<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 1996
REGISTRATION NO. 333-11017
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------------------
SIMULATION SCIENCES INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
DELAWARE 7371 95-2487793
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
</TABLE>
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601 VALENCIA AVENUE, SUITE 100, BREA, CA 92823, (714) 579-0412
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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CHARLES R. HARRIS, PRESIDENT AND CHIEF EXECUTIVE OFFICER
SIMULATION SCIENCES INC., 601 VALENCIA AVENUE, SUITE 100, BREA, CA 92823
(Name, address, including zip code, and telephone number, including area code,
of agent for service of process)
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With copies to:
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<S> <C>
JEFFREY D. SAPER, ESQ. ROBERT M. MATTSON, JR., ESQ.
MARK BONHAM, ESQ. KEVIN A. FAULKNER, ESQ.
ROBERT G. O'CONNOR, ESQ. HANS J. BRASSELER, ESQ.
WILSON SONSINI GOODRICH & ROSATI, P.C. MORRISON & FOERSTER LLP
650 PAGE MILL ROAD 19900 MACARTHUR BLVD., SUITE 1200
PALO ALTO, CALIFORNIA 94304 IRVINE, CA 92715
(415) 493-9300 (714) 251-7500
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
OCTOBER 4, 1996
3,600,000 SHARES
LOGO
COMMON STOCK
------------------
Of the 3,600,000 shares of Common Stock offered hereby, 2,700,000 shares
are being sold by Simulation Sciences Inc. ("SimSci" or the "Company") and
900,000 shares are being sold by the Selling Stockholders. See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of shares by the Selling Stockholders. Prior to this offering, there has
been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $8.00 and
$10.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company's
Common Stock has been approved for quotation on the Nasdaq National Market under
the symbol "SMCI."
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
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PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
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Per Share.............. $ $ $ $
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Total(3)............... $ $ $ $
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</TABLE>
(1) See "Underwriting" for information relating to indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $1,000,000.
(3) The Company and certain Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to 540,000 additional shares of
Common Stock solely to cover over-allotments, if any. To the extent that the
option is exercised, the Underwriters will offer the additional shares at
the Price to Public shown above. If the option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Stockholders will be $ ,
$ , $ and $ , respectively. See "Underwriting."
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1996.
ALEX. BROWN & SONS WESSELS, ARNOLD & HENDERSON
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE> 3
------------------------------------
PRO/II, PROVISION, PROVISION TOOLKIT, PIPEPHASE, HEXTRAN, INPLANT, DATACON,
OpenYield, PROTISS and ROM are registered trademarks of the Company. NETOPT is a
trademark of the Company. SimSci is a service mark of the Company. All other
trademarks or service marks referred to in this Prospectus are the property of
their respective owners.
------------------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. Investors should carefully consider the
information set forth under the heading "Risk Factors."
THE COMPANY
Simulation Sciences Inc. ("SimSci" or the "Company") is a leading provider
of commercial simulation software and related services to the process
industries, including the petroleum, petrochemical and industrial chemicals
process industries and the engineering and construction firms that support those
industries. The Company's windows-based graphical user interface and simulation
software products are designed to provide the information necessary to increase
profitability by reducing capital investment costs, improving plant yields and
enhancing management decision making. In addition, the Company's Open Simulation
Application Framework ("OSAF"), a SimSci software architecture utilized by the
Company's PROVISION product, enables companies in the process industries to
integrate their internally developed software and third-party software with the
Company's software, thereby helping customers maximize the value of investments
in existing technology. SimSci has over 500 customers throughout the process
industries and has offices in seven countries supporting sales in over 70
countries worldwide. In February 1996, the Company entered into a joint
development agreement with Shell Oil Company to develop a new, real-time
simulation and optimization software product.
According to industry sources, companies in the process industries operate
more than 14,000 processing facilities worldwide. Companies in these
capital-intensive industries must continually seek ways to increase the
efficiency of their plant designs and production operations to increase
profitability and improve return on investment. Process industry plant
operations are comprised of a series of distinct process steps that involve
different chemical reactions and physical processes. The chemistry and physics
of these individual process steps can be modeled in software using sophisticated
mathematical techniques. Because plants in these industries process very large
volumes of materials, even slight increases in efficiency may result in
significant increases in profitability. Furthermore, increasingly intense global
competition and stringent environmental and safety regulations have placed
additional pressure on these industries to optimize the conversion of raw
materials into finished products. Today's process industry managers are
increasingly seeking to use software modeling for process design, to improve the
efficiency of their ongoing operations and to manage their overall plants more
profitably.
PRO/II, the Company's leading steady-state simulation program, enables
process design engineers to rigorously model a wide range of organic and
inorganic chemical processes, such as those found in the oil and gas, chemical
and petrochemical industries. Engineers use PRO/II to design new processes or to
troubleshoot, debottleneck and retrofit existing operations to make them operate
more efficiently and profitably. SimSci's products are designed to run on
industry-standard platforms and software environments, including 32-bit Windows
and UNIX, and utilize an easy-to-use graphical user interface. The Company's
PROVISION graphical environment enables third-party and in-house software to
interoperate with the Company's simulation software through OSAF. The Company
also offers a number of other products to simulate various aspects of process
industry operations.
The Company currently has over 500 customers across the major process
industries. In 1995 and the six months ended June 30, 1996, 64% and 65%,
respectively, of the Company's total revenue was generated from customers
outside of the United States. Customers include Amoco Corporation, Arco, BP Oil
Company, Chevron U.S.A. Inc., Citgo Petroleum Company, Conoco Inc., Exxon Oil
Corporation, Mobil Oil Corporation, Royal Dutch Shell Oil Company, Sun Company
Inc., Texaco Refining and Marketing, Inc., Unocal Corporation, Allied Signal
Corporation, Hoechst A.G., Imperial Chemical Industries PLC, Mitsubishi Chemical
Corporation, Nippon Sanso Corporation, Novacor Chemical Corp., Saudi Basic
Industries Corp., Bechtel Corporation, Brown & Root, Inc., Fluor Daniel, Inc.,
Nippon Oil Engineering and Construction, Raytheon Engineers & Construction and
Snamprogetti SpA.
The Company's strategy is to expand and extend the use of its simulation
technology and solutions for design, optimization and management functions
throughout the process industries by leveraging core simulation technology,
integrating core products into its OSAF architecture, expanding on-line modeling
capabilities, penetrating additional process industries and promoting strategic
relationships.
The Company markets its products and services through its direct sales
organization complemented by sales agents and distributors. As of June 30, 1996,
the Company's global direct sales force included 26 sales personnel located in
three sales and support offices in the United States and international sales
offices in the United Kingdom, Germany, Egypt, Japan, Singapore and Venezuela.
SimSci also markets its products at a substantial discount to universities for
use in teaching and research, participates in industry trade shows, conducts
direct mail campaigns and sponsors industry conferences and seminars.
The Company was incorporated in California in 1967 and reincorporated in
Delaware in September 1996. The Company's principal offices are located at 601
Valencia Avenue, Suite 100, Brea, California 92823 and its telephone number at
that location is (714) 579-0412.
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................. 2,700,000 shares
Common Stock offered by the Selling Stockholders.... 900,000 shares
Common Stock to be outstanding after the offering... 9,400,503 shares(1)
Use of proceeds..................................... For working capital and other general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol....................... SMCI
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenue................... $21,513 $23,940 $28,144 $28,252 $33,119 $15,246 $21,791
Gross profit.................... 17,769 19,855 24,014 21,564 26,359 12,147 18,460
Total operating expenses........ 17,527 19,009 21,857 23,965 24,152 11,362 17,250
Income (loss) from operations... 242 846 2,157 (2,401) 2,207 784 1,210
Net income (loss)............... 114 536 1,604 (1,642) 1,355 620 810
Pro forma net income per
share......................... $ .17 $ .10
Pro forma weighted average
common shares(2).............. 7,789 7,789
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------
PRO FORMA(2) AS ADJUSTED(3)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.............................................. $ 2,316 $ 24,291
Total assets................................................. 22,596 44,007
Total liabilities............................................ 11,874 11,686
Total stockholders' equity................................... 10,722 32,321
</TABLE>
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(1) Excludes (i) 1,514,166 shares of Common Stock issuable upon the exercise of
outstanding options at June 30, 1996 under the Company's 1994 Stock Option
Plan at a weighted average exercise price of $4.26 per share, (ii) options
to purchase an additional 26,667 shares granted after June 30, 1996 and the
cancellation of options for 12,000 shares after June 30, 1996 and (iii)
438,598 shares issuable upon the exercise of outstanding warrants at $2.85
per share. Includes 8,000 shares of Common Stock issued upon the exercise of
options after June 30, 1996.
(2) Reflects the conversion of all outstanding shares of Preferred Stock into
shares of Common Stock at the closing of this offering. See "Capitalization"
and Note 4 of Notes to Consolidated Financial Statements. The Company has
not declared or paid any cash dividends on the Common Stock for more than
five years and does not presently intend to pay cash dividends on the Common
Stock in the foreseeable future. See "Dividend Policy."
(3) Adjusted to give effect to the sale of the 2,700,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$9.00 per share after deducting the estimated underwriting discount and
estimated offering expenses payable by the Company. See "Use of Proceeds"
and "Capitalization."
------------------------
Except as otherwise specified, all information in this Prospectus (i)
assumes no exercise of the Underwriters' over-allotment option; (ii) reflects
the conversion of all of the Company's outstanding shares of Preferred Stock
into shares of Common Stock, which will occur automatically at the closing of
this offering; (iii) reflects a one-for-three reverse stock split to be
effective prior to the closing of this offering; and (iv) reflects the
reincorporation of the Company in the State of Delaware in September 1996. See
"Underwriting."
4
<PAGE> 6
RISK FACTORS
The shares offered hereby involve a high degree of risk. The following risk
factors should be considered carefully in addition to the other information in
this Prospectus before purchasing the shares of Common Stock offered hereby. The
discussion in this Prospectus contains certain forward-looking statements that
involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
Prospectus should be read as being applicable to all related forward-looking
statements wherever they appear in this Prospectus. The Company's actual results
could differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere herein.
Fluctuations in Future Operating Results. The Company's operating results
have fluctuated in the past and may fluctuate significantly from quarter to
quarter or on an annual basis in the future as a result of a number of factors,
including, but not limited to: the size and timing of customer orders; changes
in license renewal rates, delays in renewals or failure of existing customers to
renew their licenses with the Company when their current licenses expire; the
length of the Company's sales cycle; changes in contract terms (including terms
affecting the timing of recognition of license revenue) and the rate at which
such changes are made; success of the Company's service offerings; timing of new
product announcements and introductions by the Company and its competitors; the
Company's ability to develop, introduce and market new products and product
enhancements; market acceptance of the Company's products; deferrals of customer
orders in anticipation of new products or product enhancements; the Company's
ability to control costs, including the need for, and degree of use of,
third-party contractors; the availability of components; political instability
in, or trade embargoes with respect to, foreign markets; changes in the
Company's management team; and fluctuating economic conditions. The Company's
future operating results may fluctuate as a result of these and other factors,
which could have a material adverse effect on the Company's business, operating
results and financial condition. It is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company ships software products within a short period after receipt of
a new order and typically does not have a material backlog of unfilled orders.
Revenue in any quarter is dependent (and will become substantially dependent as
the Company increases the number of contracts for new and renewing customers
that result in the recognition of license revenue upon shipment) on orders
booked and license renewals in that quarter and are not predictable with any
degree of certainty. In addition, the Company typically experiences a seasonal
increase in sales during the quarter ended December 31 of each year. Since the
Company's expense levels are based in part on its expectations regarding future
revenue, if revenue is below expectations in any given quarter, the adverse
effect may be magnified by the Company's inability to adjust spending in a
timely manner to compensate for any revenue shortfall. In addition, a customer's
purchase of the Company's products generally involves a significant commitment
of capital with the attendant delays frequently associated with authorization
procedures for substantial capital expenditures within large organizations.
