SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
|X| SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
| | SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 000-21295
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THINKING TOOLS, INC.
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(Name of small business issuer in its charter)
Delaware 77-0436410
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 Park Avenue Ste 3900
New York, New York 10166
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (212) 808-7474
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
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(Title of Class)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that
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the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein and no disclosure will be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10- KSB or any amendment to
this Form 10-KSB.
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The Registrant's revenues for its most recent fiscal year was $358,300.
As of September 1, 1999, 4,641,758 shares of common stock (the "Common Stock")
of the Registrant were outstanding. The aggregate market value of the shares of
Common Stock held by non-affiliates of the Registrant, based on a closing sale
price of the Common Stock on the OTC Bulletin Board on September 1, 1999 of $.44
per share, was approximately $962,000.
Transitional Small Business Disclosure Format (Check one): Yes ___ No X
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PART I
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This Annual Report on Form 10-KSB contains forward-looking statements that
involve certain risks and uncertainties. The Company's actual results could
differ materially from the results discussed in such forward-looking statements.
See "Description of Business-Cautionary Statements Regarding Forward-Looking
Statements."
Item 1. DESCRIPTION OF BUSINESS
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History
Thinking Tools, Inc. (the "Company") was incorporated in Delaware on
August 8, 1996, as a wholly-owned subsidiary of Thinking Tools, Inc., a
California corporation (the "Predecessor Company"). On August 28, 1996, the
Predecessor Company was merged with and into the Company. References herein to
the "Company" include the Predecessor Company.
The Predecessor Company was formed on December 30, 1993, to purchase
certain assets of the Business Simulation Division (the "Division") of Maxis,
Inc., a leading computer game company and creator of the simulation game
SimCityTM. Through the purchase agreement with Maxis, Inc., the Company acquired
the Division's equipment, staff, work-in-progress, customers, prospects,
software tools, libraries and processes. The Company's products included
SimRefinery, a refinery simulation product, SimHealth, a health care reform
simulation product and TelSim, a local telephone exchange simulation product.
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 and logistics.
The Company commenced operations in December 1993 to develop and market
business simulation software. From its inception until April 1999, the Company
was engaged in research and development activities and organizational efforts,
including the development of its initial products, recruiting personnel, and
establishing marketing and manufacturing capabilities and raising capital. The
Company commenced commercial activities in January 1994, but to date has not
generated substantial revenues from the sale of its products.
In September 1997, the Company introduced Think 2000, the first
simulation product which the Company internally funded and brought to a broader
market. The Company made a significant investment in the development and
commercialization of Think 2000, but changes in market conditions for Year 2000
products and the Company's failure to successfully commercialize Think 2000 had
a material adverse effect on the Company.
On November 6, 1998, the Company approved a bridge financing offer from
Thinking Technologies, L.P. ("Technologies"), under which Technologies was
granted the right to
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purchase up to 350 units for $1,000 per unit (the "1998 Bridge Financing"). Each
unit (a "Bridge Unit") consists of a Secured Convertible Note, in the principal
amount of $1,000, payable at 10% interest per annum (each, a "Bridge Note"), and
a warrant to purchase 200 shares of common stock of the Company (each, a "Bridge
Warrant"). Each Bridge Note is convertible into 5,000 shares of Common Stock.
One Bridge Warrant shall be terminated upon each conversion of a Bridge Note. As
of April 1, 1999, Technologies had purchased 285 Bridge Units. Technologies
shall also be reimbursed with Bridge Units for expenses incurred in obtaining
the 1998 Bridge Financing and for seeking a Target Business for the Company. The
proceeds of the 1998 Bridge Financing have been used for working capital and
general corporate purposes.
The Company received notification from The Nasdaq Stock Market, Inc.
("Nasdaq"), on May 5, 1998 that the Company was not in compliance with certain
quantitative requirements for continued listing of its Common Stock on the
Nasdaq SmallCap Market. Nasdaq requires, among other things, companies listed on
the Nasdaq SmallCap Market maintain (i) net tangible assets of $2,000,000, (ii)
a market capitalization of $35,000,000 or (iii) net income (in the latest fiscal
year or two of the last three fiscal years) of $500,000. After a hearing before
Nasdaq on July 24, 1998, Nasdaq notified the Company on November 7, 1998 that
its stock has been delisted from the Nasdaq SmallCap Market due to the Company's
failure to maintain compliance with these quantitative requirements. The
Company's Common Stock is currently traded on the OTC Bulletin Board, but the
Company intends to be listed on the Nasdaq Small Cap Market again when it is
able to comply with Nasdaq listing requirements.
Recent Developments
In light of the changes in market conditions and the Company's failure
to commercialize Think 2000, on April 23, 1999, the Company announced that it
was eliminating substantially all of its operations and terminated all personnel
other than those required to perform certain executive and administrative
functions. It has since begun to search for candidates with which to enter into
transactions. The Company has retained the technology underlying the products it
discontinued.
John Hiles, the Founder and Chief Technology Officer of the Company,
separated from the Company as part of the operations elimination process.
In July 1999, the Company completed a bridge financing in which it sold
150 units (the "Gem Units") consisting of a 10% Unsecured Convertible Note in
the principal amount of $1,000 (each, a "Gem Note") and a Warrant to purchase 30
shares of the Company's Common Stock (each, a "Gem Warrant") to Gem Management
Limited (the "Gem Financing") for $150,000. Each Gem Note is convertible into
5,000 shares of the Company's Common Stock. Upon conversion of each Gem Note,
one Gem Warrant shall be terminated. The proceeds of this financing will be used
for working capital and general corporate purposes.
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Plan of Business
The Company intends to locate and enter into a transaction with an
existing, public or privately-held company that in management's view, has growth
potential and may be involved in the software or technology industry (a "Target
Business"). To that end, the Company is currently engaged in negotiations with
several candidates. A combination may be structured as a merger, consolidation,
exchange of the Company's common stock for stock or assets or any other form
which will result in the combined enterprise's remaining a publicly-held
corporation.
Pending negotiation and consummation of a transaction, the Company
anticipates that it will have, aside from carrying on its search for a
transaction partner, no business activities, and, thus, no source of revenue.
Should the Company incur any significant liabilities prior to a combination with
a Target Business, it may not be able to satisfy without additional financing
such liabilities as are incurred. If the Company's management pursues one or
more combination opportunities beyond the preliminary negotiations stage and
those negotiations are subsequently terminated, it is foreseeable that such
efforts will exhaust the Company's ability to continue to seek such combination
opportunities before any successful transaction can be consummated. In that
event, the Company's common stock will become worthless and holders of the
Company's common stock will receive a nominal distribution, if any, upon the
Company's liquidation and dissolution.
Transaction Suitability Standards
In its pursuit for a transaction partner, the Company's management
intends to consider only transaction candidates which in management's view, have
growth potential. The Company will, if necessary funds are available, engage
attorneys and/or accountants in its efforts to investigate a transaction
candidate and to consummate a business transaction. The Company may require
payment of fees by such Target Business to fund the investigation of such Target
Business. In the event such a Target Business is engaged in a high technology
business, the Company may also obtain reports from independent organizations of
recognized standing covering the technology being developed and/or used by the
Target Business. The Company's limited financial resources may make the
acquisition of such reports difficult or even impossible to obtain without
additional financing.
Intellectual Property
The Company does not have any patents and to date has not filed patent
applications on its products. The Company believes that certain of its
technology may qualify for patent protection but is not pursuing this course at
this time. However, the Company also recognizes that 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.
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The Company believes that its products 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.
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.
Employees
The Company currently employs only Moshe Zarmi, its President and Chief
Executive Officer. In addition, Fred Knoll, Patricia Kessler and Charles Isaacs
provide services to the Company on a consulting basis, for which they may
receive equity-related compensation.
Cautionary Statements Regarding Forward-Looking Statements
Statements in this Annual Report on Form 10-KSB under the captions
"Description of Business" and "Management's Discussion and Analysis or Plan of
Operation," as well as statements made in press releases and oral statements
that may be made by the Company or by officers, directors or employees of the
Company acting on the Company's behalf, that are not statements of historical
fact, constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause the actual results of the Company to be materially different from the
historical results or from any future results expressed or implied by such
forward-looking statements. In addition to statements which explicitly describe
such risks and uncertainties, readers are urged to consider statements labeled
with the terms "believes," "belief," "expects," "plans," "anticipates," or
"intends" to be uncertain and forward-looking. All cautionary statements made in
this Annual Report on Form 10-KSB should be read as being applicable to all
related forward-looking statements wherever they appear. Investors should
consider the following risk factors as well as the risks described elsewhere in
this Annual Report on Form 10-KSB.
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Limited Operating History; Accumulated Deficit; History of Losses; Uncertain
Future Profitability
The Company commenced operations in December 1993 and has experienced
cumulative losses of $12,210,000 as of December 31, 1998. The Company has not
experienced any quarter of profitable operations. In September 1997, the Company
introduced the prototype for a new product, Think 2000, and made a significant
investment in the development and commercialization of Think 2000, a year 2000
contingency planning system. Think 2000 was released commercially in April 1998.
Through 1998 the Company did not realize the anticipated revenues from Think
2000 or any other sources. Changes in market conditions and the Company's
failure to successfully commercialize Think 2000 has had a material adverse
effect on the Company.
The Company's long-term viability and growth depended upon the
successful commercialization and marketing of its proposed products. The Company
was unable to develop adequate revenue sources to successfully complete the
commercialization and marketing of its proposed products.
