except
where the failure to be so qualified does not now have and will not
in the future have a material adverse effect on the operations,
business, properties, or assets of the Company;
(ii) the authorized capital stock of the Company consists of
20,000,000 shares of Common Stock and 3,000,000 shares of Preferred
Stock of which _________ shares of Common Stock and _______ shares
of Preferred Stock are outstanding. Each outstanding share of Common
Stock is duly authorized, validly issued, fully paid, and
nonassessable, without any personal liability attaching to the
ownership thereof and has not been issued and is not owned or held
in violation of any preemptive right of stockholders. To the
knowledge of such counsel, there is no commitment, plan, or
arrangement to issue, and no outstanding option, warrant, or other
right calling for the issuance of, any share of capital stock of the
Company, or any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for, capital
stock of the Company, except as may be properly described in the
Prospectus. There is outstanding no security or other instrument
which by its terms is convertible into or exchangeable for capital
stock of the Company except as may be properly described in the
Prospectus;
(iii) to the knowledge of such counsel, there is no litigation,
arbitration, claim, governmental or other proceeding (formal or
informal), or investigation pending, threatened, or in prospect (or
any basis therefor) with respect to the Company, or its operations,
business, properties, or assets as individually or in the aggregate
do not now have and cannot reasonably be expected in the future to
have a material adverse effect upon the operations, business,
properties or assets of the Company. To the knowledge of such
counsel, the Company is not in violation of, or in default with
respect to, any law, rule, regulation, order, judgment, or decree,
except as may be properly described in the Prospectus or such as in
the aggregate do not now have and cannot reasonably be expected in
the future to have a material adverse effect upon the operations,
business, properties or assets of the
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Company, nor is the Company required to take any action
in order to avoid any such violation or default;
(iv) to the knowledge of such counsel, neither the Company, nor
any other party is now or is expected by the Company to be in
violation or breach of, or in default with respect to, complying
with any material provision of any contract, agreement, instrument,
lease, license, arrangement, or understanding known to such counsel
which is material to the Company;
(v) the Company is not in violation or breach of, or in
default with respect to, any term of its certificate of
incorporation (or other charter document) or by-laws, as amended;
(vi) the Company has all requisite corporate power and authority
to execute, deliver and perform each of the Company Documents. All
necessary corporate proceedings of the Company have been taken to
authorize the execution, delivery, and performance by the Company of
the Company Documents. Each Company Document (excluding any Firm
Stock or Additional Stock not issued on the date of such opinion)
has been duly executed and delivered by the Company. Each Company
Document is or, when executed and delivered by the Company will be,
the legal, valid, and binding obligation of the Company, and
(subject to applicable bankruptcy, insolvency, and other laws
affecting the enforceability of creditors' rights generally) is or
will be enforceable as to the Company in accordance with its terms.
No consent, authorization, approval, order, license, certificate, or
permit of or from, or declaration or filing with, any federal,
state, local, or other governmental authority or any court or other
tribunal is required by the Company for the execution, delivery, or
performance by the Company of any of the Company Documents (except
filings under the Act which have been made prior to the Closing Date
and consents or other authorizations, approvals, orders, licenses,
certificates or permits required or necessary under "blue sky" or
state securities laws). No consent of any party to any contract,
agreement, instrument, lease, license, arrangement, or understanding
to which the Company is a party, or to which any of its properties
or assets are subject, is required for the execution, delivery, or
performance of any of the Company Documents; and the execution,
delivery, and performance of the Company Documents will not violate,
result in a breach of, conflict with, or (with or without the giving
of notice or the passage of time or both) entitle any party to
terminate or call a default under any such contract, agreement,
instrument, lease, license, arrangement, or understanding, or
violate or
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result in a breach of any term of the certificate of incorporation
(or other charter document) or by-laws of the Company, as amended,
or violate, result in a breach of, or conflict with any law, rule,
regulation, order, judgment, or decree binding on the Company or to
which any of its operations, business, properties, or assets are
subject;
(vii) the Firm Stock and the Additional Stock are validly
authorized. Such opinion delivered at the Closing Date or any
Additional Closing Date shall state that each share of Firm Stock or
Additional Stock, as the case may be, to be delivered on that date
is validly issued, fully paid, and nonassessable, with no personal
liability attaching to the ownership thereof, and is not issued in
violation of any preemptive rights of stockholders, and the
Underwriter has received good title to the Firm Stock and any
Additional Stock purchased by it, from the Company, free and clear
of all liens, security interests, pledges, charges, encumbrances,
stockholders' agreements, and voting trusts;
(viii) the Underwriter's Stock has been duly and validly reserved
for issuance. Such opinion delivered at the Closing Date shall state
that the Underwriter's Options have been duly and validly issued and
delivered. The Underwriter's Stock, when issued and delivered in
accordance with the terms of the Underwriter's Option Agreement,
will be validly authorized, validly issued, fully paid, and
nonassessable, with no personal liability attaching to the ownership
thereof, and will not have been issued in violation of any
preemptive rights of stockholders; and the holders of the
Underwriter's Options will receive good title to the securities
purchased by them, respectively, free and clear of all liens,
security interests, pledges, charges, encumbrances, stockholders'
agreements, and voting trusts;
(ix) the Common Stock and the Securities conform
to all statements relating thereto contained in the
Registration Statement or the Prospectus;
(x) to the knowledge of such counsel, any contract, agreement,
instrument, lease, or license required to be described in the
Registration Statement or the Prospectus are described therein and
such descriptions are correct and complete in all material respects.
To the knowledge of such counsel, any contract, agreement,
instrument, lease, or license required to be filed as an exhibit to
the Registration Statement has been filed with the Commission as an
exhibit to the Registration Statement;
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(xi) insofar as statements in the Prospectus purport to
summarize the status of litigation or the provisions of laws, rules,
regulations, orders, judgments, decrees, contracts, agreements,
instruments, leases, or licenses, such statements have been prepared
or reviewed by such counsel and accurately reflect the status of
such litigation and provisions purported to be summarized and are
correct in all material respects;
(xii) to the knowledge of such counsel, the conditions for use of
Form SB-2 have been satisfied with respect to the Registration
Statement;
(xiii) the Common Stock has been approved for
quotation on NASDAQ, subject to official notice of
issuance;
(xiv) the Securities have been approved for listing
on the ________ Stock Exchange, subject to official
notice of issuance;
(xv) to the knowledge of such counsel, except as may have been
registered in the Registration Statement or already been exercised
or waived, no person or entity has the right to require registration
of shares of Common Stock or other securities of the Company because
of the filing or effectiveness of the Registration Statement;
(xvi) the Registration Statement has become effective under the
Act. To the knowledge of such counsel, no Stop Order has been issued
and no proceedings for that purpose have been instituted or
threatened;
(xvii) the Registration Statement, any Rule 430A Prospectus, and
the Prospectus, and any amendment or supplement thereto (other than
financial statements and other financial data and schedules
contained therein, as to which such counsel need express no
opinion), comply as to form in all material respects with the
requirements of the Act and the Regulations;
(xviii) such counsel has no reason to believe that any of the
Registration Statement, any Rule 430A Prospectus, or the Prospectus,
or any amendment or supplement thereto (other than financial
statements and other financial data and schedules which are or
should be contained in any thereof, as to which such counsel need
express no opinion), contains any untrue statement of a material
fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading;
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(xix) to the knowledge of such counsel, since the effective date
of the Registration Statement, no event has occurred which should
have been set forth in an amendment or supplement to the
Registration Statement or the Prospectus which has not been set
forth in such an amendment or supplement; and
(xx) nothing has come to the attention of such counsel that
would lead them to believe that the Registration Statement, at the
time it became effective or at the Closing Date or Additional
Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus, at the Closing Date or Additional
Closing Date, as the case may be (unless the term "Prospectus"
refers to a Prospectus which has been provided to the Underwriter by
the Company for use in connection with the offering of the
Securities which differs from the Prospectus on file at the
Commission at the Closing Date or Additional Closing Date, as the
case may be, in which case at the time it is first provided to the
Underwriter for such use), included or includes an untrue statement
of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading (in
each case other than the financial statements and supporting
schedules and notes thereto and other financial or statistical
information included therein, as to which no opinion need be
rendered) and such counsel does not know of any amendment to the
Registration Statement required to be filed;
(xxi) any right of first refusal, preemptive right, right to
compensation, or other similar right or option, in connection with
the Offering, this Agreement, the Underwriter's Options or the
Consulting Agreement, or any of the transactions contemplated hereby
or thereby known to such counsel and not contemplated by the
Offering, this Agreement, the Underwriter's Options or the
Consulting Agreement has been effectively waived.
In rendering such opinion, counsel for the Company may rely (A) as to matters
involving the application of laws other than the laws of the United States, the
General Corporation Law of the State of Delaware and the laws of the State of
New York, to the extent counsel for the Company deems proper and to the extent
specified in such opinion, upon an opinion or opinions (in form and substance
satisfactory to counsel for the Underwriter) of other counsel, acceptable to
counsel for the Underwriter, familiar with the applicable laws, in which case
the opinion of
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counsel for the Company shall state that the opinion or opinions of such other
counsel are satisfactory in scope, form, and substance to counsel for the
Company and that reliance thereon by counsel for the Company and the Underwriter
is reasonable; (B) may rely as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company; and (C) may rely
to the extent they deem proper, upon written statements or certificates of
officers of departments of various jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company, provided
that copies of any such statements or certificates shall be delivered to counsel
for the Underwriter.
(c) On or prior to the Closing Date and any Additional Closing Date,
as the case may be, the Underwriter shall have been furnished such
information, documents, certificates, and opinions as it may reasonably
require for the purpose of enabling it to review the matters referred to
in Section 7(b), and in order to evidence the accuracy, completeness, or
satisfaction of any of the representations, warranties, covenants,
agreements, or conditions herein contained, or as you may reasonably
request.
(d) At the Closing Date and any Additional Closing Date, as the case
may be, you shall have received a certificate of the chief executive
officer and of the chief financial officer of the Company, dated the
Closing Date or such Additional Closing Date, as the case may be, to the
effect that the condition set forth in Section 7(a) has been satisfied,
that as of the date of this Agreement and as of the Closing Date or such
Additional Closing Date, as the case may be, the representations and
warranties of the Company contained herein were and are accurate, and that
as of the Closing Date or such Additional Closing Date, as the case may
be, the obligations to be performed by the Company hereunder on or prior
thereto have been fully performed.
(e) At the time this Agreement is executed and at the Closing Date
and any Additional Closing Date, as the case may be, you shall have
received a letter from KPMG Peat Marwick LLP, certified public
accountants, dated the date of delivery, and addressed to the Underwriter,
and in form and substance satisfactory to you, with reproduced copies or
signed counterparts thereof for the Underwriter.
(f) All proceedings taken in connection with the issuance, sale,
transfer, and delivery of the Firm Stock and any Additional Stock shall be
satisfactory in form and substance to you and to counsel for the
Underwriter, and the Underwriter shall have received from such counsel for
the Underwriter a favorable opinion, dated as of the Closing Date and the
Additional Closing Date, as the case may be, with respect to such of the
matters set forth under Section
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7(b), and with respect to such other related matters, as you
may reasonably request.
(g) The NASD, upon review of the terms of the public offering of the
Firm Stock and any Additional Stock, shall not have objected to the
Underwriter's participation in such offering.
(h) Prior to or on the Closing Date, the Company shall have entered
into the Underwriter's Option.
(i) Prior to or on the Closing Date, the Company shall have entered
into the Consulting Agreement with Barington Capital Group, L.P.
(j) Prior to or on the Closing Date, the Company shall have provided
to you copies of the agreements referred to in Section 2(s).
Any certificate or other document signed by any officer of the Company and
delivered to you or to counsel for the Underwriter shall be deemed a
representation and warranty by such officer individually and by the Company
hereunder to the Underwriter as to the statements made therein. If any condition
to the Underwriter's obligations hereunder to be fulfilled prior to or at the
Closing Date or any Additional Closing Date, as the case may be, is not so
fulfilled, you may terminate this Agreement or, if you so elect, in writing
waive any such conditions which have not been fulfilled or extend the time for
their fulfillment.
8. Indemnification and Contribution. (a) Subject to the conditions set
forth below, the Company agrees to indemnify and hold harmless the
Underwriter, its officers, directors, partners, employees, agents, and
counsel, and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act,
against any and all loss, liability, claim, damage, and expense whatsoever
(which shall include, for all purposes of this Section 8, but not be
limited to, attorneys' fees and any and all expense whatsoever incurred in
investigating, preparing, or defending against any litigation, commenced
or threatened, or any claim whatsoever and any and all amounts paid in
settlement of any claim or litigation) as and when incurred arising out
of, based upon, or in connection with (i) any untrue statement or alleged
untrue statement of a material fact contained (A) in any Preliminary
Prospectus, any Rule 430A Prospectus, the Registration Statement, or the
Prospectus (as from time to time amended and supplemented), or any
amendment or supplement thereto or (B) in any application or other
document or communication (in this Section 8 collectively called an
"application") executed by or on behalf of the Company or based upon
written information furnished by or on behalf of the Company filed
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in any jurisdiction in order to qualify any of the Securities under the
"blue sky" or securities laws thereof or filed with the Commission or any
securities exchange; or any omission or alleged omission to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, unless such statement or omission was
made in reliance upon and in conformity with written information furnished
to the Company as stated in Section 8(b) with respect to any Underwriter
by or on behalf of such Underwriter through the Underwriter expressly for
inclusion in any Preliminary Prospectus, any Rule 430A Prospectus, the
Registration Statement, or the Prospectus, or any amendment or supplement
thereto, or in any application, as the case may be, or (ii) any breach of
any representation, warranty, covenant, or agreement of the Company
contained in this Agreement. The foregoing agreement to indemnify shall be
in addition to any liability the Company may otherwise have, including
liabilities arising under this Agreement.
If any action is brought against the Underwriter or any of its officers,
directors, partners, employees, agents, or counsel, or any controlling persons
of the Underwriter (an "indemnified party") in respect of which indemnity may be
sought against the Company pursuant to the foregoing paragraph, such indemnified
party or parties shall promptly notify the Company in writing of the institution
of such action (but the failure so to notify shall not relieve the Company from
any liability it may have other than pursuant to this Section 8(a), except to
the extent it may have been prejudiced in any material respect by such failure)
and the Company shall promptly assume the defense of such action, including the
employment of counsel (satisfactory to such indemnified party or parties) and
payment of expenses. Such indemnified party or parties shall have the right to
employ its or their own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of such indemnified party or parties unless
the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action or the Company shall not
have promptly employed counsel satisfactory to such indemnified party or parties
to have charge of the defense of such action or such indemnified party or
parties shall have reasonably concluded that there may be one or more legal
defenses available to it or them or to other indemnified parties which are
different from or additional to those available to the Company, in any of which
events such fees and expenses shall be borne by the Company and the Company
shall not have the right to direct the defense of such action on behalf of the
indemnified party or parties. Anything in this paragraph to the contrary
notwithstanding, the Company shall not be liable for any settlement of any such
claim or action effected without its written consent, which shall not be
unreasonably withheld. The Company shall not, without the prior written consent
of each indemnified party that is not released as described in this sentence,
settle or compromise any
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action, or permit a default or consent to the entry of judgment in or otherwise
seek to terminate any pending or threatened action, in respect of which
indemnity may be sought hereunder (whether or not any indemnified party is a
party thereto), unless such settlement, compromise, consent, or termination
includes an unconditional release of each indemnified party from all liability
in respect of such action. The Company agrees promptly to notify the Underwriter
of the commencement of any litigation or proceedings against the Company or any
of its officers or directors in connection with the sale of the [Firm Stock or
the Additional Stock], any Preliminary Prospectus, any Rule 430A Prospectus, the
Registration Statement, or the Prospectus, or any amendment or supplement
thereto, or any application.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each director of the Company, each officer of the Company who
shall have signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, to the same extent as the foregoing
indemnity from the Company to the Underwriter in Section 8(a), but only
with respect to statements or omissions, if any, made in any Preliminary
Prospectus, any Rule 430A Prospectus, the Registration Statement, or the
Prospectus (as from time to time amended and supplemented), or any
amendment or supplement thereto, or in any application in reliance upon
and in conformity with written information furnished to the Company as
stated in this Section 8(b) with respect to any Underwriter by or on
behalf of such Underwriter through the Underwriter expressly for inclusion
in any Preliminary Prospectus, any Rule 430A Prospectus, the Registration
Statement, or the Prospectus, or any amendment or supplement thereto, or
in any application, as the case may be; provided, however, that the
obligation of each Underwriter to provide indemnity under the provisions
of this Section 8(b) shall be limited to the amount which represents the
underwriting discounts received by such Underwriter hereunder. For all
purposes of this Agreement, the amounts of the selling concession and
reallowance set forth in the Prospectus constitute the only information
furnished in writing by or on behalf of any Underwriter expressly for
inclusion in any Preliminary Prospectus, any Rule 430A Prospectus, the
Registration Statement, or the Prospectus (as from time to time amended or
supplemented), or any amendment or supplement thereto, or in any
application, as the case may be. If any action shall be brought against
the Company or any other person so indemnified based on any Preliminary
Prospectus, any Rule 430A Prospectus, the Registration Statement, or the
Prospectus, or any amendment or supplement thereto, or in any application,
and in respect of which indemnity may be sought against any Underwriter
pursuant to this Section 8(b), such Underwriter shall have the rights and
duties given to the Company, and the Company and each other person
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so indemnified shall have the rights and duties given to the indemnified
parties, by the provisions of Section 8(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section
8(a) or 8(b) (subject to the limitations thereof) but it is found in a
final judicial determination, not subject to further appeal, that such
indemnification may not be enforced in such case, even though this
Agreement expressly provides for indemnification in such case or (ii) any
indemnified or indemnifying party seeks contribution under the Act, the
Exchange Act, or otherwise, then the Company (including for this purpose
any contribution made by or on behalf of any director of the Company, any
officer of the Company who signed the Registration Statement, and any
controlling person of the Company), as one entity, and the Underwriter
(including for this purpose any contribution by or on behalf of an
indemnified party), as a second entity, shall contribute to the losses,
liabilities, claims, damages, and expenses whatsoever to which any of them
may be subject, so that the Underwriter is responsible for the proportion
thereof equal to the percentage which the underwriting discount per share
of Firm Stock set forth on the cover page of the Prospectus represents of
the initial public offering price per share set forth on the cover page of
the Prospectus and the Company is responsible for the remaining portion;
provided, however, that if applicable law does not permit such allocation,
then other relevant equitable considerations such as the relative fault of
the Company and the Underwriter in connection with the facts which
resulted in such losses, liabilities, claims, damages, and expenses shall
also be considered. The relative fault, in the case of an untrue
statement, alleged untrue statement, omission, or alleged omission, shall
be determined by, among other things, whether such statement, alleged
statement, omission, or alleged omission relates to information supplied
by the Company or by the Underwriter, and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent
such statement, alleged statement, omission, or alleged omission. The
Company and the Underwriter agree that it would be unjust and inequitable
if the respective obligations of the Company and the Underwriter for
contribution were determined by pro rata or per capita allocation of the
aggregate losses, liabilities, claims, damages, and expenses (even if the
Underwriter and the other indemnified parties were treated as one entity
for such purpose) or by any other method of allocation that does not
reflect the equitable considerations referred to in this Section 8(c). No
person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. For
purposes of this Section 8(c), each person, if any, who
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controls the Underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner,
employee, agent, and counsel of the Underwriter shall have the same rights
to contribution as such Underwriter and each person, if any, who controls
the Company within the meaning of Section 15 of the Act or Section 20(a)
of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement, and each director of the Company shall have the
same rights to contribution as the Company, subject in each case to the
provisions of this Section 8(c). In no case shall the Underwriter be
liable or responsible for any amount in excess of the Underwriting
discount applicable to the [Firm Stock] purchased by such Underwriter
hereunder. Anything in this Section 8(c) to the contrary notwithstanding,
no party shall be liable for contribution with respect to the settlement
of any claim or action effected without its written consent. This Section
8(c) is intended to supersede any right to contribution under the Act, the
Exchange Act, or otherwise.
9. [Reserved]
10. Representations and Agreements to Survive Delivery. All
representations, warranties, covenants, and agreements contained in this
Agreement shall be deemed to be representations, warranties, covenants, and
agreements at the Closing Date and any Additional Closing Date, and such
representations, warranties, covenants, and agreements of the Underwriter and
the Company, including the indemnity and contribution agreements contained in
Section 8, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any indemnified person,
or by or on behalf of the Company or any person or entity which is entitled to
be indemnified under Section 8(b), and shall survive termination of this
Agreement or the delivery of the Firm Stock and any Additional Stock to the
Underwriter. In addition, the provisions of Sections 6, 8, 10, 11, and 13 shall
survive termination of this Agreement, whether such termination occurs before or
after the Closing Date or any Additional Closing Date.
11. Effective Date of This Agreement and Termination
Thereof.
(a) This Agreement shall become effective at 9:30 A.M., New York
City Time, on the first full business day following the day on which the
Registration Statement becomes effective or at the time of the initial
public offering by the Underwriter of the Firm Stock, whichever is
earlier. The time of the initial public offering shall mean the time,
after the Registration Statement becomes effective, of the release by you
for publication of the first newspaper advertisement which is subsequently
published relating to the shares or the time, after the
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<PAGE>
Registration Statement becomes effective, when the Firm Stock are first
released by you for offering by the Underwriter or dealers by letter or
telegram, whichever shall first occur. You or the Company may prevent this
Agreement from becoming effective without liability of any party to any
other party, except as noted below in this Section 11, by giving the
notice indicated in Section 11(c) before the time this Agreement becomes
effective.
(b) In addition to the right to terminate this Agreement pursuant to
Section 7 hereof, you shall have the right to terminate this Agreement at
any time prior to the Closing Date or any Additional Closing Date, as the
case may be, by giving notice to the Company if any domestic or
international event, act, or occurrence has materially disrupted, or in
your opinion will in the immediate future materially disrupt, the
securities markets; or if there shall have been a general suspension of,
or a general limitation on prices for, trading in securities on the New
York Stock Exchange, NASDAQ, the American Stock Exchange, or the ________
Stock Exchange or in the over-the-counter market; or if there shall have
been an outbreak of major hostilities or other national or international
calamity; or if a banking moratorium has been declared by a state or
federal authority; or if a moratorium in foreign exchange trading by major
international banks or persons has been declared; or if there shall have
been a material interruption in the mail service or other means of
communication within the United States; or if the Company shall have
sustained a material or substantial loss by fire, flood, accident,
hurricane, earthquake, theft, sabotage, or other calamity or malicious act
which, whether or not such loss shall have been insured, will, in your
opinion, make it inadvisable to proceed with the offering, sale, or
delivery of the Firm Stock or the Additional Stock, as the case may be; or
if there shall have been such change in the market for securities in
general or in political, financial, or economic conditions as in your
judgment makes it inadvisable to proceed with the offering, sale, and
delivery of the Firm Stock or the Additional Stock, as the case may be, on
the terms contemplated by the Prospectus.
(c) If you elect to prevent this Agreement from becoming effective,
as provided in this Section 11, or to terminate this Agreement pursuant to
Section 7, or this Section 11, you shall notify the Company promptly by
telephone, telex, facsimile or telegram, confirmed by letter. If the
Company elects to prevent this Agreement from becoming effective, as
provided in this Section 11, the Company shall notify you promptly by
telephone, telex, facsimile, or telegram, confirmed by letter.
(d) Anything in this Agreement to the contrary
notwithstanding other than Section 11(e), if this Agreement
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<PAGE>
shall not become effective by reason of an election pursuant to this
Section 11 or if this Agreement shall terminate or shall otherwise not be
carried out within the time specified herein by reason of any failure on
the part of the Company to perform any covenant or agreement or satisfy
any condition of this Agreement by it to be performed or satisfied, the
sole liability of the Company to the Underwriter, in addition to the
obligations the Company assumed pursuant to Section 6, will be to (i)
reimburse the Underwriter for such out-of-pocket expenses (including the
fees and disbursements of its counsel) as shall have been incurred by them
in connection with this Agreement or the proposed offer, sale, and
delivery of the Firm Stock and any Additional Stock, and the Company
agrees to pay promptly upon demand the full amount thereof to you less
amounts previously paid to you in reimbursement of such expenses, and (ii)
if the Company has elected to prevent this Agreement from becoming
effective or if you terminate this Agreement pursuant to Section 7, the
Company and Barington Capital Group, L.P. shall enter into a consulting
agreement, substantially in the form set forth as an exhibit to the
Registration Statement, providing that for a period of one year subsequent
to such termination, if the Company or any subsidiary or affiliate of the
Company is involved in any private placement, merger, acquisition or sale
of securities, joint venture or other similar transaction (any of the
foregoing, a "Subsequent Transaction"), the Company shall pay to the
Underwriter, a "Lehman formula" fee based on the consideration received by
the Company in any Subsequent Transaction equal to five percent of the
first one million dollars of the consideration paid or received by the
Company (or any stockholder, subsidiary or affiliate) in any Subsequent
Transaction, four percent of the next million dollars of consideration so
paid or received, three percent of the next million dollars of
consideration so paid or received, two percent of the next million dollars
so paid or received and one percent of any consideration so paid or
received in excess of four million dollars. For purposes hereof, a
Subsequent Transaction shall not include a purchase by the Company of
assets or of stock of another company provided the current stockholders of
the Company retain control following such purchase and such purchase is
effected by the Company without the assistance of any other investment
banking firm.
