As filed with the Securities and Exchange Commission on October 18, 1996
Registration No. 333-11321
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2 to 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)
</TABLE>
<TABLE>
<S> <C>
Thinking Tools, Inc. John Hiles, President
One Lower Ragsdale Drive, 1-250 Thinking Tools, Inc.
Monterey, California 93940 One Lower Ragsdale Drive, 1-250
(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]
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.
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CROSS REFERENCE SHEET
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<CAPTION>
Item Number of Form SB-2 Location or Caption in Prospectus
------------------------------------------------------ -----------------------------------------------------
<S> <C> <C>
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 of Management's Discussion and Analysis of Financial
Operation .............................................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 Stockholder Risk Factors--No Dividends; Dividend Policy;
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>
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<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>
[red herring] 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 OCTOBER 18, 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 Common Stock of the Company has been approved for quotation,
subject to official notice of issuance, on the Nasdaq SmallCap Market
("NASDAQ") under the symbol "TSIM". 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.
<TABLE>
<CAPTION>
Underwriting
Discounts and Proceeds to
Price to Public Commissions(1) Company (2)
<S> <C> <C> <C>
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 160% of the initial
public offering price (the "Underwriter's Options") and (c) 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 October , 1996.
Barington Capital Group, L.P.
The date of this Prospectus is , 1996.
<PAGE>
[graphic] A screen from the Company's TeleSim product, which is a simulation
of a local exchange telephone market.
[graphic] A screen from the Company's Project Challenge product, which is a
simulation of project management of information systems projects.
[graphic] 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 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 believes that its 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 Company believes
that 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
3
<PAGE>
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.
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 was 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 30, 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, 1-250,
Monterey, California 93940, at (408) 373-8688.
4
<PAGE>
The Offering
<TABLE>
<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.
NASDAQ Trading Symbol (3) ........................."TSIM"
</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 Common Stock of the Company has been approved for
quotation, subject to official notice of issuance, on the NASDAQ,
however, there can be no assurance that such application for listing, if
approved, will be maintained. See "Risk Factors-- Absence of Public
Market; Negotiated Offering Price."
5
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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 Years Ended
June 30, 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 Forma As
Actual(1) Pro Forma(2) Adjusted (3)
At December 31, --------- ------------- ----------------
1995 (Unaudited)
---------------- -----------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Selected Balance Sheet Data:
Cash $ 152 $ 7 $1,100 $7,271
Working capital (deficit) (298) (617) (417) 7,029
Current assets 319 239 1,332 7,503
Total assets 432 350 1,443 7,614
Total current liabilities 617 856 1,749 474
Total long term liabilities 1,373 1,399 19 19
Stockholders' equity (deficit) (1,558) (1,905) (325) 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
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<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, the application of the estimated
net proceeds therefrom, and $550,000 of debt discount resulting from the
issuance of the Bridge Warrants, 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."
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<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.
The report of the Company's independent accountants concerning the Financial
Statements included herein includes an explanatory paragraph relative to the
Company's ability to continue as a going concern. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements included herein.
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 expectations as to future revenue. Consequently, revenue
or profit may vary significantly from quarter to
9
<PAGE>
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. Sales to Systems Engineering Solutions, Inc.
("SES"), SystemHouse and the Office of Research and Development ("ORD")
during the six months ended June 30, 1996 accounted for 33%, 32% and 18%,
respectively, of the Company's sales for such period. Sales to the Markle
Foundation ("Markle"), ORD and SystemHouse during the fiscal year ended
December 31, 1995 accounted for 27%, 14% and 13%, respectively, of the
Company's sales for such period. Sales to Markle and Coopers during the
fiscal year ended December 31, 1994 accounted for 59% and 17%, respectively,
of the Company's sales for such period. Such customers are not affiliated
with the Company. The Company does not believe that it is materially
dependent upon sales to these customers. Contracts with such customers have
been fully or substantially completed as of September 30, 1996. The Company
historically has not had and at September 30, 1996 did not have any
substantial firm order backlog. 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
10
<PAGE>
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."
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 Company has entered into an Employment Agreement with Mr.
Hiles which is subject to automatic annual renewals unless terminated by the
Company or Mr. Hiles upon ninety days' prior written notice. 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. Approximately 23.1% 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
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
11
<PAGE>
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.
NASDAQ Delisting; Low Stock Price.
The trading of the Company's Securities on NASDAQ will be conditioned upon
the Company meeting certain asset, capital and surplus earnings and stock
price tests set forth by such exchanges. 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 with the Underwriter which
prohibit them from selling stock in the Company for certain periods of time
following this Offering without the prior written consent of the Underwriter.