Uncertainty as to Ability to Continue as a Going Concern
The report of the Company's independent accountants contains an
explanatory paragraph that describes an uncertainty as to the ability of the
Company to continue as a going concern. Among the factors cited by the
independent accountants as raising doubt as to the Company's ability to continue
as a going concern are the Company's need for additional financing and the
Company's recurring losses during the development stage, which have resulted in
a working capital deficit and net shareholders' deficit. See Report of
Independent Accountants.
NASDAQ Delisting; Low Stock Price
On October 7, 1998, Nasdaq delisted the Company's stock from the Nasdaq
Small Cap Market due to the Company's failure to maintain compliance with
certain quantitative requirements. The effects of delisting include, without
limitation, the limited release of market prices of the Company's securities,
limited news coverage of the Company, and restriction of investors' interest in
the Company, and may adversely materially affect the trading market and prices
for the Company's securities, thereby affecting the Company's ability to issue
additional securities or secure additional financing.
In addition, the Company's securities are penny stocks under the
Securities Enforcement Penny Stock Reform Act of 1990. Additional disclosure is
required in connection with trading in the Company's securities, including
determination of a purchaser's suitability and delivery of a disclosure schedule
explaining the nature and risk of the penny stock market. In addition, a broker
or dealer is required to send monthly statements disclosing recent price
information with respect to the penny stock held in a customer's account and
information with
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respect to the limited market in penny stocks. Such requirements could severely
limit the liquidity of the Company's securities. Although there is no assurance
it will become listed again on the Nasdaq Small Cap Market, the Company intends
to reapply when it is able to comply with Nasdaq's listing requirements.
Failure to Consummate Certain Transactions
The Company's ability to continue operations depends entirely upon the
ability of management to locate and agree to work with a viable Target Business,
either through a merger, joint venture or strategic alliance. The failure to
locate such a Target Business may result in further losses by the Company.
Future Capital Needs; No Certainty of Additional Financing
The Company may need to raise additional funds in the future in order
to fund the acquisition of other companies. Any required additional financing
may be unavailable on terms favorable to the Company, or at all. If the Company
raises additional funds by issuing equity securities, existing shareholders may
experience significant dilution of their ownership interests and such securities
may have rights senior to those of existing shareholders. If additional
financing is not available when required or is not available on acceptable
terms, the Company may be unable to fund transactions, develop products or
services, take advantage of business opportunities or respond to competitive
pressures, any of which could have a material adverse effect on the Company.
Possible Dilution of Shareholders upon Merger
Should the Company decide to pursue a stock for stock merger or
acquisition, the number of shareholders of the Company could become considerably
greater. If this occurs, the Company's existing shareholders' voting power may
be substantially diluted.
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
adaptation 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
find transaction candidates and fund such transactions. There can be no
assurance that the Company will be successful in this effort and if successful,
that its new products 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.
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Target Company Instability
The Company may effect a transaction with a Target Business which may
be financially unstable or in its early stages of development or growth. To the
extent the Company effects a transaction with a financially unstable company or
an entity in its early stage of development or growth (including entities
without established records of revenue or income), the Company will become
subject to numerous risks inherent in the business and operations of financially
unstable and early stage or potential emerging growth companies. In addition, to
the extent that the Company effects a transaction with an entity in an industry
characterized by a high level of risk, the Company will become subject to the
currently unascertainable risks of that industry. An extremely high level of
risk frequently characterizes certain industries which experience rapid growth.
Although management will endeavor to evaluate the risks inherent in a particular
industry or Target Business, there can be no assurance that the Company will
properly ascertain or assess all risks.
Probable Lack of Business Diversification
As a result of the limited resources of the Company, the Company, in
all likelihood, will have the ability to effect only a single transaction.
Accordingly, the prospects for the Company's success will be entirely dependent
upon the future performance of a single business. Unlike certain entities that
have the resources to consummate several transactions or entities operating in
multiple industries or multiple segments of a single industry, it is highly
likely that the Company will not have the resources to diversify its operations
or benefit from the possible spreading of risks or offsetting of losses. The
Company's probable lack of diversification may subject the Company to numerous
economic, competitive and regulatory developments, any or all of which may have
a material adverse impact upon the particular industry in which the Company may
operate subsequent to consummation of a transaction. The prospects for the
Company's success may become dependent upon the development or market acceptance
of single or limited number of products, processes or services. Accordingly,
notwithstanding the possibility of capital investment in and management
assistance to the Target Business by the Company, there can be no assurance that
the Target Business will prove to be commercially viable.
Taxation
As a general rule, Federal and state tax laws and regulations have a
significant impact upon the structuring of transactions. The Company will
evaluate the possible tax consequences of any prospective transaction and will
endeavor to structure a transaction so as to achieve the most favorable tax
treatment to the Company, the Target Business and their respective stockholders.
There can be no assurance that the Internal Revenue Service or relevant state
tax authorities will ultimately assent to the Company's tax treatment of a
particular consummated transaction. To the extent the Internal Revenue Service
or any relevant state tax authorities ultimately prevail in recharacterizing the
tax treatment of a transaction, there may be adverse tax consequences to the
Company, the Target Business and their respective stockholders. Tax
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considerations as well as other relevant factors will be evaluated in
determining the precise structure of a particular transaction, which could be
effected through various forms of a merger, consolidation or stock or asset
acquisition.
Competition
The Company expects to encounter intense competition from other
entities having business objectives similar to that of the Company. Many of
these entities are well established and have extensive experience in connection
with identifying and effecting transactions directly or through affiliates. Many
of these competitors possess greater financial, technical, human and other
resources than the Company and there can be no assurance that the Company will
have the ability to compete successfully. The Company's financial resources will
be limited in comparison to those of any of its competitors. Further, such
competitors will generally not be required to seek the prior approval of their
own stockholders, which may enable them to close a transaction more quickly than
the Company. This inherent competitive limitation may compel the Company to
select certain less attractive transaction prospects. There can be no assurance
that such prospects will permit the Company to satisfy its stated business
objectives.
Uncertainty of Competitive Environment of Target Business
In the event that the Company succeeds in effecting a transaction, the
Company will, in all likelihood, become subject to intense competition from
competitors of the Target Business. In particular, certain industries which
experience rapid growth frequently attract an increasingly large number of
competitors including competitors with increasingly greater financial,
marketing, technical, human and other resources than the initial competitors in
the industry. The degree of competition characterizing the industry of any
prospective Target Business cannot presently be ascertained. There can be no
assurance that, subsequent to a transaction, the Company will have the resources
to compete effectively, especially to the extent that the Target Business is in
a high-growth industry.
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
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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.
Dependence on Key Personnel and Board of Directors
The Company is dependent upon the continued efforts and abilities of
its senior management, particularly those of Mr. Moshe Zarmi, the Company's
President and Chief Executive Officer and Mr. Fred Knoll, the Company's
Chairman. The loss or unavailability of Mr. Zarmi or Mr. Knoll for any
significant period could have a material adverse effect on the Company's
business, financial condition, results of operations and ability to consummate
transactions.
Control by Management and Principal Shareholders
Mr. Fred Knoll, the Company's Chairman of the Board, controls
Technologies, the principal stockholder of the Company, which owns 1,955,081
shares of Common Stock, representing approximately 42.1% of the Company's
outstanding Common Stock. Mr. Knoll has 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. Additionally, Mr. Knoll controls warrants to
purchase 468,242 shares of Common Stock at an exercise price of $1.07 per share
issued to Technologies (the "Technologies Warrants") in July 1996, warrants
issued to Technologies to purchase 156,250 shares of Common Stock (the "1996
Bridge Warrants"), at an exercise price of $3.90 per share, issued by the
Company to purchasers of its 10% Senior Secured Promissory Notes (the "1996
Bridge Notes") in connection with a debt financing consummated in August 1996
(the "1996 Bridge Financing") and the 1998 Bridge Notes, which are convertible
into up to 1,425,000 shares of Common Stock. In addition, the Company is
considering paying Mr. Knoll's salary as a consultant to the Company in options
to purchase Common Stock. The liability to Mr. Knoll as of the end of fiscal
1998 for outstanding salary and expenses is approximately $177,000.
Need For Additional Financing
The Company does not expect that it will be able to continue its
operations without additional financing. The Company needs to raise additional
debt or equity financing to fund its future operations and growth strategy. The
Company anticipated that it would be required to seek additional funding through
public or private sales of debt or equity securities. On November 6, 1998, the
Board approved the 1998 Bridge Financing with approximate proceeds of $285,000.
In July 1999, the Company consummated the GEM Financing with approximate
proceeds of $150,000. The Company is currently evaluating its financing options;
however, there can be no assurance that additional financing beyond the funds
previously described were available when needed on terms acceptable to the
Company or at all.
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Future Sales of Restricted Securities
The Company had 4,641,758 shares of Common Stock outstanding as of
December 31, 1998. Of these shares, all 1,610,000 shares of Common Stock sold in
the Company's initial public offering (the "IPO") are 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.
Effect of Previously Issued Options, Warrants and Underwriter's Options on Stock
Price
The Company reserved from the authorized, but unissued, Common Stock,
625,000 shares of Common Stock for issuance to key employees, officers,
directors, and consultants and pursuant to stock options granted to such
persons; 456,250 shares of Common Stock for issuance upon exercise of the 1996
Bridge Warrants; 468,242 shares of Common Stock for issuance upon exercise of
the Technologies Warrants; 750,000 shares of Common Stock for issuance upon
conversion of the Gem Notes; and 1,425,000 shares of Common Stock for issuance
upon conversion of the 1998 Bridge Notes. In connection with the IPO, the
Company also sold to Barington Capital Group, L.P. ("Barington"), for nominal
consideration, options to purchase an aggregate of 140,000 shares of Common
Stock at a price per share equal to $10.40 (160% of the IPO price per share),
subject to adjustment as provided therein (the "Underwriter's Options").