(e) Notwithstanding any election hereunder or any termination of
this Agreement, and whether or not this Agreement is otherwise carried
out, the provisions of Sections 6, 8, 10, and 15 shall not be in any way
affected by such election or termination or failure to carry out the terms
of this Agreement or any part hereof.
12. Notices. All communications hereunder, except as may
be otherwise specifically provided herein, shall be in writing
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<PAGE>
and, if sent to the Underwriter, shall be mailed, delivered, or telexed or
telegraphed and confirmed by letter, to Barington Capital Group, L.P., 888
Seventh Avenue, New York, New York 10019, Attention: Marc Cooper; or if sent to
the Company, shall be mailed, delivered, or telexed or telegraphed and confirmed
by letter, to the Company, One Lower Ragsdale Drive, I-250, Monterey, California
93940, Attention: John Hiles. All notices hereunder shall be effective upon
receipt by the party to which it is addressed.
13. Parties. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Underwriter and the Company and the persons and
entities referred to in Section 8 who are entitled to indemnification or
contribution, and their respective successors, legal representatives, and
assigns (which shall not include any buyer, as such, of the Firm Stock or any
Additional Stock), and no other person shall have or be construed to have any
legal or equitable right, remedy, or claim under or in respect of or by virtue
of this Agreement or any provision herein contained.
14. Construction. This Agreement shall be construed in
accordance with the laws of the State of New York, without giving
effect to conflict of laws. TIME IS OF THE ESSENCE IN THIS
AGREEMENT.
15. Consent to Jurisdiction. The Company irrevocably consents to the
jurisdiction of the courts of the State of New York and of any federal court
located in such State in connection with any action or proceeding arising out of
or relating to this Agreement, any document or instrument delivered pursuant to,
in connection with or simultaneously with this Agreement, or a breach of this
Agreement or any such document or instrument. In any such action or proceeding,
the Company waives personal service or any summons, complaint or other process
and agrees that service thereof may be made in accordance with Section 12.
Within 30 days after such service, or such other time as may be mutually agreed
upon in writing by the attorneys for the parties to such action or proceeding,
the Company shall appear or answer such summons, complaint or other process.
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<PAGE>
If the foregoing correctly sets forth the understanding between you and
the Company, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement between us.
Very truly yours,
THINKING TOOLS, INC.
BY:__________________________
Name:
Title:
Accepted as of the date first above written.
New York, New York
BARINGTON CAPITAL GROUP, L.P.
By: LNA CAPITAL CORP.,
General Partner
By:_____________________________
Marc Cooper,
Executive Vice President
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CERTIFICATE OF INCORPORATION
OF
THINKING TOOLS, INC.
under
The Delaware General Corporation Law
<PAGE>
CERTIFICATE OF INCORPORATION
OF
THINKING TOOLS, INC.
FIRST. The name of the corporation is Thinking Tools, Inc.
SECOND. The address, including street, number, city and county of the
Corporation's registered office in the State of Delaware is 9 East Loockerman
Street, in the City of Dover, County of Kent. The name of its registered agent
at such address is National Corporate Research, Ltd.
THIRD. The nature of the business or purpose to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware.
FOURTH. Authorized Shares.
A. The aggregate number of shares which the Corporation shall
have authority to issue is 23,000,000, consisting of twenty million (20,000,000)
shares of Common Stock, par value $.001 per share (the "Common Stock"), and
3,000,000 shares of undesignated Preferred Stock, par value $.001 per share (the
"Preferred Shares").
B. Authority is hereby expressly granted to the Board of
Directors of the Corporation (or a committee thereof designated by the Board of
Directors pursuant to the by-laws of the Corporation, as from time to time
amended (the "By-Laws")) to issue the Preferred Shares from time to time as
Preferred Shares of any series and to declare and pay dividends
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<PAGE>
thereon in accordance with the terms thereof and, in connection with the
creation of each such series, to fix by the resolution or resolutions providing
for the issue of shares thereof, the number of shares of such series, and the
designations, powers, preferences, and rights (including voting rights), and the
qualifications, limitations, and restrictions, of such series, to the full
extent now or hereafter permitted by the laws of the State of Delaware.
FIFTH. The name and mailing address of the incorporator is Stephen H.
Kay, Esq., Squadron, Ellenoff, Plesent & Sheinfeld, LLP, 551 Fifth Avenue, New
York, New York 10176.
SIXTH. Election of directors need not be by written ballot.
SEVENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this certificate of incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
EIGHTH. The Board of Directors is authorized to adopt, amend, or repeal
By-Laws of the Corporation except as and to the extent provided in the By-Laws.
NINTH. A. Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit, or proceeding,
whether civil, criminal, administrative, or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the Corporation or any of its direct or indirect
subsidiaries or is or was serving at the request of the Corporation as a
director, officer, employee, or agent of any other corporation or of a
partnership, joint venture, trust, or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"), whether the
basis of such proceeding is alleged action in an official capacity as
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<PAGE>
a director, officer, employee, or agent or in any other capacity while serving
as a director, officer, employee, or agent, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the Delaware
General Corporation Law, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than permitted prior
thereto), against all expense, liability, and loss (including attorneys' fees,
judgments, fines, excise or other taxes assessed with respect to an employee
benefit plan, penalties, and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith, and such indemnification
shall continue as to an indemnitee who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the indemnitee's heirs,
executors, and administrators; provided, however, that, except as provided in
Paragraph C of this Article NINTH with respect to proceedings to enforce rights
to indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Paragraph A of
this Article NINTH shall include the right to be paid by the Corporation the
expenses incurred in defending any proceeding for which such right to
indemnification is applicable in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking
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<PAGE>
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (hereinafter a "final
adjudication") that such indemnitee is not entitled to be indemnified for such
expenses under this Article NINTH or otherwise.
C. The rights to indemnification and to the advancement of
expenses conferred in Paragraphs A and B of this Article NINTH shall be contract
rights. If a claim under Paragraph A or B of this Article NINTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by an indemnitee to enforce a right to an
advancement of expenses), it shall be a defense that the indemnitee has not met
any applicable standard for indemnification set forth in the Delaware General
Corporation Law, and (ii) any suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the Corporation
shall be entitled to recover such expenses upon a final adjudication that the
indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee
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<PAGE>
is proper in the circumstances because the indemnitee has met the applicable
standard of conduct set forth in the Delaware General Corporation Law, nor an
actual determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the indemnitee has not met
such applicable standard of conduct, shall create a presumption that the
indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article NINTH or otherwise, shall be on the
Corporation.
D. The rights to indemnification and to the advancement of
expenses conferred in this Article NINTH shall not be exclusive of any other
right that any person may have or hereafter acquire under any statute, this
certificate of incorporation, by-law, agreement, vote of stockholders or
disinterested directors, or otherwise.
E. The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee, or agent of the Corporation
or another corporation, partnership, joint venture, trust, or other enterprise
against any expense, liability, or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability, or loss
under the Delaware General Corporation Law.
F. The Corporation's obligation, if any, to indemnify any
person who was or is serving as a director, officer, employee, or agent of any
direct or indirect subsidiary of the Corporation or, at the request of the
Corporation, of any other corporation or of a partnership, joint venture, trust,
or other enterprise shall be reduced by any amount such person
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<PAGE>
may collect as indemnification from such other corporation, partnership, joint
venture, trust, or other enterprise.
G. Any repeal or modification of the foregoing provisions of
this Article NINTH shall not adversely affect any right or protection hereunder
of any person in respect of any act or omission occurring prior to the time of
such repeal or modification.
TENTH. No director of the Corporation shall be liable to the
Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that this provision does not eliminate
the liability of the director (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) under Section 174 of Title 8 of the Delaware Code, or (iv) for any
transaction from which the director derived an improper personal benefit. For
purposes of the prior sentence, the term "damages" shall, to the extent
permitted by law, include without limitation, any judgment, fine, amount paid in
settlement, penalty, punitive damages, excise or other tax assessed with respect
to an employee benefit plan, or expense of any nature (including, without
limitation, counsel fees and disbursements). Each person who serves as a
director of the Corporation while this Article TENTH is in effect shall be
deemed to be doing so in reliance on the provisions of this Article TENTH, and
neither the amendment or repeal of this Article TENTH, nor the adoption of any
provision of this Certificate of Incorporation inconsistent with this Article
TENTH, shall apply to or have any effect on the liability or alleged liability
of any director of the Corporation for, arising out of, based upon, or in
connection with any acts or omissions of such director occurring prior to such
amendment, repeal, or adoption of an inconsistent provision. The provisions of
this Article TENTH are cumulative and shall be in addition to and independent
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<PAGE>
of any and all other limitations on or eliminations of the liabilities of
directors of the Corporation, as such, whether such limitations or eliminations
arise under or are created by any law, rule, regulation, by-law, agreement, vote
of shareholders or disinterested directors, or otherwise.
ELEVENTH. Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
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<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Incorporation this 8th day of August, 1996.
--------------------------------------
Stephen H. Kay, Sole Incorporator
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BY-LAWS
of
THINKING TOOLS, INC.
As adopted August 9, 1996
<PAGE>
THINKING TOOLS, INC.
A Delaware Corporation
BY-LAWS
---------------------------
ARTICLE I
OFFICES
The principal office of Thinking Tools, Inc. (the "Corporation") shall
be located at its principal place of business or such other place as the Board
of Directors ("Board") may designate. The Corporation may have such other
offices, either within or without the State of Delaware, as the Board may
designate or as the business of the Corporation may require from time to time.
ARTICLE II
STOCKHOLDERS
Section 2.1 Annual Meeting.
An annual meeting of stockholders for the purposes of electing
directors and of transacting such other business as may come before it shall be
held on such date and time as shall be designated from time to time by the Board
or the President, either within or without the State of Delaware, as may be
specified by the Board.
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<PAGE>
Section 2.2 Special Meetings.
Except as otherwise provided for in the Certificate of Incorporation,
special meetings of stockholders for any purpose or purposes may be held at any
time upon call of the Chairman of the Board, if any, the Chief Executive
Officer, the President, the Secretary, or a majority of the Board, at such time
and place either within or without the State of Delaware as may be stated in the
notice. A special meeting of stockholders shall be called by the President or
the Secretary upon the written request, stating time, place, and the purpose or
purposes of the meeting, of stockholders who together own of record 25% of the
outstanding stock of all classes entitled to vote at such meeting.
Section 2.3 Notice of Meetings.
Written notice of stockholders meetings, stating the place, date, and
hour thereof, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by the Chairman of the Board, if
any, the President, any Vice President, the Secretary, or an Assistant
Secretary, to each stockholder entitled to vote thereat at least ten days but
not more than sixty days before the date of the meeting, unless a different
period is prescribed by laws.
Section 2.4 Quorum.
Except as otherwise provided by law or in the Certificate of
Incorporation or these By-Laws, at any meeting of stockholders, the holders of a
majority of the outstanding shares of each class of stock entitled to vote at
the meeting shall be present or represented by proxy in order to constitute a
quorum for the transaction of any business. In the absence of a quorum, a
majority in interest of
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<PAGE>
144893-1.WPD [3.2]
the stockholders present or the chairman of the meeting may adjourn the meeting
from time to time in the manner provided in Section 2.5 of these By-Laws until a
quorum shall attend.
Section 2.5 Adjournment.
Any meeting of stockholders, annual or special, may adjourn from time
to time to reconvene at the same or some other place, and notice need not be
given of any such adjourned meeting if the time and place thereof are announced
at the meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
Section 2.6 Organization.
The Chairman of the Board, if any, or in his absence the President, or
in their absence any Vice President, shall call to order meetings of
stockholders and shall act as chairman of such meetings. The Board or, if the
Board fails to act, the stockholders may appoint any stockholder, director, or
officer of the Corporation to act as chairman of any meeting in the absence of
the Chairman of the Board, the President, and all Vice Presidents.
The Secretary of the Corporation shall act as secretary of all meetings
of stockholders, but, in the absence of the Secretary, the chairman of the
meeting may appoint any other person to act as secretary of the meeting.
Section 2.7 Voting.
Except as otherwise provided by law or in the Certificate of
Incorporation or these By-Laws and except for the election of directors, at any
meeting duly called and held at which
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<PAGE>
a quorum is present, a majority of the votes cast at such meeting upon a given
question by the holders of outstanding shares of stock of all classes of stock
of the Corporation entitled to vote thereon who are present in person or by
proxy shall decide such question. At any meeting duly called and held for the
election of directors at which a quorum is present, those directors receiving a
plurality of the votes cast by the holders (acting as such) of shares of any
class or series entitled to elect directors as a class shall be elected.
Section 2.8 Action Without a Meeting.
The stockholders may take any action required or permitted to be taken
by them without a meeting unless otherwise prohibited by law or the Certificate
of Incorporation.
ARTICLE III
BOARD OF DIRECTORS
Section 3.1 Number and Term of Office.
The business, property, and affairs of the Corporation shall be managed
by or under the direction of a board of at least one director; provided,
however, that the Board, by resolution adopted by vote of a majority of the then
authorized numbers of directors, may increase or decrease the number of
directors. The directors shall be elected by the holders of shares entitled to
vote thereon at the annual meeting of stockholders, and each shall serve
(subject to the provisions of Article IV) until the next succeeding annual
meeting of stockholders and until his respective successor is elected and
qualified.
Section 3.2 Chairman of the Board.
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<PAGE>
The directors may elect one of their members to be Chairman of the
Board. The Chairman shall be subject to the control of and may be removed by the
Board. He shall perform such duties as may from time to time be assigned to him
by the Board.
Section 3.3 Meetings.
Regular meetings of the Board may be held without notice at such time
and place as shall from time to time be determined by the Board.
Special meetings of the Board shall be held at such time and place as
shall be designated in the notice of the meeting whenever called by the Chairman
of the Board, if any, the President, or by a majority of the directors then in
office.
Section 3.4 Notice of Special Meetings.
The Secretary, or, in his absence, any other office of the Corporation,
shall give each director notice of the time and place of holding of special
meetings of the Board by mail at least five days before the meeting, or by
telex, telecopy, telegraph, cable or overnight courier at least three days
before the meeting. Unless otherwise stated in the notice thereof, any and all
business may be transacted at any meeting without specification of such business
in the notice.
Section 3.5 Quorum and Organization of Meetings.
A majority of the total number of members of the Board as constituted
from time to time shall constitute a quorum for the transaction of business,
but, if at any meeting of the Board (whether or not adjourned from a previous
meeting) there shall be less than a quorum present, a majority of those present
may adjourn the meeting to another time and place, and the meeting may be held
as adjourned without further notice or waiver. Except as otherwise provided by
law or in the Certificate of Incorporation or these By-Laws, a majority of the
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<PAGE>
directors present at any meeting at which a quorum is present may decide any
question brought before such meeting. Meetings shall be presided over by the
Chairman of the Board, if any, or in his absence, by the President, or in the
absence of both by such other person as the directors may select. The Secretary
of the Corporation shall act as secretary of the meeting, but in his absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 3.6 Committees.
The Board may, by resolution passed by a majority of the whole Board,
designate one or more committees, each committee to consist of one or more of
the directors of the Corporation. The Board may designate one or more directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board to
act at the meeting in place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board, shall have and
may exercise all the power and authority of the Board in the management of the
business, property, and affairs of the Corporation, and may authorize the seal
of the Corporation to be affixed to all papers which may require it; but no such
committee shall have power or authority in reference to amending the Certificate
of Incorporation of the Corporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board pursuant to authority expressly granted to the
Board by the Corporation's Certificate of Incorporation, fix any of the
preferences or rights of such shares relating to
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dividends, redemption, dissolution, any distribution of assets of the
Corporation, or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation), adopting an agreement of merger or
consolidation under Section 251 or 252 of the General Corporation Law of the
State of Delaware, recommending to the stockholders the sale, lease, or exchange
of all or substantially all of the Corporation's property and assets,
recommending to the stockholders a dissolution of the Corporation or a
revocation of dissolution, or amending these By-Laws; and, unless the resolution
expressly so provided, no such committee shall have the power or authority to
declare a dividend, to authorize the issuance of stock, or to adopt a
certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of the State of Delaware. Each committee which may be
established by the Board pursuant to these By-Laws may fix its own rules and
procedures. Notice of meetings of committees, other than of regular meetings
provided for by the rules, shall be given to committee members. All action taken
by committees shall be recorded in minutes of the meetings.
Section 3.7 Action Without Meeting.
The Board or any committee designated by the Board may take any action
required or permitted to be taken by them without a meeting unless otherwise
prohibited by law or the Certificate of Incorporation.
Section 3.8 Telephone Meetings.
Nothing contained in these By-laws shall be deemed to restrict the
power of members of the Board, or any committee designated by the Board, to
participate in a meeting of the Board, or committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other.
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ARTICLE IV
OFFICERS
Section 4.1 Executive Officers.
The executive officers of the Corporation shall be a Chairman of the
Board, a Chief Executive Officer, a President, one or more Vice Presidents, a
Treasurer, and a Secretary, each of whom shall be elected by the Board. The
Board may elect or appoint such other officers (including a Controller and one
or more Assistant Treasurers and Assistant Secretaries) as it may deem necessary
or desirable. Each officer shall hold office for such term as may be prescribed
by the Board from time to time. Any person may hold at one time two or more
offices.
Section 4.2 Powers and Duties.
The Chairman of the Board, if any, or, in his absence, the Chief
Executive Officer, or in his absence, the President, shall preside at all
meetings of the stockholders and of the Board. The Chief Executive Officer shall
be the chief executive officer of the Corporation. In the absence of the Chief
Executive Officer, the President and, in the absence of the President, a Vice
President appointed by the President or, if the President fails to make such
appointment, by the Board, shall perform all the duties of the Chief Executive
Officer. The officers and agents of the Corporation shall each have such powers
and authority and shall perform such duties in the management of the business,
property and affairs of the Corporation as generally pertain to their respective
offices, as well as such powers and authorities and such duties as from time to
time may be prescribed by the Board.
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ARTICLE V
RESIGNATIONS, REMOVALS, AND VACANCIES
Section 5.1 Resignations.
Any director or officer of the Corporation, or any member of any
committee, may resign at any time by giving written notice to the Board, the
Chief Executive Officer, the President, or the Secretary of the Corporation. Any
such resignation shall take effect at the time specified therein or, if the time
be not specified therein, then upon receipt thereof. The acceptance of such
resignation shall not be necessary to make it effective.
Section 5.2 Removals.
The Board, by a vote of not less than a majority of the entire Board,
at any meeting thereof, or by written consent, at any time, may, to the extent
permitted by law, remove with or without cause, from office or terminate the
employment of any officer or member of any committee and may, with or without
cause, disband any committee.
Any director or the entire Board may be removed, with or without cause,
by the holders of a majority of the shares entitled at the time to vote at an
election of directors.
Section 5.3 Vacancies.
Any vacancy in the office of any director or officer through death,
resignation, removal, disqualification, or other cause, and any additional
directorship resulting from any increase in the number of directors, may be
filled at any time by a majority of the directors then in office (even though
less than a quorum remains) or, in the case of any vacancy in the office of any
director, by the stockholders, and, subject to the provisions of this Article V,
the person so chosen shall hold office until his successor shall have been
elected and qualified; or, if the
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person so chosen is a director elected to fill a vacancy, he shall (subject to
the provisions of this Article IV) hold office for the unexpired term of his
predecessor.
ARTICLE VI
CAPITAL STOCK
Section 6.1 Stock Certificates.
The certificates for shares of the capital stock of the Corporation
shall be in such form as shall be prescribed by law and approved, from time to
time, by the Board.
Section 6.2 Transfer of Shares.
Shares of the capital stock of the Corporation may be transferred on
the books of the Corporation only by the holder of such shares or by his duly
authorized attorney, upon the surrender to the Corporation or its transfer agent
of the certificate representing such stock properly endorsed.
Section 6.3 Fixing Record Date.
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof or to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion, or exchange of stock, or for the purpose of any other lawful
action, the Board may fix, in advance, a record date, which, unless otherwise
provided by law, shall not be more than sixty nor less than ten days before the
date of such meeting, nor more than sixty days prior to any other action.
Section 6.4 Lost Certificates.
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The Board or any transfer agent of the Corporation may direct a new
certificate or certificates representing stock of the Corporation to be issued
in place of any certificate or certificates theretofore issued by the
Corporation, alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate to be lost,
stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board (or any transfer agent of the Corporation authorized to
do so by a resolution of the Board) may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen, or
destroyed certificate or certificates, or his legal representative, to give the
Corporation a bond in such sum as the Board (or any transfer agent so
authorized) shall direct to indemnify the Corporation against any claim that may
be made against the Corporation with respect to the certificate alleged to have
been lost, stolen, or destroyed or the issuance of such new certificates, and
such requirement may be general or confined to specific instances.
Section 6.5 Regulations.
The Board shall have power and authority to make all such rules and
regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.
ARTICLE VII
MISCELLANEOUS
Section 7.1 Corporate Seal.
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization, and the words "Corporate Seal" and
"Delaware".
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Section 7.2 Fiscal Year.
The fiscal year of the Corporation shall be determined by resolution of
the Board.
Section 7.3 Notices and Waivers Thereof.
Wherever any notice whatever is required by law, the Certificate of
Incorporation, or these By-Laws to be given to any stockholder, director, or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail, telex, telecopy, telegraph, cable or overnight courier
addressed to such address as appears on the books of the Corporation. Any notice
given by telex, telecopy, telegraph or cable shall be deemed to have been given
when it shall have been delivered for transmission, and any notice given by mail
or overnight courier shall be deemed to have been given when it shall have been
deposited in the United States mail with postage thereon prepaid or given to
such courier service, as applicable.
Whenever any notice is required to be given by law, the Certificate of
Incorporation, or these By-Laws, a written waiver thereof, signed by the person
entitled to such notice, whether before or after the meeting or the time stated
therein, shall be deemed equivalent in all respects to such notice to the full
extent permitted by law.
Section 7.4 Stock of Other Corporations or Other Interests.
Unless otherwise ordered by the Board, the Chief Executive Officer, the
President, the Secretary, and such attorneys or agents of the Corporation as may
be from time to time authorized by the Board, the Chief Executive Officer, or
the President, shall have full power and authority on behalf of the Corporation
to attend and to act and vote in person or by proxy at any meeting of the
holders of securities of any corporation or other entity in which the
Corporation owns or holds shares or other securities, and at such meetings shall
possess and
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may exercise all the rights and powers incident to the ownership of such shares
or other securities which the Corporation, as the owner or holder thereof, might
have possessed and exercised if present. The Chief Executive Officer, the
President, the Secretary, or such attorneys or agents, may also execute and
deliver on behalf of the Corporation powers of attorney, proxies, consents,
waivers, and other instruments relating to the shares or securities owned or
held by the Corporation.
ARTICLE VIII
AMENDMENTS
The holders of shares entitled at the time to vote for the election of
directors shall have power to adopt, amend, or repeal the By-laws of the
Corporation by vote of not less than a majority of such shares, and except as
otherwise provided by law, the Board shall have power equal in all respects to
that of the stockholders to adopt, amend, or repeal the By-Laws by vote of not
less than a majority of the entire Board. However, any By-Laws adopted by the
Board may be amended or repealed by vote of the holders of a majority of the
shares entitled at the time to vote for the election of directors.
ARTICLE IX
PROVISIONS OF LAW
The By-Laws shall be subject to such provisions of the statutory and
common laws of the State of Delaware as may be applicable to corporations
organized under the laws of the State of Delaware. References herein to
provisions of law shall be deemed to be references to the aforesaid provisions
of law unless otherwise explicitly stated. All references in the
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By-Laws to such provisions of law shall be construed to refer to such provisions
as from time to time amended.
ARTICLE X
CERTIFICATE OF INCORPORATION
The By-Laws shall be subject to the Certificate of Incorporation of the
Corporation. All references in the By-Laws to the Certificate of Incorporation
shall be construed to mean the Certificate of Incorporation of the Corporation
as from time to time amended.
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THE SHARES ISSUABLE UPON EXERCISE OF THE OPTION
REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT
TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. HOWEVER, NEITHER THIS OPTION
NOR SUCH SHARES MAY BE OFFERED OR SOLD EXCEPT PURSUANT
TO (i) A POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION
STATEMENT, (ii) A SEPARATE REGISTRATION STATEMENT UNDER
SUCH ACT, OR (iii) AN EXEMPTION FROM REGISTRATION UNDER
SUCH ACT.
THE TRANSFER OF THIS
OPTION IS RESTRICTED AS
DESCRIBED HEREIN.
THINKING TOOLS, INC.