Moreover, because customers are purchasing larger and more complex simulation
software products, the average order value has been increasing and purchases of
the Company's products require approval at higher executive levels. For these
and other reasons, the sales cycles for the Company's products can be lengthy
and are subject to a number of significant risks over which the Company has
little or no control. As a result of the large dollar amounts represented by a
single order, the timing of the receipt of an order can have a significant
impact on the Company's revenues and earnings for a particular period. Any
significant or ongoing failure to reach definitive agreements with customers,
including renewals of current licensing agreements upon their expiration, would
have a material adverse effect on the Company's business, operating results and
financial condition. In 1994, the Company experienced delays in the completion
of Rigorous On-line Modeling ("ROM") projects that resulted in a material
adverse effect on the Company's operating results, and no assurance can be given
that the Company will not experience similar delays with respect to ROM or any
of its products or services in the future, or that any such delay would not have
a material adverse effect on the Company's business, operating results and
financial condition.
5
<PAGE> 7
Product Concentration. The Company derives a substantial portion of its
total revenue from sales of its PRO/II simulation product. Revenue attributable
to sales of PRO/II accounted for approximately 70% of the Company's total
revenue in each of the last three years and the six months ended June 30, 1996.
The Company currently expects PRO/II, individually or integrated with other
products, to account for a significant portion of the Company's total revenue in
the future. Accordingly, factors adversely affecting the pricing of or demand
for PRO/II, including products and pricing terms offered by competitors, could
have a material adverse effect on the Company's business, operating results and
financial condition. The Company's future financial performance will depend in
significant part on the successful development, introduction and customer
acceptance of enhanced versions of PRO/II or new or enhanced products that
integrate with PRO/II. There can be no assurance that the Company will be
successful in marketing the PRO/II product, enhancements to PRO/II or enhanced
products that integrate with PRO/II in the future. See "Business -- Products and
Services."
Concentration of Revenue in the Petroleum Industry. The Company derives a
substantial majority of its total revenue from software licenses and services to
companies in the petroleum industry, which is highly cyclical. Accordingly, the
Company's future success is dependent upon the continued demand for process
engineering software by companies in the petroleum industry. The Company
believes that pricing pressures experienced by petroleum companies in connection
with cost containment measures have led to delays and reductions in certain
capital and operating expenditures by many of such companies in the past, and
such delays or reductions could recur in the future. Any such delays, reductions
or fluctuations could have a material adverse effect on the Company's business,
operating results and financial condition. Further, the Company's revenue has in
the past been, and may in the future be, subject to substantial period-to-period
fluctuations as a consequence of general domestic and foreign economic
conditions, political developments and other factors affecting spending in the
petroleum industry. The Company intends to develop new products and product
enhancements for other process industries, including the chemical process
industry. However, there can be no assurance that such products or product
enhancements, once introduced, will achieve their intended benefits, compete
successfully with in-house or commercial products that are more established in
such other process industries or achieve market acceptance in such other process
industries. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Dependence on Contract Renewals; Need to Achieve Greater Market
Penetration. The Company derives a significant portion of its total revenue
from the renewal of license agreements with existing customers. The Company
expects contract renewals to account for an increasing portion of the Company's
total revenue in the future as the Company increases the number of contracts for
renewing customers that result in the recognition of license revenue upon
shipment. The Company's license agreements generally have one to five-year terms
and do not obligate the customer to renew. The Company's ability to secure
renewals may be affected by, among other factors, its ability to deliver
consistent, high-quality and timely product enhancements; ownership or
management changes within customer organizations, including acquisitions of
customers by other companies; customer capital budget constraints; the
introduction of competing products by third parties; political and economic
stability in customers' markets; and other factors, many of which may be beyond
the control of the Company. There can be no assurance that the Company will be
able to maintain its historical renewal rates, and any significant or ongoing
decline in renewal rates would have a material adverse effect on the Company's
business, operating results and financial condition.
The success of the Company's strategy is dependent upon increased market
acceptance of commercial simulation software in general, and of the Company's
software products and services in particular, in the process industries.
Increased market acceptance of the Company's products by such companies depends
upon several factors, including the performance of the Company's products,
accuracy of results obtained by using those products, ease of implementation and
use, breadth and integration of product offerings and, generally, the extent to
which users achieve the intended cost savings and productivity gains from their
use of the Company's products. There can be no assurance that the Company's
customers will realize the intended benefits of simulation and modeling software
in general, and of the Company's products in particular, or that such software
or the Company's products will achieve increased market acceptance in the
process industries. Any significant or ongoing failure to achieve such benefits
or to increase market acceptance would
6
<PAGE> 8
substantially restrict the future growth of the Company and could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Industry Background."
Competition. The market for commercial simulation software used in the
petroleum, chemical and other process industries is intensely competitive and is
characterized by rapidly changing technology, evolving industry standards,
frequent new product introductions and rapidly changing customer requirements.
The Company experiences its primary competition from potential customers'
decisions to develop their own software internally rather than purchasing
commercial software products such as those offered by the Company. As a result,
the Company must continuously educate existing and prospective customers about
the advantages of purchasing the Company's products and services. There can be
no assurance that these customers or other potential customers will perceive
sufficient value in the Company's products and services to justify purchasing
them. In addition, customers or potential customers could enter into strategic
relationships with one or more of the Company's competitors to develop, market
and sell competing products and services.
The Company has experienced and expects to continue to experience
competition from current and future competitors, some of which have
significantly greater financial, technical, marketing and other resources than
the Company. The Company's current direct competitors include, among others,
Aspen Technology, Inc., Hyprotech Ltd. and Chemstations, Inc., and, with respect
to the Company's technology and consulting services, the Hi-Spec division of
Honeywell, Inc., the Setpoint and DMCC divisions of Aspen Technology, Inc. and
ABB Simcon Inc. Certain of the Company's competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
to devote greater resources to the development, promotion and sale of their
products than can the Company. Also, several of the Company's current and
potential competitors have greater name recognition and larger installed bases
that could be leveraged to increase market share at the Company's expense. The
Company expects to face increased competition as other established and emerging
companies enter the commercial simulation software market in the process
industries and new products and technologies are introduced. Increased
competition could result in price reductions, fewer customer orders, reduction
in license renewals and loss of market share, any of which could materially
adversely affect the Company's business, operating results and financial
condition. In addition, current and potential competitors have in the recent
past, and may in the future, make strategic acquisitions, merge or establish
cooperative relationships among themselves or with third parties, thereby
increasing the ability of their products to address the needs of the Company's
current or prospective customers. Such competition could materially adversely
affect the Company's ability to sell new or renewal licenses and maintenance and
service agreements on terms favorable to the Company. Further, competitive
pressures could require the Company to reduce the price of licenses for its
products and related services, which could materially adversely affect the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, and the failure to do so would have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Business -- Competition."
Risks Associated With International Operations. A significant portion of
the Company's total revenue is derived from customers outside the United States,
and the Company anticipates that international revenue will continue to be
significant in the future. Revenue from customers outside the United States
accounted for 58%, 62%, 64% and 65% of total revenue in 1993, 1994 and 1995 and
the six months ended June 30, 1996, respectively. The Company's international
operations are subject to risks inherent in the conduct of international
business, including unexpected changes in regulatory requirements, exchange
rates, export license requirements, tariffs and other barriers, political and
economic instability, limited intellectual property protection, difficulties in
collecting payments due from sales agents or customers, difficulties in managing
distributors or representatives, difficulties in staffing and managing foreign
subsidiary operations, and potentially adverse tax consequences. The Company
derives substantial revenue from the sale of products to customers in the Middle
East and in the past has been required to discontinue shipments to such
customers due to trade embargoes imposed by the United States. There can be no
assurance that future trade embargoes or any of the other foregoing factors will
not have a material adverse effect on the Company's international operations and
therefore its business, operating results and financial condition. Certain of
the Company's direct international sales are denominated in local currencies,
and the impact of future exchange rate
7
<PAGE> 9
fluctuations on the Company's operating results and financial condition cannot
be accurately predicted. The Company does not currently engage in currency
exchange rate hedging transactions, and there can be no assurance that
fluctuations in currency exchange rates in the future will not have a material
adverse impact on revenue from international sales and thus the Company's
business, operating results and financial condition. The Company may engage in
hedging in the future; however, there can be no assurance that any currency
hedging policies implemented by the Company in the future will be successful.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on Strategic Relationships. The Company is dependent in part on
a number of strategic alliances for the joint development and marketing of its
products. For example, the Company has entered into a joint development
agreement with Shell Oil Company with respect to the Company's ROMEO project, is
jointly developing its NETOPT product with Mobil Corporation, is jointly
developing PROTISS with Strategic Analysis and Simulation Technology, Ltd. and
has recently entered into a memorandum of understanding with the petroleum
industry business unit of IBM regarding joint development, marketing and sales
activities. There can be no assurance that the Company's strategic partners will
not revoke their commitment to the Company's products or services at any time in
the future, that they will not develop their own competitive products or
services, or that the software of other companies that is integrated with the
Company's software or services will not contain defects or errors or will
achieve market acceptance or commercial success. Accordingly, there can be no
assurance that the Company's existing or future relationships will result in
sustained business alliances, successful product or service offerings or the
generation of significant revenues for the Company. Failure of one or more of
the Company's strategic alliances to achieve commercial success, or the
termination of one or more of such alliances, could result in delay or
termination of product development projects, reduction in market penetration,
decreased ability to win new customers or loss of confidence by current or
potential customers, any of which could have a material adverse effect on the
Company's business, results of operations or financial condition. See
"Business -- Products and Services" and "-- Product Development."
Dependence Upon Product Development; Rapid Technological Change. The
software market in which the Company competes is subject to rapid technological
change, frequent introductions of new products, changes in customer demand and
evolving industry standards. The introduction of products embodying new
technologies and the emergence of new industry standards can render existing
products obsolete and unmarketable. The Company's future results of operations
will depend in part upon its ability to address the increasingly sophisticated
needs of its customers by supporting existing and emerging hardware, software,
database and networking platforms and by developing and introducing enhancements
to its existing products and new products on a timely basis that keep pace with
such technological developments, emerging industry standards and customer
requirements. There can be no assurance that the Company will be successful in
developing and marketing enhancements that respond to technological change,
evolving industry standards or customer requirements, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and sale of such enhancements or that such enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. The Company has in the past experienced delays in the release dates
of enhancements to certain of its products. If release dates of any new
significant products or product enhancements are delayed or if they fail to
achieve market acceptance, the Company's business, operating results and
financial condition would be materially adversely affected. In addition, the
introduction or announcement of new product offerings or enhancements by the
Company or the Company's competitors may cause customers to defer or forgo
purchases of current versions of its products, which could in turn have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Product Development."
Limited Time Under Current Management Team; Management of
Growth. Substantially all of the Company's current executive management team
has joined the Company in the last two years, including its Chief Executive
Officer and Chief Financial Officer, who joined the Company in July 1995 and
June 1996, respectively. The Company's business is currently experiencing a
period of growth that has placed and is expected to continue to place a
significant strain on the Company's personnel and resources. The Company's
ability to manage future growth, if any, will depend on its ability to continue
to implement and improve
8
<PAGE> 10
operational, financial and management information and controls systems on a
timely basis, and any failure to do so could have a material adverse effect on
the Company's business, operating results and financial condition. In addition,
the Company in the past has experienced difficulties in the management of its
service offerings, which difficulties materially and adversely affected the
Company's operating results. No assurance can be given that the Company will not
experience similar difficulties in the future. See "Management."