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
12
<PAGE>
to purchase an aggregate of 140,000 shares of Common Stock at a price per
share equal to 160% 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 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>
Approximate Percentage 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 ($325,000), or ($0.11) 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 $1.72 per
share to present stockholders and an immediate dilution of $5.39 or 77% 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 $(0.11)
Increase attributable to purchase of Shares by new
investors 1.72
---------
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 $ 1,373 $ 98
========= ============= ===============
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 2,510 10,535
Accumulated Deficit (1,997) (2,838) (3,418)
Total Stockholders' Equity (Deficit) (1,905) (325) 7,121
--------- ------------- ---------------
Total Capitalization $ (506) $ (306) $ 7,140
========= ============= ===============
</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, the application of the estimated net proceeds
therefrom, and $550,000 of debt discount resulting from the issuance of
the Bridge Warrants, 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. Sales to SES, SystemHouse and ORD during the six months
ended June 30, 1996 accounted for 33%, 32% and 18%, respectively, of the
Company's sales for such period. Sales to Markle, ORD and SystemHouse during
the fiscal year ended December 31, 1995 accounted for 27%, 14% and 13%,
respectively, of the Company's sales for such period. Sales to Markle and
Coopers during the fiscal year ended December 31, 1994 accounted for 59% and
17%, respectively, of the Company's sales for such period. Such customers are
not affiliated with the Company. The Company does not believe that it is
materially dependent upon sales to these customers. Contracts with such
customers have been fully or substantially completed as of September 30,
1996. The Company historically has not had and at September 30, 1996 did not
have any substantial firm order backlog. 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.
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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 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
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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.
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 1.75% and 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
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expansion may take the form of the issuance of common or preferred stock or
debt securities, or may involve other debt financing. Such financing may
involve secured or unsecured debt financing. To the extent that the Company
elects to obtain debt financing, the lender may impose certain restrictive
covenants on the Company and upon any default by the Company on such debt
financing, and a liquidation of the Company, the rights of such lender would
be superior to the rights of the holders of Common Stock, including
purchasers in this Offering. 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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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 30, 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.
In order to imitate these systems, models must themselves be adaptive.
Some definitions will help to explain how this is accomplished:
(bullet) Object. A capsule of data and logic that are thematically
related.
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(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:
(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.
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(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 has combined 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.
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.
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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 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
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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 was 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.
(bullet) 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.
(bullet) The Company continues to introduce and apply newer, more powerful
techniques for programming its agents, often incorporating methods
based on biological processes.
(bullet) 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."
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
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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:
Coopers & Lybrand L.L.P. Systems Engineering Solutions, Inc.
SHL SystemHouse, Inc. Xerox Corp.
Andersen Consulting L.L.P. Harcourt General, Inc.
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:
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AT&T Corp. Sprint Corp.
NYNEX Corporation Pacific Telecom, Inc.
U.S. Army U.S. Air Force
Sales to SES, SystemHouse and ORD for the six months ended June 30, 1996
accounted for 33%, 32% and 18%, respectively, of the Company's sales for such
period. Sales to Markle, ORD and SystemHouse in Fiscal 1995 accounted for
27%, 14% and 13%, respectively, of the Company's sales for such period. Sales
to Markle and Coopers in Fiscal 1994 accounted for 59% and 17%, respectively,
of the Company's sales for such period. The Company does not believe that it
is materially dependent upon sales to these customers.
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 entered into a Vertical Market Software
Development/ Licensing Agreement, dated October 12, 1994, with Coopers
pursuant to which the Company receives a royalty from Coopers in exchange for
the grant to Coopers of a worldwide, perpetual license to use and reproduce
TeleSim subject to the following: (i) for a period equal to the greater of
five years from Coopers' final acceptance of TeleSim or any period of one
year of non-use by Coopers of TeleSim, the Company may not license or sell
TeleSim worldwide without Coopers' written approval and (ii) the Company may
use TeleSim in any product for use outside the telecommunications industry,
and for any non-competitive product, including other products for the
telecommunications industry, provided that the Company shall not use Coopers'
confidential information or trademarks. The Company also entered into a
Development Agreement, dated June 30, 1995, with SystemHouse, pursuant to
which the Company receives a royalty from SystemHouse in exchange for the
grant to SystemHouse of a worldwide, exclusive right to use, market, sell,
distribute and license Project Challenge for systems integration. 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."
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<PAGE>
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.
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.
30
<PAGE>
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"
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.