Option for the Purchase of
Common Stock
No. _ 140,000 Shares
THIS CERTIFIES that, for receipt in hand of $140.00 and other value
received, BARINGTON CAPITAL GROUP, L.P., 888 Seventh Avenue, New York, New York
10019 (the "Holder"), is entitled to subscribe for and purchase from Thinking
Tools, Inc., a Delaware corporation (the "Company"), upon the terms and
conditions set forth herein, at any time or from time to time after the date
hereof, and before 5:00 P.M. on ______ __, 2001, New York time (the "Exercise
Period"), up to 140,000 shares (the "Option Shares") of the Company's common
stock, par value $.001 per share ("Common Stock") at a price of $____ (120% of
the public offering price) per Option Share (the "Exercise Price"). This Option
is the option or one of the options (collectively, including any options issued
upon the exercise or transfer of any such options
<PAGE>
in whole or in part, the "Options") issued pursuant to the Underwriting
Agreement, dated ______ __, 1996, between the Company, Barington Capital Group,
L.P., as underwriter (the "Underwriting Agreement"). As used herein the term
"this Option" shall mean and include this Option and any Option or Options
hereafter issued as a consequence of the exercise or transfer of this Option in
whole or in part. This Option may not be sold, transferred, assigned or
hypothecated until one year after the Effective Date except that it may be
transferred, in whole or in part, to (i) one or more officers or partners of the
Holder (or the officers or partners of any such partner); (ii) any other
underwriting firm or member of the selling group which participated in the
public offering of 1,400,000 shares of the Company's Common Stock which
commenced on ______ __, 1996 (or the officers or partners of any such firm);
(iii) a successor to the Holder, or the officers or partners of such successor;
(iv) a purchaser of substantially all of the assets of the Holder; or (v) by
operation of law; and the term the "Holder" as used herein shall include any
transferee to whom this Option has been transferred in accordance with the
above.
1. (a) This Option may be exercised during the Exercise Period, as to the
whole or any lesser number of whole Option Shares, by the surrender of this
Option (with the election at the end hereof duly executed) to the Company at its
office at One Lower Ragsdale Drive, I-250, Monterey, CA 93940 (Attention: John
Hiles), or at such other place as is designated in writing by the Company,
together with a certified or bank cashier's check payable to the order of the
Company in an amount equal to the Exercise Price multiplied by the number of
Option Shares for which this Option is being exercised.
(b) All or any part of this Option may be exercised on a "cashless"
basis, by stating in the exercise notice such intention, and the maximum number
(the "Maximum Number") of shares of Common Stock the optionee elects to purchase
pursuant to such exercise. The number of shares of Common Stock the optionee
shall receive (the "Cashless Exercise Number") shall equal the Maximum Number
minus the quotient that is obtained when the product of the Maximum Number and
the then current Exercise Price is divided by the then Current Market Price per
share (as hereinafter defined).
2. Upon each exercise of the Holder's rights to purchase Option Shares,
the Holder shall be deemed to be the holder of record of the Option Shares
issuable upon such exercise, notwithstanding that the transfer books of the
Company shall then be closed or certificates representing such Option Shares
shall not then have been actually delivered to the Holder. As soon as
practicable after each such exercise of this Option, the Company shall issue and
deliver to the Holder a certificate or certificates for the Option Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. If this Option
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should be exercised in part only, the Company shall, upon surrender of this
Option for cancellation, execute and deliver a new Option evidencing the right
of the Holder to purchase the balance of the Option Shares (or portions thereof)
subject to purchase hereunder.
3. Any Options issued upon the transfer or exercise in part of this Option
shall be numbered and shall be registered in an Option Register as they are
issued. The Company shall be entitled to treat the registered holder of any
Option on the Option Register as the owner in fact thereof for all purposes and
shall not be bound to recognize any equitable or other claim to or interest in
such Option on the part of any other person, and shall not be liable for any
registration or transfer of Options which are registered or to be registered in
the name of a fiduciary or the nominee of a fiduciary unless made with the
actual knowledge that a fiduciary or nominee is committing a breach of trust in
requesting such registration or transfer, or with the knowledge of such facts
that its participation therein amounts to bad faith. This Option shall be
transferable only on the books of the Company upon delivery thereof duly
endorsed by the Holder or by his duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment, or authority to
transfer. In all cases of transfer by an attorney, executor, administrator,
guardian, or other legal representative, duly authenticated evidence of his or
its authority shall be produced. Upon any registration of transfer, the Company
shall deliver a new Option or Options to the person entitled thereto. This
Option may be exchanged, at the option of the Holder thereof, for another
Option, or other Options of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Option
Shares (or portions thereof), upon surrender to the Company or its duly
authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Options to be transferred on its books to any person if, in
the opinion of counsel to the Company, such transfer does not comply with the
provisions of the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations thereunder.
4. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the Options, such number of shares of Common Stock as shall,
from time to time, be sufficient therefor. The Company covenants that all shares
of Common Stock issuable upon exercise of this Option, upon receipt by the
Company of the full payment therefor, shall be validly issued, fully paid,
nonassessable, and free of preemptive rights.
5. (a) Subject to the provisions of this Section 5, the
Exercise Price in effect from time to time shall be subject to
adjustment, as follows:
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(i) In case the Company shall at any time after the date hereof (A)
declare a dividend on the outstanding Common Stock payable in shares of
its capital stock, (B) subdivide the outstanding Common Stock, (C) combine
the outstanding Common Stock into a smaller number of shares, or (D) issue
any shares of its capital stock by reclassification of the Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation), then, in each
case, the Exercise Price, and the number of shares of Common Stock
issuable upon exercise of the Options in effect at the time of the record
date for such dividend or of the effective date of such subdivision,
combination, or reclassification, shall be proportionately adjusted so
that the holders of the Options after such time shall be entitled to
receive the aggregate number and kind of shares which, if such Options had
been exercised immediately prior to such time, such holders would have
owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination or reclassification, at such aggregate
price as the holders of such Options would have paid for such exercise
immediately prior to such time. Such adjustment shall be made successively
whenever any event listed above shall occur.
(ii) In case the Company shall issue or fix a record date for the
issuance to all holders of Common Stock of rights, options, or warrants to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) at a price per share (or having a
conversion or exchange price per share, if a security convertible into or
exchangeable for Common Stock) less than the Current Market Price per
share of Common Stock (as determined pursuant to Subsection 5(b) hereof)
on such record date, then, in each case, the Exercise Price shall be
adjusted by multiplying the Exercise Price in effect immediately prior to
such record date by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding on such record date plus the number
of shares of Common Stock which the aggregate offering price of the total
number of shares of Common Stock so to be offered (or the aggregate
initial conversion or exchange price of the convertible or exchangeable
securities so to be offered) would purchase at such Current Market Price
and the denominator of which shall be the number of shares of Common Stock
outstanding on such record date plus the number of additional shares of
Common Stock to be offered for subscription or purchase (or into which the
convertible or exchangeable securities so to be offered are initially
convertible or exchangeable). Such adjustment shall become effective at
the close of business on such record date; provided, however, that, to the
extent the shares of Common Stock (or securities convertible into or
exchangeable for shares of Common Stock) are not delivered, the Exercise
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Price shall be readjusted after the expiration of such rights, options, or
warrants (but only with respect to Options exercised after such
expiration), to the Exercise Price which would then be in effect had the
adjustments made upon the issuance of such rights, options, or warrants
been made upon the basis of delivery of only the number of shares of
Common Stock (or securities convertible into or exchangeable for shares of
Common Stock) actually issued. In case any subscription price may be paid
in a consideration part or all of which shall be in a form other than
cash, the value of such consideration shall be as determined in good faith
by the board of directors of the Company, whose determination shall be
conclusive absent manifest error. Shares of Common Stock owned by or held
for the account of the Company or any majority-owned subsidiary shall not
be deemed outstanding for the purpose of any such computation.
(iii) In case the Company shall distribute to all holders of Common
Stock (including any such distribution made to the shareholders of the
Company in connection with a consolidation or merger in which the Company
is the continuing corporation) evidences of its indebtedness, cash (other
than any cash dividend which, together with any cash dividends paid within
the 12 months prior to the record date for such distribution, does not
exceed 5% of the Current Market Price at the record date for such
distribution) or assets (other than distributions and dividends payable in
shares of Common Stock), or rights, options, or warrants to subscribe for
or purchase Common Stock, or securities convertible into or exchangeable
for shares of Common Stock (excluding those with respect to the issuance
of which an adjustment of the Exercise Price is provided pursuant to
Section 5(a)(ii) hereof), then, in each case, the Exercise Price shall be
adjusted by multiplying the Exercise Price in effect immediately prior to
the record date for the determination of shareholders entitled to receive
such distribution by a fraction, the numerator of which shall be the
Current Market Price per share of Common Stock on such record date, less
the fair market value (as determined in good faith by the board of
directors of the Company, whose determination shall be conclusive absent
manifest error) of the portion of the evidences of indebtedness or assets
so to be distributed, or of such rights, options, or warrants or
convertible or exchangeable securities, or the amount of such cash,
applicable to one share, and the denominator of which shall be such
Current Market Price per share of Common Stock. Such adjustment shall
become effective at the close of business on such record date.
(iv) In case the Company shall issue shares of Common Stock or
rights, options, or warrants to subscribe for or purchase Common Stock, or
securities convertible into or exchangeable for Common Stock (excluding
shares, rights,
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options, warrants, or convertible or exchangeable securities issued or
issuable (A) in any of the transactions with respect to which an
adjustment of the Exercise Price is provided pursuant to Section 5(a)(i),
5(a)(ii) or 5(a)(iii) above, (B) upon any issuance of securities pursuant
to the Underwriting Agreement, (C) upon exercise of the Option, (D) upon
the grant of options to purchase 376,000 shares of Common Stock pursuant
to the Company's 1996 Stock Option Plan (the "Plan") and (E) upon the
grant of options to purchase 15,000 shares of Common Stock, outside of the
Plan, to a non-affiliate of the Company1, at a price per share
(determined, in the case of such rights, options, warrants, or convertible
or exchangeable securities, by dividing (x) the total amount received or
receivable by the Company in consideration of the sale and issuance of
such rights, options, warrants, or convertible or exchangeable securities,
plus the minimum aggregate consideration payable to the Company upon
exercise, conversion, or exchange thereof, by (y) the maximum number of
shares covered by such rights, options, warrants, or convertible or
exchangeable securities) lower than the Current Market Price per share of
Common Stock in effect immediately prior to such issuance, then the
Exercise Price shall be reduced on the date of such issuance to a price
(calculated to the nearest cent) determined by multiplying the Exercise
Price in effect immediately prior to such issuance by a fraction, (a) the
numerator of which shall be an amount equal to the sum of (A) the number
of shares of Common Stock outstanding immediately prior to such issuance
plus (B) the quotient obtained by dividing the aggregate consideration
received by the Company upon such issuance by such Current Market Price,
and (b) the denominator of which shall be the total number of shares of
Common Stock outstanding immediately after such issuance. For the purposes
of such adjustments, the maximum number of shares which the holders of any
such rights, options, warrants, or convertible or exchangeable securities
shall be entitled to initially subscribe for or purchase or convert or
exchange such securities into shall be deemed to be issued and outstanding
as of the date of such issuance, and the consideration received by the
Company for such rights, options, warrants, or convertible or exchangeable
securities, plus the minimum aggregate consideration or premiums stated in
such rights, options, warrants or convertible or exchangeable securities
to be paid for the shares covered thereby. No further adjustment of the
Exercise Price shall be made as a result of the actual issuance of shares
of Common Stock on exercise of such rights, options, or warrants or on
conversion or exchange of such convertible or exchangeable securities. On
the expiration or the termination of such rights, options, or warrants, or
the termination of such rights to convert or
- --------
1 To be deleted if such options are granted prior to IPO.
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<PAGE>
exchange, the Exercise Price shall be readjusted (but only with respect to
Options exercised after such expiration or termination) to such Exercise
Price as would have been obtained had the adjustments made upon the
issuance of such rights, options, warrants, or convertible or exchangeable
securities been made upon the basis of the delivery of only the number of
shares of Common Stock actually delivered upon the exercise of such
rights, options, or warrants or upon the conversion or exchange of any
such securities; and on any change of the number of shares of Common Stock
deliverable upon the exercise of any such rights, options, or warrants or
conversion or exchange of such convertible or exchangeable securities or
any change in the consideration to be received by the Company upon such
exercise, conversion, or exchange, including, but not limited to, a change
resulting from the antidilution provisions thereof, the Exercise Price, as
then in effect, shall forthwith be readjusted (but only with respect to
Options exercised after such change) to such Exercise Price as would have
been obtained had an adjustment been made upon the issuance of such
rights, options, or warrants not exercised prior to such change, on the
basis of such change. In case the Company shall issue shares of Common
Stock or any such rights, options, warrants, or convertible or
exchangeable securities for a consideration consisting, in whole or in
part, of property other than cash or its equivalent, then the "price per
share" and the "consideration received by the Company" for purposes of the
first sentence of this Section 3(a)(iv) shall be as determined in good
faith by the board of directors of the Company, whose determination shall
be conclusive absent manifest error. Shares of Common Stock owned by or
held for the account of the Company or any majority-owned subsidiary shall
not be deemed outstanding for the purpose of any such computation.
(b) For the purpose of any computation under this Section 5 the
Current Market Price per share of Common Stock on any date shall be deemed to be
the average of the daily closing prices for the 30 consecutive trading days
immediately preceding the date in question. The closing price for each day shall
be the last reported sales price regular way or, in case no such reported sale
takes place on such day, the closing bid price regular way, in either case on
the principal national securities exchange (including, for purposes hereof, the
NASDAQ National Market System) on which the Common Stock is listed or admitted
to trading or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the highest reported bid price for the Common
Stock as furnished by the National Association of Securities Dealers, Inc.
through NASDAQ or a similar organization if NASDAQ is no longer reporting such
information. If on any such date the Common Stock is not listed or admitted to
trading on any national securities exchange and is not quoted by NASDAQ or any
similar organization, the fair value of a share of Common Stock on such date as
determined in good
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<PAGE>
faith by the board of directors of the Company, whose determination shall be
conclusive absent manifest error shall be used.
(c) No adjustment in the Exercise Price shall be required if such
adjustment is less than $.05; provided, however, that any adjustments which by
reason of this Section 5 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under this
Section 5 shall be made to the nearest cent or to the nearest one thousandth of
a share, as the case may be.
(d) In any case in which this Section 5 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer, until the occurrence of such
event, issuing to the holders of the Option, if any holder has exercised an
Option after such record date, the shares of Common Stock, if any, issuable upon
such exercise over and above the shares of Common Stock, if any, issuable upon
such exercise on the basis of the Exercise Price in effect prior to such
adjustment; provided, however, that the Company shall deliver to such exercising
holder a due bill or other appropriate instrument evidencing such holder's right
to receive such additional shares upon the occurrence of the event requiring
such adjustment.
(e) Upon each adjustment of the Exercise Price as a result of the
calculations made in Sections 5(a)(ii), 5(a)(iii) or 5(a)(iv) hereof the Option
shall thereafter evidence the right to purchase, at the adjusted Exercise Price,
that number of shares (calculated to the nearest thousandth) obtained by
dividing (A) the product obtained by multiplying the number of shares
purchasable upon exercise of the Option prior to adjustment of the number of
shares by the Exercise Price in effect prior to adjustment of the Exercise Price
by (B) the Exercise Price in effect after such adjustment of the Exercise Price.
(f) In case of any capital reorganization, other than in the cases
referred to in Section 5(a) hereof, or the consolidation or merger of the
Company with or into another corporation (other than a merger or consolidation
in which the Company is the continuing corporation and which does not result in
any reclassification of the outstanding shares of Common Stock or the
conversion of such outstanding shares of Common Stock into shares of other stock
or other securities or property), or the sale of the property of the Company as
an entirety or substantially as an entirety (collectively such actions being
hereinafter referred to as "Reorganizations"), there shall thereafter be
deliverable upon exercise of any Option (in lieu of the number of shares of
Common Stock theretofore deliverable) the number of shares of stock or other
securities or property to which a holder of the number of shares of Common Stock
which would otherwise have been deliverable upon the exercise of such Option
would have been entitled
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upon such Reorganization if such Option had been exercised in full immediately
prior to such Reorganization. In case of any Reorganization, appropriate
adjustment, as determined in good faith by the board of directors of the
Company, shall be made in the application of the provisions herein set forth
with respect to the rights and interests of Option holders so that the
provisions set forth herein shall thereafter be applicable, as nearly as
possible, in relation to any shares or other property thereafter deliverable
upon exercise of Options. Any such adjustment shall be made by and set forth in
a supplemental agreement between the Company, or any successor thereto, and
[American Stock Transfer & Trust Company] and shall for all purposes hereof
conclusively be deemed to be an appropriate adjustment. The Company shall not
effect any such Reorganization, unless upon or prior to the consummation thereof
the successor corporation, or if the Company shall be the surviving corporation
in any such Reorganization and is not the issuer of the shares of stock or other
securities or property to be delivered to holders of shares of the Common Stock
outstanding at the effective time thereof, then such issuer, shall assume by
written instrument the obligation to deliver to the registered holder of the
Options such shares of stock, securities, cash or other property as such holder
shall be entitled to purchase in accordance with the foregoing provisions. In
the event of sale or conveyance or other transfer of all or substantially all of
the assets of the Company as a part of a plan for liquidation of the Company,
all rights to exercise any Option shall terminate 30 days after the Company
gives written notice to each registered holder of a Option Certificate that such
sale or conveyance of other transfer has been consummated.
(g) In case of any reclassification or change of the shares of
Common Stock issuable upon exercise of the Options (other than a change in par
value or from no par value to a specified par value, or as a result of a
subdivision or combination, but including any change in the shares into two or
more classes or series of shares), the holders of the Options shall have the
right thereafter to receive upon exercise of the Options solely the kind and
amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such reclassification or change by a holder
of the number of shares of Common Stock for which the Options might have been
exercised immediately prior to such reclassification or change. Thereafter,
appropriate provision shall be as nearly equivalent as practicable to the
adjustments in Section 5. The above provisions of this subsection 5(a) shall
similarly apply to successive reclassifications and changes of shares of Common
Stock.
(h) Whenever the Exercise Price is adjusted as provided in this
Section 5, the Company will promptly obtain a certificate of a firm of
independent public accountants of recognized standing selected by the board of
directors (who may be the regular auditors of the Corporation) setting forth the
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exercise price as so adjusted and a brief statement of the facts accounting for
such adjustment, and will make available a brief summary thereof to the holders
of the Option Certificates, at their addresses listed on the register maintained
for the purpose by the Company.
(i) Whenever any adjustment is made pursuant to this Section 5, the
Company shall cause notice of such adjustment to be mailed to each registered
holder of an Option Certificate within 15 Business Days (as hereinafter defined)
thereafter, such notice to include in reasonable detail (i) the events
precipitating the adjustment, (ii) the computation of any adjustments, and (iii)
the Exercise Price, the number of shares or the securities or other property
purchasable upon exercise of each Option after giving effect to such adjustment.
For purposes hereof, "Business Day" shall mean any day other than a Saturday, a
Sunday, or a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
(j) Irrespective of any adjustments pursuant to this Section 5,
Option Certificates theretofore or thereafter issued need not be amended or
replaced, but certificates thereafter issued shall bear an appropriate legend or
other notice of any adjustments.
(k) The Company shall not be required upon the exercise of any
Option to issue fractional shares of Common Stock which may result from
adjustments in accordance with this Section 5 to the Exercise Price or number of
shares of Common Stock purchasable under each Option. If more than one Option is
exercised at one time by the same registered holder, the number of full shares
of Common Stock which shall be deliverable shall be computed based on the number
of shares deliverable in exchange for the aggregate number of Options exercised.
With respect to any final fraction of a share called for upon the exercise of
any Option or Options, the Company shall pay a cash adjustment in respect of
such final fraction in an amount equal to the same fraction of the Current
Market Price of a share of Common Stock calculated in accordance with Subsection
5(b).
6. (a) In case of any consolidation with or merger of the Company with or
into another corporation (other than a merger or consolidation in which the
Company is the surviving or continuing corporation), or in case of any sale,
lease, or conveyance to another corporation of the property and assets of any
nature of the Company as an entirety or substantially as an entirety, such
successor, leasing, or purchasing corporation, as the case may be, shall (i)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter to receive upon exercise of this Option solely the kind and
amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such consolidation, merger, sale, lease, or
conveyance by a holder of the number of shares of Common Stock for which this
Option might have been exercised immediately prior
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to such consolidation, merger, sale, lease, or conveyance and (ii) make
effective provision in its certificate of incorporation or otherwise, if
necessary, to effect such agreement. Such agreement shall provide for
adjustments which shall be as nearly equivalent as practicable to the
adjustments provided for in Section 5.
(b) In case of any reclassification or change of the shares of
Common Stock issuable upon exercise of this Option (other than a change in par
value or from no par value to a specified par value, or as a result of a
subdivision or combination, but including any change in the shares into two or
more classes or series of shares), or in case of any consolidation or merger of
another corporation into the Company in which the Company is the continuing
corporation and in which there is a reclassification or change (including a
change to the right to receive cash or other property) of the shares of Common
Stock (other than a change in par value, or from no par value to a specified par
value, or as a result of a subdivision or combination, but including any change
in the shares into two or more classes or series of shares), the Holder shall
have the right thereafter to receive upon exercise of this Option solely the
kind and amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such reclassification, change,
consolidation, or merger by a holder of the number of shares of Common Stock for
which this Option might have been exercised immediately prior to such
reclassification, change, consolidation, or merger. Thereafter, appropriate
provision shall be made for adjustments which shall be as nearly equivalent as
practicable to the adjustments in Section 5.
(c) The above provisions of this Section 6 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose:
(a) to pay any dividend or make any distribution on shares of Common
Stock in shares of Common Stock or make any other distribution (other than
regularly scheduled cash dividends which are not in a greater amount per share
than the most recent such cash dividend) to all holders of Common Stock; or
(b) to issue any rights, warrants, or other securities to all
holders of Common Stock entitling them to purchase any additional shares of
Common Stock or any other rights, warrants, or other securities; or
(c) to effect any reclassification or change of outstanding shares
of Common Stock, or any consolidation, merger, sale, lease, or conveyance of
property, described in Section 6; or
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(d) to effect any liquidation, dissolution, or
winding-up of the Company; or
(e) to take any other action which would cause an
adjustment to the Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Option Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined, (ii) the date on which any
such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up, or (iii) the date of such action which would require
an adjustment to the Exercise Price pursuant to Section 5 hereof.
8. The issuance of any shares or other securities upon the exercise of
this Option, and the delivery of certificates or other instruments representing
such shares or other securities, shall be made without charge to the Holder for
any tax or other charge in respect of such issuance. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of any certificate in a name other
than that of the Holder and the Company shall not be required to issue or
deliver any such certificate unless and until the person or persons requesting
the issue thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
9. (a) If, at any time prior to August __, 2003 (seven years from the
"Effective Date", as such term is defined in the Underwriting Agreement), the
Company shall file a registration statement (other than on Form S-4, Form S-8,
or any successor form) with the Securities and Exchange Commission (the
"Commission") while this Option or any Underwriter's Securities (as hereinafter
defined) are outstanding, the Company shall give all the then holders of this
Option or any Underwriter's Securities (collectively, the "Eligible Holders") at
least 45 days prior written notice of the filing of such registration statement.
If requested by any Eligible Holder in writing within 30 days after receipt of
any such notice, the Company shall, at the Company's sole expense (other than
the fees and disbursements of counsel for the Eligible Holders and the
underwriting discounts, if any, payable in respect of the Underwriter's
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<PAGE>
Securities sold by any Eligible Holder), register or qualify all or, at each
Eligible Holder's option, any portion of the Underwriter's Securities of any
Eligible Holders who shall have made such request, concurrently with the
registration of such other securities, all to the extent requisite to permit the
public offering and sale of the Underwriter's Securities through the facilities
of all appropriate securities exchanges and the over-the-counter market, and
will use its best efforts through its officers, directors, auditors, and counsel
to cause such registration statement to become effective as promptly as
practicable. Notwithstanding the foregoing, if the managing underwriter of any
such offering shall advise the Company in writing that, in its opinion, the
distribution of all or a portion of the Underwriter's Securities requested to be
included in the registration concurrently with the securities being registered
by the Company would materially adversely affect the distribution of such
securities by the Company for its own account, then any Eligible Holder who
shall have requested registration of his or its Underwriter's Securities shall
delay the offering and sale of such Underwriter's Securities (or the portions
thereof so designated by such managing underwriter) for such period, not to
exceed 90 days (the "Delay Period"), as the managing underwriter shall request,
provided that no such delay shall be required as to any Underwriter's Securities
if any securities of the Company are included in such registration statement and
eligible for sale during the Delay Period for the account of any person other
than the Company and any Eligible Holder unless the securities included in such
registration statement and eligible for sale during the Delay Period for such
other person shall have been reduced pro rata to the reduction of the
Underwriter's Securities which were requested to be included and eligible for
sale during the Delay Period in such registration. As used herein,
"Underwriter's Securities" shall mean the Option Shares issued upon exercise of
the Underwriter's Options, which have not been previously sold pursuant to a
registration statement or Rule 144 promulgated under the Act.