The existence of the aforementioned outstanding options and warrants
may prove to be a hindrance to future financing, 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 such Underwriter's Options or underlying securities, such
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 Regulation M 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 such 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.
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Share Price 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 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.
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.
Anti-Takeover Effects of Certain Provisions of Certificate of Incorporation and
Delaware Law
The Company's Certificate of Incorporation authorizes 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.
Item 2. DESCRIPTION OF PROPERTY
The Company's principal offices located at One Lower Ragsdale Drive,
1-250 Monterey, California 93940 were vacated on May 1, 1999. The Company had
leased approximately 5,046 square feet of office space at this location pursuant
to a lease dated August 19, 1994. Annual lease payments for the year ending
December 31, 1998, were $98,000 plus common area charges of approximately
$11,000. Lease payments for the year ending December 31, 1999 are expected to be
$99,000 including common area charges. This lease expires in September 1999.
In December 1997, the Company's management decided to restructure and
consolidate the Company's facilities in order to reduce operating expenses and
concentrate its resources on Think 2000. Accordingly, the Company's office
located at 6541 Via Del Oro, San Jose,
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California 95119 was closed, and the Company recognized an anticipated loss on
lease cost of $24,000. Annual lease payments for the year ended December 31,
1998 for the San Jose facility were $16,500. The Company subleased this space on
April 1, 1998. The sublessor is currently paying all lease payments, but the
responsibilities of the lease remain with the Company. The lease ends April 30,
2001. There are no estimated annual lease payments for the year ended December
31, 1999.
Item 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No Annual Meeting of Stockholders was held during 1998.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted on the OTC Bulletin Board under
the symbol "TSIM." The Common Stock traded on the Nasdaq SmallCap Market from
October 25, 1996 until October 7, 1998.
The following table sets forth the quarterly high and low bid prices of
a share of Common Stock as reported by the Nasdaq SmallCap Market and the OTC
Bulletin Board for the period commencing January 1, 1997, and ending on December
31, 1998.
Period High Low
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Fiscal 1998
First Quarter 6 3/8 2 1/2
Second Quarter 4 1/2 1 5/16
Third Quarter 3 9/16 7/16
Fourth Quarter 1/2 3/32
Fiscal 1997
First Quarter 10 1/2 8 1/4
Second Quarter 10 3/8 8 3/4
Third Quarter 13 1/8 8 1/2
Fourth Quarter 19 3 1/2
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The number of holders of record for the Company's Common Stock as of
December 31, 1998, was approximately ten. This number excludes individual
stockholders holding stock under nominee security position listings.
The Company has not paid any dividends on the Common Stock since its
inception and does not intend to pay any cash 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.
In the past three years, the Company 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 and as
otherwise indicated herein.
In August 1996, the Company, through Barington, acting as placement
agent, issued and sold 18.25 units of its securities (the "Barrington Units"),
each Barrington Unit consisting of one $100,000 principal amount 10% senior
notes and warrants to purchase 25,000 shares of Common Stock at an exercise
price of $3.90 per share (60% of the IPO price per share), at $100,000 per
Barrington Unit 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 received, for its services, a placement fee of 10% of the gross
proceeds from the sale of the Barrington Units, warrants to purchase 45,625
shares of Common Stock at $3.90 per share (which were canceled in connection
with the IPO) and reimbursement of certain expenses.
In September 1994, pursuant to a stock purchase and loan agreement,
dated September 28, 1994, by and between Technologies and the Company, which
proceeds were used in connection with the purchase of the Division from Maxis,
Inc. (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 Commons Stock at an exercise price of $1.07 per share. 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 believed that each such transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act and/or rule 506 promulgated
thereunder.
Under the Company's 1996 Stock Option Plan and 1997 Option Plan
(together, the "Plan"), options to purchase up to 976,000 shares of Common Stock
may be granted to officers, directors, employees or consultants. As of August
1998, the Company had granted 639,500 of
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<PAGE>
these shares. 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. Options to purchase 114,500 shares granted
pursuant to the Plan were terminated as of April 1999 and are no longer
outstanding. Options to purchase 425,000 shares of Common Stock remain
outstanding under the Plan.
In December 1998, the Company consummated the 1998 Bridge Financing.
See Item 1 - History.
In July 1999, the Company consummated the Gem Financing. See Item 1 -
Recent Developments.
The Company is considering compensating Mr. Fred Knoll, Chairman of the
Board of Directors, salary due to him for consulting services in options to
purchase Common Stock. The number of options to be granted has not yet been
determined, but the amounts outstanding as of December 31, 1998 are $177,000.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
accompanying financial statements and notes thereto appearing elsewhere in this
Annual Report on Form 10- KSB.
Overview
The Company commenced operations in December 1993 to develop and market
business simulation software. Until April 1999, the Company was 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.
The Company commenced commercial activities in January 1994, but to
date has not generated substantial revenues from the sale of its products.
Revenues generated through October 30, 1997 were primarily derived from software
development projects completed under contracts with customers. Historically, a
significant portion of such revenues were derived from a limited number of
relatively large development projects contracted for by a small number of
customers. 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 completed as of December 31, 1997.
The Company historically has not had, and at December 31, 1998, did not have,
any firm order backlog. During 1998 the Company sought to continue its
previously announced strategy to change its focus from custom projects to self-
funded development of simulations for broader markets. As part of this strategy,
the Company sought to leverage its existing products and technology platform to
become a product-oriented,
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sales-driven company. During this transition period, revenues were not expected
to be material, as the Company was focusing on developing new product sales
channels.
As of December 31, 1998, the Company had experienced cumulative losses
of $12,210,000 and has not experienced any quarter of profitable operations. The
Company's operations to date have been funded primarily through private sales of
debt and equity securities and the IPO.
During 1998, the Company focused primarily on the commercial
introduction of Think 2000, a Year 2000 risk simulation software program, which
was introduced in September 1997. Think 2000 was the first simulation product
the Company internally funded and brought to a broader market. The Company made
a significant investment in the development and commercialization of Think 2000.
A change in market conditions and the failure of the Company to successfully
commercialize Think 2000 has had a material adverse effect on the Company's
business, operating results and financial condition.
In light of the changes in market conditions, and the Company's failure
to commercialize Think 2000, on April 23, 1999, the Company announced that it
was eliminating substantially all of its operations and terminated all personnel
other than those required to perform certain executive and administrative
functions. It has since begun to search for candidates with which to enter into
transactions. The Company has retained the technology underlying the products it
discontinued.
Comparison of years ended December 31, 1998 and 1997
Revenues. Revenues for the year ended December 31, 1998 increased by
$221,300 or 161% to $358,300 from $137,000 for the year ended December 31, 1997.
During the first 10 months of 1997, the Company's revenues were derived
primarily from a relatively small number of contracts. During November and
December of 1997, and during 1998, the Company's revenues were primarily sales
of the Company's software products.
Gross Margin. Gross margin for the year ended December 31, 1998 was
100% of revenues as compared with 5% of revenues for the year ended December 31,
1997. Gross margin for 1997 included contract costs approximating contract
revenues. Gross margin for 1998 did not include any contract revenues and
related contract costs. All costs of software products during 1998 were absorbed
directly to operating expense.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $947,000, or 30%, for the year ended
December 31, 1998, to $2,215,000, from $3,162,000, for the year ended December
31, 1997. Selling, general and administrative expenses consisted primarily of
wages and benefits, legal, accounting, and consulting expenses, insurance and
rents. The decrease in selling, general and administrative and sales expenses
was due mainly to the Company reducing certain costs as part of the
restructuring plan launched in
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<PAGE>
January, 1998. This plan included closing the San Jose facility. A sub lease was
entered into with an unrelated party in March, 1998.
Research and Development. Research and development expenses for the
year ended December 31, 1998 decreased by $235,000, or 14%, to $1,427,100 from
$1,662,000 for the year ended December 31, 1997. Research and development costs
consisted primarily of wages and benefits. The decrease in research and
development was primarily due to the shifting of development efforts from
software development contracts to internal development of new software products
and further reducing certain costs as part of the restructuring plan launched in
January, 1998.
Interest Income. Interest income for the year ended December 31, 1998
decreased by $198,000 or 80%, from $246,000, to $48,000 from the year ended
December 31, 1997 to December 31, 1998. The interest earned decreased primarily
due to the 1998 reduced balance of proceeds raised from the IPO.
Interest Expense. Interest expense for the year ended December 31, 1998
decreased by $8,800, or 98%, to $200, from $9,000 for the year ended December
31, 1997. The decrease was due to the repayment of the small debt balance held
at the fiscal year ended 1997.
Other Expenses, net. Other expenses for the year ended December 31,
1998 was $248,000. There were no other expenses for the year ended December 31,
1997. Expenses were primarily as follows: $18,550 due to losses on sales of
certain fixed assets; $31,500 resulting from revaluation of assets (impairment)
remaining on records after subsequent event; sale of assets on April 29, 1999;
and $198,375 recorded as deferred earnings for 1997 for stock options
requirements resulting from option grants offered to employees.