Limited Protection of Proprietary Rights. The Company relies upon a
combination of copyright, trade secret and trademark laws to protect its
proprietary technology. The Company enters into confidentiality agreements with
its employees, developers, distributors and customers and limits access to and
distribution of the source code to its software and other proprietary
information. However, policing unauthorized use of the Company's products is
difficult. There can be no assurance that the steps taken by the Company in this
regard will be adequate to prevent misappropriation of its technology or that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. Any such
misappropriation of the Company's technology or development of competitive
technologies could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, the laws of certain
countries in which the Company's products are distributed do not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States. The laws of many countries in which the Company
licenses its products protect trademarks solely on the basis of registration.
The Company currently possesses a limited number of trademark registrations in
certain foreign jurisdictions and does not possess any foreign copyright or
patent registrations. Accordingly, effective trademark and patent protection may
be unavailable in certain foreign countries.
Certain technology used in the Company's current products and products
under development, including OpenYield, Visual Flare, NETOPT, PROTISS and ROMEO,
is licensed from third parties. These licenses generally require the Company to
pay royalties and to fulfill confidentiality obligations. The termination of any
such licenses, or the failure of the third party licensors to adequately
maintain or update their products, could result in delay in the Company's
ability to ship certain of its products while it seeks to implement technology
offered by alternative sources, if any, which could prove costly. Also, any such
delay could result in a material adverse effect on the Company's business,
operating results and financial condition by delaying the Company's ability to
ship products.
The Company could incur substantial costs in protecting and enforcing its
intellectual property rights. Moreover, from time to time third parties may
assert patent, trademark, copyright and other intellectual property rights to
technologies that are important to the Company. In such an event, the Company
may be required to incur significant costs in litigating a resolution to the
asserted claims. There can be no assurance that such a resolution would not
require that the Company pay damages or obtain a license of a third party's
proprietary rights in order to continue licensing its products as currently
offered or, if such a license is required, that it will be available on terms
acceptable to the Company. See "Business -- Proprietary Rights."
Dependence on Contract Developers. The Company currently subcontracts
certain aspects of its research and development to outside contractors. The
Company may in the future experience problems with those contractors, such as
quality or on-time delivery problems. In addition, certain of these contractors
are located in India, and the Company may therefore suffer adverse consequences
as a result of communication, cultural or political barriers or because the laws
of other countries may be less protective of the Company's intellectual property
than are the laws of the United States. In addition, the Company may in the
future experience pricing pressure from its contractors. To date, the Company
has had only limited experience with the use of research and development
contractors. There can be no assurance that the Company will be able to manage
its contract developers effectively or that these developers will meet the
Company's future requirements for timely delivery of high-quality products. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Employees."
Product Liability. The Company markets its products to customers for
process design, simulation and optimization in the petroleum, chemical and other
process industries. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in the Company's
9
<PAGE> 11
license agreements may not be effective as a result of existing or future
federal, state or local laws or ordinances or unfavorable judicial decisions.
Although the Company has not experienced any product liability claims to date,
the sale and support of its simulation and optimization software may entail the
risk of such claims, which are likely to be substantial in light of the
applications in which the Company's products are used. The Company maintains
insurance against claims associated with the use of its products, but there can
be no assurance that its insurance coverage would adequately cover any claim
asserted against the Company. A successful product liability claim brought
against the Company in excess of its insurance coverage or outside the scope of
such coverage could have a material adverse effect upon the Company's business,
operating results and financial condition.
Potential for Software Defects. Complex software products such as those
offered by the Company may contain undetected errors or failures commonly
referred to as "bugs." There can be no assurance that, despite significant
testing by the Company and by current and potential customers, errors will not
be found in new products or enhancements to existing products after commencement
of commercial shipments. This risk may be more severe with respect to new
products where industry standards and customer loyalty are not yet established
and where commercial use of the product is not widespread. Although the Company
has not experienced material adverse effects resulting from any such errors or
defects to date, there can be no assurance that errors or defects will not be
discovered in the future, potentially causing delays in product introduction and
shipments or requiring design modifications that could adversely affect the
Company's business, results of operations, or financial condition. See
"Business -- Products and Services" and "-- Product Development."
Dependence on Key Personnel. The Company's future business results depend
in significant part on the Company's Chief Executive Officer and other senior
management and key employees, including certain technical, managerial and
marketing personnel. The loss of the services of any of these individuals or
groups of individuals could have a material adverse effect on the Company's
business, operating results and financial condition. None of the Company's
executive officers has entered into an employment agreement with the Company.
The Company believes that its future business results will also depend in
significant part upon its ability to attract, motivate and retain additional
highly skilled technical, managerial and marketing personnel. Competition for
such personnel is intense, and there can be no assurance that the Company will
be successful in attracting and retaining the personnel it requires. See
"Management."
Control by Stockholders. Upon completion of the offering, Summit Ventures
III, L.P., Summit Investors II, L.P., Enterprise Partners II, L.P. and
Enterprise Partners II Associates, L.P. (collectively, the "Investors") will in
the aggregate beneficially own approximately 16.3% of the issued and outstanding
shares of Common Stock of the Company. In addition, upon completion of the
offering, the Company's founders, Dr. Yui L. Wang, N. Fred Brannock and Vincent
S. Verneuil (the "Founders") will in the aggregate beneficially own
approximately 28.5% of the issued and outstanding shares of Common Stock of the
Company. Accordingly, the Investors and the Founders together will beneficially
own 44.8% of the issued and outstanding shares and will therefore have the
ability to effectively control the outcome of all matters (including the
election of directors, any merger or consolidation, or the sale of all or
substantially all of the Company's assets) submitted to the stockholders for
approval. This concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of the Company and making certain
transactions more difficult or impossible absent the support of such
stockholders, including proxy contests, mergers involving the Company, tender
offers, open-market purchase programs or other purchases of Common Stock that
could give stockholders of the Company the opportunity to realize a premium over
the then-prevailing market price for shares of Common Stock. See "Principal and
Selling Stockholders."
Antitakeover Effects of the Company's Charter, Bylaws and Delaware
Law. The Company's Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. However, the issuance of
Preferred Stock could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plans to issue
shares of Preferred Stock. In addition, the Company is subject to the anti-
10
<PAGE> 12
takeover provisions of Section 203 of the Delaware General Corporation Law. In
general, this statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. Furthermore, certain other provisions of the Company's
charter and bylaws may have the effect of discouraging, delaying or preventing a
merger, tender offer or proxy contest, which could adversely affect the market
price of the Company's Common Stock. See "Description of Capital
Stock -- Antitakeover Effects of Provisions of the Company's Charter and Bylaws"
and "-- Section 203 of the Delaware General Corporation Law."
No Prior Public Trading Market; Possible Volatility of Stock Price. Prior
to the offering, there has been no public trading market for shares of the
Common Stock, and there can be no assurance that an active public trading market
will develop following completion of the offering or, if developed, that such
market will be sustained. The initial public offering price of the shares of
Common Stock will be determined by negotiation between the Company, the Selling
Stockholders and the Representatives of the Underwriters and will not
necessarily reflect the market price of the Common Stock following the offering.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price.
The market price for the Common Stock following the offering will be
affected by a number of factors, including the announcement of new products,
product enhancements or new services by the Company or its competitors,
quarterly variations in the Company's results of operations or the results of
operations of the Company's competitors, changes in earnings estimates or
recommendations by securities analysts, developments in the Company's industry,
general market conditions and other factors, including factors unrelated to the
operating performance of the Company or its competitors. In addition, stock
prices for many companies in the technology and emerging growth sectors have
experienced wide fluctuations which have often been unrelated to the operating
performance of such companies. Such factors and fluctuations may adversely
affect the market price of the Company's Common Stock.
Broad Management Discretion in Use of Proceeds. The net proceeds to the
Company from the sale of the Common Stock offered by the Company hereby at an
assumed initial public offering price of $9.00 per share are estimated to be
$21.6 million ($26.0 million if the Underwriters over-allotment option is
exercised in full) after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company. While the
Company currently anticipates that it may use a portion of such proceeds for
continued investments in product development and the expansion of sales and
marketing activities, a substantial portion of such proceeds are currently
allocated only for general corporate purposes. Consequently, management will
have broad discretion over the use of a majority of the proceeds of the
offering. See "Use of Proceeds."
Shares Eligible for Future Sale. Sales of substantial numbers of shares of
Common Stock in the public market following the offering could adversely affect
the market price of the Common Stock prevailing from time to time. Upon
completion of this offering, the Company will have 9,400,503 shares of Common
Stock outstanding. Of these outstanding shares, the 3,600,000 shares sold in
this offering will be freely transferable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless they are held by "affiliates" of the Company within the meaning of
Rule 144 promulgated under the Securities Act as currently in effect. Of the
remaining 5,800,503 shares held by existing stockholders, 25,334 shares are
"restricted" shares within the meaning of Rule 144 and may not be sold in the
absence of registration under the Securities Act or an exemption therefrom and
5,775,169 shares are eligible for sale without restriction or further
registration under Rule 144, unless they are held by "affiliates" of the Company
or subject to a "lock-up" agreement.
Each of the stockholders of the Company has entered into a lock-up
agreement providing that such stockholder will not offer, sell, pledge, grant an
option for the sale of or otherwise dispose of shares of Common Stock, or any
interest therein, or any securities exercisable for or convertible into shares
of Common Stock, for a period of 180 days after the effective date of the
offering made hereby without the prior written consent of Alex. Brown & Sons
Incorporated. As a result of these contractual restrictions, notwithstanding
possible earlier eligibility for sale under Rules 144 and 701, unless earlier
released from the lock-up agreements, 5,800,503 shares of Common stock will be
eligible for sale 180 days after the effective date of the offering
11
<PAGE> 13
made hereby, subject in the case of shares held by "affiliates" of the Company
to the volume limitations of Rules 144 and 701.
In addition, 413,167 shares of Common Stock subject to vested stock options
will be eligible for sale upon expiration of the lock-up agreements. As of the
date of this Prospectus, the Company had reserved an aggregate of 1,666,667
shares of Common Stock for issuance pursuant to its 1994 Stock Option Plan and
options to purchase 1,520,833 shares were outstanding under the 1994 Stock
Option Plan, and the Company had reserved 1,000,000, 125,000 and 200,000 shares
for issuance under its 1996 Stock Plan, the 1996 Director Option Plan and
Employee Stock Purchase Plans, respectively. As soon as practicable following
the offering, the Company intends to file a registration statement on Form S-8
under the Securities Act to register shares of Common Stock reserved for
issuance under such plans. Such registration statement will automatically become
effective immediately upon filing, and such shares will thereafter be freely
transferable, subject to the lock-up agreements summarized above. See "Shares
Eligible For Future Sale."
Dilution. Purchasers of the Common Stock offered hereby will suffer an
immediate and substantial dilution of $5.69 per share (assuming an initial
public offering price of $9.00 per share) in the net tangible book value per
share of the Common Stock. See "Dilution."
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$9.00 per share are estimated to be $21.6 million ($26.0 million, if the
Underwriters' over-allotment option is exercised in full) after deducting the
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company. The Company will not receive any of the proceeds from
the sale of Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders."