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<PAGE>
PRI Automation, Inc. manufactures factory automation systems used in the
fabrication of integrated circuits by semi-conductor manufacturers.
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.
Government Regulation
The Company is subject to regulation under various federal and state laws
regarding, among other things, occupational safety, environmental protection,
hazardous substance control and product advertising and promotion. The
Company believes that it has complied with these laws and regulations in all
material respects and it has not been required to take any action to correct
any material noncompliance. The Company does not currently anticipate that
any material capital expenditures will be required in order to comply with
federal, state and local laws or that compliance with such laws will have a
material effect on the financial condition or competitive position of the
Company.
Personnel
As of October 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,
1-250, Monterey, California 93940. The Company leases approximately 3,776
square feet of office space at this location pursuant to a lease with KI
Monterey Research, Inc. dated August 19, 1994. 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.
32
<PAGE>
MANAGEMENT
Officers, Directors, Key Employees and Consultants
The executive officers, directors, key employees and consultants of the
Company are as follows:
Name Age Position
--------------------- ----- ------------------------------------------
Mr. John Hiles 50 Founder, President, Secretary, 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
John Hiles is the founder and has been President and Secretary 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, a plastics
distributor, US Envirosystems a co-generation energy company, and Lamar
Signal Processing, Ltd., a digital processing company, 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
33
<PAGE>
technology worldwide, and on the emerging computer markets of Central and
Eastern Europe. Since 1994, 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.
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<PAGE>
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 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.
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<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 years ended December
31, 1995 and 1994, 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 fiscal years ended December 31, 1995 and 1994.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------
Annual Compensation Awards Payouts
-----------------------------------
Long-
Term
Other Restricted Incentive
Annual Stock Options Plan All Other
Name and 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 NSOs. Unexercised options granted under the Plan
terminate upon a merger (other than a stock merger),
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<PAGE>
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.
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<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. 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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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 by and between 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 committee 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.
The Company has no present intention to acquire or merge with a business
or company in which the Company's management or their affiliates or
associates directly or indirectly have an ownership interest. All future
transactions with officers, directors, affiliates and/or controlling
stockholders of the Company will be on terms no less favorable than could be
obtained from unaffiliated parties, and shall be approved by a majority of
the directors of the Company, including a majority of the independent
disinterested directors of the Company.
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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. Technologies has agreed that it will not sell
the Technologies Warrants or the shares underlying the Technologies Warrants
for a period of two years from the effective date of the Registration
Statement, of which this Prospectus forms a part. 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 which was repaid by the
Company out of the proceeds of the Bridge Financing. 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 Underwriter. The Underwriter has agreed that it will not consent to the
release of any holders of the Bridge Warrants from such lock-up for a period
of one year from the effective date of the Registration Statement, of which
this Prospectus forms a part. 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,
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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 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 160% 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 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 or, $250,000, at the election of the Company.
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.
47
<PAGE>
THINKING TOOLS, INC.
INDEX TO FINANCIAL STATEMENTS
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
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)
<S> <C> <C> <C>
ASSETS
(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 80
Current portion of capital lease obligations 13 18 18
Bridge notes payable -- -- 1,275
--------------- ------------- ------------
Total current liabilities 617 856 1,749
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 1,768
--------------- ------------- ------------
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 2,510
Accumulated deficit (1,650) (1,997) (2,838)
--------------- ------------- ------------
Total stockholders' deficit (1,558) (1,905) (325)
--------------- ------------- ------------
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>
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
December 1993 to purchase certain assets of the business simulations
division of Maxis, Inc. On December 30, 1993, the Company purchased
intangible assets, a contract in process, and property and equipment from
Maxis in exchange for a note payable of $500,000 which was repaid in 1994.
The acquisition was accounted for using the purchase method. The purchase
price was allocated to the assets acquired, based on relative fair values, as
follows:
Contracts in process $115,000
Acquired in-process research and development 330,000
Property, equipment, and other assets 55,000
-----------
$500,000
===========
The Company 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.
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)
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. 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.