Net Loss. As a result of the foregoing, net loss for the year ended
December 31, 1998 decreased by $1,078,000, or 24%, to $3,484,000 from $4,562,000
for the year ended December 31, 1997.
Liquidity and Capital Resources
Since its inception and through December 31, 1998, the Company has
incurred cumulative losses aggregating approximately $12,210,000, 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 efforts to fund transactions.
During the past two fiscal years, the Company has satisfied its cash
requirements principally from advances from stockholders, private and public
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 December 31, 1998, the Company had cash and cash equivalents of
approximately $2,000, a negative working capital of approximately $975,000 and a
negative stockholder's
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equity of approximately $917,000. At December 31, 1998, the Company had
long-term liabilities of approximately $10,000 outstanding.
The Company's operating activities used cash of $2,585,000 and
$3,884,000 in 1998 and 1997, respectively. The funds were used for the Company's
product development and to fulfill general operating expenses.
The Company's financing activities used cash of $3,000 for the fiscal
year ending December 31,1998, and used cash of $167,000 for the fiscal year
ending December 31, 1997. The decrease in the cash balance for the fiscal year
ended December 31, 1998 is primarily due to the operating losses incurred
through 1998.
Impact of Year 2000 Issue
An issue exists for all companies that rely on computers as the year
2000 approaches. The "Year 2000" problem is the result of the past practice in
the computer industry of using two digits rather than four to identify the
applicable year. This practice will result in incorrect results when computers
perform arithmetic operations, comparisons or data field sorting involving years
later than 1999. Currently, the Company has no active operations and will not
have active operations until and unless it enters into a transaction with a
Target Business. As part of its consideration of the merits of entering into a
transaction with a Target Business, the Company will consider the effects of the
Year 2000 problem on such Target Business and the actions taken by such Target
Business to be ready for Year 2000. In assessing the level of readiness of any
Target Business, the Company considers the following to be the most important
factors: (i) the level of compliance of such Target Business' central computer
systems; (ii) the level of compliance of the software used in such Target
Business' ongoing operations; and (iii) the level of readiness of such Target
Business' largest vendors.
There can be no assurances that either a Target Business or any
customers and suppliers of such Target Business, will be Year 2000 compliant. In
the event that any Target Business or any of such Target Business' customers or
suppliers do not install Year 2000 compliant systems, following such transaction
the Company may need additional clerical staff to perform certain tasks, such as
order entry and cash posting, and to provide the information currently provided
to customers electronically. There can be no assurance that the Company will not
have to bear additional costs and expenses in the future related to the Year
2000 problem.
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<PAGE>
Significant Financial and Business Developments
On February 12, 1998, Thinking Tools, Inc. announced the appointment of
Moshe Zarmi as President and Chief Executive Officer. Mr. Zarmi replaced Phillip
F. Whalen, Jr. who resigned to pursue other interests.
On December 19, 1997, due to slower than anticipated sales of the
Company's new product, management decided to restructure the Company's
operations by closing its San Jose office and temporarily reducing its work
force. As a result of the restructuring, the Company recorded a charge of
$149,000 (this includes $24,000 lease costs, $60,000 wages and compensation pay
and the balance to the other costs as they relate to closing the San Jose
Office) for the year ended December 31, 1997. During the fiscal year 1998, the
Company recognized that the estimates of reorganization were higher than actual
and recorded an estimated $24,900 credit to the 1998 general and administrative
expense area.
In August 1996, Technologies converted $1,200,000 aggregate principal
amount of outstanding indebtedness, plus an aggregate of approximately, $120,000
of accrued interest, into an aggregate of 263,158 shares of Common Stock. On
August 28, 1996, the Company closed the 1996 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 principal amount plus $123,000 of accrued interest related to
loans from Technologies from a portion of such proceeds. Technologies purchased
$625,000 aggregate principal amount of promissory notes pursuant to the 1996
Bridge Financing.
On October 30, 1996, the Company received net proceeds of $7,860,347
(net of underwriting discounts, commissions and expenses of $1,239,663) from the
issuance of 1,400,000 shares of Common Stock at $6.50 per share, pursuant to the
IPO. On November 20, 1996, the Company received additional net proceeds of
approximately $1,187,550 net of underwriting discounts, commissions, and
expenses of $177,450 from the issuance of 210,000 shares of Common Stock,
pursuant to the exercise in full of the underwriter's over-allotment option
granted as part of the IPO. Approximately, $1,856,500 of the net proceeds of the
IPO were used to retire outstanding indebtedness and accrued interest under the
promissory notes issued in the 1996 Bridge Financing. The remainder of the net
proceeds of the IPO were used to fund the Company's sales and marketing and
product development efforts, and for working capital and general corporate
purposes.
In December 1998, the Company entered into the 1998 Bridge Financing.
See Item 1--History. From December 10, 1998 through March 15, 1999, Technologies
loaned the Company a total of approximately $285,000, evidenced by the 1998
Bridge Notes.
In April 1999, the Company announced that it was eliminating
substantially all of its operations and closed the Monterey facility and
terminated all personnel other than those needed to perform certain executive
and administrative functions. The Company is searching for
20
<PAGE>
candidates with which to enter into transactions. The Company has retained the
technology underlying the products it discontinued.
In July 1999, the Company consummated the Gem Financing. See Item 1 -
Recent Developments.
Item 7. FINANCIAL STATEMENTS
The Financial Statements and Notes thereto can be found beginning on
page F-1, "Index to Financial Statements," at the end of this Form 10-KSB.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company filed a Form 8-K with the Securities and Exchange
Commission with a Report Date of July 23, 1998, in connection with the
resignation of Deloitte & Touche LLP ("Deloitte") as the Company's independent
accountants, effective as of the close of business July 16, 1999. Deloitte's
report on the Company's financial statements during the past two years contained
no adverse opinion or disclaimer of opinion, and was not qualified or modified
as to audit scope or accounting principles. Deloitte had not issued a report on
the Company's financial statements for the year ended December 31, 1998. For the
year ended December 31, 1997, Deloitte's report on the Company's financial
statements was unqualified and included an explanatory paragraph concerning
certain factors which raise substantial doubt about the Company's ability to
continue as a going concern. During the Company's two most recent fiscal years
and subsequent interim period through the date of Deloitte's resignation, there
had been no disagreements with Deloitte on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure.
During the two most recent fiscal years and through July 16, 1999, there were no
reportable events as that term is defined in Item 304(a)(1)(v) of Regulation
S-K.
A Form 8-K was filed on August 17, 1999 in connection with the
engagement of Druker, Rahl & Fein as the Company's independent accountants.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The executive officers, directors and key employees of the Company as of
September 1, 1999 are as follows:
Name Age Position
- ---- --- --------
Mr. Fred Knoll 44 Chairman of the Board, Director
Mr. Moshe Zarmi 61 President, Chief Executive Officer, Director
Mr. John Hiles 51 Director
Mr. Marc Cooper 37 Director
Ms. Esther Dyson 48 Director
Mr. Frederick Gluck 64 Director
Dr. Ted Prince 52 Director
Mr. Fran Saldutti 51 Director
Mr. Mort Meyerson 61 Advisory Committee Member
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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
Arthur Treachers, Inc., a company in the fast service seafood restaurant
business and ISurfTV Corporation, an internet company, and is a principal of
Valor International 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.
Moshe Zarmi has been President, Chief Executive Officer, and a director
of Thinking Tools, Inc. since February 12, 1998. From July 1997 to December
1997, Mr. Zarmi was a consultant to the Company. Mr. Zarmi has 30 years
experience, primarily in high technology industries. February 1993 to January
1997, Mr. Zarmi was CEO of Geotest, a leading Automated Test Equipment company
based in Southern California. His extensive business experience includes a
tenure at Israel Aircraft Industries (IAI), where he held various positions in
finance and administration, as well as head of US marketing and sales. Mr. Zarmi
also served as President of ATG, the Canadian subsidiary of IAI. Additionally,
Mr. Zarmi headed his own company which specialized in technology transfer and
worked mainly with Israeli high technology companies doing business in the
United States. Mr. Zarmi attended Tel Aviv University and holds a MBA from
Columbia University.
John Hiles, the Founder of the Company, has been a member of its board
of directors, since its inception. Mr. Hiles served as the Company's President
from its inception until November 30, 1996 (except during the period from March
to August 1996) and its Secretary and Chief Technology Officer until his
separation from the Company on April 15, 1999. Mr.
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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, Inc., 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 led 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.
Marc S. Cooper has been a member of the board of directors since
January 1997. Mr. Cooper has been a Managing Director of Peter J. Solomon
Company since June 1999. Prior to that, he served as Vice Chairman of Barington
Capital Group, L.P. from January 1998 to June 1999 and as the Executive Vice
President - Director of Investment Banking and Research for Barington Capital
Group, L.P. from March 1992 until January 1998. From April 1989 to March 1992,
Mr. Cooper was a partner of Scharf Brothers, a private merchant bank involved in
acquisitions of domestic and international industrial and technology companies.
From April 1987 to April 1989, Mr. Cooper was a Vice President in the corporate
finance department of Kidder Peabody & Co., Inc., where he was involved in
structuring and negotiating a wide variety of merchant banking and merger and
acquisition transactions. From 1982 to 1987, Mr. Cooper was an associate in
investment banking at Dean Witter Reynolds, Inc. Mr. Cooper received an M.B.A.
from the New York University Graduate School of Business Administration, and a
B.S. in Management and Economics from New York University.