(b) If, at any time during the five-year period commencing one year
after the Effective Date, the Company shall receive a written request, from
Eligible Holders who in the aggregate own (or upon exercise of all Options then
outstanding would own) a majority of the total number of shares of Common Stock
then included (or upon such exercises that would be included) in the
Underwriter's Securities (the "Majority Holders"), to register the sale of all
or part of such Underwriter's Securities, the Company shall, as promptly as
practicable, prepare and file with the Commission a registration statement
sufficient to permit the public offering and sale of the Underwriter's
Securities through the facilities of all appropriate securities exchanges and
the over-the-counter market, and will use its best efforts through its officers,
directors, auditors, and counsel to cause such registration statement to become
effective as promptly as practicable; provided, however, that the Company shall
only be obligated to file one such
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<PAGE>
registration statement for which all expenses incurred in connection with such
registration (other than the fees and disbursements of counsel for the Eligible
Holders and underwriting discounts, if any, payable in respect of the Under-
writer's Securities sold by the Eligible Holders) shall be borne by the Company
and one additional such registration statement for which all such expenses shall
be paid by the Eligible Holders. Within three business days after receiving any
request contemplated by this Section 9(b), the Company shall give written notice
to all the other Eligible Holders, advising each of them that the Company is
proceeding with such registration and offering to include therein all or any
portion of any such other Eligible Holder's Underwriter's Securities, provided
that the Company receives a written request to do so from such Eligible Holder
within 30 days after receipt by him or it of the Company's notice.
(c) In the event of a registration pursuant to the provisions of
this Section 9, the Company shall use its best efforts to cause the
Underwriter's Securities so registered to be registered or qualified for sale
under the securities or blue sky laws of such jurisdictions as the Holder or
such holders may reasonably request; provided, however, that the Company shall
not be required to qualify to do business in any state by reason of this Section
9(c) in which it is not otherwise required to qualify to do business.
(d) The Company shall keep effective any registration or
qualification contemplated by this Section 9 and shall from time to time amend
or supplement each applicable registration statement, preliminary prospectus,
final prospectus, application, document, and communication for such period of
time as shall be required to permit the Eligible Holders to complete the offer
and sale of the Underwriter's Securities covered thereby. The Company shall in
no event be required to keep any such registration or qualification in effect
for a period in excess of nine months from the date on which the Eligible
Holders are first free to sell such Underwriter's Securities; provided, however,
that, if the Company is required to keep any such registration or qualification
in effect with respect to securities other than the Underwriter's Securities
beyond such period, the Company shall keep such registration or qualification in
effect as it relates to the Underwriter's Securities for so long as such
registration or qualification remains or is required to remain in effect in
respect of such other securities.
(e) In the event of a registration pursuant to the provisions of
this Section 9, the Company shall furnish to each Eligible Holder such number of
copies of the registration statement and of each amendment and supplement
thereto (in each case, including all exhibits), such reasonable number of copies
of each prospectus contained in such registration statement and each supplement
or amendment thereto (including each preliminary prospectus), all of which shall
conform to the requirements of
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the Act and the rules and regulations thereunder, and such other documents, as
any Eligible Holder may reasonably request to facilitate the disposition of the
Underwriter's Securities included in such registration.
(f) In the event of a registration pursuant to the provisions of
this Section 9, the Company shall furnish each Eligible Holder of any
Underwriter's Securities so registered with an opinion of its counsel
(reasonably acceptable to the Eligible Holders) to the effect that (i) the
registration statement has become effective under the Act and no order
suspending the effectiveness of the registration statement, preventing or
suspending the use of the registration statement, any preliminary prospectus,
any final prospectus, or any amendment or supplement thereto has been issued,
nor has the Commission or any securities or blue sky authority of any
jurisdiction instituted or threatened to institute any proceedings with respect
to such an order, (ii) the registration statement and each prospectus forming a
part thereof (including each preliminary prospectus), and any amendment or
supplement thereto, complies as to form with the Act and the rules and
regulations thereunder, and (iii) such counsel has no knowledge of any material
misstatement or omission in such registration statement or any prospectus, as
amended or supplemented. Such opinion shall also state the jurisdictions in
which the Underwriter's Securities have been registered or qualified for sale
pursuant to the provisions of Section 9(c).
(g) In the event of a registration pursuant to the provision of this
Section 9, the Company shall enter into a cross-indemnity agreement and a
contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses, and customary closing
conditions, including, but not limited to, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any Underwriter's
Securities.
(h) The Company agrees that until all the Underwriter's Securities
have been sold under a registration statement or pursuant to Rule 144 under the
Act, it shall keep current in filing all reports, statements and other materials
required to be filed with the Commission to permit holders of the Underwriter's
Securities to sell such securities under Rule 144.
(i) Except for rights granted to holders of the Options and rights
existing prior to the issuance of the Options, the Company will not, without the
written consent of the Majority Holders, grant to any persons the right to
request the Company to register any securities of the Company, provided that the
Company may grant such registration rights to other persons so long as such
rights are subordinate to the rights of the Eligible Holders.
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10. (a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless each Eligible Holder, its officers, directors,
partners, employees, agents, and counsel, and each person, if any, who controls
any such person within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all loss, liability, charge, claim, damage, and expense
whatsoever (which shall include, for all purposes of this Section 10, but not be
limited to, attorneys' fees and any and all reasonable expense whatsoever
incurred in investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation), as and when incurred, arising out of,
based upon, or in connection with (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any registration statement,
preliminary prospectus, or final prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, relating to the sale of
any of the Underwriter's Securities or (B) in any application or other document
or communication (in this Section 10 collectively called an "application")
executed by or on behalf of the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
register or qualify any of the Underwriter's Securities under the securities or
blue sky laws thereof or filed with the Commission or any securities exchange;
or any omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading,
unless such statement or omission was made in reliance upon and in conformity
with written information furnished to the Company with respect to such Eligible
Holder by or on behalf of such person expressly for inclusion in any
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be, or
(ii) any breach of any representation, warranty, covenant, or agreement of the
Company contained in this Option. The foregoing agreement to indemnify shall be
in addition to any liability the Company may otherwise have, including
liabilities arising under this Option. The Company shall not be liable for
losses based on untrue statements or omissions contained in Preliminary
Prospectuses if an Underwriter failed to deliver a final Prospectus prior to or
simultaneously with the delivery of written confirmation of any public sale of
the Underwriter's Securities and a court of competent jurisdiction in a judgment
not subject to appeal or final review shall have determined that such final
Prospectus would have corrected such untrue statement or omission.
If any action is brought against any Eligible Holder or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of such person (an "indemnified party") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
indemnified party or parties shall promptly notify the Company in
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writing of the institution of such action (but the failure so to notify shall
not relieve the Company from any liability other than pursuant to this Section
10(a)) and the Company shall promptly assume the defense of such action,
including the employment of counsel (reasonably satisfactory to such indemnified
party or parties) and payment of expenses. Such indemnified party or parties
shall have the right to employ its or their own counsel in any such case, but
the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless the employment of such counsel shall have
been authorized in writing by the Company in connection with the defense of such
action or the Company shall not have promptly employed counsel reasonably
satisfactory to such indemnified party or parties to have charge of the defense
of such action or such indemnified party or parties shall have reasonably
concluded that there may be one or more legal defenses available to it or them
or to other indemnified parties which are different from or additional to those
available to the Company, in any of which events such fees and expenses shall be
borne by the Company and the Company shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties. Anything
in this Section 10 to the contrary notwithstanding, the Company shall not be
liable for any settlement of any such claim or action effected without its
written consent, which shall not be unreasonably withheld. The Company shall
not, without the prior written consent of each indemnified party that is not
released as described in this sentence, settle or compromise any action, or
permit a default or consent to the entry of judgment in or otherwise seek to
terminate any pending or threatened action, in respect of which indemnity may be
sought hereunder (whether or not any indemnified party is a party thereto),
unless such settlement, compromise, consent, or termination includes an
unconditional release of each indemnified party from all liability in respect of
such action. The Company agrees promptly to notify the Eligible Holders of the
commencement of any litigation or proceedings against the Company or any of its
officers or directors in connection with the sale of any Underwriter's
Securities or any preliminary prospectus, prospectus, registration statement, or
amendment or supplement thereto, or any application relating to any sale of any
Underwriter's Securities.
(b) The Holder agrees to indemnify and hold harmless the Company,
each director of the Company, each officer of the Company who shall have signed
any registration statement covering Underwriter's Securities held by the Holder,
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, and its or their
respective counsel, to the same extent as the foregoing indemnity from the
Company to the Holder in Section 10(a), but only with respect to statements or
omissions, if any, made in any registration statement, preliminary prospectus,
or final prospectus (as from time to time amended and supplemented), or any
amendment or supplement thereto, or in any application, in
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reliance upon and in conformity with written information furnished to the
Company with respect to the Holder by or on behalf of the Holder expressly for
inclusion in any such registration statement, preliminary prospectus, or final
prospectus, or any amendment or supplement thereto, or in any application, as
the case may be. If any action shall be brought against the Company or any other
person so indemnified based on any such registration statement, preliminary
prospectus, or final prospectus, or any amendment or supplement thereto, or in
any application, and in respect of which indemnity may be sought against the
Holder pursuant to this Section 10(b), the Holder shall have the rights and
duties given to the Company, and the Company and each other person so
indemnified shall have the rights and duties given to the indemnified parties,
by the provisions of Section 10(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 10(a) or
10(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company, and its or their
respective counsel), as one entity, and the Eligible Holders of the
Underwriter's Securities included in such registration in the aggregate
(including for this purpose any contribution by or on behalf of an indemnified
party), as a second entity, shall contribute to the losses, liabilities, claims,
damages, and expenses whatsoever to which any of them may be subject, on the
basis of relevant equitable considerations such as the relative fault of the
Company and such Eligible Holders in connection with the facts which resulted in
such losses, liabilities, claims, damages, and expenses. The relative fault, in
the case of an untrue statement, alleged untrue statement, omission, or alleged
omission, shall be determined by, among other things, whether such statement,
alleged statement, omission, or alleged omission relates to information supplied
by the Company or by such Eligible Holders, and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement, alleged statement, omission, or alleged omission. The Company and the
Holder agree that it would be unjust and inequitable if the respective
obligations of the Company and the Eligible Holders for contribution were
determined by pro rata or per capita allocation of the aggregate losses,
liabilities, claims, damages, and expenses (even if the Holder and the other
indemnified parties were treated as one entity for such purpose) or by any other
method of allocation that does not reflect the equitable considerations referred
to in this Section 10(c). In no case
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shall any Eligible Holder be responsible for a portion of the contribution
obligation imposed on all Eligible Holders in excess of its pro rata share based
on the number of shares of Common Stock owned (or which would be owned upon
exercise of all Underwriter's Securities) by it and included in such
registration as compared to the number of shares of Common Stock owned (or which
would be owned upon exercise of all Underwriter's Securities) by all Eligible
Holders and included in such registration. No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this Section 10(c), each person, if any, who
controls any Eligible Holder within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee,
agent, and counsel of each such Eligible Holder or control person shall have the
same rights to contribution as such Eligible Holder or control person and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, each officer of the Company who shall
have signed any such registration statement, each director of the Company, and
its or their respective counsel shall have the same rights to contribution as
the Company, subject in each case to the provisions of this Section 10(c).
Anything in this Section 10(c) to the contrary notwithstanding, no party shall
be liable for contribution with respect to the settlement of any claim or action
effected without its written consent. This Section 10(c) is intended to
supersede any right to contribution under the Act, the Exchange Act or
otherwise.
11. Unless registered pursuant to the provisions of Section 9 hereof, the
Option Shares issued upon exercise of the Options shall be subject to a stop
transfer order and the certificate or certificates evidencing such securities
shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO
A REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. HOWEVER, SUCH SHARES MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION
STATEMENT, (ii) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR
(iii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT."
12. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Option (and upon surrender of any
Option if mutilated), and upon reimbursement of the Company's reasonable
incidental expenses, the Company shall execute and deliver to the Holder thereof
a new Option of like date, tenor, and denomination.
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13. The Holder of any Option shall not have, solely on account of such
status, any rights of a stockholder of the Company, either at law or in equity,
or to any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Option.
14. This Option shall be construed in accordance with the laws of the
State of New York applicable to contracts made and performed within such State,
without regard to principles of conflicts of law.
15. The Company irrevocably consents to the jurisdiction of the courts of
the State of New York and of any federal court located in such State in
connection with any action or proceeding arising out of or relating to this
Option, any document or instrument delivered pursuant to, in connection with or
simultaneously with this Option, or a breach of this Option or any such document
or instrument. In any such action or proceeding, the Company waives personal
service of any summons, complaint or other process and agrees that service
thereof may be made in accordance with Section 12 of the Underwriting Agreement.
Within 30 days after such service, or such other time as may be mutually
agreed upon in writing by the attorneys for the parties to such action or
proceeding, the Company shall appear to answer such summons, complaint or other
process.
Dated: _________, 1996
THINKING TOOLS INC.
By: ________________________
[John Hiles, President]
Chief Executive Officer
- ----------------------
Secretary
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<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Option.)
FOR VALUE RECEIVED, ______________________ hereby sells, assigns, and
transfers unto _________________ an Option to purchase __________ shares of
common stock of the Company, par value $0.001 per share, together with all
right, title, and interest therein, and does hereby irrevocably constitute and
appoint ___________ attorney to transfer such Option on the books of the
Company, with full power of substitution.
Dated: _________________
Signature_______________________
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<PAGE>
NOTICE
The signature on the foregoing Assignment must correspond to the name as
written upon the face of this Option in every particular, without alteration or
enlargement or any change whatsoever.
To: Thinking Tools, Inc.
One Lower Ragsdale Drive, I-250
Monterey, CA 93940
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<PAGE>
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase
_______ Option Shares covered by the within Option and tenders payment herewith
in the aggregate amount of $_________ including (i) $_________ by certified or
bank cashier's check, and (ii) cancellation of Options to purchase Option
Shares, based upon a Maximum Number (as therein defined) of ________, in
accordance with the terms thereof, and requests that certificates for such
securities be issued in the name of, and delivered to:
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Option Shares shall not be all the Option Shares covered
by the within Option, that a new Option for the balance of the Option Shares
covered by the within Option be registered in the name of, and delivered to, the
undersigned at the address stated below.
Dated: __________________
Name________________________
(Print)
Address:
(Signature)
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THINKING TOOLS, INC.
1996 STOCK OPTION PLAN
Adopted August 9, 1996
SECTION 1. PURPOSE. The purpose of the Thinking Tools, Inc. 1996 Stock
Option Plan (the "Plan"), is to provide a means whereby selected employees,
officers, directors, agents, consultants, and independent contractors of
Thinking Tools, Inc., a Delaware corporation (the "Company"), or of any parent
or subsidiary (as defined in subsection 5.7 hereof and referred to hereinafter
as "Affiliates") thereof, may be granted incentive stock options and/or
nonqualified stock options to purchase shares of common stock, $.001 par value
("Common Stock"), in order to attract and retain the services or advice of such
directors, employees, officers, agents, consultants, and independent contractors
and to provide additional incentive for such persons to exert maximum efforts
for the success of the Company and its Affiliates by encouraging stock ownership
in the Company.
SECTION 2. ADMINISTRATION. Subject to Section 2.3 hereof, the Plan shall be
administered by the Board of Directors of the Company (the "Board") or, in the
event the Board shall appoint and/or authorize a committee of two or more
members of the Board to administer the Plan, by such committee. The
administrator of the Plan shall hereinafter be referred to as the "Plan
Administrator."
The foregoing notwithstanding, in the event the Company shall register any
of its equity securities pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and any directors are
eligible to receive options under the Plan, then with respect to grants to be
made to directors: (a) the Plan Administrator shall be constituted so as to meet
the requirements of Section 16(b) of the Exchange Act and Rule 16b-3 thereunder,
each as amended from time to time, or (b) if the Plan Administrator cannot be so
constituted, no options shall be granted under the Plan to any directors.
2.1 PROCEDURES. The Board shall designate one of the members of the Plan
Administrator as chairman. The Plan Administrator may hold meetings at such
times and places as it shall determine. The acts of a majority of the members of
the Plan Administrator present at meetings at which a quorum exists, or acts
approved in writing by all Plan Administrator members, shall be valid acts of
the Plan Administrator.
2.2 RESPONSIBILITIES. Except for the terms and conditions explicitly set
forth herein, the Plan Administrator shall have the authority, in its
discretion, to determine all matters relating to the options to be granted under
the Plan, including, without limitation, selection of whether an option will be
an incentive stock option or a nonqualified stock option, selection of the
individuals to be granted options, the number of shares to be subject to each
option, the exercise price per share, the timing of grants and all other terms
and conditions of the options. Grants under the Plan need not be identical in
any respect, even when made simultaneously. The Plan Administrator may also
establish, amend, and revoke rules and
<PAGE>
regulations for the administration of the Plan. The interpretation and
construction by the Plan Administrator of any terms or provisions of the Plan or
any option issued hereunder, or of any rule or regulation promulgated in
connection herewith, shall be conclusive and binding on all interested parties,
so long as such interpretation and construction with respect to incentive stock
options corresponds to the requirements of Internal Revenue Code of 1986, as
amended (the "Code") Section 422, the regulations thereunder, and any amendments
thereto. The Plan Administrator shall not be personally liable for any action
made in good faith with respect to the Plan or any option granted thereunder.
2.3 RULE 16B-3 AND SECTION 16(B) COMPLIANCE; BIFURCATION OF PLAN. It is the
intention of the Company that the Plan comply in all respects with Rule 16b-3
under the Exchange Act, to the extent applicable, and in all events the Plan
shall be construed in favor of its meeting the requirements of Rule 16b-3. If
any Plan provision is later found not to be in compliance with such Rule, such
provision shall be deemed null and void. The Board of Directors may act under
the Plan only if all members thereof are "disinterested persons" as defined in
Rule 16b-3 and further described in Section 4 hereof; and from and after the
date that the Company first registers a class of equity securities under Section
12 of the Exchange Act, no director or officer or other Company "insider"
subject to Section 16 of the Exchange Act may sell shares received upon the
exercise of an option during the six month period immediately following the
grant of the option. Notwithstanding anything in the Plan to the contrary, the
Board, in its absolute discretion, may bifurcate the Plan so as to restrict,
limit, or condition the use of any provision of the Plan to participants who are
officers and directors or other persons subject to Section 16(b) of the Exchange
Act without so restricting, limiting, or conditioning the Plan with respect to
other participants.
SECTION 3. STOCK SUBJECT TO THE PLAN. The stock subject to this Plan shall
be the Common Stock, presently authorized but unissued or subsequently acquired
by the Company. Subject to adjustment as provided in Section 7 hereof, the
aggregate amount of Common Stock to be delivered upon the exercise of all
options granted under the Plan shall not exceed in the aggregate 376,000 shares
as such Common Stock was constituted on the effective date of the Plan. If any
option granted under the Plan shall expire, be surrendered, exchanged for
another option, cancelled, or terminated for any reason without having been
exercised in full, the unpurchased shares subject thereto shall thereupon again
be available for purposes of the Plan, including for replacement options which
may be granted in exchange for such surrendered, cancelled, or terminated
options.
SECTION 4. ELIGIBILITY. An incentive stock option may be granted only to
any individual who, at the time the option is granted, is an employee of the
Company or any Affiliate thereof. A nonqualified stock option may be granted to
any director, employee, officer, agent, consultant, or independent contractor of
the Company or any Affiliate thereof, whether an individual or an entity. Any
party to whom an option is granted under the Plan shall be referred to
hereinafter as an "Optionee".
A director shall in no event be eligible for the benefits of the Plan
unless at the time discretion is exercised in the selection of a director as a
person to whom options may be
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<PAGE>
granted, or in the determination of the number of shares which may be covered by
options granted to the director, the Plan complies with the requirements of Rule
16b-3 under the Exchange Act.
SECTION 5. TERMS AND CONDITIONS OF OPTIONS. Options granted under the Plan
shall be evidenced by written agreements which shall contain such terms,
conditions, limitations, and restrictions as the Plan Administrator shall deem
advisable and which are not inconsistent with the Plan. Notwithstanding the
foregoing, options shall include or incorporate by reference the following terms
and conditions:
5.1 NUMBER OF SHARES AND PRICE. The maximum number of shares that may be
purchased pursuant to the exercise of each option, and the price per share at
which such option is exercisable (the "exercise price"), shall be as established
by the Plan Administrator; provided, that the Plan Administrator shall act in
good faith to establish the exercise price which shall be not less than 100% of
the fair market value per share of the Common Stock at the time of grant of the
option; and provided, further, that, with respect to incentive stock options
granted to greater than ten percent stockholders, the exercise price shall be as
required by Section 6 hereof.
5.2 TERM AND MATURITY. Subject to the restrictions contained in Section 6
hereof with respect to granting stock options to greater than ten percent
stockholders, the term of each stock option shall be as established by the Plan
Administrator and, if not so established, shall be ten years from the date of
its grant, but in no event shall the term of any incentive stock option exceed a
ten year period. The vesting period and time for exercising an option shall be
prescribed by the Plan Administrator in each particular case.
5.3 EXERCISE. Subject to any vesting schedule established by the Plan
Administrator pursuant to Subsection 5.2 hereof, each option may be exercised in
whole or in part; provided, that only whole shares may be issued pursuant to the
exercise of any option. Subject to any other terms and conditions herein, the
Plan Administrator may provide that an option may not be exercised in whole or
in part for a stated period or periods of time during which such option is
outstanding; provided, that the Plan Administrator may rescind, modify, or waive
any such limitation at any time and from time to time after the grant date
thereof. During an Optionee's lifetime, any incentive stock options granted
under the Plan are personal to such Optionee and are exercisable solely by such
Optionee. Options shall be exercised by delivery to the Company of notice of the
number of shares with respect to which the option is exercised, together with
payment of the exercise price in accordance with Section 5.4 hereof.
5.4 PAYMENT OF EXERCISE PRICE. Payment of the option exercise price shall
be made in full at the time the notice of exercise of the option is delivered to
the Company and shall be in cash, bank certified or cashier's check, or personal
check (unless at the time of exercise the Plan Administrator in a particular
case determines not to accept a personal check) for shares of Common Stock being
purchased.
The Plan Administrator can determine at the time the option is granted in the
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<PAGE>
case of incentive stock options, or at any time before exercise in the case of
nonqualified stock options, that additional forms of payment will be permitted.
To the extent permitted by the Plan Administrator and applicable laws and
regulations (including, without limitation, federal tax and securities laws and
regulations and state corporate law), an option may be exercised by delivery of
a properly executed Notice of Exercise, together with irrevocable instructions
to a broker, all in accordance with the regulations of the Federal Reserve
Board, to promptly deliver to the Company the amount of sale or loan proceeds to
pay the exercise price and any federal, state, or local withholding tax
obligations that may arise in connection with the exercise; provided, that the
Plan Administrator, in its sole discretion, may at any time determine that this
sentence, to the extent the instructions to the broker call for an immediate
sale of the shares, shall not be applicable to any Optionee who is subject to
Section 16(b) of the Exchange Act, or is not an employee at the time of
exercise.
5.5 WITHHOLDING TAX REQUIREMENT. The Company or any Affiliate thereof shall
have the right to retain and withhold from any payment of cash or Common Stock
under the Plan the amount of taxes required by any government to be withheld or
otherwise deducted and paid with respect to such payment. No option may be
exercised unless and until arrangements satisfactory to the Company, in its sole
discretion, to pay such withholding taxes are made. At its discretion, the
Company may require an Optionee to reimburse the Company for any such taxes
required to be withheld by the Company and withhold any distribution in whole or
in part until the Company is so reimbursed. In lieu thereof, the Company shall
have the right to withhold from any other cash amounts due or to become due from
the Company to the Optionee an amount equal to such taxes or retain and withhold
a number of shares having a market value not less than the amount of such taxes
required to be withheld by the Company to reimburse the Company for any such
taxes and cancel (in whole or in part) any such shares of Common Stock so
withheld. If required by Section 16(b) of the Exchange Act, the election to pay
withholding taxes by delivery of shares of Common Stock held by any person who
at the time of exercise is subject to Section 16(b) of the Exchange Act shall be
made either six months prior to the date the option exercise becomes taxable or
at such other times as the Company may determine as necessary to comply with
Section 16(b) of the Exchange Act. Although the Company may, in its discretion,
accept Common Stock as payment of withholding taxes, the Company shall not be
obligated to do so.
5.6 NONTRANSFERABILITY.
5.6.1 OPTION. Options granted under the Plan and the rights and privileges
conferred hereby may not be transferred, assigned, pledged, or hypothecated in
any manner (whether by operation of law or otherwise) other than by will or by
the applicable laws of descent and distribution or pursuant to a qualified
domestic relations order as defined in Section 414(p) of the Code, or Title I of
the Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder, and shall not be subject to execution, attachment, or similar
process. Any attempt to transfer, assign, pledge, hypothecate, or otherwise
dispose of any option under the Plan or of any right or privilege conferred
hereby, contrary to the Code
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<PAGE>
or to the provisions of the Plan, or the sale or levy or any attachment or
similar process upon the rights and privileges conferred hereby shall be null
and void ab initio. The designation by an Optionee of a beneficiary does not, in
and of itself, constitute an impermissible transfer under this subsection 5.6.1.