The principal purposes of the offering are to obtain additional working
capital, to create a public market for the Company's Common Stock and to
facilitate future access by the Company to public equity markets. The Company
intends to use the net proceeds for general corporate purposes, including
continued investments in product development and expansion of sales and
marketing activities. In addition, the Company may use the net proceeds from the
sale of the Common Stock offered by the Company hereby for acquisitions of
complementary products, technologies or businesses, although the Company is not
engaged in any negotiation with respect to any such acquisitions. Pending such
uses, the Company will invest the net proceeds from the sale of the Common Stock
offered by the Company hereby in short-term, investment grade, interest-bearing
securities.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on the Common Stock
for more than five years and does not presently intend to pay cash dividends on
the Common Stock in the foreseeable future. The Company's line of credit
agreement currently prohibits the payment of cash dividends on its capital stock
without the lender's consent. Any payment of cash dividends on shares of Common
Stock will be within the discretion of the Company's Board of Directors and will
depend upon the earnings of the Company, the Company's capital requirements,
restrictions imposed by the Company's lenders, applicable requirements of the
Delaware General Corporation Law and other factors which are considered relevant
by the Company's Board of Directors.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
June 30, 1996, the pro forma capitalization of the Company after giving effect
to (i) the conversion of all outstanding shares of Preferred Stock to Common
Stock on a one-for-one basis and as adjusted to give effect to the sale of the
2,700,000 shares of Common Stock offered by the Company hereby, assuming an
initial public offering price of $9.00 per share and after deducting the
estimated underwriting discount and estimated offering expenses payable by the
Company, and the application of the net proceeds therefrom. See "Use of
Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------- ------------ --------------
<S> <C> <C> <C>
(IN THOUSANDS)
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock, $0.001 par value,
5,000,000 shares authorized; 1,666,668 issued and
outstanding actual, none issued or outstanding pro
forma and as adjusted................................. $ 4,802 $ -- $ --
Common Stock, $0.001 par value, 30,000,000 shares
authorized; 5,025,835 shares issued and outstanding
actual; 6,692,503 and 9,392,503 shares issued and
outstanding pro forma and as adjusted(3).............. 5 7 9
Additional paid-in capital............................... 1,541 6,341 27,938
Retained earnings........................................ 4,374 4,374 4,374
------- ------------ --------------
Total stockholders' equity............................ 5,920 10,722 32,321
------- ------------ --------------
Total capitalization............................. $10,722 $ 10,722 $ 32,321
======= ========== ===========
</TABLE>
- ---------------
(1) Reflects the conversion of all outstanding shares of Preferred Stock into
shares of Common Stock on a one-for-one basis. See "Underwriting."
(2) Adjusted to give effect to the sale of the 2,700,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $9.00 per share after deducting the estimated underwriting discount and
estimated offering expenses payable by the Company.
(3) Excludes (i) 1,514,166 shares of Common Stock issuable upon the exercise of
outstanding options at June 30, 1996 under the Company's 1994 Stock Option
Plan at a weighted average exercise price of $4.26 per share, (ii) options
to purchase an additional 26,667 shares granted after June 30, 1996, the
exercise of options to purchase 8,000 shares of Common Stock after June 30,
1996 and the cancellation of options for 12,000 shares after June 30, 1996
and (iii) 438,598 shares issuable upon the exercise of outstanding warrants
at an exercise price of $2.85 per share.
14
<PAGE> 16
DILUTION
The pro forma net tangible book value of the Company at June 30, 1996 was
$9,345,875, or $1.40 per share of Common Stock after giving effect to (i) a
one-for-three reverse stock split to be effected prior to the closing of this
offering, (ii) the conversion of all outstanding shares of Preferred Stock into
Common Stock on a one-for-one basis and (iii) the reincorporation of the Company
in the State of Delaware in September 1996. Pro forma net tangible book value is
determined by subtracting total liabilities from net tangible assets, and then
dividing by the number of pro forma outstanding shares of Common Stock. After
giving effect to the sale of the 2,700,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $9.00 per share
and after deducting the estimated underwriting discount and estimated offering
expenses payable by the Company and the application of the net proceeds
therefrom, the pro forma net tangible book value of the Company at June 30, 1996
would have been $31,132,875 or $3.31 per share of Common Stock, representing an
immediate increase in net tangible book value of $1.91 per share to existing
stockholders and an immediate dilution of $5.69 per share to persons purchasing
shares of Common Stock offered hereby. The following table illustrates this
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......................... $ 9.00
Pro forma net tangible book value per share before offering............ $ 1.40
Increase per share attributable to new investors....................... 1.91
------
Pro forma net tangible book value per share after offering............... 3.31
------
Net tangible book value dilution per share to new investors.............. $ 5.69
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
after giving effect to the events described above, the number of shares
purchased from the Company, the total consideration paid to the Company and the
average price per share paid by the Company's existing stockholders and the new
investors (assuming an initial public offering price of $9.00 per share).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)................. 6,692,503 71.3% $ 6,347,745 20.7% $ .95
New Investors(1)......................... 2,700,000 28.7 24,300,000 79.3 $ 9.00
--------- ------- ----------- -------
Total.................................. 9,392,503 100.0% $30,647,745 100.0%
======== ===== ========== =====
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders in the offering made hereby will reduce
the number of shares held by existing stockholders to 5,792,503 shares, or
61.7% of the total number of shares of Common Stock outstanding, and will
increase the number of shares held by new investors to 3,600,000 shares, or
38.3% of the total number of shares of Common Stock outstanding after this
offering.
The above table excludes (i) 1,514,166 shares issuable upon the exercise of
outstanding stock options at June 30, 1996 under the Company's 1994 Stock Option
Plan at a weighted average exercise price of $4.26 per share, (ii) options to
purchase an additional 26,667 shares issued after June 30, 1996, the exercise of
options to purchase 8,000 shares of Common Stock and the cancellation of options
for 12,000 shares after June 30, 1996 and (iii) 438,598 shares issuable upon the
exercise of outstanding warrants at June 30, 1996 at an exercise price of $2.85
per share.
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of December 31,
1994 and 1995 and June 30, 1996, and for the years ended December 31, 1993, 1994
and 1995 and the six months ended June 30, 1996, are derived from the Company's
consolidated financial statements included elsewhere in this Prospectus, which
were audited by Deloitte and Touche LLP, independent auditors. The selected
financial data presented below as of December 31, 1992 and 1993 and for the year
ended December 31, 1992 is derived from the Company's consolidated financial
statements, not included in this Prospectus, which have been audited by Deloitte
and Touche LLP, independent auditors, and the selected financial data presented
below as of December 31, 1991 and for the year then ended is derived from other
audited consolidated financial statements of the Company not included in this
Prospectus. The selected consolidated financial data for the six months ended
June 30, 1995 have been derived from the unaudited consolidated financial
statements of the Company that have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for the periods
presented. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes included
elsewhere in this Prospectus. Also see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview" for a discussion of a
change in the Company's license contract terms that affects the comparability of
recent revenue to revenue earned before 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
Software license revenue........... $19,613 $22,443 $25,048 $25,609 $29,889 $13,953 $19,637
Services and other revenue......... 1,900 1,497 3,096 2,643 3,230 1,293 2,154
------- ------- ------- ------- ------- ------- -------
Total revenue.................... 21,513 23,940 28,144 28,252 33,119 15,246 21,791
Cost of revenue:
Cost of software license revenue... 3,106 2,849 2,886 3,990 3,509 1,705 1,778
Cost of services and other
revenue.......................... 638 1,236 1,244 2,698 3,251 1,394 1,553
------- ------- ------- ------- ------- ------- -------
Total cost of revenue............ 3,744 4,085 4,130 6,688 6,760 3,099 3,331
------- ------- ------- ------- ------- ------- -------
Gross profit......................... 17,769 19,855 24,014 21,564 26,359 12,147 18,460
Operating expenses:
Sales and marketing................ 7,679 8,685 9,842 10,473 11,662 5,663 7,339
Research and development........... 7,232 7,258 8,230 9,634 8,621 4,331 6,845
General and administrative......... 2,616 3,066 3,785 3,858 3,869 1,368 3,066
------- ------- ------- ------- ------- ------- -------
Total operating expenses......... 17,527 19,009 21,857 23,965 24,152 11,362 17,250
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations........ 242 846 2,157 (2,401) 2,207 784 1,210
Interest and other income............ 204 271 313 194 100 272 163
------- ------- ------- ------- ------- ------- -------
Income (loss) before provision
(benefit) for income taxes......... 446 1,117 2,470 (2,207) 2,307 1,056 1,373
Provision (benefit) for income
taxes.............................. 332 581 866 (565) 952 436 563
------- ------- ------- ------- ------- ------- -------
Net income (loss).................... $ 114 $ 536 $ 1,604 $(1,642) $ 1,355 $ 620 $ 810
======== ======== ======== ======== ======== ======== ========
Pro forma net income (loss) per
share.............................. $ .17 $ .10
======== ========
Pro forma weighted average common
shares............................. 7,789 7,789
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE
------------------------------------------------------- 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital...................... $ 4,955 $ 5,943 $ 7,375 $ 5,320 $ 6,415 $ 2,316
Total assets......................... 11,446 13,914 16,939 16,293 21,554 22,596
Total liabilities.................... 3,875 5,807 6,810 7,806 11,712 11,874
Total stockholders' equity(1)........ 7,571 8,107 10,129 8,487 9,842 10,722
</TABLE>
- ---------------
(1) Includes amounts attributable to preferred stock. The Company has not
declared or paid any cash dividends on the Common Stock for more than five
years and does not presently intend to pay cash dividends on the Common
Stock in the foreseeable future. See "Dividend Policy."
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. The
discussion in this Prospectus contains certain forward-looking statements that
involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
Prospectus should be read as being applicable to all related forward-looking
statements wherever they appear in this Prospectus. The Company's actual results
could differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere herein.
OVERVIEW
Simulation Sciences Inc. was founded in 1967 to develop simulation
technology and software used in the design of refineries for the petroleum
industry. Thereafter, the Company developed other software products to address
additional needs for plant design and operation within the petroleum industry
and later expanded the application of these software products to other process
industries, including petrochemicals and chemicals. Since 1994, the Company has
been developing products and services that further enhance and optimize plant
operation and enable integrated enterprise management. The Company hired
substantially all of its current executive management team in 1995.
The Company generally licenses its software pursuant to non-cancelable,
one- to five-year contracts. The Company receives approximately 90% of its
worldwide revenue from licenses of its software products. These licenses
obligate the Company to provide customer support, maintenance and any product
updates. During the past five years, over 95% of all licenses have been renewed.
See "Risk Factors -- Dependence on Contract Renewals; Need to Achieve Greater
Market Penetration."
Revenue from the Company's primary simulation product, PRO/II, accounted
for approximately 70% of total revenue in each of the last three years. The
remainder of the Company's revenue is derived from other products and services,
including development, integration, ROM and consulting and training services.
International revenue, which includes revenue from international subsidiaries
and export sales, accounted for approximately 58%, 62%, 64% and 65% of total
revenue in 1993, 1994, 1995 and the six months ended June 30, 1996,
respectively.
The Company recognizes revenue from product licensing agreements in
accordance with American Institute of Certified Public Accountants Statement of
Position No. 91-1, Software Revenue Recognition ("SOP 91-1"). SOP 91-1 generally
requires recognition of license revenue upon shipment or renewal and recognition
of revenue for maintenance and support ratably over the life of the contract.
However, if license fees and maintenance and support charges are not separately
identified, then all revenue from the contract must be recognized ratably over
its life. More than 95% of the Company's license contracts entered into before
1996 did not separately identify software license fees and charges for
maintenance and support obligations. As a result, the Company recognized revenue
from these contracts ratably over the terms of such contracts in accordance with
SOP 91-1 ("Ratable Revenue"). The remaining contracts identified the cost of the
license fee and maintenance and support separately and, under SOP 91-1, the
Company recognized revenue from the license portion of the contracts upon
shipment or renewal ("License Revenue") and from the maintenance and support
portion of such contracts as Ratable Revenue. Accordingly, the revenue
recognized under a contract resulting in License Revenue recognition will be
higher in the quarter of shipment or renewal, and lower in later quarters, than
that recognized under a contract resulting only in Ratable Revenue recognition.
In order to more closely conform to industry-standard practices regarding
licenses and maintenance agreements, the Company, in 1996, began increasing the
number of contracts for new and renewing customers that separately identify
software license fees and maintenance and support charges, resulting in
recognition of License Revenue on an increased portion of contracts. The Company
intends to convert the substantial majority of its contracts to License Revenue
terms as new and renewal contracts are executed. For this reason, the Company
does not believe that revenue and results of operations for prior periods will
be directly
17
<PAGE> 19
comparable to results for 1996 and future periods. Revenue recognition on ROM
and other service offerings is based on percentage of completion and on
attainment of project milestones.