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)
(2) Accounts Receivable
A summary of accounts receivable follows (in thousands):
December 31, June 30,
1995 1996
--------------- ------------
(Unaudited)
Completed contract billings $ 28 $ 18
Contracts in progress billings 118 92
Other receivables -- 55
--------------- ------------
Total $146 $165
=============== ============
(3) Property and Equipment
A summary of property and equipment follows (in thousands):
December 31, June 30,
1995 1996
------------- ------------
(Unaudited)
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
============= ============
(4) Accrued Expenses
A summary of accrued expenses follows (in thousands):
December 31, June 30,
1995 1996
--------------- ------------
(Unaudited)
Payroll and employee benefits $ 72 $ 94
Legal 31 36
Interest -- 35
Other 21 82
--------------- ------------
Total $124 $247
=============== ============
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
Costs, estimated earnings, and billings on uncompleted fixed fee contracts
are summarized as follows (in thousands):
December 31, June 30,
1995 1996
--------------- ------------
(Unaudited)
Costs incurred on uncompleted contracts $ 249 $231
Estimated earnings 309 208
--------------- ------------
558 439
Less billings to date 757 486
--------------- ------------
Total $(199) $(47)
=============== ============
They are included in the accompanying balance sheets under the following
captions (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1995 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):
Capital Operating
Year ending December 31, leases lease
------------------------------------------------------------------ ------------
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
=========
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):
Current Deferred Total
------------ ------------- ----------
Federal $-- $-- $--
State 1 -- 1
------------ ------------- ----------
$1 $-- $1
============ ============= ==========
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:
Years ended Six months ended
December 31, June 30,
------------------ ------------------
1994 1995 1995 1996
-------- -------- -----------------
(Unaudited)
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
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 Technologies Advances), 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
------------- -----------------------------------
(Unaudited)
-------------------------------------------------
<S> <C> <C> <C>
ASSETS
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 (351)(a,c) $ 80
Bridge notes payable -- 1,275 (c) 1,275
Other current liabilities 425 (31)(a,b,c) 394
------------- ----------------
Total current liabilities 856 1,749
Long-term liabilities:
Note payable 1,380 (1,380)(b) --
Other long-term liabilities 19 19
------------- ----------------
Total liabilities 2,255 1,768
------------- ----------------
Stockholders' deficit:
Common stock 3 3
Additional paid-in capital 89 2,421(b,c,d) 2,510
Accumulated deficit (1,997) (841)(a,c,d) (2,838)
------------- ----------------
Total stockholders' deficit (1,905) (325)
------------- ----------------
Total liabilities and stockholders' deficit $ 350 $ 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
$550,000 related to the value attributable to the warrants (which will be
amortized to interest expense over the period that the debt is
outstanding), 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>
[graphic]
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
Page
---------
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 23
Management 33
Principal Stockholders 38
Certain Transactions 39
Description of Securities 40
Shares Eligible for Future Sale 43
Underwriting 45
Legal Matters 47
Experts 47
Available Information 47
Index to Financial Statements F-1
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.
SEC Registration Fee $ 5,565.66
NASD Registration Fee 2,114.04
Blue Sky Fee 40,000.00
Printing and Engraving 75,000.00
Legal fees and expenses 150,000.00
Accounting fees and expenses 150,000.00
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 47,320.30
Total $794,000.00
=============
(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. The names of the purchasers of such Units are as follows:
II-1
<PAGE>
Shares
---------
B&B Trading Retirement Plan 6,250
Alexander Mitchell 6,250
Gerald Benjamin 6,250
Steven A. Endquist 12,500
Michael Stoyka, M.D. 6,250
Peter Horrigan 6,250
Lyonshare Venture Capital 56,250
Steve Yavers 6,250
Wayne Saker 12,500
Paul Matusow 6,250
Floyd M. Smith 6,250
Dr. Harvey Kaplan 6,250
David Mitchell 18,750
Oliver Mitchell 6,250
Alladin Depot Partnership 6,250
C.M. Solomon 6,250
Philip Schonfeld 6,250
Eric & Suzanne Partch 6,250
Dr. Gershon Stern 12,500
Marvin Barish 6,250
CLFS Equities, Ltd. 6,250
Robert Jacobs IRA R/O 6,250
John Bykowsky 6,250
Robert Spitzer 6,250
David Kohane 6,250
Donald Heimstaedt 6,250
James Levi 6,250
Jerry Politzer 6,250
Paul and Linda Salsgiver 12,500
Guy Montanari 6,250
Woodland Partners 25,000
Thinking Technologies, L.P. 156,250
In August 1996, the Company issued an aggregate of 145,036 options under
its Stock Option Plan including (i) options to purchase 10,259 shares of
Common Stock at an exercise price of $1.00 per share to each of Ted Prince,
Fred Gluck, Esther Dyson and Fran Saldutti, directors of the Company, (ii)
52,000 options at an exercise price of $0.794 per share to each of:
Bruce Skidmore 14,000
Rick Rosenbaum 11,000
Greg Rossi 5,000
Mike Bailey 3,000
Debra Lavoy 3,000
Riddle Kaufman 3,000
Wendy Wibbens 3,000
Bernadette Smith 2,000
Randy Jones 2,000
Bill Wiltshko 2,000
Nancy Keleher 2,000
Kelly McFadden 1,000
Marianne Marinovich 1,000
II-2
<PAGE>
and (iii) 52,000 options at an exercise price of $5.00 per share to each of:
Bruce Skidmore 10,000
Rick Rosenbaum 8,000
Greg Rossi 8,000
Mike Baily 3,000
Debra Lavoy 3,000
Riddle Kaufman 3,000
Wendy Wibbens 3,000
Bernadette Smith 2,000
Randy Jones 2,000
Bil Wiltshko 2,000
Nancy Keleher 2,000
Kelly McFadden 1,000
Marianne Marinovich 1,000
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.