Esther Dyson has been a member of the board of directors since October
1994. From 1983 to 1997 Ms. Dyson has served as president of EDventure Holdings,
and now is EDventure Holdings chairman. EDventure Holdings is a diversified
company focusing on emerging information technology worldwide, and on the
emerging computer markets of Central and Eastern Europe. Since 1997, Ms. Dyson
has been chairman of the Electronic Frontier Foundation. Ms. Dyson is a member
of the board of directors of the Global Business Network, ComputerLand Poland
and Cygnus Solutions, and she is a member of the advisory board of Perot
Systems. She is a limited partner in the Maryfield 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. He is currently serving as a consultant to McKinsey & Company,
Inc. Mr. Gluck served as vice-chairman and a director of Bechtel Group, Inc. and
as a member of the Board of Directors of Bechtel Enterprises, Inc. from 1995 to
1998. He also served as a member of both companies' executive committees. Prior
to joining Bechtel, Mr. Gluck spent more than 25 years with
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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. Mr. Gluck is also a
member of the Board of Directors of several public and private companies
including ACT Networks, Inc.
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, on which he also serves on
the compensation committee. He is a member of the Software and Services Splinter
Group of the New York Society of Securities Analysts.
Mort Meyerson, the Chairman of the Advisory Committee, is Chairman and
CEO of 2M Companies, Inc., a private investment firm. Mr. Meyerson was Chairman
of Perot Systems from 1992 to 1998. 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.
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Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's Directors, executive officers, and persons who own more
than 10% of a registered class of the Company's equity securities, to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership of Shares and other equity securities of the Company.
Directors, officers and greater than 10% shareholders are required to furnish
the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company, during the fiscal year ended December 31,
1998, Section 16(a) reports have not been filed by Gem Management Limited in
connection with the Gem Financing or by Technologies or Mr. Knoll in connection
with the 1998 Bridge Financing. In addition, Mr. Zarmi has not filed a Form 3
for the grant of Options to purchase Common Stock he received in 1998 and
neither Mr. Hiles nor Gem Management Limited have filed Form 4s in connection
with the sale of 500,377 shares of Common Stock from Mr. Hiles to Gem Management
Limited in June 1999. Mr. Hiles has also not filed Form 4s in connection with
his sale of the Company's securities during September through November of 1998.
Each of Gem Management Limited, Mr. Knoll, Mr. Zarmi and Mr. Hiles intend to
file such statements shortly after the filing of this Form 10-KSB.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth compensation paid for the fiscal years
ended December 31, 1998, and December 31, 1997 to those persons who were, at
December 31, 1998, (i) the chief executive officer and (ii) the one other most
highly compensated executive officer of the Company, who was the only other
executive officer of the Company who received over $100,000 in compensation in
the form of salary and bonus (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
Awards
Securities
Name and Other Annual Underlying
Principal Compensation Options/ All Other
Position Year Salary ($) Bonus ($) ($) SARs Compensation
<S> <C> <C> <C> <C> <C> <C>
Moshe Zarmi CEO(1) 1998 $157,500 ----- ----- 420,000 -----
1997 (1) ----- ----- ----- -----
John Hiles(2) 1998 $144,000 ----- ----- ----- -----
Founder, Chief 1997 $158,758 ----- ----- ----- -----
Technology Officer
</TABLE>
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- --------
(1) Mr. Zarmi joined the Company on December 15, 1997. Mr. Zarmi's options
continue in effect as long as he is affiliated with the Company per the
Option agreement.
(2) Mr. Hiles was President of the Company until November 30, 1996. Mr.
Hiles separated from the Company as an officer effective April 15,
1999. He remains a Director of the Company.
Stock Option Grants
The Company strives to distribute stock option awards broadly
throughout the organization. Stock option awards are based on the individual's
position and contribution to the Company. The Company's long term performance
ultimately determines compensation from stock options because stock option value
is entirely dependent on the long term growth of the Company's Common Stock
price.
Compensation Committee
The Compensation Committee of the Board of Directors is responsible for
determining the compensation of executive officers of the Company and to
administer the Company's Plan. Messrs. Prince and Saldutti, who are
disinterested directors, comprise the Compensation Committee. There were no
stock option grants during the 1998 year.
General Policies Regarding Compensation of Executive Officers
The Company's executive compensation policies are intended (1) to
attract and retain high quality managerial and executive talent and to motivate
these individuals to maximize shareholder returns, (2) to afford appropriate
incentives for executives to produce sustained superior performance, and (3) to
reward executives for superior individual contributions to the achievement of
the Company's business objectives. The Company's compensation structure consists
of base salary, annual cash bonuses, and stock options. Together these
components link each executive's compensation directly to individual and Company
performance.
Salary. Base salary levels reflect individual positions,
responsibilities, experience, leadership, and potential contribution to the
success of the Company. Actual salaries vary based on the Compensation
Committee's subjective assessment of the individual executive's performance and
the Company's performance. Four officers of the Company did take 10% salary cuts
during the 1998 year to be repaid when finances would allow. The 10% reduction
has not been repaid.
Bonuses. Executive officers are eligible to receive cash bonuses based
on the Compensation Committee's subjective assessment of the respective
executive's individual performance and the performance of the Company. In its
evaluation of executive officers and the determination of incentive bonuses, the
Compensation Committee does not assign quantitative relative weights to
different factors or follow mathematical formulae. Rather, the Compensation
Committee makes its determination in each case after considering the factors it
deems relevant, which may include consequences for performance that is below
expectations.
26
<PAGE>
Bonuses for the Company's officers were accrued during the 1998 year and have
not been distributed.
Stock Options. Stock options are currently the Company's sole long term
compensation vehicle. The stock options are intended to provide employees with
sufficient incentive to manage from the perspective of an owner with an equity
stake in the business.
As a result of the closing of the Company's offices during April, 1999
all employees that left the Company forfeited their rights to the Stock Options.
The Directors at the Company do not receive any cash compensation for
their participation on the board. During 1998, there were no options granted to
directors except for those granted to Moshe Zarmi in his capacity as President
and CEO. The Company may grant additional options to its independent directors
in 1999.
In determining the size of individual option grants, the Compensation
Committee considers the aggregate number of shares available for grant, the
number of individuals to be considered for an award of stock options, and the
range of potential compensation levels that the option awards may yield. The
number and timing of stock option grants to executive officers are decided by
the Compensation Committee based on its subjective assessment of the performance
of each grantee. In determining the size and timing of option grants, the
Compensation Committee weighs any factors it considers relevant and gives such
factors the relative weight it considers appropriate under the circumstances
then prevailing. While an ancillary goal of the Compensation Committee in
awarding stock options is to increase the stock ownership of the Company's
management, the Compensation Committee does not, when determining the amount of
stock options to award, consider the amount of stock already owned by an
officer. The Compensation Committee believes that to do so could have the effect
of inappropriately or inequitably penalizing or rewarding executives based upon
their personal decisions as to stock ownership and option exercises.
In 1993, the Internal Revenue Code was amended to limit the
deductibility of certain compensation expenses in excess of $1 million. These
changes in the tax laws will apply to the compensation paid to executive
officers of the Company in fiscal year ending December 31, 1998. The
Compensation Committee believes that the compensation paid by the Company in
fiscal year ending December 31, 1998, will not result in any material loss of
tax deductions for the Company. The Compensation Committee will continue to
monitor the tax regulations as they are finalized to determine whether any
policy changes are appropriate.
Arrangements with Directors and Executive Officers
Until 1999, Mr. Zarmi was paid an annual base salary of $175,000 plus a
discretionary bonus determined by the Compensation Committee of the Board of
Directors. Mr. Zarmi took a 10% pay reduction during 1998. Additionally, in
connection with his employment by the Company, Mr. Zarmi received (i) an option
under the 1996 Plan to purchase 230,000 shares of
27
<PAGE>
Common Stock at $2.50 per share, such option vesting in equal annual
installments over three years commencing March 2, 1998 provided that Mr. Zarmi
remains an employee of the Company; (ii) an option under the 1997 Plan to
purchase 190,000 shares of Common Stock at $4.50 per share, such options vesting
at such time the market price of the Common Stock is $20.00 per share or higher
for 20 consecutive trading days, and provided that Mr. Zarmi remains an employee
of the Company. The vesting of all options granted to Mr. Zarmi is subject to
acceleration under certain circumstances. Mr. Zarmi has received no salary in
1999. In lieu thereof, the Board of Directors is considering repricing the
options previously granted to Mr. Zarmi.
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. Since October 1, 1997, Mr.
Knoll has been compensated for such services at the rate of $150,000 per annum.
Payment of Mr. Knoll's compensation will be deferred until the Board of
Directors determines to make payments in respect thereof. The Company is
currently considering paying Mr. Knoll in options to purchase Common Stock. Mr.
Knoll is also entitled to reimbursement of any expenses he incurs in connection
with providing services to the Company. Mr. Knoll, through certain affiliates,
controls Technologies.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 1, 1999, certain
information known to the Company with respect to the beneficial ownership of the
Company's voting securities 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 Named Executive Officers, 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.
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percentage of Class(1)
------------------- -------------------- ---------------------
Thinking Technologies, L.P.(2) 4,004,573(12) 59.8%
Mr. Fred Knoll(3) 4,004,573(13) 59.8%
Mr. Marc Cooper(4) 0 0
Ms. Esther Dyson(5) 25,000(14) *
28
<PAGE>
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percentage of Class(1)
------------------- -------------------- ----------------------
Mr. Frederick Gluck(6) 25,000(14) *
Dr. Ted Prince(7) 25,000(14) *
Mr. Fran Saldutti(8) 25,000(14) *
Mr. Moshe Zarmi(9) 105,000(15) 2.2%
John Hiles(10) 0 .0
Gem Management Limited(11) 1,250,377(16) 23.2%
All directors and
Executive officers as a group
(9 persons) 5,281,250 61.0%
- -------
* Less than one percent.