In accordance with Financial Accounting Standards Board Statement No. 86,
the Company is required to capitalize software development costs incurred after
technological feasibility of the product has been established and prior to the
first shipment of such product. Because the Company believes that its process
for developing software has been essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized to
date.
OPERATING RESULTS
The following table sets forth certain items in the Company's Consolidated
Statements of Operations expressed as a percentage of total revenue for the
periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
Software license revenue......................... 89.0% 90.6% 90.2% 91.5% 90.1%
Services and other revenue....................... 11.0 9.4 9.8 8.5 9.9
----- ----- ----- ----- -----
Total revenue............................ 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of software license revenue................. 10.3 14.1 10.6 11.2 8.2
Cost of services and other revenue............... 4.4 9.6 9.8 9.1 7.1
----- ----- ----- ----- -----
Total cost of revenue.................... 14.7 23.7 20.4 20.3 15.3
----- ----- ----- ----- -----
Gross profit..................................... 85.3 76.3 79.6 79.7 84.7
Operating expenses:
Sales and marketing.............................. 35.0 37.0 35.2 37.1 33.7
Research and development......................... 29.2 34.1 26.0 28.4 31.4
General and administrative....................... 13.5 13.7 11.7 9.0 14.1
----- ----- ----- ----- -----
Total operating expenses................. 77.7 84.8 72.9 74.5 79.2
----- ----- ----- ----- -----
Income (loss) from operations...................... 7.6 (8.5) 6.7 5.2 5.5
Interest and other income.......................... 1.1 0.7 0.3 1.7 0.8
Income (loss) before provision (benefit) for income
taxes............................................ 8.7 (7.8) 7.0 6.9 6.3
Provision (benefit) for income taxes............... 3.0 (2.0) 2.9 2.8 2.6
----- ----- ----- ----- -----
Net income (loss).................................. 5.7% (5.8)% 4.1% 4.1% 3.7%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1995 AND JUNE 30, 1996
Total Revenue. Total revenue was $15.2 million and $21.8 million for the
six months ended June 30, 1995 and 1996, respectively, representing an increase
of 43%. Software license revenue includes revenue from software license,
maintenance and support fees. Software license revenue was $14.0 million and
$19.6 million for the six months ended June 30, 1995 and 1996, respectively,
representing an increase of 41%. The increase in software license revenue was
attributable to Ratable Revenue from increased unit sales in prior periods,
renewals of licenses for higher fees, licenses to new customers and the effect
of the change in contract terms. Services and other revenue includes
integration, ROM, consulting and training services. Services and other revenue
was $1.3 million and $2.2 million for the six months ended June 30, 1995 and
1996, respectively, representing an increase of 67%. This increase in services
and other revenue was primarily due to improvement in ROM project management and
recruitment of a sufficient number of qualified personnel, which resulted in
completion of delayed ROM projects and allowed for the signing and commencement
of new projects.
18
<PAGE> 20
International revenue was $10.0 million and $14.2 million for the six
months ended June 30, 1995 and 1996, respectively, representing an increase of
42%. The increase in international revenue was primarily attributable to
increased revenue from PRO/II software licenses and international ROM service
projects. The Company anticipates that international revenue may increase as a
percentage of total revenue. See "Risk Factors -- Risks Associated With
International Operations."
Cost of Software License Revenue. Cost of software license revenue
includes costs of production and distribution, customer support and maintenance,
and royalties. Cost of software license revenue was $1.7 million and $1.8
million in the six months ended June 30, 1995 and 1996, respectively. Cost of
software license revenue as a percentage of software license revenue was 12% and
9% in the six months ended June 30, 1995 and 1996, respectively. Cost of
software license revenue decreased as a percentage of software license revenue
primarily due to increases in staffing and support organization levels in 1995
to support a higher revenue base. In the last quarter of 1995, the Company
entered into royalty-bearing license agreements with respect to three products
it began marketing at that time. Royalties paid from the sale of these products
were not significant during the six months ended June 30, 1996. Cost of software
license revenue as a percentage of software license revenue will increase if
revenue from royalty-bearing products increases as a percentage of software
license revenue. Regardless of whether royalty-bearing products begin
representing any substantial proportion of software license revenue, the Company
anticipates that cost of software license revenue will increase in dollars due
to royalties paid on new products that incorporate third-party technology.
Cost of Services and Other Revenue. Cost of services and other revenue
includes costs of personnel involved in training and project execution, as well
as travel, third-party professional fees and related administrative costs. Cost
of services and other revenue was $1.4 million and $1.6 million in the six
months ended June 30, 1995 and 1996, respectively. The increase in cost of
services and other revenue in dollars was due primarily to hiring of additional
personnel and increased use of engineering resources as a result of increased
ROM activity. Cost of services and other revenue as a percentage of services and
other revenue was 108% and 72% in the six months ended June 30, 1995 and 1996,
respectively. Cost of services and other revenue as a percentage of services and
other revenue declined significantly as the Company improved employee
productivity in ROM projects. The Company anticipates that cost of services and
other revenue will increase in dollars and may fluctuate as a percentage of
services and other revenue in the future.
Sales and Marketing. Sales and marketing expenses include payroll,
commissions and related costs attributable to direct sales, technical and
marketing personnel. Sales and marketing expenses were $5.7 million and $7.3
million for the six months ended June 30, 1995 and 1996, respectively. Sales and
marketing expense as a percentage of total revenue was 37% and 34% for the six
months ended June 30, 1995 and 1996, respectively. The dollar increase in sales
and marketing expense was due primarily to an increase in the number of sales
and marketing professionals and related hiring costs. The Company anticipates
that sales and marketing expenses will increase in dollars and will fluctuate as
a percentage of total revenue in the future.
Research and Development. Research and development expenses include
payroll and related costs attributable to research and development personnel and
development contractors. Research and development expenses were $4.3 million and
$6.8 million for the six months ended June 30, 1995 and 1996, respectively. The
dollar increase in research and development expenses was due primarily to
several product releases, an increase in the number of engineers and third-party
contractors involved in research, development of a number of planned upgrades
and new products and severance expenses associated with the termination of one
executive's employment. Research and development expense as a percentage of
total revenue was 28% and 31% in the six months ended June 30, 1995 and 1996,
respectively. The Company expects to continue to devote substantial resources to
its research and development efforts to continue to develop and support the
Company's highly complex software products. Accordingly, the Company anticipates
that research and development expenses will increase in dollars and may
fluctuate as a percentage of total revenue in the future.
General and Administrative. General and administrative expenses include
accounting, finance, MIS, human resources and administrative expenses. General
and administrative expenses were $1.4 million and $3.0 million for the six
months ended June 30, 1995 and 1996, respectively. General and administrative
expenses as a percentage of total revenue were 9% and 14% in the six months
ended June 30, 1995 and 1996,
19
<PAGE> 21
respectively. The increase in general and administrative expenses in dollars and
as a percentage of total revenue was due primarily to the addition of senior
management personnel. The Company believes that its general and administrative
expenses will increase in dollars in the future, and may fluctuate as a
percentage of total revenue, due in part to the Company's planned expansion in
staffing and costs associated with being a publicly held company.
Interest and Other Income. Interest and other income consists primarily of
investment income and foreign exchange gains and losses. Interest and other
income was $272,000 and $163,000 for the six months ended June 30, 1995 and
1996, respectively. In 1995, interest and other income was favorably affected by
foreign currency gains.
Foreign currency gains and losses historically have not been material
because most of the Company's contracts are denominated in U.S. dollars.
However, certain of the Company's direct international sales are denominated in
local currencies, and the impact of future exchange rate fluctuations on the
Company's operating results and financial condition cannot be accurately
predicted. See "Risk Factors -- Risks Associated With International Operations."
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Total Revenue. The Company's total revenue was $28.1 million, $28.3
million and $33.1 million in 1993, 1994 and 1995, respectively, representing a
less than 1% increase from 1993 to 1994 and an increase of 17% from 1994 to
1995. Software license revenue was $25.0 million, $25.6 million and $29.9
million in 1993, 1994, and 1995, respectively, representing an increase of 2%
from 1993 to 1994 and an increase of 17% from 1994 to 1995. The modest increase
in software license revenue from 1993 to 1994 was primarily due to customer
deferral of software license commitments in anticipation of the introduction of
PRO/II with PROVISION. The increase in software license revenue from 1994 to
1995 was primarily due to new international licenses and license renewals
associated primarily with the September 1994 introduction of PRO/II with
PROVISION and increased sales force productivity following the restructuring and
expansion of the Company's sales force.
Services and other revenue was $3.1 million, $2.6 million and $3.2 million
in 1993, 1994 and 1995, respectively, representing a decrease of 15% from 1993
to 1994 and an increase of 22% from 1994 to 1995. The decrease in services and
other revenue from 1993 to 1994 resulted primarily from delays experienced in
the attainment of ROM project milestones due to project management challenges
and a shortage in qualified personnel to complete the projects in a timely
manner. The increase in services and other revenue from 1994 to 1995 was due
primarily to improvement in ROM project management and recruitment of a
sufficient number of qualified personnel, which resulted in completion of
delayed ROM projects and allowed for the signing and commencement of new
projects.
International revenue was $16.2 million, $17.4 million and $21.3 million in
1993, 1994 and 1995, respectively, representing an increase of 7% from 1993 to
1994 and of 23% from 1994 to 1995.
Cost of Software License Revenue. Cost of software license revenue was
$2.9 million, $4.0 million and $3.5 million in 1993, 1994, and 1995,
respectively. Cost of software license revenue as a percentage of software
license revenue was 12%, 16%, and 12% in 1993, 1994 and 1995, respectively. The
high percentage in 1994 was primarily due to increased customer support and
distribution costs associated with the introduction of PRO/II with PROVISION.
Cost of Services and Other Revenue. Cost of services and other revenue was
$1.2 million, $2.7 million and $3.3 million in 1993, 1994 and 1995,
respectively. Cost of services and other revenue as a percentage of services and
other revenue was 40%, 102% and 101% in 1993, 1994 and 1995, respectively. In
1994 and 1995, the Company's service operations were not profitable due to
ineffective utilization of engineering staff and costs associated with delays in
completion of ROM projects.
Sales and Marketing. Sales and marketing expenses were $9.8 million, $10.5
million and $11.7 million in 1993, 1994 and 1995, respectively, representing
35%, 37% and 35% of total revenue, respectively. The dollar
20
<PAGE> 22
increases in sales and marketing expenses were generally attributable to
expansion of the Company's sales organization and, in 1995, to costs associated
with a restructuring of the Company's sales force.
Research and Development. Research and development expenses were $8.2
million, $9.6 million and $8.6 million in 1993, 1994 and 1995, respectively,
representing 29%, 34% and 26% of total revenue, respectively. The higher level
of research and development expense in 1994 was primarily due to contract
development costs associated with the completion of PRO/II with PROVISION.
General and Administrative. General and administrative expenses were $3.8
million, $3.9 million and $3.9 million in 1993, 1994 and 1995, respectively,
representing 13%, 14% and 12% of total revenue, respectively.
Interest and Other Income. Interest and other income consists primarily of
investment income and foreign exchange gains and losses. Interest and other
income was $313,000, $194,000 and $100,000 in 1993, 1994, and 1995,
respectively. The decrease from 1993 to 1994 was primarily due to a decrease in
interest income. The further decrease from 1994 to 1995 was primarily
attributable to foreign currency translation losses.
Provision (Benefit) for Income Taxes. The Company's effective tax rate was
35% in 1993 and 41% in 1995. The increase in the effective tax rate in 1995 was
primarily due to the effect of income tax rates and the related tax rate
differential effect of the Company's foreign subsidiaries' operations. The tax
benefit in 1994 was 26% and was primarily due to a reduction in state tax rates
resulting from the tax loss and foreign tax rate differential resulting from the
carryback of such taxes.