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, including options to purchase 14,741 shares of common stock at an
exercise price of $.79 per share to each of Ted Prince, Fred Gluck, Esther
Dyson and Fran Saldutti, directors of the Company and options to purchase
15,000 shares of common stock at an exercise price of $1.00 per share to
James Houston, Esq. 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.
II-3
<PAGE>
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
4.7 Form of Lock-up Agreement
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
10.3 Development Agreement between the Company and SystemHouse dated June 30, 1995
10.4 Services Agreement between the Company and SystemHouse dated March 8, 1995
10.5 Vertical Market Software Development/Licensing Agreement between the Company and Coopers dated
October 12, 1994
10.6 Technologies Agreement between the Company and Technologies dated September 26, 1994
10.7 Consent, Waiver and Amendment between the Company and Technologies dated August 31, 1996
10.8 Lease between the Company and KI Monterey Research, Inc. dated August 19, 1994, as amended
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>
* Previously filed.
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:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
II-4
<PAGE>
(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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in The
City of Monterey, California on October 18, 1996.
THINKING TOOLS, INC.
By: /s/ John Hiles
------------------------------------
John Hiles
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the 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, October 18, 1996
- ---------------------- Accounting and Financial
John Hiles Officer) and Director
/s/ Fred Knoll* Chairman of the Board and October 18, 1996
- ---------------------- Director
Fred Knoll
/s/ Esther Dyson* Director October 18, 1996
- ----------------------
Esther Dyson
/s/ Frederick Gluck* Director October 18, 1996
- ----------------------
Frederick Gluck
/s/ Ted Prince* Director October 18, 1996
- ----------------------
Ted Prince
/s/ Fran Saldutti* Director October 18, 1996
- ----------------------
Fran Saldutti
*By: /s/ John Hiles
- ----------------------
John Hiles, Attorney-in-Fact
</TABLE>
II-6
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION DATED , 199
THINKING TOOLS, 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
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 TSIM.
</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 Sold After Offering
----------------------- Shares Being -----------------------
Shares Percentage Sold Shares Percentage
---------------------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
B&B Trading Retirement Plan 6,250 *
Alexander Mitchell 6,250 *
Gerald Benjamin 6,250 *
Steven A. Endquist 12,500 *
Michael Stoyka, M.D. 6,250 *
Peter Horrigan 6,250 *
Lyonshare Venture Capital 56,250 *
Steve Yavers 6,250 *
Wayne Saker 12,500 *
Paul Matusow 6,250 *
Floyd M. Smith 6,250 *
Dr. Harvey Kaplan 6,250 *
David Mitchell 18,750 *
Oliver Mitchell 6,250 *
Alladin Depot Partnership 6,250 *
C.M. Solomon 6,250 *
Philip Schonfeld 6,250 *
Eric & Suzanne Partch 6,250 *
Dr. Gershon Stern 12,500 *
Marvin Barish 6,250 *
CLFS Equities, Ltd. 6,250 *
Robert Jacobs IRA R/O 6,250 *
John Bykowsky 6,250 *
Robert Spitzer 6,250 *
David Kohane 6,250 *
Donald Heimstaedt 6,250 *
James Levi 6,250 *
Jerry Politzer 6,250 *
Paul and Linda Salsgiver 12,500 *
Guy Montanari 6,250 *
Woodland Partners 25,000 *
Thinking Technologies, L.P. 156,250 *
</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. The
Underwriter has agreed that it will not consent to the release of any holders
of the Bridge Warrants from such lock-up for a period of one year from the
effective date of the Company Offering. 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."
Alt-4
<PAGE>
Plan of Distribution
The distribution of the Shares by the Selling Stockholders may be effected
from time to time in transactions on the Nasdaq 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.
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