(1) Percentage of ownership is based on 4,641,758 shares of Common Stock
outstanding. For each beneficial owner, shares of Common Stock subject
to convertible securities exercisable within 60 days of the date of
this Form 10-KSB are deemed outstanding for computing the percentage of
such beneficial owner.
(2) The address of Thinking Technologies, L.P. is 200 Park Avenue, Suite
3900, New York, New York 10166.
(3) The address of Mr. Knoll is c/o Knoll Capital Management, 200 Park
Avenue, Suite 3900, New York, New York 10166.
(4) The address of Mr. Cooper is c/o Peter J. Solomon Company, 767 Fifth
Avenue, New York, NY 10153.
(5) The address of Ms. Dyson is c/o EDventure Holdings, Inc., 104 Fifth
Avenue, 20th Floor, New York, New York 10011-6987.
(6) The address of Mr. Gluck is c/o McKinsey & Co., 400 South Hope Street,
Los Angeles, California 90071.
29
<PAGE>
(7) The address of Dr. Prince is c/o Perth Ventures, 10 West 74th Street,
#2F, New York, New York 10023.
(8) The address of Mr. Saldutti is c/o Ardent Research Partners, 153 East
53rd Street, Suite 4800, New York, New York 10022.
(9) The address of Mr. Zarmi is 215 Frankel Blvd. Merrick, NY 11566
(10) The address of Mr. Hiles is 22 Deer Stalker Path, Monterey, CA 93940.
(11) The address of Gem Management Limited is P.O. Box 860, 11 Bath Street,
St. Hellar, Jersey, JE4 0YZ.
(12) Includes 468,242 shares of Common Stock issuable upon the exercise of
the Technologies Warrants, 156,250 shares of Common Stock issuable upon
exercise of the 1996 Bridge Warrants and 1,425,000 shares of Common
Stock issuable upon the conversion of the 1998 Bridge Notes.
(13) Includes 468,242 shares of Common Stock issuable upon the exercise of
the Technologies Warrants, 156,250 shares of Common Stock issuable upon
exercise of the 1996 Bridge Warrants and 1,425,000 shares of Common
Stock issuable upon the conversion of the 1998 Bridge Notes.
(14) Includes an aggregate of 25,000 shares of Common Stock issuable to each
non-affiliated director of the Company upon the exercise of outstanding
options.
(15) Includes 105,000 shares of Common Stock issuable to Mr. Zarmi upon the
exercise of outstanding options.
(16) Includes 750,000 shares of Common Stock issuable to Gem Management
Limited upon the conversion of the Gem Notes.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with its purchase of certain assets from Maxis, Inc., 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. 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
was effective until the Company (i) was acquired through a merger or
acquisition; or (ii) effects an initial public IPO 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
30
<PAGE>
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 1996 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. The loan was paid in full on December 31, 1996.
Pursuant to the Technologies Agreement, as long as Technologies owned
20% of the Company's Common Stock, the Company could not take certain actions
without the approval of the Company's board of directors. Technologies entered
into a Consent, Waiver and Amendment dated as of August 28, 1996, as amended
(the "Consent & Waiver"), with the Company in connection with the 1996 Bridge
Financing pursuant to which such covenants terminated upon consummation of the
IPO.
In addition, in connection with the 1996 Bridge Financing, pursuant to
the Consent and Waiver, the following transactions were consummated:
The Predecessor Company was merged with and into the Company, its
wholly-owned subsidiary. Pursuant to the merger, each share of common stock of
the Predecessor Company 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 1996 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 1996
Bridge Financing.
On November 6, 1998, the Company entered into the 1998 Bridge
Financing. See Item 1 - History.
The Company intends to issue additional options to purchase shares of
Common Stock to its independent directors during 1999.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
Exhibit
No. Description
------ -----------
3.1 Certificate of Incorporation of Thinking Tools, Inc.(1)
3.2 By-Laws of Thinking Tools, Inc.(1)
4.1 Form of Underwriter's Option Agreement(1)
4.2 1996 Stock Option Plan(1)
31
<PAGE>
Exhibit
No. Description
------ -----------
4.3 Form of Stock Certificate(2)
4.4 Form of Private Placement Investors' Warrant(1)
4.5 Technologies Warrant(2)
4.6 Form of Private Placement Note(1)
4.7 Form of Lock-up Agreement(2)
4.8 1997 Stock Option Plan(3)
10.1 Form of Consulting Agreement(1)
10.2 Technologies Agreement between the Company and
Technologies dated September 26, 1994(2)
10.3 Consent, Waiver and Amendment between the Company and
Technologies dated August 31, 1996(2)
10.4 Lease between the Company and KI Monterey Research, Inc.
dated August 19, 1994, as amended(2)
16.1 Letter on change in certifying accountant(4)
16.2 Letter on change in certifying accountant.(5)
16.3 Letter on change in certifying accountant.(6)
27.1 Financial Data Schedule
- ----------------
(1) Incorporated herein by reference to the Company's Registration
Statement on Form SB-2 (Registration No. 33-11321), as filed with the
Securities and Exchange Commission (the "Commission") on September 3,
1996 (the "Registration Statement").
(2) Incorporated herein by reference to Amendment No. 1 to the Registration
Statement, as filed with the Commission on October 11, 1996.
(3) Incorporated herein by reference to Exhibit A of the Company's Proxy
Statement, dated November 13, 1997.
(4) Incorporated herein by reference to the Company's Current Report on
Form 8-K, as filed with the Commission on March 7, 1997, and Amendment
No. 1 thereto on Form 8-K/4, as filed with the Commission on March 14,
1997.
(5) Incorporated herein by reference to the Company's Current Report on
Form 8-K, as filed with the Commission on July 23, 1999, and Amendment
No. 1 thereto on Form 8-K/A, as filed with the Commission on July 30,
1999.
(6) Incorporated herein by reference to the Company's Current Report on
Form 8-K, as filed with the Commission on August 17, 1999.
(b) Reports on Form 8-K
-------------------
The Company did not file any Reports on Form 8-K during the fourth
quarter of Fiscal 1998. The Company did file four Reports on Form 8-K subsequent
to the fourth quarter of Fiscal 1998 and prior to completion of this Form
10-KSB.
32
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: September 10, 1999
THINKING TOOLS, INC.
By: /s/ Moshe Zarmi
---------------
Moshe Zarmi
President and Chief Executive Officer,
Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Company
in the capacities and on the dates indicated.
Dated: September 10, 1999 /s/ Moshe Zarmi
---------------
President and Chief Executive Officer,
Director
(Principal Executive Officer)
Dated: September 10, 1999 /s/ Marc Cooper
---------------
Marc Cooper, Director
Dated: September 10, 1999 /s/ Esther Dyson
----------------
Esther Dyson, Director
Dated: September 10, 1999 /s/ Frederick Gluck
-------------------
Frederick Gluck, Director
Dated: September 10, 1999 /s/ John Hiles
--------------
John Hiles, Director
Dated: September 10, 1999 /s/ Fred Knoll
--------------
Fred Knoll, Director
Dated: September 10, 1999 /s/ Ted Prince
--------------
Dr. Ted Prince, Director
Dated: September 10, 1999 /s/ Fran Saldutti
-----------------
Fran Saldutti, Director
<PAGE>
THINKING TOOLS, INC.
INDEX TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Page
Number
------
INDEPENDENT AUDITORS' REPORTS......................................F-2-3
FINANCIAL STATEMENTS
Balance Sheets..............................................F-4
Statements of Operations....................................F-5
Statements of Shareholders' Equity (Deficiency).............F-6
Statements of Cash Flows....................................F-7
Notes to Financial Statements............................F-8-16
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Thinking Tools, Inc.:
We have audited the accompanying balance sheet of Thinking Tools, Inc. as of
December 31, 1998, and the related statements of operations, shareholders'
deficiency and cash flows for the year then ended. 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 audit. The
financial statements of Thinking Tools, Inc. for the year ended December 31,
1997 were audited by other auditors whose report, dated February 2, 1998, on
those statements included an explanatory paragraph that described the Company's
ability to continue as a going concern as discussed in Note 1 to the financial
statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998, and the
results of its operations and its cash flows for the year then ended 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's recurring losses from operations and lack of
revenues raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in
Note 1. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
DRUKER, RAHL & FEIN
Princeton, New Jersey
August 6, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Thinking Tools, Inc.:
We have audited the accompanying balance sheet of Thinking Tools, Inc. as of
December 31, 1997, and the related statements of operations, shareholders'
equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1997, and the
results of its operations and its cash flows for the year ended December 31,
1997 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's recurring losses from operations and lack of
revenues raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
San Jose, California
February 2, 1998
F-3
<PAGE>
<TABLE>
<CAPTION>
THINKING TOOLS, INC.