5.6.2 STOCK. The Plan Administrator may provide in the agreement granting
the option that (a) the Optionee may not transfer or otherwise dispose of shares
acquired upon exercise of an option without first offering such shares to the
Company for purchase on the same terms and conditions as those offered to the
proposed transferee or (b) upon termination of employment of an Optionee the
Company shall have a six month right of repurchase as to the shares acquired
upon exercise, which right of repurchase shall allow for a maximum purchase
price equal to the fair market value of the shares on the termination date. The
foregoing rights of the Company shall be assignable by the Company upon
reasonable written notice to the Optionee.
5.7 TERMINATION OF RELATIONSHIP. If the Optionee's relationship with the
Company or any Affiliate thereof ceases for any reason other than termination
for cause, death, or total disability, and unless by its terms the option sooner
terminates or expires, then the Optionee may exercise, for a three month period,
that portion of the Optionee's option which is exercisable at the time of such
cessation, but the Optionee's option shall terminate at the end of the three
month period following such cessation as to all shares for which it has not
theretofore been exercised, unless, in the case of a nonqualified stock option,
such provision is waived in the agreement evidencing the option or by resolution
adopted by the Plan Administrator within 90 days of such cessation. If, in the
case of an incentive stock option, an Optionee's relationship with the Company
or Affiliate thereof changes from employee to nonemployee (i.e., from employee
to a position such as a consultant), such change shall constitute a termination
of an Optionee's employment with the Company or Affiliate and the Optionee's
incentive stock option shall terminate in accordance with this subsection 5.7.
If an Optionee is terminated for cause, any option granted hereunder shall
automatically terminate as of the first discovery by the Company of any reason
for termination for cause, and such Optionee shall thereupon have no right to
purchase any shares pursuant to such option. "Termination for cause" shall mean
dismissal for dishonesty, conviction or confession of a crime punishable by law
(except minor violations), fraud, misconduct, or disclosure of confidential
information. If an Optionee's relationship with the Company or any Affiliate
thereof is suspended pending an investigation of whether or not the Optionee
shall be terminated for cause, all Optionee's rights under any option granted
hereunder likewise shall be suspended during the period of investigation.
If an Optionee's relationship with the Company or any Affiliate thereof
ceases because of a total disability, the Optionee's option shall not terminate
or, in the case of an incentive stock option, cease to be treated as an
incentive stock option until the end of the 12 month period following such
cessation (unless by its terms it sooner terminates and expires). As used in the
Plan, the term "total disability" refers to a mental or physical impairment of
the Optionee which is expected to result in death or which has lasted or is, in
the opinion of the
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<PAGE>
Company and two independent physicians, expected to last for a continuous period
of 12 months or more and which causes or is, in such opinion, expected to cause
the Optionee to be unable to perform his or her duties for the Company and to be
engaged in any substantial gainful activity. Total disability shall be deemed to
have occurred on the first day after the Company and the two independent
physicians have furnished their opinion of total disability to the Plan
Administrator.
For purposes of this subsection 5.7, a transfer of relationship between or
among the Company and/or any Affiliate thereof shall not be deemed to constitute
a cessation of relationship with the Company or any of its Affiliates. For
purposes of this subsection 5.7, with respect to incentive stock options,
employment shall be deemed to continue while the Optionee is on military leave,
sick leave, or other bona fide leave of absence (as determined by the Plan
Administrator). The foregoing notwithstanding, employment shall not be deemed to
continue beyond the first 90 days of such leave, unless the Optionee's
reemployment rights are guaranteed by statute or by contract.
As used herein, the term "Affiliate" shall be defined as follows: (a) when
referring to a subsidiary corporation, "Affiliate" shall mean any corporation
(other than the Company) in, at the time of the granting of the option, an
unbroken chain of corporations ending with the Company, if stock possessing 50%
or more of the total combined voting power of all classes of stock of each of
the corporations other than the Company is owned by one of the other
corporations in such chain; and (b) when referring to a parent corporation,
"Affiliate" shall mean any corporation in an unbroken chain of corporations
ending with the Company if, at the time of the granting of the option, each of
the corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
5.8 DEATH OF OPTIONEE. If an Optionee dies while he or she has a
relationship with the Company or any Affiliate thereof or within the three month
period (or 12 month period in the case of totally disabled Optionees) following
cessation of such relationship, any option held by such Optionee, to the extent
that the Optionee would have been entitled to exercise such option, may be
exercised within one year after his or her death by the personal representative
of his or her estate or by the person or persons to whom the Optionee's rights
under the option shall pass by will or by the applicable laws of descent and
distribution.
5.9 STATUS OF STOCKHOLDER. Neither the Optionee nor any party to which the
Optionee's rights and privileges under the option may pass shall be, or have any
of the rights or privileges of, a stockholder of the Company with respect to any
of the shares issuable upon the exercise of any option granted under the Plan
unless and until such option has been exercised.
5.10 CONTINUATION OF EMPLOYMENT. Nothing in the Plan or in any option
granted pursuant to the Plan shall confer upon any Optionee any right to
continue in the employ of the Company or of an Affiliate thereof, or to
interfere in any way with the right of the Company or of any such Affiliate to
terminate his or her employment or other relationship with
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<PAGE>
the Company at any time.
5.11 MODIFICATION AND AMENDMENT OF OPTION. Subject to the requirements of
Section 422 of the Code with respect to incentive stock options and to the terms
and conditions and within the limitations of the Plan, including, without
limitation, Section 9.1 hereof, the Plan Administrator may modify or amend
outstanding options granted under the Plan. The modification or amendment of an
outstanding option shall not, without the consent of the Optionee, impair or
diminish any of his or her rights or any of the obligations of the Company under
such option. Except as otherwise provided herein, no outstanding option shall be
terminated without the consent of the Optionee. Unless the Optionee agrees
otherwise, any changes or adjustments made to outstanding incentive stock
options granted under the Plan shall be made in such a manner so as not to
constitute a "modification" as defined in Section 424(h) of the Code and so as
not to cause any incentive stock option issued hereunder to fail to continue to
qualify as an incentive stock option as defined in Section 422(b) of the Code.
5.12 LIMITATION ON VALUE FOR INCENTIVE STOCK OPTIONS. As to all incentive
stock options granted under the terms of the Plan, to the extent that the
aggregate fair market value (determined at the time of the grant of the
incentive stock option) of the shares of Common Stock with respect to which
incentive stock options are exercisable for the first time by the Optionee
during any calendar year (under the Plan and all other incentive stock option
plans of the Company, an Affiliate thereof or a predecessor corporation) exceeds
$100,000, such options shall be treated as nonqualified stock options. The
foregoing sentence shall not apply, and the limitation shall be that provided by
the Code or the Internal Revenue Service, as the case may be, if such annual
limit is changed or eliminated by (a) amendment of the Code or (b) issuance by
the Internal Revenue Service of (i) a Revenue ruling, (ii) a Private Letter
ruling to any of the Company, any Optionee, or any legatee, personal
representative, or distributee of any Optionee, or (iii) regulations.
5.13 VALUATION OF COMMON STOCK RECEIVED UPON EXERCISE. The value of Common
Stock received by the Optionee from an exercise under the third paragraph of
Section 5.4 hereof shall equal the sales price received for such shares.
SECTION 6. GREATER THAN TEN PERCENT STOCKHOLDERS.
6.1 EXERCISE PRICE AND TERM OF INCENTIVE STOCK OPTIONS. If incentive stock
options are granted under the Plan to employees who, at the time of such grant,
own greater than ten percent of the total combined voting power of all classes
of stock of the Company or any Affiliate thereof, the term of such incentive
stock options shall not exceed five years and the exercise price shall be not
less than 110% of the fair market value of the Common Stock at the time of grant
of the incentive stock option. This provision shall control notwithstanding any
contrary terms contained in an option agreement or any other document. The term
and exercise price limitations of this provision shall be amended to conform to
any change required by a change in the Code or by ruling or pronouncement of the
Internal Revenue Service.
6.2 ATTRIBUTION RULE. For purposes of subsection 6.1, in determining stock
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<PAGE>
ownership, an employee shall be deemed to own the stock owned, directly or
indirectly, by or for his or her brothers, sisters, spouse, ancestors, and
lineal descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership estate, or trust shall be deemed to be owned
proportionately by or for its stockholders, partners, or beneficiaries. If an
employee or a person related to the employee owns an unexercised option or
warrant to purchase stock of the Company, the stock subject to that portion of
the option or warrant which is unexercised shall not be counted in determining
stock ownership. For purposes of this Section 6, stock owned by an employee
shall include all stock owned by him or her which is actually issued and
outstanding immediately before the grant of the incentive stock option to the
employee.
SECTION 7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The aggregate number
and class of shares for which options may be granted under the Plan, the number
and class of shares covered by each outstanding option, and the exercise price
per share thereof (but not the total price), and each such option, shall all be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock of the Company resulting from a split or consolidation of
shares or any like capital adjustment, or the payment of any stock dividend.
7.1. EFFECT OF LIQUIDATION, REORGANIZATION, OR CHANGE IN CONTROL.
7.1.1 CASH, STOCK, OR OTHER PROPERTY FOR STOCK. Except as provided in
subsection 7.1.2 hereof, upon a merger (other than a merger of the Company in
which the holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock in the surviving corporation immediately
after the merger), consolidation, acquisition of property or stock, separation,
reorganization (other than mere reincorporation or creation of a holding
company), or liquidation of the Company (each, an "event"), as a result of which
the stockholders of the Company receive cash, stock, or other property in
exchange for, or in connection with, their shares of Common Stock, any option
granted hereunder shall terminate, but the time during which such options may be
exercised shall be accelerated as follows: the Optionee shall have the right
immediately prior to any such event to exercise such Optionee's option in whole
or in part whether or not the vesting requirements set forth in the option
agreement have been satisfied.
7.1.2 CONVERSION OF OPTIONS ON STOCK FOR EXCHANGE STOCK. If the
stockholders of the Company receive capital stock of another corporation
("Exchange Stock") in exchange for their shares of Common Stock in any
transaction involving a merger (other than a merger of the Company in which the
holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock in the surviving corporation immediately
after the merger), consolidation, acquisition of property or stock, separation,
or reorganization (other than mere reincorporation or creation of a holding
company), all options granted hereunder shall be converted into options to
purchase shares of Exchange Stock unless the Company and corporation issuing the
Exchange Stock, in their sole discretion, determine that any or all such options
granted hereunder shall not be converted into options to purchase shares of
Exchange Stock but instead shall terminate in accordance with the provisions of
subsection 7.1.1 hereof. The amount and price of converted options shall be
determined by
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<PAGE>
adjusting the amount and price of the options granted hereunder in the same
proportion as used for determining the number of shares of Exchange Stock the
holders of the Common Stock receive in such merger, consolidation, acquisition,
separation, or reorganization. Unless the Board determines otherwise, the
converted options shall be fully vested whether or not the vesting requirements
set forth in the option agreement have been satisfied.
7.2 FRACTIONAL SHARES. In the event of any adjustment in the number of
shares covered by an option, any fractional shares resulting from such
adjustment shall be disregarded and each such option shall cover only the number
of full shares resulting from such adjustment.
7.3 DETERMINATION OF BOARD TO BE FINAL. Except as otherwise required for
the Plan to qualify for the exemption afforded by Rule 16b-3 under the Exchange
Act, all adjustments under this Section 7 shall be made by the Board, and its
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding, and conclusive. Unless an Optionee agrees otherwise,
any change or adjustment to an incentive stock option shall be made in such a
manner so as not to constitute a "modification" as defined in Section 425(h) of
the Code and so as not to cause the incentive stock option issued hereunder to
fail to continue to qualify as an incentive stock option as defined in Section
422(b) of the Code.
SECTION 8. SECURITIES LAW COMPLIANCE. Shares shall not be issued with
respect to an option granted under the Plan unless the exercise of such option
and the issuance and delivery of such shares pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, any applicable
state securities laws, the Securities Act of 1933, as amended (the "Act"), the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance, including, without limitation, the availability of an
exemption from registration for the issuance and sale of any shares hereunder.
Inability of the Company to obtain from any regulatory body having jurisdiction,
the authority deemed by the Company's counsel to be necessary for the lawful
issuance and sale of any shares hereunder or the unavailability of an exemption
from registration for the issuance and sale of any shares hereunder shall
relieve the Company of any liability in respect of the nonissuance or sale of
such shares as to which such requisite authority shall not have been obtained.
As a condition to the exercise of an option, if, in the opinion of counsel
for the Company, assurances are required by any relevant provision of the
aforementioned laws, the Company may require the Optionee to give written
assurances satisfactory to the Company at the time of any such exercise (a) as
to the Optionee's knowledge and experience in financial and business matters
(and/or to employ a purchaser representative reasonably satisfactory to the
Company who is knowledgeable and experienced in financial and business matters)
and that such Optionee is capable of evaluating, either alone or with the
purchaser representative, the merits and risks of exercising the option or (b)
that the shares are being purchased only for investment and without any present
intention to sell or distribute such shares. The foregoing requirements shall be
inoperative if the issuance of the shares upon the exercise of the option
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<PAGE>
has been registered under a then currently effective registration statement
under the Act.
At the option of the Company, a stop-transfer order against any shares may
be placed on the official stock books and records of the Company, and a legend
indicating that the stock may not be pledged, sold, or otherwise transferred
unless an opinion of counsel is provided (concurred in by counsel for the
Company) stating that such transfer is not in violation of any applicable law or
regulation, may be stamped on stock certificates in order to assure exemption
from registration. The Plan Administrator may also require such other action or
agreement by the Optionees as may from time to time be necessary to comply with
the federal and state securities laws. NONE OF THE ABOVE SHALL BE CONSTRUED TO
IMPLY AN OBLIGATION ON THE PART OF THE COMPANY TO UNDERTAKE REGISTRATION OF THE
OPTIONS OR STOCK HEREUNDER.
Should any of the Company's capital stock of the same class as the stock
subject to options granted hereunder be listed on a national securities exchange
or on the NASDAQ National Market, all stock issued hereunder if not previously
listed on such exchange or market shall, if required by the rules of such
exchange or market, be authorized by that exchange or market for listing thereon
prior to the issuance thereof.
SECTION 9. USE OF PROCEEDS. The proceeds received by the Company from the
sale of shares pursuant to the exercise of options granted hereunder shall
constitute general funds of the Company.
SECTION 10. AMENDMENT AND TERMINATION.
10.1 BOARD ACTION. The Board may at any time suspend, amend, or terminate
the Plan, provided, that no amendment shall be made without stockholder approval
within 12 months before or after adoption of the Plan if such approval is
necessary to comply with any applicable tax or regulatory requirement, including
any such approval as may be necessary to satisfy the requirements for exemptive
relief under Rule 16b-3 of the Exchange Act or any successor provision. Rights
and obligations under any option granted before amendment of the Plan shall not
be altered or impaired by any amendment of the Plan unless the Company requests
the consent of the person to whom the option was granted and such person
consents in writing thereto.
10.2 AUTOMATIC TERMINATION. Unless sooner terminated by the Board, the Plan
shall terminate ten years from the earlier of (a) the date on which the Plan is
adopted by the Board or (b) the date on which the Plan is approved by the
stockholders of the Company. No option may be granted after such termination or
during any suspension of the Plan. The amendment or termination of the Plan
shall not, without the consent of the option holder, alter or impair any rights
or obligations under any option theretofore granted under the Plan.
SECTION 11. EFFECTIVENESS OF THE PLAN. The Plan shall become effective upon
adoption by the Board so long as it is approved by the holders of a majority of
the Company's outstanding shares of voting capital stock at any time within 12
months before or after the adoption of the Plan by the Board.
- 10 -
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER
CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS. THE WARRANT REPRESENTED BY THIS CERTIFICATE
MAY ALSO BE SUBJECT TO A LOCK-UP AGREEMENT BETWEEN THE ORIGINAL HOLDER AND
BARINGTON CAPITAL GROUP, L.P.
THE TRANSFER OF THIS WARRANT IS
RESTRICTED AS DESCRIBED HEREIN.
THINKING TOOLS, INC.
Warrant for the Purchase of Shares of Common Stock,
$.001 par value per share
THIS WARRANT EXPIRES ON ________ , 2001
No. _ _____,000 Shares
THIS CERTIFIES that, for value received, _____________ with an
address at ________________________________________ (including any transferee,
the "Holder"), is entitled to subscribe for and purchase from Thinking Tools,
Inc., a Delaware corporation (the "Company"), upon the terms and conditions set
forth herein, at any time or from time to time before 5:00 P.M. on ______, 2001,
New York time (the "Exercise Period"), _____,000 shares of the Company's Common
Stock, $.001 par value per share ("Common Stock"), at a price equal to $4.20 per
share prior to consummation of the Company's initial public offering, and at the
lesser of $4.20 and 60% of the initial public offering price per share of Common
Stock in the Company's initial public offering thereafter (the "Exercise
Price").
If the Company avails itself of the Initial Extension Period or the
Additional Extension Period (as such terms are defined in Section 1(e) of the
Subscription Agreements, dated the date hereof between the Company and certain
investors (the "Subscription Agreements")), then the number of shares of Common
Stock which this Warrant represents the right to purchase shall be increased by
5% for each month of the Initial Extension Period, and 10% for each month of the
Additional Extension
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Period, of which the Company avails itself. If the Company avails itself of the
Additional Extension Period (such term is defined in Section 1(e) of the
Subscription Agreements) then the Exercise Period following the Company's
initial public offering shall be deemed to have been defined in the preceding
sentence as the lesser of $3.50 and 50% of the initial public offering price per
share of Common Stock in the Company's initial public offering.
Notwithstanding anything to the contrary contained herein, in the
event that (i) Barington Capital Group, L.P. ("Barington") commences its selling
efforts with respect to the offering contemplated under the letter of intent
between the Company and Barington dated July 23, 1996 with respect to an initial
public offering of the Company's securities (the "Letter of Intent"), and is
either unable to sell the full amount of such offering or is unable to sell such
offering within the price range set forth in the Letter of Intent, and (ii) the
Company consummates an alternative financing from an unrelated party in which
the Notes (as hereinafter defined) and any accrued interest thereon are paid in
full prior to the Time-Based Maturity Date (as such term is defined in the
Subscription Agreement pursuant to which this Warrant was issued by the
Company), without taking into account any extensions thereof, then the exercise
price hereunder shall be adjusted to the same per share price paid by the
investors in any such alternate financing.
This Warrant is the warrant or one of the warrants (collectively,
including any warrants issued upon the exercise or transfer of any such warrants
in whole or in part, the "Warrants") issued pursuant to an offering (the
"Offering") by the Company of units, each consisting of (i) a $100,000 senior
secured promissory note (collectively, with all notes included in the units, the
"Notes"), and (ii) a warrant to purchase 25,000 shares of Common Stock, pursuant
to a Confidential Private Placement Memorandum, dated August 15, 1996, as it may
be amended or supplemented (the "Memorandum"). As used herein the term "this
Warrant" shall mean and include this Warrant and any Warrant or Warrants
hereafter issued as a consequence of the exercise or transfer of this Warrant in
whole or in part.
The number of shares of Common Stock issuable upon exercise of the
Warrants (the "Warrant Shares") and the Exercise Price may be adjusted from time
to time as hereinafter set forth.
1. (a) This Warrant may be exercised during the Exercise Period, as
to the whole or any lesser number of whole Warrant Shares, by the surrender of
this Warrant (with the election at the end hereof duly executed) to the Company
at its office at One Lower Ragsdale Drive, I-250, Monterey, CA 93940, or at such
other place as is designated in writing by the Company. Subject to Section 1(b)
hereof, such executed election must be accompanied by payment in an amount equal
to the
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Exercise Price multiplied by the number of Warrant Shares for which this Warrant
is being exercised. Such payment may be made by certified or bank cashier's
check payable to the order of the Company, or as provided in Section 1(b)
hereof, or as otherwise provided in Section 1(b) hereof.
(b) All or any part of this Warrant may be exercised on a
"cashless" basis, by stating in the Exercise Notice such intention and either
(x) the maximum number (the "Maximum Number") of shares of Common Stock the
Holder desires to purchase in consideration of cancellation of Warrants in
payment for such exercise, or (y) the amount of then outstanding principal and
accrued interest under Notes submitted with such Exercise Notice, to be deemed
to be prepaid pursuant to such exercise. The number of shares of Common Stock
the Holder shall receive (the "Cashless Exercise Number") upon such exercise
pursuant to clause (x) of this Section 1(b) shall equal the difference between
the Maximum Number and the quotient that is obtained when the product of the
Maximum Number and the then current Exercise Price is divided by the then
Current Market Price per share (as hereinafter defined). The amount credited
toward the payment due from the Holder upon such exercise in respect of
prepayment of Notes pursuant to clause (y) of this Section 1(b) shall equal the
amount of principal and interest deemed prepaid thereby.
2. Upon each exercise of the Holder's rights to purchase Warrant
Shares, the Holder shall be deemed to be the holder of record of the Warrant
Shares issuable upon such exercise, notwithstanding that the transfer books of
the Company shall then be closed or certificates representing such Warrant
Shares shall not then have been actually delivered to the Holder. As soon as
practicable after each such exercise of this Warrant, the Company shall issue
and deliver to the Holder a certificate or certificates for the Warrant Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the right of the Holder to purchase the balance of the
Warrant Shares (or portions thereof) subject to purchase hereunder.
3. (a) Any Warrants issued upon the transfer or exercise in part of
this Warrant shall be numbered and shall be registered in a Warrant Register as
they are issued. The Company shall be entitled to treat the registered holder of
any Warrant on the Warrant Register as the owner in fact thereof for all
purposes and shall not be bound to recognize any equitable or other claim to or
interest in such Warrant on the part of any other person, and shall not be
liable for any registration or transfer of Warrants which are registered or to
be registered in the name of a fiduciary or the nominee of a fiduciary unless
made with the actual knowledge that a fiduciary or nominee is committing a
breach of trust in requesting such registration or transfer, or with the
knowledge of such facts that its
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<PAGE>
participation therein amounts to bad faith. This Warrant shall be transferable
only on the books of the Company upon delivery thereof duly endorsed by the
Holder or by his duly authorized attorney or representative, or accompanied by
proper evidence of succession, assignment, or authority to transfer. In all
cases of transfer by an attorney, executor, administrator, guardian, or other
legal representative, duly authenticated evidence of his or its authority shall
be produced. Upon any registration of transfer, the Company shall deliver a new
Warrant or Warrants to the person entitled thereto. This Warrant may be
exchanged, at the option of the Holder thereof, for another Warrant, or other
Warrants of different denominations, of like tenor and representing in the
aggregate the right to purchase a like number of Warrant Shares (or portions
thereof), upon surrender to the Company or its duly authorized agent.
Notwithstanding the foregoing, the Company shall have no obligation to cause
Warrants to be transferred on its books to any person if, in the opinion of
counsel to the Company, such transfer does not comply with the provisions of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
thereunder.
(b) The Holder acknowledges that he has been advised by the
Company that neither this Warrant nor the Warrant Shares have been registered
under the Act, that this Warrant is being or has been issued and the Warrant
Shares may be issued on the basis of the statutory exemption provided by Section
4(2) of the Act or Regulation D promulgated thereunder, or both, relating to
transactions by an issuer not involving any public offering, and that the
Company's reliance thereon is based in part upon the representations made by the
original Holder in the original Holder's Subscription Agreement executed and
delivered in accordance with the terms of the Offering (the "Subscription
Agreement"). The Holder acknowledges that he has been informed by the Company
of, or is otherwise familiar with, the nature of the limitations imposed by the
Act and the rules and regulations thereunder on the transfer of securities. In
particular, the Holder agrees that no sale, assignment or transfer of this
Warrant or the Warrant Shares issuable upon exercise hereof shall be valid or
effective, and the Company shall not be required to give any effect to any such
sale, assignment or transfer, unless (i) the sale, assignment or transfer of
this Warrant or such Warrant Shares is registered under the Act, it being
understood that neither this Warrant nor such Warrant Shares are currently
registered for sale and that the Company has no obligation or intention to so
register this Warrant or such Warrant Shares except as specifically provided
herein, or (ii) this Warrant or such Warrant Shares are sold, assigned or
transferred in accordance with all the requirements and limitations of Rule 144
under the Act, it being understood that Rule 144 is not available at the time of
the original issuance of this Warrant for the sale of this Warrant or such
Warrant Shares and that there can be no assurance that Rule 144 sales will be
available at any subsequent time, or (iii) such sale, assignment, or transfer is
otherwise exempt from registration under the Act.