21
<PAGE> 23
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited statements of operations
data for each of the quarters in the six-quarter period ended June 30, 1996, as
well as data expressed as a percentage of the Company's revenues for the periods
presented. This data has been derived from unaudited financial statements that,
in the opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such information
when read in conjunction with the Company's audited consolidated financial
statements and notes thereto. Quarterly operating results are not necessarily
indicative of future results of operations.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------
MAR. JUNE SEPT. DEC. MAR. JUNE
31, 30, 30, 31, 31, 30,
1995 1995 1995 1995 1996 1996
------ ------ ------ ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Software license revenue......... $7,127 $6,826 $7,523 $8,413 $ 8,942 $10,695
Services and other revenue....... 372 921 738 1,199 1,086 1,068
------ ------ ------ ------ ------- -------
Total revenue............ 7,499 7,747 8,261 9,612 10,028 11,763
Cost of revenue:
Cost of software license
revenue....................... 982 723 774 1,030 1,017 761
Cost of services and other
revenue....................... 666 729 1,032 824 873 680
------ ------ ------ ------ ------- -------
Total cost of revenue.... 1,648 1,452 1,806 1,854 1,890 1,441
------ ------ ------ ------ ------- -------
Gross profit....................... 5,851 6,295 6,455 7,758 8,138 10,322
Operating expenses:
Sales and marketing.............. 2,714 2,949 2,514 3,485 3,548 3,791
Research and development......... 2,214 2,117 2,122 2,168 2,699 4,146
General and administrative....... 658 710 1,126 1,375 1,467 1,599
------ ------ ------ ------ ------- -------
Total operating
expenses............... 5,586 5,776 5,762 7,028 7,714 9,536
------ ------ ------ ------ ------- -------
Income from operations............. 265 519 693 730 424 786
Interest and other income
(expense)........................ 197 75 (135) (37) 28 135
------ ------ ------ ------ ------- -------
Income before provision for income
taxes............................ 462 594 558 693 452 921
Provision for income taxes......... 191 245 230 286 185 378
------ ------ ------ ------ ------- -------
Net income......................... $ 271 $ 349 $ 328 $ 407 $ 267 $ 543
====== ====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
---------------------------------------------------------------
MAR. JUNE SEPT. DEC. MAR. JUNE
31, 30, 30, 31, 31, 30,
1995 1995 1995 1995 1996 1996
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Software license revenue......... 95.0% 88.1% 91.1% 87.5% 89.2% 90.9%
Services and other revenue....... 5.0 11.9 8.9 12.5 10.8 9.1
------ ------ ------ ------ ------- -------
Total revenue............ 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of software license
revenue....................... 13.1 9.3 9.4 10.7 10.2 6.5
Cost of services and other
revenue....................... 8.9 9.4 12.5 8.6 8.7 5.8
------ ------ ------ ------ ------- -------
Total cost of revenue.... 22.0 18.7 21.9 19.3 18.9 12.3
------ ------ ------ ------ ------- -------
Gross profit....................... 78.0 81.3 78.1 80.7 81.1 87.7
Operating expenses:
Sales and marketing.............. 36.2 38.1 30.4 36.2 35.4 32.2
Research and development......... 29.5 27.3 25.7 22.6 26.9 35.2
General and administrative....... 8.8 9.2 13.6 14.3 14.6 13.6
------ ------ ------ ------ ------- -------
Total operating
expenses............... 74.5 74.6 69.7 73.1 76.9 81.0
------ ------ ------ ------ ------- -------
Income from operations............. 3.5 6.7 8.4 7.6 4.2 6.7
Interest and other income
(expense)........................ 2.6 1.0 (1.6) (0.4) 0.3 1.1
------ ------ ------ ------ ------- -------
Income before provision for income
taxes............................ 6.1 7.7 6.8 7.2 4.5 7.8
Provision for income taxes......... 2.5 3.2 2.8 3.0 1.8 3.2
------ ------ ------ ------ ------- -------
Net income......................... 3.6% 4.5% 4.0% 4.2% 2.7% 4.6%
====== ====== ====== ====== ======= =======
</TABLE>
22
<PAGE> 24
The Company's operating results have fluctuated in the past and may
fluctuate significantly from quarter to quarter or on an annual basis in the
future as a result of a number of factors, including, but not limited to: the
size and timing of customer orders; changes in license renewal rates, delays in
renewals, or failure of existing customers to renew their licenses with the
Company when their current licenses expire; the length of the Company's sales
cycle; changes in contract terms (including terms affecting the timing of
recognition of license revenue); success of the Company's service offerings;
timing of new product announcements and introductions by the Company and its
competitors; the Company's ability to develop, introduce and market new products
and product enhancements; market acceptance of the Company's products; deferrals
of customer orders in anticipation of new products or product enhancements; the
Company's ability to control costs; the availability of components; political
instability in, or trade embargoes with respect to, foreign markets; changes in
the Company's management team; and fluctuating economic conditions. The
Company's future operating results may fluctuate as a result of these and other
factors, which could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company's total revenue increased sequentially in each of the last five
quarters. In the quarter ended June 30, 1995, the Company's software license
revenue decreased primarily as a result of a decrease in revenue from sales
agents in South America in that quarter as compared to the previous quarter.
Services and other revenue increased in that quarter as a result of attainment
of milestones on various ROM and other engineering projects. In the quarter
ended September 30, 1995 the Company's sales and marketing expense decreased due
to increased use of sales engineers in the attainment of project milestones,
resulting in an allocation of costs associated with such engineers to cost of
service revenue. Sales and marketing expense began increasing in the quarter
ended December 31, 1995 primarily as a result of an expansion in the sales force
and new marketing programs. The Company's research and development expense in
the quarters ended March 31 and June 30, 1996 increased primarily in connection
with hiring of additional personnel and third-party contractors to complete and
introduce product upgrades and new products and a one-time severance payment in
the quarter ended June 30, 1996. The Company's general and administrative
expense beginning in the quarter ended December 31, 1995 has increased due
primarily to costs of hiring new executives since the last half of 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the past three years, the Company has satisfied its cash needs
principally through cash generated from operations. Cash generated from
operating activities during 1993 and 1995 was approximately $2.5 million and
$2.6 million, respectively, which was primarily attributable to net income and
increases in accrued liabilities and deferred revenue, offset in part by
increases in accounts receivable and the accrued 401(k) Plan contributions. In
1994, net cash used in operating activities was approximately $2.5 million due
primarily to net losses and increases in deferred income taxes, accounts
receivable and income tax refund receivable, offset by increases in deferred
revenue. The increase in deferred income taxes is primarily related to the net
operating loss generated in 1994. The increase in income tax refund receivable
is primarily due to the recapture of foreign tax credits paid in 1994 that was
carried back to offset federal taxes paid in 1993 and 1992. In 1994 and 1995,
the increase in accounts receivable was primarily due to an increase in foreign
sales, which generally have longer payment terms. Cash generated by operations
during the six months ended June 30, 1996 was $252,000 due to net income,
increases in refundable income taxes and other accrued liabilities offset by
increases in accounts receivable and other assets from cash used in the
acquisition of technology from Shell Oil Company for use in the Company's ROMEO
project.
Cash used in investing activities in 1993 and 1995 was approximately $1.3
million and $1.1 million, respectively, primarily due to purchases of property
and equipment. Cash generated from investing activities of $400,000 in 1994 was
primarily due to proceeds from property disposition, the sale of marketable
securities and proceeds from redemption of officers' life insurance policies
offset in part by purchases of property and equipment. Cash used in investing
activities during the six months ended June 30, 1996 was $4.1 million, which was
attributable to purchases of property and equipment and increases in
installments receivable.
23
<PAGE> 25
In December 1993, the Company generated cash of approximately $100,000 from
financing activities, primarily from the net proceeds from the Preferred Stock
issuance and the contribution of an ownership interest in an affiliate, offset
by a $5.0 million repurchase of Common Stock from the Company's founders.
The Company does not anticipate that the increased use of contracts
requiring recognition of License Revenue will have a material effect on cash
flow in the foreseeable future. At June 30, 1996, the Company had a revolving
line of credit with a commercial bank under which it may borrow up to $3.0
million at the bank's prime rate. The agreement expires in October 1996, is
collateralized by substantially all of the Company's assets and contains certain
financial and other covenants. At June 30, 1996 there were no borrowings
outstanding under the agreement. See Note 3 of Notes to Consolidated Financial
Statements. The Company's principal commitments at June 30, 1996 consisted of
leases on its worldwide offices.
The Company currently does not anticipate that capital expenditures in the
foreseeable future will vary materially from amounts incurred in previous years.
The Company believes that existing cash resources, cash flow from operations, if
any, and the line of credit facility, together with the net proceeds from the
offering made hereby, will be sufficient to fund the Company's operations for at
least the next twelve months.
24
<PAGE> 26
BUSINESS
THE COMPANY
Simulation Sciences Inc. ("SimSci" or the "Company") is a leading provider
of simulation software and related services to the process industries, including
the petroleum, petrochemical and industrial chemicals process industries and to
the engineering and construction firms that support those industries. Through
the Company's windows-based graphical user interface ("GUI") and modeling
capabilities, SimSci's simulation software products are designed to provide the
information necessary to increase profitability by reducing capital investment
costs, improving plant yields and enhancing management decision-making. In
addition, the Company's Open Simulation Application Framework enables companies
in the process industries to integrate their software with the Company's and
other third-party software, thereby maximizing their investments in existing
technology. The Company has over 500 customers throughout the process industries
and has offices in seven countries supporting sales in over 70 countries
worldwide. In February 1996, the Company entered into a joint development
agreement with Shell Oil Company to develop a new real-time simulation and
optimization software product.
INDUSTRY BACKGROUND
SimSci provides commercial simulation software and related services to
process industries worldwide, including the petroleum, petrochemical and
industrial chemical industries. According to industry sources, companies in the
process industries operate more than 14,000 processing facilities worldwide.
Companies in these capital-intensive process industries must continually seek
ways to increase the efficiency of their plant designs and production operations
to increase profitability and improve return on investment. Because plants in
these industries process very large volumes of materials, even slight increases
in efficiency may result in significant increases in profitability. For example,
a two cent per barrel reduction in oil processing costs would yield a $1.0
million annual increase in profits for a typical oil refinery that processes
150,000 barrels per day. Furthermore, increasingly intense global competition
and stringent environmental and safety regulations have placed additional
pressure on these industries to optimize the conversion of raw materials into
finished products.
Process industry plant operations are comprised of a series of distinct
process steps that involve different chemical reactions and physical processes.
The chemistry and physics of these individual process steps can be modeled in
software using sophisticated mathematical techniques. To simulate the
performance of specific plants, engineers link mathematical models of each step
into overall processes that represent the physical configuration of the plant.
Due to the number and complexity of the variables involved, such as the specific
chemical properties of the raw materials and the volume, temperature and
pressure at which various processes occur, process simulation software is
complex and calculation intensive. Engineers use simulation software to analyze
the design and operation of the plant and conduct studies to understand process
results, operational efficiencies and the economics of production.
Historically, simulation software was custom-designed by each company and
operated on large mainframe computers. Because of the restricted capabilities of
these computers, early software models had a limited range of application,
required substantial company resources to maintain and support and sometimes
generated imprecise results. The time required to process a new scenario was
often many hours, resulting in the modeling of operations using non-current
data, with an attendant inability to determine optimal plant settings in a
timely way. Because of the time required to simulate production processes in
this off-line manner, operations personnel were unable to use these models in
production decisions. Further, this proprietary software was not designed for
widespread use within a company, making consistency in results throughout an
enterprise difficult to achieve. In addition, this software was focused
primarily on process design rather than ongoing operations or management and had
highly technical interfaces that required specialized programming knowledge and
chemical engineering skills to operate. Furthermore, these software models were
not designed for sharing of data over networked computers.
25
<PAGE> 27
In recent years, more powerful computers and advances in software
technology have resulted in improved simulation capabilities. However, many
process industry companies still use non-object-oriented, proprietary software
that implements simplistic models in an off-line environment primarily for
design purposes.