BALANCE SHEETS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------------------
(In thousands, except share and per share amounts)
ASSETS 1998 1997
--------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 2 $ 2,597
Accounts receivable 53 7
Prepaid expenses and other current assets - 131
--------- ---------
Total current assets 55 2,735
PROPERTY AND EQUIPMENT, Net 56 265
OTHER ASSETS 12 29
--------- ---------
TOTAL ASSETS $ 123 $ 3,029
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable $ 282 $ 200
Accrued expenses 638 359
Notes payable 85 88
Deferred revenues 22 -
Current portion of capital lease obligations 3 13
--------- ---------
Total current liabilities 1,030 660
LONG TERM DEPOSITS 10 -
--------- ---------
Total liabilities 1,040 660
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIENCY)
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;
4,641,758 shares issued and outstanding 5 5
Additional paid-in capital 11,288 11,288
Deferred stock compensation - (198)
Accumulated deficit (12,210) (8,726)
--------- ---------
Total shareholders' equity (deficiency) (917) 2,369
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) $ 123 $ 3,029
========= =========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
THINKING TOOLS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------
1998 1997
---------- ----------
<S> <C> <C>
REVENUES
Product $ 358 $ 21
Contract - 116
---------- ----------
Total revenues 358 137
COST OF REVENUES - 130
---------- ----------
Gross profit 358 7
---------- ----------
OPERATING EXPENSES
Selling, general and administrative 2,215 3,162
Research and development 1,427 1,662
---------- ----------
Total operating expenses 3,642 4,824
---------- ----------
LOSS FROM OPERATIONS (3,284) (4,817)
---------- ----------
OTHER INCOME (EXPENSE)
Interest income 48 264
Other expense (248) (9)
---------- ----------
Total other income (expense) (200) 255
---------- ----------
NET LOSS $ (3,484) $ (4,562)
========= ==========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.72) $ (0.98)
========= ==========
SHARES USED IN CALCULATION OF NET LOSS PER SHARE 4,642 4,642
========= ==========
See notes to financial statements.
</TABLE>
F-5
<PAGE>
THINKING TOOLS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
(In thousands, except share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Total
Common Stock Additional Deferred Shareholders'
--------------------- Paid-in Stock Accumulated Equity
Shares Amount Capital Compensation Deficit (Deficiency)
----------- ------ ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1997 4,461,758 $ 5 $ 11,288 $ (302) $ (4,164) $ 6,827
Amortization of deferred stock compensation - - - 104 - 104
Net loss - - - - (4,562) (4,562)
----------- ------ -------- ------------- ----------- -----------
BALANCES, December 31, 1997 4,641,758 5 11,288 (198) (8,726) 2,369
Amortization of deferred stock compensation - - - 198 - 198
Net loss - - - - (3,484) (3,484)
----------- ------ -------- ------------ ----------- --------------
BALANCES, December 31, 1998 4,641,758 $ 5 $ 11,288 $ - $ (12,210) $ (917)
=========== ====== ======== ============ =========== ==============
</TABLE>
See notes to financial statements.
F-6
<PAGE>
THINKING TOOLS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,484) $ (4,562)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 80 57
Impairment of assets 113 -
Loss on sales of fixed assets 26 -
Stock compensation expense 198 104
Changes in assets and liabilities:
Accounts receivable (45) 223
Prepaid expenses and other assets 150 109
Accounts payable 82 19
Accrued expenses 273 166
Deferred revenues 22 -
---------- ----------
Net cash used in operating activities (2,585) (3,884)
---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (7) (221)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (88) (151)
Proceeds from issuance of notes payable 85 -
Principal payments on capital lease obligations (10) (16)
Proceeds from long term deposits 10 -
---------- ----------
Net cash used in financing activities (3) (167)
---------- ----------
NET (DECREASE) IN CASH AND EQUIVALENTS (2,595) (4,272)
CASH AND EQUIVALENTS, Beginning of year 2,597 6,869
---------- ----------
CASH AND EQUIVALENTS, End of year $ 2 $ 2,597
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ - $ 9
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITY:
Liability insurance financed under a note payable $ - $ 112
========= =========
</TABLE>
See notes to financial statements.
F-7
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997
1. BUSINESS AND BASIS OF PRESENTATION
Business - Thinking Tools, Inc. (the "Company") was incorporated in Delaware on
August 8, 1996, as a wholly-owned subsidiary of Thinking Tools, Inc., a
California corporation (the "Predecessor Company"). On August 28, 1996, the
Predecessor Company was merged with and into the Company. References herein to
the "Company" include the Predecessor Company.
The Predecessor Company was formed on December 30, 1993, to purchase certain
assets of the Business Simulation Division (the "Division") of Maxis, Inc., a
leading computer game company and creator of the simulation game SimCityTM.
Through the purchase agreement with Maxis, Inc., the Company acquired the
Division's equipment, staff, work-in-progress, customers, prospects, software
tools, libraries and processes. The Company's products included SimRefinery, a
refinery simulation product, SimHealth, a health care reform simulation product
and TelSim, a local telephone exchange simulation product.
The Company commenced operations in December 1993 to develop and market business
simulation software. From its inception until April 1999, the Company was
engaged in research and development activities and organizational efforts,
including the development of its initial products, recruiting personnel, and
establishing marketing and manufacturing capabilities and raising capital. The
Company commenced commercial activities in January 1994, but to date has not
generated substantial revenues from the sale of its products.
In September 1997, the Company introduced Think 2000, the first simulation
product which the Company internally funded and brought to a broader market. The
Company made a significant investment in the development and commercialization
of Think 2000, but changes in market conditions for Year 2000 products and the
Company's failure to successfully commercialize Think 2000 had a material
adverse effect on the Company.
From November 1998 through July 1999, the Company received approximately
$285,000 of proceeds of a secured convertible note from Thinking Technologies,
L.P. and approximately $150,000 of proceeds from an unsecured convertible note
with Gem Management Ltd. These amounts have been used for working capital and
general corporate purposes.
Basis of Presentation - The Company's financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplates the
continuation of the Company as a going concern. The Company lacks product
revenues and has sustained substantial operating losses. In addition, the
Company has used substantial amounts of working capital in its operations.
Further, at December 31, 1998, its current liabilities exceed its current assets
by $975,000.
As shown in the accompanying financial statements, the Company incurred a net
loss of $3,484,000 for the year ended December 31, 1998, and as of December 31,
1998, had an accumulated deficit of $12,210,000. The Company intends to locate
and enter into a transaction
F-8
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997
1. BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
Basis of Presentation (Continued) - with an existing, public or privately-held
company which in management's view, has growth potential and may be involved in
the software or technology industry. To that end, the Company is currently
engaged in negotiations with several candidates. The Company's continued
existence is dependent on its ability to negotiate such a transaction and its
ability to raise additional financing. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Contract and Product Revenues - The Company generally recognizes revenue for
software product sales upon delivery of the software and at the time at which
all criteria for revenue recognition have been met in accordance with American
Institute of Certified Public Accountants Statement of Position 97-2 "Software
Revenue Recognition." For multiple-element arrangements involving either
licensing of a product or post-delivery customer support, a portion of the
revenue based upon the fair value of the respective element is deferred and
recognized ratably over the life of the license or technical support period.
The Company follows the percentage-of-completion method of accounting for
revenues related to fixed-price contracts. Percentage-of-completion is
determined using certain measures of input. Adjustments to cost and other
contract-related estimates are made periodically, and losses expected to be
incurred on contracts in progress are charged to operations in the period such
losses are determined. Costs related to these contracts consist mainly of direct
labor and related costs.
Cash Equivalents - The Company considers all highly liquid debt instruments
purchased with an original maturity date of three months or less to be cash
equivalents.
Concentration of Credit Risk - Financial instruments that potentially subject
the Company to concentration of credit risk are cash and equivalents and
accounts receivable. Risks associated with cash and equivalents are mitigated by
banking with credit-worthy institutions. The Company performs an ongoing
evaluation of its customers' creditworthiness and generally requires no
collateral.
F-9
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment - Property and equipment are stated at the lower of cost
or fair value. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets of three to seven years. Leasehold
improvements are amortized over the shorter of the estimated useful lives or the
underlying lease term. The Company evaluates the recoverability of long-lived
assets on an on-going basis.
As of December 31, 1998 certain property and equipment were deemed to be
impaired and were written down to their fair value. An impairment loss of
approximately $113,000 has been charged to research and development expenses and
other expenses in 1998.
Research and Development - Research and development costs are charged to expense
as incurred, while software development costs incurred between the establishment
of technological feasibility and general production release are capitalized.
Since the Company's development process generally results in the establishment
of technological feasibility concurrent with general production release, no
software development costs were capitalized in 1998 or 1997.
Income Taxes - The Company records income taxes using the asset and liability
approach, whereby deferred tax assets and liabilities, net of valuation
allowances, are recorded for the future tax consequences of temporary
differences between financial statement and tax bases of assets and liabilities
and for the benefit of net operating loss carryforwards.
Stock Compensation - The Company accounts for stock-based awards granted to
employees based on the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Due to subsequent events in April, 1999, with the exception of an
officer and two consultants, there are no other employees after April 1999. As a
result those employees who have separated from the Company have forfeited their
stock options.
Net Loss Per Share - The Company follows Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings Per Share." Due to the Company's net loss,
all convertible securities, options and warrants are antidilutive; hence both
basic and diluted loss per share are computed based on the weighted average
number of shares of common stock outstanding during the period.
F-10
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 are comprised as follows
(in thousands):
1998 1997
------- --------
Equipment $ 71 $ 296
Furniture and fixtures 3 73
Leasehold improvements - 10
------- --------
Total property and equipment 74 379
Accumulated depreciation and amortization (18) (114)
-------- ---------
Property and equipment, net $ 56 $ 265
======== =========
At December 31, 1998 and 1997, property and equipment included assets leased
under capital leases of approximately $3,000 and $20,000, net of accumulated
amortization of $4,000 and $32,000, respectively.
4. ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1997 are comprised as follows (in
thousands):
1998 1997
--------- ---------
Lease abandonment costs $ 75 $ 149
Legal and professional fees 79 112
Payroll and related benefits 292 72
Accrued severance costs - 19
Consulting expense due to related party 177 -
Other 15 7
-------- --------
Total $ 638 $ 359
======== ========
5. LEASES
The Company leases its office space under two noncancelable operating leases,
one (San Jose Office) expiring in 2001 and a second (Monterey office) expiring
September 1999. The Company consolidated its locations prior to expiration of
one of its leases in March of 1998 and sub-leased the San Jose office. This
resulted in a lease abandonment accrual of $149,000 at December 31, 1997.
Closure of the Monterey office in April 1999 resulted in a lease abandonment
accrual of approximately $75,000 at December 31, 1998.
F-11
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997
5. LEASES (CONTINUED)
Future minimum rental commitments under the above leases at December 31, 1998
are as follows (in thousands):
Years Ending December 31,
1999 $ 170
2000 71
2001 30
-------
$ 271
=======
The minimum future rental commitments have not been reduced by $172,000 of
sublease rentals to be received in the future under non-cancelable subleases.
The Company leases certain office equipment under noncancelable capital lease
obligations. At December 31, 1998, future payments under such leases total
$3,000.
Total rent expense was approximately $184,000 and $277,000, including the
abandonment accruals, for the years ended December 31, 1998 and 1997,
respectively.
6. INCOME TAXES
Due to the Company's history of net losses, the Company has fully reserved its
net deferred tax benefits (including its net operating losses) and,
consequently, its tax provision (benefit) is nil.
Calculations for deferred tax assets and liabilities are as follows (in
thousands):
Deferred tax assets: 1988 1997
-------- --------
Net operating loss carryforwards $ 3,453 $ 2,775
Accruals and reserves not currently deductible 377 294
-------- --------
Total gross deferred tax assets 3,830 3,069
Total gross deferred tax liabilities - depreciation - (14)
Less valuation allowance (3,830) (3,055)
-------- --------
Net deferred tax assets $ - $ -
======== =========
F-12
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997
6. INCOME TAXES (CONTINUED)
As of December 31, 1998, the Company has net operating loss carryforwards of
$10,155,000 and $6,964,000 for federal and state purposes, respectively. As of
December 31, 1998, the Company also has tax credit carryforwards of $32,000 and
$25,000 for federal and state purposes. The losses expire beginning in 2009 and
2002, respectively. Federal and State of California tax laws impose significant
restrictions on the utilization of net operating loss carryforwards in the event
of a change in ownership as defined by the Internal Revenue Service Code Section
382.
7. NOTES PAYABLE
The note payable at December 31, 1997 relating to the Company's directors and
officers insurance policy was approximately $88,000. This note was paid in full
in September 1998. The policy was not renewed.
In November 1998, the Company approved a bridge financing offer from Thinking
Technologies, L.P ("Technologies"), under which Technologies was granted the
right to purchase up to $350,000 of Senior Secured Convertible Notes due within
90 days at 10% interest per annum, and warrants to purchase shares of common
stock of the Company. Each $1,000 note is convertible into 5,000 shares of
Common Stock. If the notes are converted, the warrants expire. As of December
31, 1998, $85,000 was outstanding. Subsequent cash advances through March 1999,
resulted in borrowings under this arrangement amounting to approximately
$285,000.
In July 1999, an additional unsecured convertible note of $150,000, with
interest of 10% per annum and with warrants to purchase common stock, was
entered into with Gem Management Ltd. The note is convertible into shares of
Common Stock at $.20 per share. If the note is converted, the warrants expire.
Interest expense was approximately $200 and $9,000 for the years ended December
31, 1998 and 1997, respectively.
8. SHAREHOLDERS' EQUITY (DEFICIENCY)
Warrants
The Company consumated a series of financing transactions in 1996. Warrants were
issued to Thinking Technologies, L.P. to purchase 468,242 shares of common stock
at an exercise price of $1.07 per share, expiring December 2006. Warrants to
purchase 456,250 shares of the Company's common stock at $3.90 per share,
expiring August 2001, were also issued. In addition, in October and November
1996, the Company completed its IPO (including the exercise of the underwriter's
over-allotment option) and issued 1,610,000 shares of common stock at $6.50 per
share for net proceeds of approximately $8,470,000. In connection with its
initial public offering, the Company sold to its underwriter options to purchase
140,000 common shares for $.001 per option. These options are exercisable for a
period of five years at an exercise price equal to 160% of the initial public
offering price ($10.40 per share).
F-13
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1998 and 1997
8. SHAREHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Warrants (Continued)
As discussed in Note 7, the Company has issued 1,420,000 warrants under a bridge
financing offer to Thinking Technologies, L.P. and 750,000 warrants to Gem
Management, Ltd.
Stock Option Plans
Under the Company's 1996 and 1997 Stock Option Plans (the "Plans"), options to
purchase up to an aggregate of 976,000 shares of common stock may be granted to
officers, directors, employees or consultants. The Plans provide 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 Plans become exercisable as determined by the
Board of Directors and must be exercised within ten years. Options granted are
forfeited after 90 days of an employee's separation from the Company.
A summary of the status of the Company's stock option plans as of December 31,
1998 and 1997, and the changes during the years ended December 31, 1998 and
1997, is presented below:
Number of Range of
Shares Exercise Prices
---------- ---------------
Outstanding at January 1, 1997 534,000 $ .794 - 5.000
Granted - $ -
Exercised - $ -
Forfeited - $ -
---------- ----------------
Outstanding at December 31, 1997 534,000 $ .794 - 5.000
Granted 535,500 $ 2.500 - 5.000
Exercised - $ -
Forfeited (461,000) $ 0.794
---------- ----------------
Outstanding at December 31, 1998 608,500 $ .794 - 5.000
========== ================
Exercisable at December 31, 1998 24,333 $ .794 - 5.000
==========
Weighted-average fair value of options
granted during the year ended
December 31, 1998 $ 1.43
==========
Weighted-average fair value of options
granted during the year ended
December 31, 1997 $ -
==========
F-14
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1998 and 1997
8. SHAREHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
The following table summarizes information about fixed stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
---------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
Weighted-
Number average Weighted- Number Weighted-
Outstanding at Remaining average Outstanding at average
Range of Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1998 Life Price 1998 Price
- ------------------- ---------------- ------------- ----------- -------------- -----------
$ 0.794 39,000 8.6 years $ 0.794 13,000 $ 0.794
$ 5.000 34,000 8.6 years $ 5.000 11,333 $ 5.000
$ 2.500 345,500 9.2 years $ 2.500 - $ 2.500
$ 4.500 190,000 9.2 years $ 5.000 - $ 5.000
--------------- --------------
608,500 24,333
=============== ==============
</TABLE>
As discussed in Note 2, the Company accounts for its stock-based awards using
the intrinsic value method in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and its related interpretations.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), requires the disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of the minimum value method for all
periods prior to the initial public offering, and subsequently through the use
of option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock option
price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the minimum and
Black-Scholes option pricing models with the following weighted average
assumptions: expected life of 30 to 40 months; stock volatility, 61% subsequent
to the initial public offering in 1996; risk-free interest rates, approximately
6.0%; and no dividends during the expected term. The Company's calculations are
based on a multiple option valuation approach and forfeitures are recognized as
they occur. If the computed fair values of the 1998 and 1997 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
would have been $3,705,000 ($.80 per share) in 1998 and $5,524,000 ($1.19 per
share) in 1997.
F-15
<PAGE>
THINKING TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1998 and 1997
9. MAJOR CUSTOMERS
Three customers accounted for 15%, 13% and 10% each of software revenues for the
year ended December 31, 1998. One of these customers accounted for 50% and one
other customer accounted for 47% of the accounts receivable at December 31,
1998.
Three customers accounted for 68%, 16%, and 11% each of contract revenues for
the year ended December 31, 1997. One other customer accounted for 100% of
accounts receivable at December 31, 1997.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the financial statements as of December 31,
1998 and 1997 for cash and equivalents and notes payable approximate their
respective fair values due to the short maturities of those instruments.
11. ADVERTISING COSTS
Advertising costs, except for costs associated with direct-response advertising,
are charged to operations when incurred. The costs of direct-response
advertising are capitalized and amortized over the period during which future
benefits are expected to be received. Advertising expense was $428,000 and
$128,000 for the years ended December 31, 1998 and 1997, respectively.
12. RELATED PARTY TRANSACTIONS
The Company's Chairman of the Board controls Thinking Technologies, L.P., which
owns approximately 42% of the Company's outstanding common stock, owns warrants
to purchase additional shares of common stock, and has made a Bridge Loan to the
Company, as discussed in Notes 7 and 8. Included in accrued expenses at December
31, 1998, is $177,000 due to the Company's Chairman of the Board for consulting
services as approved by the Board of Directors. This obligation may, at the
Company's election, be paid in options to purchase common stock. These
consulting services commenced October 1997 for $150,000 per year less certain
related expenses.
13. SUBSEQUENT EVENTS
In April 1999, the Company closed its Monterey office and sold most of its
property and equipment as discussed in Notes 1, 2 and 5. In addition, the
Company has received proceeds of approximately $350,000 in 1999 under financing
arrangements as discussed in Notes 1 and 7.
F-16