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<PAGE>
4. The Company shall at all times reserve and keep available out of
its authorized and unissued Common Stock, solely for the purpose of providing
for the exercise of the rights to purchase all Warrant Shares granted pursuant
to the Warrants, such number of shares of Common Stock as shall, from time to
time, be sufficient therefor. The Company covenants that all shares of Common
Stock issuable upon exercise of this Warrant, upon receipt by the Company of the
full Exercise Price therefor, shall be validly issued, fully paid,
nonassessable, and free of preemptive rights.
5. (a) In case the Company shall at any time after the date this
Warrant is first issued (i) declare a dividend on the outstanding Common Stock
payable in shares of its capital stock, (ii) subdivide the outstanding Common
Stock, or (iii) combine the outstanding Common Stock into a smaller number of
shares, then, in each case, the Exercise Price, and the number of Warrant Shares
issuable upon exercise of this Warrant, in effect at the time of the record date
for such dividend or of the effective date of such subdivision, or combination,
shall be proportionately adjusted so that the Holder after such time shall be
entitled to receive the aggregate number and kind of shares for such
consideration which, if such Warrant had been exercised immediately prior to
such time at the then-current exercise price, he would have owned upon such
exercise and been entitled to receive by virtue of such dividend, subdivision,
or combination. Such adjustment shall be made successively whenever any event
listed above shall occur.
(b) In case the Company shall issue or fix a record date for
the issuance to all holders of Common Stock of rights, options, or warrants to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) at a price per share (or having a conversion or
exchange price per share, if a security convertible into or exchangeable for
Common Stock) less than the Current Market Price per share of Common Stock on
such record date, then, in each case, the Exercise Price shall be adjusted by
multiplying the Exercise Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding on such record date plus the number of shares of Common Stock
which the aggregate offering price of the total number of shares of Common Stock
so to be offered (or the aggregate initial conversion or exchange price of the
convertible or exchangeable securities so to be offered) would purchase at such
Current Market Price and the denominator of which shall be the number of shares
of Common Stock outstanding on such record date plus the number of additional
shares of Common Stock to be offered for subscription or purchase (or into which
the convertible or exchangeable securities so to be offered are initially
convertible or exchangeable); provided, however, that no such adjustment shall
be made which results in an increase in the Exercise Price. Such adjustment
shall become effective at the close of business on such record date; provided,
however, that, to the extent the shares of Common
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<PAGE>
Stock (or securities convertible into or exchangeable for shares of Common
Stock) are not delivered, the Exercise Price shall be readjusted after the
expiration of such rights, options, or warrants (but only with respect to
Warrants exercised after such expiration), to the Exercise Price which would
then be in effect had the adjustments made upon the issuance of such rights,
options, or warrants been made upon the basis of delivery of only the number of
shares of Common Stock (or securities convertible into or exchangeable for
shares of Common Stock) actually issued. In case any subscription price may be
paid in a consideration part or all of which shall be in a form other than cash,
the value of such consideration shall be as determined in good faith by the
board of directors of the Company, whose determination shall be conclusive
absent manifest error. Shares of Common Stock owned by or held for the account
of the Company or any majority-owned subsidiary shall not be deemed outstanding
for the purpose of any such computation.
(c) In case the Company shall distribute to all holders of
Common Stock (including any such distribution made to the stockholders of the
Company in connection with a consolidation or merger in which the Company is the
continuing corporation) evidences of its indebtedness, cash (other than any cash
dividend which, together with any cash dividends paid within the 12 months prior
to the record date for such distribution, does not exceed 5% of the Current
Market Price at the record date for such distribution) or assets (other than
distributions and dividends payable in shares of Common Stock), or rights,
options, or warrants to subscribe for or purchase Common Stock, or securities
convertible into or changeable for shares of Common Stock (excluding those with
respect to the issuance of which an adjustment of the Exercise Price is provided
pursuant to section 5(b) hereof), then, in each case, the Exercise Price shall
be adjusted by multiplying the Exercise Price in effect immediately prior to the
record date for the determination of stockholders entitled to receive such
distribution by a fraction, the numerator of which shall be the Current Market
Price per share of such class of Common Stock on such record date, less the fair
market value (as determined in good faith by the board of directors of the
Company, whose determination shall be conclusive absent manifest error) of the
portion of the evidences of indebtedness or assets so to be distributed, or of
such rights, options, or warrants or convertible or exchangeable securities, or
the amount of such cash, applicable to one share, and the denominator of which
shall be such Current Market Price per share of Common Stock. Such adjustment
shall become effective at the close of business on such record date.
(d) In case the Company shall issue shares of Common Stock or
rights, options, or warrants to subscribe for or purchase Common Stock, or
securities convertible into or exchangeable for Common Stock (excluding shares,
rights, options, warrants, or convertible or exchangeable securities issued or
issuable (i) in any of the transactions with respect
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<PAGE>
to which an adjustment of the Exercise Price is provided pursuant to Sections
5(a), 5(b), or 5(c) above, (ii) upon any issuance of securities pursuant to the
Offering or the proposed initial public offering or the exercise of securities
so issued, (iii) upon exercise of the Warrants, (iv) upon issuance or exercise
of any warrants issued to Barington or its designees in connection with the
Offering or the public offering proposed to be made as described in the
Memorandum,(v) upon adjustment of the number of shares of Common Stock issuable
upon exercise of the Warrants pursuant to the Preamble hereof, (vi) upon
issuance or exercise of up to 391,000 stock options granted or to be granted to
the directors, consultants or employees of the Company pursuant to any stock
option plan in effect on the date of the issuance of this Warrant or pursuant to
up to 60,000 stock options issued to directors of the Company prior to the date
hereof, (vii) upon exercise of the certain 468,242 warrants currently held by
Thinking Technologies, L.P. or (viii) upon issuance, prior to the initial public
offering of the Company, or exercise of stock options to purchase up to 15,000
shares of common stock to a non-affiliate of the Company at an exercise price
not lower than $1.00 per share) at a price per share (determined, in the case of
such rights, options, warrants, or convertible or exchangeable securities, by
dividing (x) the total amount received or receivable by the Company in
consideration of the sale and issuance of such rights, options, warrants, or
convertible or exchangeable securities, plus the minimum aggregate consideration
payable to the Company upon exercise, conversion, or exchange thereof, by (y)
the maximum number of shares covered by such rights, options, warrants, or
convertible or exchangeable securities) lower than the Current Market Price per
share of Common Stock in effect immediately prior to such issuance, then the
Exercise Price shall be reduced on the date of such issuance to a price
(calculated to the nearest cent) determined by multiplying the Exercise Price in
effect immediately prior to such issuance by a fraction, (1) the numerator of
which shall be an amount equal to the sum of (A) the number of shares of Common
Stock outstanding immediately prior to such issuance plus (B) the quotient
obtained by dividing the consideration received by the Company upon such
issuance by such Current Market Price, and (2) the denominator of which shall be
the total number of shares of Common Stock outstanding immediately after such
issuance; provided, however, that no such adjustment shall be made which results
in an increase in the Exercise Price. For the purposes of such adjustments, the
maximum number of shares which the holders of any such rights, options,
warrants, or convertible or exchangeable securities shall be entitled to
initially subscribe for or purchase or convert or exchange such securities into
shall be deemed to be issued and outstanding as of the date of such issuance,
and the consideration received by the Company therefor shall be deemed to be the
consideration received by the Company for such rights, options, warrants, or
convertible or exchangeable securities, plus the minimum aggregate consideration
or premiums stated in such rights, options, warrants, or convertible or
exchangeable securities to be paid
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<PAGE>
for the shares covered thereby. No further adjustment of the Exercise Price
shall be made as a result of the actual issuance of shares of Common Stock on
exercise of such rights, options, or warrants or on conversion or exchange of
such convertible or exchangeable securities. On the expiration or the
termination of such rights, options, or warrants, or the termination of such
right to convert or exchange, the Exercise Price shall be readjusted (but only
with respect to Warrants exercised after such expiration or termination) to such
Exercise Price as would have obtained had the adjustments made upon the issuance
of such rights, options, warrants, or convertible or exchangeable securities
been made upon the basis of the delivery of only the number of shares of Common
Stock actually delivered upon the exercise of such rights, options, or warrants
or upon the conversion or exchange of any such securities; and on any change of
the number of shares of Common Stock deliverable upon the exercise of any such
rights, options, or warrants or conversion or exchange of such convertible or
exchangeable securities or any change in the consideration to be received by the
Company upon such exercise, conversion, or exchange, including, without
limitation, a change resulting from the antidilution provisions thereof. In case
the Company shall issue shares of Common Stock or any such rights, options,
warrants, or convertible or exchangeable securities for a consideration
consisting, in whole or in part, of property other than cash or its equivalent,
then the "price per share" and the "consideration received by the Company" for
purposes of the first sentence of this Section 5(d) shall be as determined in
good faith by the board of directors of the Company, whose determination shall
be conclusive absent manifest error. Shares of Common Stock owned by or held for
the account of the Company or any majority-owned subsidiary shall not be deemed
outstanding for the purpose of any such computation.
(e) For the purpose of any computation under this Section 5 or
Section 1, the Current Market Price per share of Common Stock on any date shall
be deemed to be the average of the daily closing prices for the 30 consecutive
trading days immediately preceding the date in question. The closing price for
each day shall be the last reported sales price regular way or, in case no such
reported sale takes place on such day, the closing bid price regular way, in
either case on the principal national securities exchange (including, for
purposes hereof, the NASDAQ National Market) on which the Common Stock is listed
or admitted to trading or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, the highest reported bid price for
the Common Stock as furnished by the National Association of Securities Dealers,
Inc. through NASDAQ or a similar organization if NASDAQ is no longer reporting
such information. If on any such date the Common Stock is not listed or admitted
to trading on any national securities exchange and is not quoted by NASDAQ or
any similar organization, the fair value of a share of Common Stock on such
date, as determined in good faith by the board of directors of
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the Company, whose determination shall be conclusive absent manifest error,
shall be used.
(f) No adjustment in the Exercise Price shall be required if
such adjustment is less than $.05; provided, however, that any adjustments which
by reason of this Section 5 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under this
Section 5 shall be made to the nearest cent or to the nearest one-thousandth of
a share, as the case may be.
(g) In any case in which this Section 5 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer, until the occurrence of such
event, issuing to the Holder, if the Holder exercised this Warrant after such
record date, the shares of Common Stock, if any, issuable upon such exercise
over and above the shares of Common Stock, if any, issuable upon such exercise
on the basis of the Exercise Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to the Holder a due bill or other
appropriate instrument evidencing the Holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(h) Upon each adjustment of the Exercise Price as a result of
the calculations made in Sections 5(b), 5(c), or 5(d) hereof, this Warrant shall
thereafter evidence the right to purchase, at the adjusted Exercise Price, that
number of shares (calculated to the nearest thousandth) obtained by dividing (A)
the product obtained by multiplying the number of shares purchasable upon
exercise of this Warrant prior to adjustment of the number of shares by the
Exercise Price in effect prior to adjustment of the Exercise Price by (B) the
Exercise Price in effect after such adjustment of the Exercise Price.
(i) Whenever there shall be an adjustment as provided in this
Section 5, the Company shall promptly cause written notice thereof to be sent by
certified mail, postage prepaid, to the Holder, at its address as it shall
appear in the Warrant Register, which notice shall be accompanied by an
officer's certificate setting forth the number of Warrant Shares purchasable
upon the exercise of this Warrant and the Exercise Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment and
the computation thereof, which officer's certificate shall be conclusive
evidence of the correctness of any such adjustment absent manifest error.
(j) The Company shall not be required to issue fractions of
shares of Common Stock or other capital stock of the Company upon the exercise
of this Warrant. If any fraction of a share would be issuable on the exercise of
this Warrant (or specified portions thereof), the Company shall purchase such
fraction for an amount in cash equal to the same fraction of the
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Current Market Price of such share of Common Stock on the date of exercise of
this Warrant.
6. (a) In case of any consolidation with or merger of the Company
with or into another corporation (other than a merger or consolidation in which
the Company is the surviving or continuing corporation), or in case of any sale,
lease, or conveyance to another corporation of the property and assets of any
nature of the Company as an entirety or substantially as an entirety, such
successor, leasing, or purchasing corporation, as the case may be, shall (i)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter to receive upon exercise of this Warrant solely the kind and
amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such consolidation, merger, sale, lease, or
conveyance by a holder of the number of shares of Common Stock for which this
Warrant might have been exercised immediately prior to such consolidation,
merger, sale, lease, or conveyance, and (ii) make effective provision in its
certificate of incorporation or otherwise, if necessary, to effect such
agreement. Such agreement shall provide for adjustments which shall be as nearly
equivalent as practicable to the adjustments in Section 5.
(b) In case of any reclassification or change of the shares of
Common Stock issuable upon exercise of this Warrant (other than a change in par
value or from no par value to a specified par value, or as a result of a
subdivision or combination, but including any change in the shares into two or
more classes or series of shares), or in case of any consolidation or merger of
another corporation into the Company in which the Company is the continuing
corporation and in which there is a reclassification or change (including a
change to the right to receive cash or other property) of the shares of Common
Stock (other than a change in par value, or from no par value to a specified par
value, or as a result of a subdivision or combination, but including any change
in the shares into two or more classes or series of shares), the Holder shall
have the right thereafter to receive upon exercise of this Warrant solely the
kind and amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such reclassification, change,
consolidation, or merger by a holder of the number of shares of Common Stock for
which this Warrant might have been exercised immediately prior to such
reclassification, change, consolidation, or merger. Thereafter, appropriate
provision shall be made for adjustments which shall be as nearly equivalent as
practicable to the adjustments in Section 5.
(c) The above provisions of this Section 6 shall similarly
apply to successive reclassifications and changes of shares of Common Stock and
to successive consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose to:
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(a) pay any dividend or make any distribution on shares of
Common Stock in shares of Common Stock or make any other distribution (other
than regularly scheduled cash dividends which are not in a greater amount per
share than the most recent such cash dividend) to all holders of Common Stock;
or
(b) issue any rights, warrants, or other securities to all
holders of Common Stock entitling them to purchase any additional shares of
Common Stock or any other rights, warrants, or other securities; or
(c) effect any reclassification or change of outstanding
shares of Common Stock, or any consolidation, merger, sale, lease, or conveyance
of property, described in Section 6 hereof; or
(d) effect any liquidation, dissolution, or
winding-up of the Company; or
(e) take any other action which would cause an
adjustment to the Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by certified mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined, (ii) the date on which any
such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up, or (iii) the date of such action which would require
an adjustment to the Exercise Price.
8. The issuance of any shares or other securities upon the exercise
of this Warrant, and the delivery of certificates or other instruments
representing such shares or other securities, shall be made without charge to
the Holder for any tax or other charge in respect of such issuance. The Company
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue and delivery of any certificate in a name
other than that of the Holder and the Company shall not be required to issue or
deliver any such certificate unless and until the person or persons requesting
the issue thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
11
<PAGE>
9. (a) If, at any time following the date of issuance of this
Warrant, the Company shall file a registration statement for the Company's
initial public offering with the Securities and Exchange Commission (the
"Commission") while any Registrable Securities (as hereinafter defined) are
outstanding, the Company shall, at the Company's sole expense (other than the
fees and disbursements of counsel for the then holders of any Registrable
Securities (the "Eligible Holders") and the underwriting discounts, if any,
payable in respect of the Registrable Securities sold by any Eligible Holder),
register or qualify all of the Registrable Securities of any Eligible Holders,
all to the extent necessary to permit the public offering and sale of the
Registrable Securities through the facilities of all securities exchanges and
the over-the-counter markets on which the Company's securities are traded, and
will use its best efforts through its officers, directors, auditors, and counsel
to cause such registration statement to become effective as promptly as
practicable. As used herein, "Registrable Securities" shall mean the Warrant
Shares, if any, which, in each case, have not been previously sold pursuant to a
registration statement or Rule 144 promulgated under the Act.
(b) If, at any time following the date of issuance of this
Warrant, the Company shall file a registration statement (other than for the
Company's initial public offering or any registration statement on Form S-4,
Form S-8, or any successor form) with the Commission while any Registrable
Securities are outstanding, and for any reason the Eligible Holders will not
otherwise have as of the effective date of such registration statement, the
benefit of an effective registration statement, including all required
amendments and supplements, filed pursuant to Section 9(a) or 9(c) hereof,
registering for sale the Registrable Securities, the Company shall give all the
Eligible Holders at least 30 days prior written notice of the filing of such
registration statement. If requested by any Eligible Holder in writing within 20
days after receipt of any such notice, the Company shall, at the Company's sole
expense (other than the fees and disbursements of counsel for the Eligible
Holders and the underwriting discounts, if any, payable in respect of the
Registrable Securities sold by any Eligible Holder), register or qualify all or,
at each Eligible Holder's option, any portion of the Registrable Securities of
any Eligible Holders who shall have made such request, concurrently with the
registration of such other securities, all to the extent necessary to permit the
public offering and sale of the Registrable Securities through the facilities of
all securities exchanges and the over-the-counter markets on which the Company's
securities are traded, and will use its best efforts through its officers,
directors, auditors, and counsel to cause such registration statement to become
effective as promptly as practicable. Notwithstanding the foregoing, if the
managing underwriter of any such offering shall advise the Company in writing
that, in its opinion, the distribution of all or a portion of the Registrable
Securities requested to be included
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<PAGE>
in the registration concurrently with the securities being registered by the
Company would materially adversely affect the distribution of such securities by
the Company for its own account, then any Eligible Holder who shall have
requested registration of his or its Registrable Securities shall not be
entitled to have such Eligible Holder's Registrable Securities (or the portions
thereof so designated by the managing underwriter) included in such registration
statement, provided that no such exclusion or reduction shall be made as to any
Registrable Securities if any securities of the Company are included in such
registration statement for the account of any person other than the Company and
any Eligible Holder unless the securities so included in such registration
statement for each such other person or persons requesting registration shall
have been reduced by the same proportion (based upon the total amount of
securities for which each person is entitled to request registration in such
registration statement) as the Registrable Securities which were requested to be
included in such registration were reduced.
(c) If, at any time after 12 months after the effective date
of the Company's initial public offering, and for any reason the Eligible
Holders do not otherwise have as of such date the benefit of an effective
registration statement, including all required amendments and supplements
thereto, filed pursuant to Section 9(a) or 9(b) hereof registering for sale the
Registrable Securities, the Company shall receive a written request, from
Eligible Holders who in the aggregate own (or which upon exercise of all
Warrants then outstanding would own) a majority of the total number of shares of
Common Stock then included (or upon such exercise would be included) in the
Registrable Securities then outstanding ("Majority Holders"), to register the
sale of all or part of such Registrable Securities, the Company shall, as
promptly as practicable, prepare and file with the Commission a registration
statement sufficient to permit the public offering and sale of the Registrable
Securities through the facilities of all securities exchanges and the
over-the-counter markets on which the Company's securities are traded, and will
use its best efforts through its officers, directors, auditors, and counsel to
cause such registration statement to become effective as promptly as
practicable; provided, however, that the Company shall only be obligated to file
one such registration statement for which all expenses incurred in connection
with such registration (other than the fees and disbursements of counsel for the
Eligible Holders and underwriting discounts, if any, payable in respect of the
Registrable Securities sold by the Eligible Holders) shall be borne by the
Company and one additional such registration statement for which all such
expenses shall be paid by the Eligible Holders electing to include Registrable
Securities in such Registration Statement. The Company shall not be obligated to
effect any registration of its securities pursuant to this Section 9(c) within
six months after the effective date of a previous registration statement
prepared and filed in accordance with Section 9(a) (in which Registrable
13
<PAGE>
Securities could have been included), 9(b) or 9(c). Within ten business days
after receiving any request contemplated by this Section 9(b), the Company shall
send written notice to all the other Eligible Holders, advising each of them
that the Company is proceeding with such registration and offering to include
therein all or any portion of any such other Eligible Holder's Registrable
Securities, provided that the Company receives a written request to do so from
such Eligible Holder within 20 days after receipt by him or it of the Company's
notice.
(d) In the event of a registration pursuant to the provisions
of this Section 9, the Company shall use its best efforts to cause the
Registrable Securities so registered to be registered or qualified for sale
under the securities or blue sky laws of such jurisdictions as the Holder or
such holders may reasonably request; provided, however, that the Company shall
not by reason of this Section 9(d) be required to qualify to do business in any
state in which it is not otherwise required to qualify to do business or to file
a general consent to service of process.
(e) The Company shall keep effective any registration or
qualification contemplated by this Section 9 and shall from time to time amend
or supplement each applicable registration statement, preliminary prospectus,
final prospectus, application, document, and communication for such period of
time as shall be required to permit the Eligible Holders to complete the offer
and sale of the Registrable Securities covered thereby. The Company shall in no
event be required to keep any such registration or qualification in effect for a
period in excess of nine months from the date on which the Eligible Holders are
first free to sell such Registrable Securities taking into account any lock-up
agreement agreed to by such Holder, and the underwriter of the Company's initial
public offering; provided, however, that, if the Company is required to keep any
such registration or qualification in effect with respect to securities other
than the Registrable Securities beyond such period, the Company shall keep such
registration or qualification in effect as it relates to the Registrable
Securities for so long as such registration or qualification remains or is
required to remain in effect in respect of such other securities.
(f) In the event of a registration pursuant to the provisions
of this Section 9, the Company shall furnish to each Eligible Holder such
reasonable number of copies of the registration statement and of each amendment
and supplement thereto (in each case, including all exhibits), such reasonable
number of copies of each prospectus contained in such registration statement and
each supplement or amendment thereto (including each preliminary prospectus),
all of which shall conform to the requirements of the Act and the rules and
regulations thereunder, and such other documents, as any Eligible Holder may
reasonably request to facilitate the
14
<PAGE>
disposition of the Registrable Securities included in such registration.
(g) In the event of a registration pursuant to the provisions
of this Section 9, the Company shall furnish each Eligible Holder of any
Registrable Securities so registered with an opinion of its counsel (reasonably
acceptable to the Eligible Holders) to the effect that (i) the registration
statement has become effective under the Act and no order suspending the
effectiveness of the registration statement, preventing or suspending the use of
the registration statement, any preliminary prospectus, any final prospectus, or
any amendment or supplement thereto has been issued, nor to the best knowledge
of such counsel has the Commission or any securities or blue sky authority of
any jurisdiction instituted or threatened to institute any proceedings with
respect to such an order, and (ii) the registration statement and the prospectus
included therein and any supplements or amendments thereto (except for financial
statements and related schedules and documents incorporated thereto by
reference, as to which such counsel need express no opinion) comply as to form
in all material respects with the Act, and the rules and regulations of the
Commission thereunder (except for financial statements and related schedules, as
to which counsel need express no opinion). In addition, such counsel shall state
that it has participated in conferences with officers and other representatives
of the Company, and representatives of independent accountants for the Company,
at which conferences such counsel made inquiries of such officers,
representatives and accountants; discussed the contents of the preliminary
prospectus; the registration statement; and the prospectus and related matters
were discussed and, although such counsel is not passing and does not assume any
responsibility for the accuracy, completeness or fairness, the statements
contained in the preliminary prospectus, the registration statement and the
prospectus, on the basis of the foregoing, no facts have come to the attention
of such counsel which lead it to believe that either the registration statement
or on any amendment thereto, at the time such registration statement or
amendment became effective or the preliminary prospectus or prospectus or
amendment or any supplement thereto as of the date of such opinion contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
(it being understood that such counsel need express no opinion with respect to
the financial statements and schedules and other financial and statistical data
included in the preliminary prospectus, the registration statement, or
prospectus). The Company shall also furnish to each Eligible Holder a cold
comfort letter from the independent certified public accountants of the Company
in customary form and substance.
(h) In the event of a registration pursuant to the provision
of this Section 9, the Company and each Eligible Holder shall enter into a
cross-indemnity agreement and a
15
<PAGE>
contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses, and customary closing
conditions, including, without limitation, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any Registrable
Securities.
(i) The Company agrees that, after the completion of its
initial public offering and until all the Registrable Securities have been sold
under a registration statement or pursuant to Rule 144 under the Act, it shall
keep current in filing all reports, statements and other materials required to
be filed with the Commission to permit holders of the Registrable Securities to
sell such securities under Rule 144.
(j) Except for rights granted to holders of the Warrants, any
warrants issued or issuable to Barington or its designees in connection with
this Offering or any other public or private offering, and the Notes, the
Company will not grant to any persons the right to request the Company to
register any securities of the Company without the written consent of the
Majority Holders, provided that the Company may grant such registration rights
to other persons so long as such rights are pari passu or subordinate to the
rights of the holders of the Registrable Securities.