Today's process industry managers are increasingly seeking to use software
modeling for both process design and operations to improve the efficiency of
their ongoing operations and to manage their overall plants more profitably. To
achieve this, simulation software must have easy to use interfaces, allow
information to be distributed to managers throughout an organization, process
new scenarios based on real-time plant operations data and integrate with other
control and data systems. In addition, simulation software must use highly
sophisticated models based on rigorous mathematics to generate more accurate
information that can be used by different departments throughout an enterprise
to provide both managers and engineers with timely, consistent information.
THE SIMSCI SOLUTION
SimSci's products and services are designed to increase process
manufacturers' profitability by enabling the accurate, reliable design of more
efficient processes, improving plant operations and providing plant managers
with better decision-support tools. The Company's principal product has an
easy-to-use GUI and operates on industry standard hardware and software
platforms. This product's open, object-based architecture facilitates
interoperability with customer-developed applications and enables the effective
use of simulation technology throughout the enterprise. The Company's core
simulation technology includes a substantial proprietary collection of physical
property data and modeling algorithms used to calculate physical and chemical
characteristics of materials under a broad set of operating conditions. Because
SimSci's software modules are readily useable for multiple applications,
different departments within an enterprise can share common models, thus
increasing the accuracy, timeliness and consistency of information use across
multiple departments. The Company's software provides both managers and
engineers with critical process information necessary to make more informed
decisions.
- Design. The Company's products allow design engineers to predict the
behavior of chemical and physical processes, shorten the time required to
design new processes or improve existing processes, achieve more
efficient designs, decrease the cost of constructing or improving plants,
and more easily comply with environmental and safety requirements.
- Operate. Operations engineers use SimSci products to improve a
manufacturers' cost structure and profitability by modifying plant
processes to reduce raw material requirements, save energy, maintain
quality, enhance product yield and increase throughput. The Company also
delivers customized, turn-key solutions through its ROM service offerings
that use rigorous modeling and on-line links to plant data for improving
operations without interrupting the ongoing stream of materials.
- Manage. The Company's easy-to-use products enable corporate decision
makers to base business and financial decisions on a more accurate and
complete understanding of their operations, including operating and
profit margins, return on capital equipment, raw materials selection,
throughput, product quality and market timing.
Information gathered in the design, operation and management functions can
be used in an iterative way to further improve processing of materials,
management of the enterprise, use of the Company's products and the design of
new plants.
STRATEGY
The Company's objective is to expand and extend the use of its simulation
technology and solutions for design, optimization and management functions
throughout the process industries. The key components of the Company's strategy
to achieve this objective include the following:
Leverage Core Simulation Technology. Over the last three decades, the
Company has created proprietary algorithms, designed process unit models and
developed physical and chemical property prediction methods for rigorous process
simulation. In addition, the Company has extended the visibility of its products
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<PAGE> 28
by developing an interactive GUI as well as the OSAF architecture. The Company
intends to continue to leverage this core technology to broaden the use of its
products from the design of processes to the optimization of operations and the
management of the enterprise.
Integrate Core Products Into The Open Simulation Application
Framework. The Company's PROVISION tool set and OSAF architecture enable
customers to adapt their in-house and legacy software to interoperate with
software from the Company or other third parties. As a result, customers can
increase engineering productivity and expand the value of their existing
technologies. SimSci's principal product, PRO/II, currently utilizes the
PROVISION interface. The Company intends to use PROVISION and its OSAF
architecture for future product offerings, as well as to make it available to
system integrators and third-party developers.
Expand On-line Modeling Capabilities. The Company intends to continue
developing turn-key solutions to enable engineers and managers to better operate
and manage plant processes. On-line models of specific operating plants may be
created by utilizing the Company's ROM service offering to create rigorous
models that use real-time plant data and current economic objectives to
determine more profitable process settings. The Company, in a joint development
arrangement with Shell Oil Company, is developing a new product to enable the
use of common models for both off-line and on-line applications.
Penetrate Additional Process Industries. To date, the majority of the
Company's revenue has been derived from sales to companies in the refining
industry. The Company is seeking to increase sales of its products in additional
process industries, including the upstream petroleum, petrochemicals and
chemicals industries, by offering additional product functionality. For example,
the Company recently added batch and polymer simulation capabilities to
facilitate increased penetration of the Company's products in the chemicals
industry.
Promote Strategic Relationships. SimSci has developed a network of
alliances with a select group of customers that meet with SimSci senior
technical and business management to help influence future technical direction.
In addition, the Company has entered into strategic alliances with key customers
and vendors to enhance SimSci's technology content and deliver more complete
technology solutions. Customers and vendors with which the Company has technical
alliances include Shell, Mobil and Strategic Analysis and Simulation Technology,
Ltd. The Company recently entered into a memorandum of understanding with IBM
regarding joint development, marketing and sales activities.
TECHNOLOGY
The Company believes that it has developed significant expertise in core
simulation and mathematical technologies that allow customers to define, model,
simulate, analyze and understand the behavior of complex processes. The core
technology required to support the Company's customers includes software and
chemical engineering, process analysis, heat and mass transfer, thermodynamics,
fluid flow and solution algorithms related to the delivery of these competencies
to the customer.
Open Simulation Application Framework. SimSci's Open Simulation
Application Framework is an architecture for integrating a GUI with simulation
software products, proprietary simulation programs, engineering databases and
other software applications used in the process industry. OSAF is implemented
through PROVISION. The Company's PROVISION tool-set provides three core
functionalities: a GUI development environment for the creation of process-flow
based applications; a Data Entry Window Editor that enables the creation of
objects for use in the GUI and defines their structure, data, methods and
behavior; and a Database Server that provides object-oriented access to PRO/II
data and is designed to provide access to legacy data and industry standard
databases.
Engineering Models of Plant Process Equipment. Plant process equipment
performs a variety of manufacturing functions, including heat exchange,
distillation, chemical reaction, pumping and compressing. The Company's
engineering models of such equipment are based on fundamental laws of chemistry
and physics, including laws governing material and energy balances, chemical and
thermodynamic equilibrium, rates of heat and mass transfer and chemical
reaction. These models can involve thousands of nonlinear
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algebraic equations. The Company's products incorporate models for substantially
all standard process plant equipment types.
Physical Property Data and Modeling Algorithms. The Company's library of
physical property data and modeling algorithms includes thermodynamic
properties, such as enthalpy, entropy and heats of formation, as well as
transport properties, including viscosity, thermal conductivity and
diffusivities. The Company's data and models have been developed over more than
20 years and are capable of representing a wide range of physical systems, such
as those used in petroleum processes. The Company's data tables contain data for
approximately 1,700 chemical components and are supplemented by methods for
estimating property data for unknown or unusual compounds based on functional
groups and utilities for regression analysis of experimental laboratory or plant
data. In addition, the Company has substantial proprietary banks of chemical
component interaction data to enhance the accuracy of simulation models.
Solution Algorithms. Process simulation models require the solution of
complex algebraic and partial differential equations that are often highly
nonlinear and therefore difficult to solve. Also, optimization functions employ
sequential quadratic programming techniques to solve these difficult equation
sets. The Company's principal simulation software product, PRO/II, is based on a
sequential modular solution technique, by which process unit models are solved
sequentially in the most efficient order. In addition to utilizing a sequential
modular technique, one of the Company's principal products under development,
ROMEO, employs an equation-based solution technique in which the equations for
multiple process models are solved simultaneously. Offering products that are
based on both modeling techniques will allow the Company's customers to address
a broader range of problems.
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<PAGE> 30
PRODUCTS AND SERVICES
SimSci's product strategy is to develop, market and sell its products under
its Open Simulation Application Framework to help customers increase engineering
productivity, leverage existing technology and improve plant profitability.
SimSci's products are designed to run on industry-standard platforms and
software environments, including 32-bit Windows and UNIX, and utilize an
easy-to-use GUI. The following table sets forth certain information with respect
to the Company's products, service offerings and products under development.
<TABLE>
<CAPTION>
FIRST/LATEST
RELEASE
PRODUCTS AND SERVICES DESCRIPTION APPLICATION PROCESS INDUSTRIES DATE
- ---------------------- --------------------- ----------- ------------------- -----------
<S> <C> <C> <C> <C>
PRINCIPAL PRODUCTS:
PRO/II General-purpose Design All June 1988/
simulation software Operations April 1996
with graphical Management
flowsheeting
environment for
processes in
steady-state
PROVISION Software integration Design All September
tool-set for Operations 1994/
integrating process Management September
industry software 1995
with OSAF
OTHER PRODUCTS:
PIPEPHASE Simulation software Design Oil/Gas production November
for pipeline networks Operations 1985/
Management May 1996
HEXTRAN Heat transfer Design All October
simulation software Operations 1980/
June 1994
INPLANT Simulation software Design All October
for plant piping Operations 1989/
systems February
1995
DATACON Data reconciliation Operations All February
software for process 1990/
data May 1994
OpenYield Integrated data Operations All June 1994/
reconciliation and Management November
yield accounting 1995
software
Visual Flare Simulation software Design Oil/Gas refining January
for flare relief Operations and petrochemicals 1995/
systems February
1996
SERVICE OFFERINGS:
ROM Rigorous On-line Operations Oil/Gas production, April 1991/
Modeling (ROM) and Management refining and April 1996
optimization service petrochemicals
utilizing several of
the companies
products
PRODUCTS UNDER DEVELOPMENT:
PROTISS Software for Design All In
simulating both Operations Development
steady-state and
dynamic conditions in
process operations
ROMEO Integrated system for Design All In
performing off-line Operations Development
process simulation Management
and on-line process
optimization
NETOPT Software for Design Oil/Gas production In
optimizing the Operations Development
production of oil and Management
gas fields
</TABLE>
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<PAGE> 31
PRINCIPAL PRODUCTS
PRO/II. PRO/II is a steady-state simulation program that enables process
engineers to rigorously model a wide range of organic and inorganic chemical
processes, such as those found in oil and gas, chemical and petrochemical
industries. Engineers use PRO/II to design new processes or to troubleshoot,
debottleneck and retrofit existing operations and assess compliance with safety
and environmental regulations. PRO/II has an intuitive and easy-to-use GUI
through PROVISION.
The Company derives a substantial portion of its total revenue from sales
of its PRO/II simulation product. Revenue attributable to sales of PRO/II
accounted for approximately 70% of the Company's total revenue in each of the
last three years and the six months ended June 30, 1996. The Company currently
expects PRO/II, individually or integrated with other products, to account for a
significant portion of the Company's total revenue in the future. See "Risk
Factors -- Product Concentration."
PROVISION. PROVISION is a graphical environment for process industry
software that enables third party, in-house and legacy software to interoperate
with the Company's simulation software through the Company's Open Simulation
Application Framework. PROVISION includes a set of tools that provides software
integrators or developers the software, development tools, documentation and
instructions needed to integrate process industry software into the PROVISION
environment. The PROVISION tool-set is designed to support the development of
GUI clients in client-server applications and consists of an object class
library and application program interface for building applications that use the
PROVISION flowsheet drawing capabilities, an object class library of process
engineering data specification controls used to build the data entry windows,
and the tools and information necessary to interact with PRO/II's database
server to provide access to PRO/II process data, stream information and
thermophysical property data.
OTHER PRODUCTS
PIPEPHASE. PIPEPHASE is a steady-state simulation program that enables
engineers to simulate multi-phase fluid flow in pipelines, networks and
production transmission systems and is typically utilized to simulate the flow
of gas or oil from the well to the processing complex.
HEXTRAN. HEXTRAN is a steady-state simulation program that enables
engineers to perform energy audits to monitor and optimize the performance of
existing heat exchange network configurations and to design new systems.
INPLANT. INPLANT is a rigorous, steady-state simulation program for
designing, rating and analyzing plant piping systems. Utilizing INPLANT's
Windows interface, engineers can efficiently rate and analyze the safety of
plant piping systems as well as design new piping systems and revamp a wide
variety of existing systems.