10. (a) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless each Eligible Holder, its officers,
directors, partners, employees, agents, and counsel, and each person, if any,
who controls any such person within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, from and against any and all loss, liability,
charge, claim, damage, and expense whatsoever (which shall include, for all
purposes of this Section 10, without limitation, reasonable attorneys' fees and
any and all expense whatsoever incurred in investigating, preparing, or
defending against any litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation), as and when incurred, arising out of, based upon, or in connection
with, (i) any breach of any representation, warranty, covenant, or agreement of
the Company contained in any of the Notes or Warrants, or (ii) any untrue
statement or alleged untrue statement of a material fact contained (A) in any
registration statement, preliminary prospectus, or final prospectus (as from
time to time amended and supplemented), or any amendment or supplement thereto,
relating to the sale of any of the Registrable Securities, or (B) in any
application or other document or communication (in this Section 10 collectively
called an "application") executed by or on behalf of the Company or based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to register or qualify any of the Registrable Securities
under the securities or blue sky laws
16
<PAGE>
thereof or filed with the Commission or any securities exchange; or any omission
or alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, unless such statement
or omission was made in reliance upon and in conformity with written information
furnished to the Company with respect to such Eligible Holder by or on behalf of
such person expressly for inclusion in any registration statement, preliminary
prospectus, or final prospectus, or any amendment or supplement thereto, or in
any application, as the case may be. The foregoing agreement to indemnify shall
be in addition to any liability the Company may otherwise have, including
liabilities arising under any of the Notes or Warrants.
If any action is brought against any Eligible Holder or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of such person (an "indemnified party") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
indemnified party or parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve the
Company from any liability under this Section 10(a) unless the Company shall
have been materially prejudiced by such failure or relieve the Company from any
liability other than pursuant to this Section 10(a)) and the Company shall
promptly assume the defense of such action, including the employment of counsel
(reasonably satisfactory to such indemnified party or parties) and payment of
expenses. Such indemnified party or parties shall have the right to employ its
or their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless the
employment of such counsel shall have been authorized in writing by the Company
in connection with the defense of such action or the Company shall not have
employed counsel reasonably satisfactory to such indemnified party or parties to
have charge of the defense of such action or such indemnified party or parties
shall have reasonably concluded that there may be one or more legal defenses
available to it or them or to other indemnified parties which are different from
or additional to those available to the Company, in any of which events such
fees and expenses shall be borne by the Company and the Company shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties. Anything in this Section 10 to the contrary notwithstanding,
the Company shall not be liable for any settlement of any such claim or action
effected without its written consent, which shall not be unreasonably withheld.
The Company agrees promptly to notify the Eligible Holders of the commencement
of any litigation or proceedings against the Company or any of its officers or
directors in connection with the sale of any Registrable Securities or any
preliminary prospectus, prospectus, registration statement, or amendment or
supplement thereto, or any application relating to any sale of any Registrable
Securities.
17
<PAGE>
(b) The Holder agrees to indemnify and hold harmless the
Company, each director of the Company, each officer of the Company who shall
have signed any registration statement covering Registrable Securities held by
the Holder, each other person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, and its
or their respective counsel, to the same extent as the foregoing indemnity from
the Company to the Eligible Holders in Section 10(a), but only with respect to
statements or omissions, if any, made in any registration statement, preliminary
prospectus, or final prospectus (as from time to time amended and supplemented),
or any amendment or supplement thereto, or in any application, in reliance upon
and in conformity with written information furnished to the Company with respect
to the Holder by or on behalf of the Holder expressly for inclusion in any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be. If
any action shall be brought against the Company or any other person so
indemnified based on any such registration statement, preliminary prospectus, or
final prospectus, or any amendment or supplement thereto, or in any application,
and in respect of which indemnity may be sought against the Holder pursuant to
this Section 10(b), the Holder shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the indemnified parties, by the provisions of Section
10(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 10(a) or
10(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Warrant expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company, and its or their
respective counsel), as one entity, and the Eligible Holders of the Registrable
Securities included in such registration in the aggregate (including for this
purpose any contribution by or on behalf of an indemnified party), as a second
entity, shall contribute to the losses, liabilities, claims, damages, and
expenses whatsoever to which any of them may be subject, on the basis of
relevant equitable considerations such as the relative fault of the Company and
such Eligible Holders in connection with the facts which resulted in such
losses, liabilities, claims, damages, and expenses. The relative fault, in the
case of an untrue statement, alleged untrue statement, omission, or alleged
omission, shall be determined by, among other things, whether such statement,
alleged statement, omission, or alleged omission relates to information supplied
by the Company or by
18
<PAGE>
such Eligible Holders, and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement, alleged
statement, omission, or alleged omission. The Company and the Holder agree that
it would be unjust and inequitable if the respective obligations of the Company
and the Eligible Holders for contribution were determined by pro rata or per
capita allocation of the aggregate losses, liabilities, claims, damages, and
expenses (even if the Eligible Holders and the other indemnified parties were
treated as one entity for such purpose) or by any other method of allocation
that does not reflect the equitable considerations referred to in this Section
10(c). In no case shall any Eligible Holder be responsible for a portion of the
contribution obligation imposed on all Eligible Holders in excess of its pro
rata share based on the number of shares of Common Stock owned (or which would
be owned upon exercise of all Registrable Securities) by it and included in such
registration as compared to the number of shares of Common Stock owned (or which
would be owned upon exercise of all Registrable Securities) by all Eligible
Holders and included in such registration. No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
representation. For purposes of this Section 10(c), each person, if any, who
controls any Eligible Holder within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee,
agent, and counsel of each such Eligible Holder or control person shall have the
same rights to contribution as each Eligible Holder or control person and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, each officer of the Company who shall
have signed any such registration statement, each director of the Company, and
its or their respective counsel shall have the same rights to contribution as
the Company, subject in each case to the provisions of this Section 10(c).
Anything in this Section 10(c) to the contrary notwithstanding, no party shall
be liable for contribution with respect to the settlement of any claim or action
effected without its written consent. This Section 10(c) is intended to
supersede any right to contribution under the Act, the Exchange Act or
otherwise.
11. Unless registered pursuant to the provisions of Section 9
hereof, the Warrant Shares issued upon exercise of the Warrants shall be subject
to a stop transfer order and the certificate or certificates evidencing such
Warrant Shares shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY
INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR
OTHERWISE TRANSFERRED UNLESS
19
<PAGE>
(1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER
THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY
RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES,
WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE
COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED,
ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE
SECURITIES LAWS."
12. Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction, or mutilation of any Warrant (and upon surrender of
any Warrant if mutilated), including an affidavit of the Holder thereof that
this Warrant has been lost, stolen, destroyed or mutilated, together with an
indemnity against any claim that may be made against the Company on account of
such lost, stolen, destroyed or mutilated Warrant, and upon reimbursement of the
Company's reasonable incidental expenses, the Company shall execute and deliver
to the Holder thereof a new Warrant of like date, tenor, and denomination.
13. The Holder of any Warrant shall not have solely on account of
such status, any rights of a stockholder of the Company, either at law or in
equity, or to any notice of meetings of stockholders or of any other proceedings
of the Company, except as provided in this Warrant.
14. This Warrant shall be construed in accordance with the laws of
the State of New York applicable to contracts made and performed within such
State, without regard to principles governing conflicts of law.
15. The Company irrevocably consents to the jurisdiction of the
courts of the State of New York and of any federal court located in such State
in connection with any action or proceeding arising out of or relating to this
Warrant, any document or instrument delivered pursuant to, in connection with or
simultaneously with this Warrant, or a breach of this Warrant or any such
document or instrument. In any such action or proceeding, the Company waives
personal service of any summons, complaint or other process and agrees that
service thereof may be made in accordance with Section 7(b) of the Subscription
Agreement. Within 30 days after such service, or such other time as may be
mutually agreed upon in writing by the
20
<PAGE>
attorneys for the parties to such action or proceeding, the Company shall appear
to answer such summons, complaint or other process.
16. Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex or similar telecommunications equipment) against receipt to the party to
whom it is to be given, (i) if to the Company, at One Lower Ragsdale Drive,
I-250, Monterey, CA 93940, Attention: President, (ii) if to the Holder, at its
address set forth on the first page hereof, or (iii) in either case, to such
other address as the party shall have furnished in writing in accordance with
the provisions of this Section 16. Notice to the estate of any party shall be
sufficient if addressed to the party as provided in this Section 16. Any notice
or other communication given by certified mail shall be deemed given at the time
of certification thereof, except for a notice changing a party's address which
shall be deemed given at the time of receipt thereof. Any notice given by other
means permitted by this Section 16 shall be deemed given at the time of receipt
thereof.
17. No course of dealing and no delay or omission on the part of the
Holder in exercising any right or remedy shall operate as a waiver thereof or
otherwise prejudice the Holder's rights, powers or remedies. No right, power or
remedy conferred by this Warrant upon the Holder shall be exclusive of any other
right, power or remedy referred to herein or now or hereafter available at law,
in equity, by statute or otherwise, and all such remedies may be exercised
singly or concurrently.
21
<PAGE>
18. This Warrant may be amended or any of its provisions waived only
by a written consent or consents executed by the Company and Holders of Warrants
representing a majority of the Warrants issued to investors pursuant to the
Memorandum. Any amendment or waiver shall be binding upon all future Holders.
Dated: __________, 1996
THINKING TOOLS, INC.
By: _____________________________
Name:
Title:
- --------------------------------------
_______________, Secretary
22
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, _____________________ hereby sells, assigns, and
transfers unto _________________ a Warrant to purchase __________ shares of
Common Stock, $.001 par value per share, of Thinking Tools, Inc. (the
"Company"), together with all right, title, and interest therein, and does
hereby irrevocably constitute and appoint ______________________ attorney to
transfer such Warrant on the books of the Company, with full power of
substitution.
Dated: _________________
Signature____________________
_____________________________
Signature Guarantee
NOTICE
The signature on the foregoing Assignment must correspond to the
name as written upon the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
23
<PAGE>
To: Thinking Tools, Inc.
One Lower Ragsdale Drive, I-250
Monterey, CA 93940
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase
_______ Warrant Shares covered by the within Warrant, and tenders payment
herewith in the aggregate amount of $________, including (i) $_______ by
certified or bank cashier's check, (ii) $_________ by deemed prepayment of Notes
held by _________, and/or (iii) cancellation of Warrants to purchase ___ Warrant
Shares based upon a Maximum Number (as therein defined) of ______, in accordance
with the terms thereof, and requests that certificates for such securities be
issued in the name of, and delivered to:
- ----------------------------------------------------------------
- ----------------------------------------------------------------
- ----------------------------------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant and the remaining portion of the within Warrant be
not cancelled in payment of the Exercise Price, that a new Warrant for the
balance of the Warrant Shares covered by the within Warrant be registered in the
name of, and delivered to, the undersigned at the address stated below.
- ----------------------------------------------------------------
- ----------------------------------------------------------------
- ----------------------------------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
Dated: _________________
Name:___________________
(Print)
24
<PAGE>
Address:________________________________________________________
------------------------
(Signature)
------------------------
(Signature Guarantee)
------------------------
(Signature Guarantee)
25
THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THIS NOTE, NOR
ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
BORROWER RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE BORROWER, THAT THIS NOTE
MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER
CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS.
THINKING TOOLS, INC.
10% Senior Secured Promissory Note
$__0,000.00 __, 1996
New York, New York
THINKING TOOLS, INC., a Delaware corporation (the "Borrower"), for
value received, hereby promises to pay to ___________________ with an address at
_______________________, ________________, or registered assigns (the "Holder"),
the principal amount of __________ thousand dollars ($__0,000.00) on the
Maturity Date (as defined below), and to pay interest on the unpaid principal
balance hereof at the rate of 10% per annum (calculated on the basis of a
360-day year consisting of twelve 30-day months) on the 1st day of each of
__________, __________, __________ and __________1 commencing December 1, 1996
and on the Maturity Date (each such date being an "Interest Payment Date") all
as hereafter further provided.
In no event shall any interest to be paid hereunder exceed the
maximum rate permitted by law. In any such event, this Note shall automatically
be deemed amended to permit interest charges at an amount equal to, but no
greater than, the maximum rate permitted by law.
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1 Beginning 3 months plus from the date of note and every three months.
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1. Offering, Subscription Agreement and Security.
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This Note was issued by the Borrower in an offering (the "Offering")
of Units, each whole Unit consisting of one 10% Senior Secured Promissory Note
in the principal amount of $100,000 and a warrant to purchase 25,000 shares of
Common Stock, $.001 par value per share, of the Company (the "Common Stock"),
subject to adjustment as provided therein, made pursuant to a certain
Confidential Private Placement Memorandum dated August 15, 1996, as it may be
supplemented and amended (the "Memorandum"), and a subscription agreement (the
"Subscription Agreement") between the Borrower and the original Holder hereof.
The series of promissory notes issued in connection with the Offering is
referred to hereafter as the "Notes" and the warrants issued in connection with
the Offering are referred to hereafter as the "Warrants." The Notes are
collateralized by a security interest in certain of the assets of the Borrower
pursuant to a security agreement (the "Security Agreement") between the Borrower
and Barington Capital Group, L.P., as secured party and agent for the Holders of
the Notes (the "Secured Party"). The Notes also shall be entitled to the
benefits of any subordination and pledge agreement (the "Subordination
Agreement") executed and delivered by the holders (the "Junior Holders") of any
Junior Debt (as hereinafter defined).
2. Payments.
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(a) Principal of, and any accrued and unpaid interest on, this
Note shall be due and payable in full on the Maturity Date. The "Maturity Date"
shall be the date which is the earliest of (i) August 28, 1997 subject to
extension as provided below,(the "Stated Maturity Date"), (ii) the day after the
date of the closing of the initial public offering of securities of the Borrower
or any subsidiary of the Borrower pursuant to a registration statement filed
with the Securities and Exchange Commission under the Act, and (iii) the date of
the closing of a sale (or the closing of the last of a series of sales) of
securities of the Borrower or any subsidiaries of the Borrower after the date
hereof (other than pursuant to the Memorandum), the gross proceeds of which, in
the aggregate, equal or exceed $1,825,000. The Company may elect to extend the
Stated Maturity Date for a period of six months (the "Initial Extension"),
during which interest shall continue to accrue on the Notes and the number of
shares of Common Stock purchasable upon exercise of the Warrants shall be
adjusted as provided therein. Following expiration of the Initial Extension, the
Company may elect to extend the Stated Maturity Date for an additional period of
up to six months, during which interest shall continue to accrue on the Notes
and the number of shares of Common Stock purchasable upon exercise of the
Warrants, and the exercise price thereof, shall be adjusted as provided therein,
and Barington shall exercise such powers as are
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provided in Section 2 of the Subscription Agreement. The Company shall be deemed
to have elected to extend the Stated Maturity Date through any date at which the
Notes and any accrued interest thereon remain unpaid.
(b) Interest on this Note shall accrue from the most recent
Interest Payment Date to which interest has been paid or, if no interest has
been paid on this Note, from August 28, 1996, to but excluding the next Interest
Payment Date, and shall be payable in arrears on each Interest Payment Date.
(c) If any Interest Payment Date or the Maturity Date would
fall on a day that is not a Business Day (as defined below), the payment due on
such Interest Payment Date or Maturity Date will be made on the next succeeding
Business Day with the same force and effect as if made on the Interest Payment
Date or the Maturity Date, as the case may be. "Business Day" means any day
which is not a Saturday or Sunday and is not a day on which banking institutions
are generally authorized or obligated to close in the City of New York, New
York.
(d) The Borrower may, at its option, prepay all or any part of
the principal of this Note, without payment of any premium or penalty. The
Holder may elect upon written notice to the Borrower at any time to apply any or
all of the principal or interest then outstanding under this Note to payment of
the exercise price due upon exercise of any Warrant; such application of amounts
outstanding hereunder shall be deemed to be prepayment by the Borrower of such
amounts. All payments on this Note shall be applied first to accrued interest
hereon and the balance to the payment of principal hereof.
(e) Payments of principal and interest on this Note shall be
made by check sent to the Holder's address set forth above or to such other
address as the Holder may designate for such purpose from time to time by
written notice to the Borrower, in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts.
(f) The obligations to make the payments provided for in this
Note are absolute and unconditional and not subject to any defense, set-off,
counterclaim, rescission, recoupment or adjustment whatsoever. The Borrower
hereby expressly waives demand and presentment for payment, notice of
non-payment, notice of dishonor, protest, notice of protest and diligence in
taking any action to collect any amount called for hereunder, and shall be
directly and primarily liable for the payment of all sums owing and to be owing
hereon, regardless of and without any notice, diligence, act or omission with
respect to the collection of any amount called for hereunder.
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3. Ranking of Note.
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(a) The Borrower, for itself, its successors and assigns,
covenants and agrees that the payment of the principal of and interest on this
Note is senior in right of payment to the payment of all existing and future
Junior Debt (as hereinafter defined). "Junior Debt" shall mean all existing and
future Indebtedness (as hereinafter defined) other than (i) the Indebtedness
represented by the Notes, and (ii) capital lease obligations existing on the
date hereof. "Indebtedness" shall mean (A) any liability of the Borrower for
borrowed money, (x) evidenced by a note, debenture, bond or other instrument of
indebtedness (including, without limitation, a purchase money obligation),
including any given in connection with the acquisition of property, assets or
service, or (y) for the payment of rent or other amounts relating to capitalized
lease obligations; (B) any liability of others described in Section 3(a)(A)
which the Borrower has guaranteed or which is otherwise its legal liability; and
(C) any modification, renewal, extension, replacement or refunding of any such
liability described in Section 3(a)(A) or (B); provided, that Indebtedness does
not include unsecured trade credit or up to $70,000 of indebtedness to Fred
Knoll existing as of the date hereof.
(b) The Borrower covenants and agrees to use its best efforts
to cause any current holder of Junior Debt and to cause any future holder of
Junior Debt to execute such subordination agreements, instruments or waivers as
may be reasonably necessary in the opinion of the Secured Party to reflect the
terms set forth herein.
(c) Except as provided in the Memorandum, until the payment in
full of all amounts of principal of and interest on the Notes, and all other
amounts owing under the Notes, the Security Agreement and the Subordination
Agreement, no payment may be made with respect to the principal of or interest
on or other amounts owing with respect to any Junior Debt, or in respect of any
redemption, retirement, purchase or other acquisition thereof.
(d) Upon any payment or distribution of the Collateral (as
defined in the Security Agreement) of the Borrower to creditors upon
dissolution, total or partial liquidation or reorganization of or similar
proceeding relating to the Borrower, the Holders of the Notes will be entitled
to receive payment in full before any holder of Junior Debt is entitled to
receive any payment.
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4. Covenants.
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The Borrower covenants and agrees with the Holder that, so long as
any amount remains unpaid on the Notes, unless the consent of the Holders of a
majority of the principal amount outstanding under the Notes is obtained, the
Borrower:
(a) Shall not create, incur, or suffer to exist any
Indebtedness except (i) the Indebtedness represented by the Notes, (ii) Junior
Debt, the holders of which have duly executed a Subordination Agreement,
substantially in the form of Exhibit E to the Memorandum, (iii) an aggregate
total of $35,565.81 of capital lease obligations existing as of the date hereof,
and (iv) trade debt.
(b) Shall not create, incur or suffer to exist any mortgage,
lien, pledge, charge, security interest or encumbrance of any kind on any of its
property or assets (collectively, "Liens"), except (i) the Liens of the Security
Agreement, (ii) Liens for taxes not yet due or contested in good faith with
appropriate reserves maintained on the books of such Borrower, (iii) carriers',
warehousemen's, mechanics', and similar Liens and purchase money Liens arising
in the ordinary course of business which are not overdue for more than 90 days
or are being contested in good faith, (iv) easements, rights of way, zoning
restrictions, and similar Liens on real property, which in the aggregate are not
material and do not materially detract from the use of such property, (v) Liens
for Indebtedness permitted to be incurred or in existence under Sections
4(a)(ii),(iii),(iv), and (v)landlord Liens with respect to real property leased
by such Borrower.
(c) Shall not create, acquire, or maintain any subsidiaries
other than those referred to under the heading "The Company" in the Memorandum.
(d) Except as contemplated by the Memorandum, shall not pay
any dividend or make any distribution on, or purchase, redeem, or retire, any
shares of its capital stock or other securities or any warrants, options, or
other rights to reacquire any such shares or other securities, except that the
Borrower may pay dividends payable solely in shares of its capital stock.
(e) Shall not change its primary line of business.
(f) Except as contemplated by the Memorandum, shall not (i)
enter into any merger or consolidation, (ii) liquidate, wind up its affairs or
dissolve, or (iii) except in the ordinary course of business, convey, sell,
lease, transfer or otherwise dispose of, or purchase or acquire, any business,
assets, capital stock (other than that issuable upon exercise of
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stock options pursuant to the Company's 1996 Stock Option Plan upon exercise of
the options described in Section 1 hereof) or other property.
(g) Except as contemplated by the Memorandum, shall not,
directly or indirectly, enter into any transaction with or for the benefit of an
affiliate (other than reasonable compensation, consistent with Section 4(h), for
services as an officer, director, partner or employee).
(h) Shall not in any manner increase the compensation of its
existing officers or directors and partners from the levels in effect on the
date of issuance of this Note other than (i) in the ordinary course of business
and in an amount not to exceed, in the aggregate, 5% annually or (ii) as
provided for in the Memorandum.
(i) Shall use the proceeds of the Offering in
substantially the manner specified in the Memorandum.
(j) Shall deliver to each Holder and to the
Secured Party:
(i) as soon as available, and in any event
within 50 days after the end of each of the first three quarterly fiscal periods
of each fiscal year of the Borrower or, if the Borrower is subject to the
periodic reporting requirements set forth in Sections 13 or 15(d) of the
Exchange Act, when such reports are filed with the Commission, whichever is
later, consolidated statements of income, retained earnings and cash flow of the
Borrower, for such period and for the period from the beginning of the
respective fiscal year to the end of such period, and the related consolidated
balance sheet of the Borrower as at the end of such period setting forth in the
case of each such statement in comparative form the corresponding figures for
the corresponding period in the preceding fiscal year, accompanied by a
certificate of the chief financial officer of the Borrower, which certificate
shall state that (A) such financial statements fairly present in all material
respects the financial position and results of operations of the Borrower, all
in accordance with generally accepted accounting principles consistently
applied, and (B) no Default (as hereinafter defined) has occurred and is
continuing or, if any Default has occurred and is continuing, a description
thereof in reasonable detail and of the action the Borrower has taken or
proposes to take with respect thereto;
(ii) as soon as available and in any event
within 95 days after the end of each fiscal year of the Borrower or, if the
Borrower is subject to the periodic reporting requirements set forth in Sections
13 or 15(d) of the Exchange Act, when such reports are filed with the
Commission, whichever is later, consolidated statements of income, retained
earnings
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and cash flow of the Borrower for such fiscal year, and the related consolidated
balance sheet of the Borrower as at the end of such fiscal year, setting forth
in the case of each such statement in comparative form the corresponding figures
for the preceding fiscal year, and accompanied by (A) an opinion thereon of
independent certified public accountants of recognized national standing, which
opinion shall state that such consolidated financial statements present fairly,
in all material respects, the financial position and results of operations of
the Borrower in conformity with generally accepted accounting principles
consistently applied, and (B) a certificate of the chief financial officer of
the Borrower stating that no Default has occurred and is continuing or, if any
Default has occurred and is continuing, a description thereof in reasonable
detail and of the action the Borrower has taken or proposes to take with respect
thereto;
(iii) promptly upon their becoming available, copies of
all registration statements which the Borrower shall have filed with the
Securities and Exchange Commission (or any governmental agency substituted
therefor) or any national securities exchange;
(iv) promptly after the Borrower shall obtain knowledge
of such, written notice of all legal or arbitral proceedings, and of all
proceedings by or before any governmental or regulatory authority or agency, and
each material development in respect of such legal or other proceedings,
affecting the Borrower, except proceedings which, if adversely determined, would
not have a material adverse effect on the Borrower; and
(v) promptly after the Borrower shall obtain knowledge
of the occurrence of any Event of Default (as hereinafter defined) or any event
which with notice or lapse of time or both would become an Event of Default (an
Event of Default or such other event being a "Default"), a notice specifying
that such notice is a "Notice of Default" and describing such Default in
reasonable detail, and, in such Notice of Default or as soon thereafter as
practicable, a description of the action the Borrower has taken or proposes to
take with respect thereto.
5. Events of Default.
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The occurrence of any of the following events shall constitute an
event of default (an "Event of Default"):
(a) A default in the payment of the principal on any Note,
when and as the same shall become due and payable.
(b) A default in the payment of any interest on
any Note, when and as the same shall become due and payable,
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which default shall continue for fifteen business days after the date fixed for
the making of such interest payment.
(c) A default in the performance, or a breach, of any of the
covenants of the Borrower contained in Section 3 or 4(a), (d), (e), (f), (g),
(h) or (i) of this Note; or a default in the performance, or a breach, of any of
the covenants contained in Section 4(b), (c) or (j) of this Note and continuance
of such default or breach for a period of 15 days after receipt of notice from
the Holder as to such breach or after such time as the Borrower had or should
have had knowledge of such breach.
(d) A default in the performance, or a breach, of any other
covenant or agreement of the Borrower in this Note and continuance of such
default or breach for a period of 45 days after receipt of notice from the
Holder as to such breach or after the Borrower had or should have had knowledge
of such breach.
(e) A default in the performance, or a breach, of any covenant
or agreement of the Borrower under the Security Agreement or any Subordination
Agreement which default or breach shall have continued beyond any grace or cure
period provided therein.
(f) A default or event of default which remains uncured
following any applicable cure period shall have occurred with respect to any
Junior Debt or under the Security Agreement or any Subordination Agreement.
(g) A default or event of default which remains uncured
following any applicable cure period shall have occurred (A) with respect to any
Indebtedness or (B) under any other material agreement of any Debtor (as such
term is defined in the Security Agreement).
(h) Any representation, warranty or certification made by the
Borrower in or pursuant to this Note, the Subscription Agreement, the Security
Agreement, or the Subordination Agreement shall prove to have been false or
misleading as of the date made in any material respect.
(i) A final judgment or judgments for the payment of money in
excess of $50,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals or other bodies having jurisdiction against
the Borrower and the same shall not be discharged (or provision shall not be
made for such discharge), or a stay of execution thereof shall not be procured,
within 60 days from the date of entry thereof and the Borrower shall not, within
such 60-day period, or such longer period during which execution of the same
shall have been stayed, appeal therefrom and cause the execution
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thereof to be stayed during such appeal.
(j) The entry of a decree or order by a court having
jurisdiction adjudging the Borrower a bankrupt or insolvent, or approving a
petition seeking reorganization, arrangement, adjustment or composition of or in
respect of the Borrower, under federal bankruptcy law, as now or hereafter
constituted, or any other applicable federal or state bankruptcy, insolvency or
other similar law, and the continuance of any such decree or order unstayed and
in effect for a period of 60 days; or the commencement by the Borrower of a
voluntary case under federal bankruptcy law, as now or hereafter constituted, or
any other applicable federal or state bankruptcy, insolvency, or other similar
law, or the consent by the Borrower to the institution of bankruptcy or
insolvency proceedings against it, or the filing by the Borrower of a petition
or answer or consent seeking reorganization or relief under federal bankruptcy
law or any other applicable federal or state law, or the consent by the Borrower
to the filing of such petition or to the appointment of a receiver, liquidator,
assignee, trustee, sequestrator or similar official of the Borrower or of any
substantial part of the property of the Borrower, or the making by the Borrower
of an assignment for the benefit of creditors, or the admission by the Borrower
in writing of its inability to pay its debts generally as they become due, or
the taking of corporate action by the Borrower in furtherance of any such
action.
6. Remedies Upon Default.
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(a) Upon the occurrence of an Event of Default referred to in
Section 5(j), the principal amount then outstanding of, and the accrued interest
on, this Note shall automatically become immediately due and payable without
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Borrower. Upon the occurrence of an Event of
Default referred to in Section 5(a) or 5(b), the Holders of not less than 50% in
principal amount of then outstanding Notes (excluding any Notes held by or for
the account of the Borrower or any affiliate of the Borrower), by notice in
writing given to the Borrower, may declare the entire principal amount then
outstanding of, and the accrued interest on, this Note to be due and payable
immediately, and upon any such declaration the same shall become and be due and
payable immediately, without presentation, demand, protest or other formalities
of any kind, all of which are expressly waived by the Borrower. Upon the
occurrence of an Event of Default other than one referred to in Sections 5(a),
(b) and (j), the Secured Party or the Holders of not less than 50% in principal
amount of then outstanding Notes (excluding any Notes held by or for the account
of the Borrower or any affiliate of the Borrower may declare the principal
amount then outstanding of, and the accrued interest on, the Notes to be due and
payable immediately, and upon such declaration the same
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shall become due and payable immediately, without presentation, demand, protest
or other formalities of any kind, all of which are expressly waived by the
Borrower. In any case, the Holder or the Secured Party also may take any action
available to it under the Security Agreement or any instrument, agreement or
other document executed in connection herewith or therewith.
(b) The Holder may institute such actions or proceedings in
law or equity as it shall deem expedient for the protection of its rights and
may prosecute and enforce its claims against all assets of the Borrower, and in
connection with any such action or proceeding shall be entitled to receive from
the Borrower, payment of the principal amount of this Note plus accrued interest
to the date of payment plus reasonable expenses of collection, including,
without limitation, attorneys' fees and expenses.
7. Transfer.
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(a) Any Notes issued upon the transfer of this Note shall be
numbered and shall be registered in a Note Register by the Borrower as they are
issued. The Borrower shall be entitled to treat the registered holder of any
Note on the Note Register as the owner in fact thereof for all purposes and
shall not be bound to recognize any equitable or other claim to or interest in
such Note on the part of any other person, and shall not be liable for any
registration or transfer of Notes which are registered or to be registered in
the name of a fiduciary or the nominee of a fiduciary unless made with the
actual knowledge that a fiduciary or nominee is committing a breach of trust in
requesting such registration or transfer, or with the knowledge of such facts
that its participation therein amounts to bad faith. This Note shall be
transferable only on the books of the Borrower upon delivery thereof to the
Borrower, duly endorsed by the Holder or by his duly authorized attorney or
representative, or accompanied by proper evidence of succession, assignment, or
authority to transfer. In all cases of transfer by an attorney, executor,
administrator, guardian, or other legal representative, duly authenticated
evidence of his or its authority shall be produced. Upon any registration of
transfer, the Borrower shall deliver a new Note or Notes to the person entitled
thereto. This Note may be exchanged, at the option of the Holder thereof, for
another Note, or other Notes of different denominations, of like tenor and
representing in the aggregate a like principal amount, upon surrender to the
Borrower, or its duly authorized agent. Notwithstanding the foregoing, the
Borrower shall have no obligation to cause Notes to be transferred on its books
to any person unless (i) the sale, assignment or transfer of the Notes is
registered under the Act; (ii) the Notes are sold, assigned or transferred in
accordance with all the requirements and limitations of Rule 144 under the Act;
or (iii) such sale, assignment or transfer is otherwise exempt from registration
under the securities laws,
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and the Borrower receives an opinion of counsel to the Holder reasonably
acceptable to the Borrower to such effect.
(b) The Holder acknowledges that he has been advised that this
Note has not been registered under the Act, that the Note is being or has been
issued on the basis of the statutory exemption provided by Section 4(2) of the
Act or Regulation D promulgated thereunder, or both, relating to transactions by
an issuer not involving any public offering, and that the Borrower's reliance
thereon is based in part upon the representations made by the original Holder in
the original Holder's Subscription Agreement executed and delivered in
accordance with the terms of the Offering. The Holder acknowledges that he has
been informed of, or is otherwise familiar with, the nature of the limitations
imposed by the Act and the rules and regulations thereunder on the transfer of
securities. In particular, the Holder agrees that no sale, assignment or
transfer of the Note shall be valid or effective, and the Borrower shall not be
required to give any effect to any such sale, assignment or transfer, unless (i)
the sale, assignment or transfer of the Note is registered under the Act, it
being understood that the Note is not currently registered for sale and that the
Borrower has no obligation or intention to so register the Notes except as
specifically provided herein, or (ii) the Note is sold, assigned or transferred
in accordance with all the requirements and limitations of Rule 144 under the
Act, it being understood that Rule 144 is not available at the time of the
original issuance of this Note for the sale of the Note and that there can be no
assurance that Rule 144 sales will be available at any subsequent time, or (iii)
such sale, assignment, or transfer is otherwise exempt from registration under
the Act. The Holder further understands that an opinion of counsel and other
documents may be required to transfer the Note.
8. Miscellaneous.
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(a) Any notice or other communication required or permitted to
be given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex or similar telecommunications equipment) against receipt to the party to
whom it is to be given, (i) if to the Borrower, at its address at Thinking
Tools, Inc., One Lower Ragsdale Drive, I- 250, Monterey, CA 93940, Attention:
President, (ii) if to the Holder, at its address set forth on the first page
hereof, or (iii) in either case, to such other address as the party shall have
furnished in writing in accordance with the provisions of this Section 8(a).
Notice to the estate of any party shall be sufficient if addressed to the party
as provided in this Section 8(a). Any notice or other communication given by
certified mail shall be deemed given at the time of certification thereof,
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except for a notice changing a party's address which shall be deemed given at
the time of receipt thereof. Any notice given by other means permitted by this
Section 8(a) shall be deemed given at the time of receipt thereof.
(b) Upon receipt of evidence satisfactory to the Borrower of
the loss, theft, destruction or mutilation of this Note (and upon surrender of
this Note if mutilated), including an affidavit of the Holder thereof that this
Note has been lost, stolen, destroyed or mutilated, together with an indemnity
against any claim that may be made against the Borrower on account of such lost,
stolen, destroyed or mutilated Note, and upon reimbursement of the Borrower's
reasonable incidental expenses, the Borrower shall execute and deliver to the
Holder a new Note of like date, tenor and denomination.
(c) No course of dealing and no delay or omission on the part
of the Holder in exercising any right or remedy shall operate as a waiver
thereof or otherwise prejudice the Holder's rights, powers or remedies. No
right, power or remedy conferred by this Note upon the Holder shall be exclusive
of any other right, power or remedy referred to herein or now or hereafter
available at law, in equity, by statute or otherwise, and all such remedies may
be exercised singly or concurrently.
(d) This Note may be amended only by a written instrument
executed by the Borrower and the Holder hereof. Any amendment shall be endorsed
upon this Note, and all future Holders shall be bound thereby.
(e) This Note shall be governed by and construed in accordance
with the laws of the State of New York, without giving effect to principles
governing conflict of laws.
(f) The Borrower irrevocably consents to the jurisdiction of
the courts of the State of New York and of any federal court located in such
State in connection with any action or proceeding arising out of or relating to
this Note, any document or instrument delivered pursuant to, in connection with
or simultaneously with this Note, or a breach of this Note or any such document
or instrument. In any such action or proceeding, the Borrower waives personal
service of any summons, complaint or other process and agrees that service
thereof may be made in accordance with Section 8(a). Within 30 days after such
service, or such other time as may be mutually agreed upon in writing by the
attorneys for the parties to such action or
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proceeding, the Borrower shall appear or answer such summons, complaint, or
other process.
This Note may be amended, or any of its provisions waived
(which amendment or waiver shall be binding upon all future Holders) only by
written consent or consents executed by the Company and the Holders of Notes
representing a majority (in principal amount) of the Notes issued to investors
pursuant to the Memorandum, provided, however that any waiver or amendment to
the interest rate, Maturity Date or any Interest Payment Date provided hereunder
shall be effective only with respect to Notes the Holders of which have
consented thereto.
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed
and dated the day and year first above written.
THINKING TOOLS, INC.
By: ___________________________
Name:
Title:
13
BARINGTON CAPITAL GROUP, L.P
888 Seventh Avenue
New York, New York 10019
(212) 974-5700
________ __, 1996
Thinking Tools, Inc.
One Lower Ragsdale Drive, I-250
Monterey, CA 93940
Attention: John Hiles
President
Gentlemen:
This letter, when executed by the parties hereto, will
constitute an agreement between Thinking Tools, Inc. (the
"Company") and Barington Capital Group, L.P. ("Barington"),
pursuant to which the Company agrees to retain Barington and
Barington agrees to be retained by the Company under the terms
and conditions set forth below:
1. The Company hereby retains Barington on a non-
exclusive basis to perform consulting services related to
corporate finance and other financial services matters, and
Barington hereby accepts such retention, for a term commencing
on the date hereof and ending on ________ __, 1998. In this
regard, subject to the terms set forth below, Barington shall
furnish to the Company advice and recommendations with respect
to such aspects of the business and affairs of the Company as
the Company shall, from time to time, reasonably request upon
reasonable notice.
2. As compensation for the services described in
paragraph 1 above, the Company shall pay to Barington (i) a fee
equal to five percent of the first one million dollars of the
consideration paid or received by the Company (or any
stockholder, subsidiary or affiliate) in any Transaction (as
hereinafter defined) not covered by clause (ii) hereof, four
percent of the next million dollars of consideration so paid or
received, three percent of the next million dollars of
consideration so paid or received, two percent of the next
million dollars so paid or received and one percent of any
consideration so paid or received in excess of four million
dollars. Except as provided in the penultimate sentence of this
Section 2, such fee shall be paid in cash, and (ii) 33% of all
consideration paid to any other investment banking firm or firms
in any Transaction in which the Company is represented by an
investment banking firm other than Barington at the closing of
the Transaction to which it relates. The amount of
<PAGE>
Thinking Tools, Inc.
_________ __, 1996
Page 2
consideration paid in a Transaction shall include, for purposes
of calculating such fee, all forms of consideration paid by the
Company or any subsidiary or affiliate, or received by the
Company, its stockholders, or any subsidiary or affiliate of the
Company, including, but not limited to, cash, stock or evidence
of indebtedness, or any combination thereof. Notwithstanding
the foregoing, Barington shall not be entitled to receive a fee
pursuant to this Section 2 for any Transaction which is
identified, negotiated and consummated by the Company without
the assistance or participation of Barington or any other
investment banking firm or other intermediary. A "Transaction"
shall mean any transaction in which the Company or any
subsidiary or affiliate of the Company may be involved,
including, but not limited to, mergers, acquisitions, joint
ventures, sale of assets not in the ordinary course of business,
or sales or other issuances of any securities, to which the
provisions of Section 5 do not apply.
3. In addition, Barington shall hold itself ready to
assist the Company in evaluating and negotiating particular
contracts or projects, if requested to do so by the Company,
upon reasonable notice, and will undertake such evaluations and
negotiations under prior written agreement as to additional
compensation to be paid by the Company to Barington with respect
to such evaluations and negotiations.
4. All obligations of Barington contained herein shall be
subject to Barington's reasonable availability for such
performance, in view of the nature of the requested service and
the amount of notice received. Barington shall devote such time
and effort to the performance of its duties hereunder as
Barington shall determine is reasonably necessary for such
performance. Barington may look to such others for such factual
information, investment recommendations, economic advice and/or
research, upon which to base its advice to the Company
hereunder, as it shall deem appropriate. The Company shall
furnish to Barington all information relevant to the performance
by Barington of its obligations under this Agreement, or
particular projects as to which Barington is acting as advisor,
which will permit Barington to know all facts material to the
advice to be rendered, and all materials or information
reasonably requested by Barington. In the event that the
Company fails or refuses to furnish any such material or
information reasonably requested by Barington, and thus prevents
or impedes Barington's performance hereunder, any inability of
Barington to perform shall not be a breach of its obligations
hereunder.
<PAGE>
Thinking Tools, Inc.
_________ __, 1996
Page 3
5. For a period of three years from the later of the date
hereof or the date the offering is completed, Barington shall
have an irrevocable preferential right of first refusal to
purchase for its account or to sell for the account of the
Company or any subsidiary of or successor to the Company any
securities of the Company or any such subsidiary or successor of
the Company which the Company, any such subsidiary or successor
may seek to sell, whether pursuant to registration under the
Securities Act of 1933, as amended (the "Act") or otherwise.
The Company and, any such subsidiary or successor will consult
Barington with regard to any such offering and will offer
Barington the opportunity to purchase or sell any such
securities on terms not more favorable to the seller of such
securities than it or he can secure elsewhere. If Barington
fails to accept such offer within 20 business days with respect
to an underwritten offering and within 5 business days with
respect to any other proposed sale, after the mailing of a
notice containing such offer by registered mail addressed to
Barington, then Barington shall have no further claim or right
with respect to the proposal contained in such notice. If,
however, the terms of such proposal are subsequently modified,
the preferential right referred to herein shall apply to such
modified proposal as if the original proposal had not been made.
Barington's failure to exercise its preferential right with
respect to any particular proposal shall not affect its
preferential rights relative to future proposals. Notwith-
standing the foregoing, in the event that such future sale
relates to an underwritten public offering to be lead managed by
an institutionally-based major bracket or large regional
underwriting firm, the Company shall be deemed to have satisfied
the right of first refusal contained herein if Barington is
given the right to participate in such offering as a co-manager
(right hand side) and receives at least 33% of the total
economics and 33% of the total number of shares being sold in,
such offering.
6. Subject to Section 7, nothing contained in this
Agreement shall limit or restrict the right of Barington or of
any partner, employee, agent or representative of Barington,
to be a partner, director, officer, employee, agent or
representative of, or to engage in, any other business, whether
or not of a similar nature to the Company's business, nor to
limit or restrict the right of Barington to render services of
any kind to any other corporation, firm, individual or
association.
7. Barington will hold, and will use its commercially
reasonable efforts to cause its officers, directors, employees,
consultants, advisors, and agents to hold, in confidence any
<PAGE>
Thinking Tools, Inc.
_________ __, 1996
Page 4
confidential information which the Company provides to Barington
pursuant to this Agreement. Barington may disclose such
information to its officers, directors, employees, consultants,
advisors and agents, in connection with the services to be
rendered as contemplated by this Agreement, so long as such
persons are informed by Barington of the confidential nature of
such information and are directed by Barington to treat such
information confidentially in accordance herewith.
Notwithstanding the foregoing, Barington shall not be required
to maintain confidentiality with respect to information (i)
which is or becomes part of the public domain; (ii) of which
Barington had independent knowledge prior to disclosure to it by
the Company; (iii) which comes into the possession of Barington
in the normal and routine course of its own business from and
through independent non-confidential sources; or (iv) which is
required to be disclosed by Barington by governmental
requirements. If Barington is requested or required (by oral
questions, interrogatories, requests for information or document
subpoenas, civil investigative demands, or similar process) to
disclose any confidential information supplied to it by the
Company, or the existence of other negotiations in the course of
its dealings with the Company or its representatives, Barington
shall, unless prohibited by law, promptly notify the Company of
such request(s) so that the Company may seek an appropriate
protective order.
8. Because Barington will be acting on your behalf, it is
its practice to receive indemnification. A copy of Barington's
standard indemnification provisions (the "Indemnification
Provisions") is attached to this Agreement and is incorporated
herein and made a part hereof.
9. This Agreement may not be transferred, assigned or
delegated by any of the parties hereto without the prior written
consent of the other party hereto.
10. The failure or neglect of the parties hereto to
insist, in any one or more instances, upon the strict
performance of any of the terms or conditions of this Agreement,
or their waiver of strict performance of any of the terms or
conditions of this Agreement, shall not be construed as a waiver
or relinquishment in the future of such term or condition, but
the same shall continue in full force and effect.
11. This Agreement may not be terminated by the Company.
This Agreement may be terminated by Barington at any time upon
30 days' written notice, without liability or continuing
obligation to you or to us (except for any compensation earned
by us up to the date of termination, including compensation to
<PAGE>
Thinking Tools, Inc.
_________ __, 1996
Page 5
be paid subsequent to such termination), except as set forth in
this Section 11. Neither termination nor completion of this
assignment shall affect the provision of Section 2 hereof or the
Indemnification Provisions which are incorporated herein, which
shall remain operative and in full force and effect.
12. Any notices hereunder shall be sent to the Company and
to Barington at their respective addresses set forth above. Any
notice shall be given by hand delivery, facsimile transmission
or overnight delivery or courier service, against receipt
therefor, and shall be deemed to have been given when received.
Either party may designate any other address to which notice
shall be given, by giving written notice to the other of such
change of address in the manner herein provided.
13. This Agreement has been made in the State of New York
and shall be construed and governed in accordance with the laws
thereof without giving effect to principles governing conflicts
of law.
14. This Agreement contains the entire agreement between
the parties, may not be altered or modified, except in writing
and signed by the party to be charged thereby, and supersedes
any and all previous agreements between the parties relating to
the subject matter hereof.
15. This Agreement shall be binding upon the parties
hereto and their respective heirs, administrators, successors
and permitted assigns.
<PAGE>
Thinking Tools, Inc.
_________ __, 1996
Page 6
If you are in agreement with the foregoing, please execute
two copies of this letter in the space provided below and return
them to the undersigned.
Yours truly,
BARINGTON CAPITAL GROUP, L.P.
By: LNA CAPITAL CORP.,
General Partner
By:_______________________________
Marc Cooper,
Executive Vice President
ACCEPTED AND AGREED
TO AS OF THE DATE FIRST
ABOVE WRITTEN:
Thinking Tools, Inc.
By: ____________________________
John Hiles
President
<PAGE>
INDEMNIFICATION PROVISIONS
Thinking Tools, Inc. (the "Company") agrees to indemnify
and hold harmless Barington Capital Group, L.P. ("Barington")
against any and all losses, claims, damages, obligations,
penalties, judgments, awards, liabilities, costs, expenses and
disbursements (and any and all actions, suits, proceedings and
investigations in respect thereof and any and all legal and
other costs, expenses and disbursements in giving testimony or
furnishing documents in response to a subpoena or otherwise),
including, without limitation, the costs, expenses and
disbursements, as and when incurred, of investigating, preparing
or defending any such action, suit, proceeding or investigation
(whether or not in connection with litigation in which Barington
is a party), directly or indirectly, caused by, relating to,
based upon, arising out of, or in connection with Barington's
acting for the Company, including, without limitation, any act
or omission by Barington in connection with its acceptance of or
the performance or non performance of its obligations under the
Agreement, dated _______ __, 1996, between the Company and
Barington to which these indemnification provisions are attached
and form a part (the "Agreement"), except to the extent that any
such liability is found in a final judgment by a court of
competent jurisdiction (not subject to further appeal) to have
resulted primarily and directly from Barington's gross
negligence or willful misconduct. The Company also agrees that
Barington shall not have any liability (whether direct or
indirect, in contract or tort or otherwise) to the Company for
or in connection with the engagement of Barington under the
Agreement, except to the extent that any such liability is found
in a final judgment by a court of competent jurisdiction (not
subject to further appeal) to have resulted primarily and
directly from Barington's gross negligence or willful
misconduct.
These indemnification provisions shall be in addition to
any liability which the Company may otherwise have to Barington
or the persons indemnified below in this sentence and shall
extend to the following: Barington, its affiliated entities,
directors, partners, employees, legal counsel, agents and
controlling persons (within the meaning of the federal
securities laws), and the officers, directors, employees, legal
counsel, agents and controlling persons of any of them. All
references to Barington in these indemnification provisions
shall be understood to include any and all of the foregoing.
If any action, suit, proceeding or investigation is
commenced, as to which Barington proposes to demand
indemnification, it shall notify the Company with reasonable
promptness; provided, however, that any failure by Barington to
notify the Company shall not relieve the Company from its
obligations hereunder. Barington shall have the right to retain
counsel of its own choice to represent it, and the Company shall
<PAGE>
pay the fees, expenses and disbursements of such counsel; and
such counsel shall, to the extent consistent with its
professional responsibilities, cooperate with the Company and
any counsel designated by the Company. The Company shall be
liable for any settlement of any claim against Barington made
with the Company's written consent, which consent shall not be
unreasonably withheld. The Company shall not, without the prior
written consent of Barington, settle or compromise any claim, or
permit a default or consent to the entry of any judgment in
respect thereof, unless such settlement, compromise or consent
includes, as a unconditional term thereof, the giving by the
claimant to Barington of an unconditional release from all
liability in respect of such claim. In order to provide for
just and equitable contribution, if a claim for indemnification
pursuant to these indemnification provisions is made but it is
found in a final judgment by a court of competent jurisdiction
(not subject to further appeal) that such indemnification may
not be enforced in such case, even though the express provisions
hereof provide for indemnification in such case, then the
Company, on the one hand, and Barington, on the other hand,
shall contribute to the losses, claims, damages, obligations,
penalties, judgments, awards, liabilities, costs, expenses and
disbursements to which the indemnified persons may be subject in
accordance with the relative benefits received by the Company,
on the one hand, and Barington, on the other hand, and also the
relative fault of the Company, on the one hand, and Barington,
on the other hand, in connection with the statements, acts or
omissions which resulted in such losses, claims, damages,
obligations, penalties, judgments, awards, liabilities, costs,
expenses or disbursements and the relevant equitable
considerations shall also be considered. No person found liable
for a fraudulent misrepresentation shall be entitled to
contribution from any person who is not also found liable for
such fraudulent misrepresentation. Notwithstanding the
foregoing, Barington shall not be obligated to contribute any
amount hereunder that exceeds the amount of fees previously
received by Barington pursuant to the Agreement.
Neither termination nor completion of the engagement of
Barington referred to above shall affect these indemnification
provisions which shall then remain operative and in full force
and effect.
- 2 -
EXHIBIT 11.1
Thinking Tools, Inc.
Statement of computation of net loss per share
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
-------------------------- ---------------------------
1994 1995 1995 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net loss $ 731 $ 589 $ 280 $ 347
Weighted average common
shares outstanding 2,768 2,768 2,768 2,768
Convertible debt, as if
converted 263 263 263 263
Common stock options in
accordance with SAB 83 110 110 110 110
--------- --------- --------- -----------
3,141 3,141 3,141 3,141
========= ========= ========= ===========
Net loss per share $(0.23) $(0.19) $(0.09) $(0.11)
</TABLE>
The Board of Directors
Thinking Tools, Inc:
We consent to the use of our report included herein and to the
reference to our firm under the heading "Experts" in the prospectus.
Our report dated August 16, 1996, except as to note 13 which is as of
August 28, 1996, contains an explanatory paragraph that states that the Company
has suffered recurring losses from operations and has a net capital deficiency
that raise substantial doubt about its ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of that uncertainty.
San Jose, California
August 30, 1996
KPMG Peat Marwick LLP