DATACON. DATACON is a data reconciliation program that enables users to
turn real time process data into consistent and reliable information. DATACON
reconciles flow, temperature and composition measurements to satisfy material
and energy balances around each unit in a process plant, detects gross errors in
measurements, pinpoints the errors' locations and confirms the presence or
absence of measurement redundancy.
OpenYield. OpenYield is an integrated data reconciliation and yield
accounting system designed to improve plant profitability. OpenYield tracks the
movements of material through a process, identifies sources of material
imbalance and reduces the uncertainty of material loss calculations. OpenYield
utilizes the capabilities of the Company's DATACON program to improve the
accuracy of plant data used in yield calculations by applying statistical
techniques to reconcile material balances on a unit-by-unit and plant-wide
basis. The Company is currently enhancing its OpenYield offering to operate
under the PROVISION environment and to include links to enterprise management
software, such as SAP, to provide an integrated plant performance and yield
accounting system.
Visual Flare. Visual Flare is a Windows-based simulation program that
enables process safety engineers to design and model safety systems and pressure
relief networks in oil and gas processing facilities. The
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<PAGE> 32
Company offers Visual Flare pursuant to an exclusive, worldwide marketing and
licensing agreement from a third party.
SERVICE OFFERINGS
The Company's principal service offering is ROM. ROM involves the
development of on-line software models of existing process plants. SimSci's core
products, such as PRO/II, DATACON and PIPEPHASE, are used by ROM engineers to
develop on-line models. ROM provides operations personnel with highly accurate
models for performing case studies and for determining how to improve operating
profits. ROM uses real-time plant data combined with current economic objectives
to precisely replicate plant operations and is designed to provide a real-world
model of an actual operating facility, calculate new process setpoints to
improve performance, and help determine the location and cause of operating
problems.
In addition, the Company offers engineering services to assist customers in
the application of simulation technology to manage their businesses effectively
and to maximize the benefits provided by SimSci's core products. SimSci's
engineering services include training, application consulting, project
implementation and application integration.
PRODUCTS UNDER DEVELOPMENT
PROTISS. PROTISS is an integrated software environment that provides full
access to the steady-state simulation capabilities of PRO/II as well as the
dynamic simulation technology licensed from a third party. PROTISS has been
developed to enable process and control engineers to create a steady-state plant
model and then to convert the steady-state model automatically to a dynamic
model. Dynamic plant models are highly robust due to the combination of
sequential modular and simultaneous solution techniques employed in the program.
PROTISS runs under the PROVISION GUI and is OSAF-compliant. PROTISS is being
jointly developed under an agreement with Strategic Analysis and Simulation
Technology, Inc.
NETOPT. NETOPT is a network optimization software application designed to
optimize the design, production and planning of oil networks and enhanced oil
recovery. NETOPT is being developed in conjunction with Mobil Oil Corporation.
ROMEO. ROMEO ("Rigorous On-line Modeling and Equation-based Optimization")
is a software application being jointly developed by the Company and Shell Oil
Company that is designed to enable engineers to rigorously model and optimize
plant operations on a unit, multi-unit and plant-wide basis, enhancing decision
support at all business levels. ROMEO is designed to provide a united framework
for data reconciliation, parameter estimation and process optimization. It will
automatically retrieve pertinent plant data from the control system and use the
information to predict new process setpoints rapidly and accurately to achieve
optimum performance. The ROMEO system is based on an object-oriented design and
will include a commercial database, facilitating data transfer between
applications and enhancing application interoperability.
CUSTOMERS
SimSci currently has over 500 customers across the major process
industries, including the petroleum, petrochemical and chemical industries, and
the engineering and construction industry that supports them. In 1995 and the
six months ended June 30, 1996, 64% and 65%, respectively, of SimSci's total
revenue was generated from customers outside of the United States.
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<PAGE> 33
The following table sets forth selected customers of the Company,
categorized by process industry, whose current license and service agreements
with the Company have a total contract value of at least $100,000, and selected
academic institutions that use the Company's software for chemical engineering
education:
<TABLE>
<CAPTION>
ENGINEERING &
PETROLEUM INDUSTRY CHEMICAL INDUSTRY CONSTRUCTION INDUSTRY
- ------------------------------ ------------------------------ ------------------------------
<S> <C> <C>
Agip SpA Allied Signal Corporation ABB Lummus Crest
Amerada Hess Corporation Enichem SpA Bechtel Corporation
Amoco Corporation Henkel KGaA Brown & Root, Inc.
Arco Hoechst A.G. Chisso Corporation
BP Oil Company Imperial Chemical Industries Edeleanu GmbH
Chevron U.S.A. Inc. PLC Fluor Daniel, Inc.
Citgo Petroleum Company Mitsubishi Chemical Foster Wheeler U.S.A.
Conoco Inc. Corporation Corporation
Den Norske Stats Oljeselskap Nippon Sanso Corporation Idem Isu Engineering Company,
a.s. Novacor Chemical Corp Ltd.
Exxon Oil Corporation Saudi Basic Industries Corp Ishikawajima-Harima Heavy
Hindustan Petroleum Corp. Ltd. Tokuyama Corp Industries Co. Ltd.
Honam Oil Refinery Co. Ltd. Vista Chemical Co. Jacobs Engineering Group, Inc.
Koa Oil Co. Ltd. ACADEMIC INSTITUTIONS JGC Corporation
Kuwait Oil Co. Carnegie-Mellon Davy John Brown Pty Ltd.
Mobil Oil Corporation Fachhochschule Ostfriesland KTI BV
Pertamina Indian Institute of Technology Kvaerner Engineering AS
Petroleo Brasileiro-Petrobras Kansas State University Lurgi AG
Petrolios de Venezuela Louisiana State University M.W. Kellogg Company Ltd.
Royal Dutch Shell Oil Company New Mexico State University Niigata Engineering Company
Saudi Arabian Oil Co. Oklahoma State University Nippon Oil Engineering and
Scientific Computing Pennsylvania State University Construction
Consulting Ltd.-Vniigas University of Calgary Raytheon Engineers &
Star Enterprise University of Southern Construction
Sun Company Inc. California Snamprogetti SpA
Texaco Refining and University of Texas Stone & Webster Engineering
Marketing, Inc. University of Wisconsin Corp.
Unocal Corporation Toyo Engineering Corporation
</TABLE>
Customers typically license SimSci's software for terms of one, three or
five years. During the past five years, over 95% of all licenses have been
renewed. Currently, the annualized cost for the license by a single U.S.
corporate user of one of SimSci's core products ranges from $10,000 to $36,000,
depending on the product and the license term. The license fees charged by
SimSci for each of its core products are typically based on the number of
licensed users, with the cost per user declining as the customer increases the
total number of licensed users. More than 95% of the Company's license contracts
entered into before 1996 did not separately identify both software license fees
and charges for customer support obligations. In 1996, the Company began
increasing the number of new and renewed contracts that separately identify
software license fees and maintenance and support fees. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
The Company ships software products within a short period after receipt of
an order and typically does not have a material backlog of unfilled orders.
Total revenue in any quarter is dependent (and will become substantially
dependent as the Company increases the number of contracts for new and renewing
customers that result in the recognition of license revenue upon shipment) on
orders booked and license renewals in that quarter and are not predictable with
any degree of certainty. See "Risk Factors -- Fluctuations in Future Operating
Results" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Company derives a significant portion of its total revenue from
software licenses to companies in the petroleum industry, which is highly
cyclical. Accordingly, the Company's future success is dependent upon the
continued demand for process engineering software by companies in the petroleum
industry. The Company believes that pricing pressures experienced by petroleum
companies in connection with cost containment measures have led to delays and
reductions in certain capital and operating expenditures by many of such
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<PAGE> 34
companies in the past, and such delays or reductions could recur in the future.
Any such delays, reductions or fluctuations could have a material adverse effect
on the Company's business, operating results and financial condition. Further,
the Company's revenue has in the past been, and may in the future be, subject to
substantial period-to-period fluctuations as a consequence of general domestic
and foreign economic conditions, political developments and other factors
affecting spending in the petroleum industry. See "Risk Factors -- Concentration
of Revenue in the Petroleum Industry."
A significant portion of the Company's total revenue is derived from
customers outside the United States, and the Company anticipates that
international revenue will continue to be significant in the future. Revenue
from customers outside the United States accounted for 58%, 62%, 64% and 65% of
total revenue in 1993, 1994 and 1995 and the six months ended June 30, 1996,
respectively. The Company's international operations are subject to risks
inherent in the conduct of international business, including unexpected changes
in regulatory requirements, exchange rates, export license requirements, tariffs
and other barriers, political and economic instability, limited intellectual
property protection, difficulties in collecting payments due from sales agents
or customers, difficulties in managing distributors or representatives,
difficulties in staffing and managing foreign subsidiary operations, and
potentially adverse tax consequences. The Company derives substantial revenue
from the sale of products to customers in the Middle East and in the past has
been required to discontinue shipments to such customers due to trade embargoes
imposed by the United States. There can be no assurance that future trade
embargoes or any of the other foregoing factors will not have a material adverse
effect on the Company's international operations and therefore its business,
operating results and financial condition. See "Risk Factors -- Risks Associated
with International Operations" and Note 9 of Notes to Consolidated Financial
Statements.
SALES AND MARKETING
SimSci markets its products and services through its direct sales
organization complemented by sales agents and distributors. As of June 30, 1996,
the Company's global direct sales force included 26 sales personnel located in
three sales and support offices in the United States and international sales
offices in the United Kingdom, Germany, Egypt, Japan, Singapore and Venezuela.
The Company currently intends to add to its direct sales and support force in
the United States and internationally. In addition, the Company devotes a
significant portion of its sales and marketing efforts to increasing penetration
of its products with new and existing large multinational customers. Due to
their size and geographically dispersed installations and decision-making
process, the Company assigns one senior sales representative world-wide
responsibility for sales to these customers.
In support of these sales efforts, the Company conducts marketing programs
intended to position and promote its products and services. SimSci markets its
products at a substantial discount to universities for use in teaching and
research. The Company participates in industry tradeshows, publishes articles
and advertisements in industry publications, conducts direct mail campaigns, and
sponsors industry conferences and seminars.
STRATEGIC ALLIANCES
SimSci has entered into a number of strategic alliances with respect to its
core products, new products and product enhancements, including a development
arrangement with Strategic Analysis and Simulation Technology, Ltd. with respect
to PROTISS; a development arrangement with Mobil with respect to NETOPT; and a
joint development arrangement with Shell Oil Company with respect to ROMEO. The
Company also has recently entered into a memorandum of understanding with IBM
regarding joint development, marketing and sales activities.
CUSTOMER SUPPORT
Substantially all of the Company's direct sales to customers include
maintenance and support contracts, which are typically 12 to 36 months and
entitle the customer to product updates and to technical support. In addition,
the Company offers instruction in the use of its products for various levels of
student proficiency.
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<PAGE> 35
Users of the Company's products can also attend user group conferences held at
various times and locations worldwide.
PRODUCT DEVELOPMENT
The Company's development efforts are focused on expanding SimSci's
simulation software product line, designing enhancements to the Company's core
technology, and integrating existing and new products into the Company's Open
Simulation Application Framework. The Company's principal products under
development are PROTISS, NETOPT and ROMEO. The Company has made substantial
investments in product development. The Company believes that its future
performance will depend in large part on its ability to maintain and enhance its
current product line, develop new products that achieve market acceptance,
maintain technological competitiveness and meet an expanding range of customer
requirements. As of June 30, 1996, there were 88 employees on the Company's
research and development staff. The Company's research and development
expenditures in 1994, 1995 and the six months ended June 30, 1996 were $9.6
million, $8.6 million and $6.8 million, respectively, and represented 34%, 26%
and 31% of total revenue, respectively. The Company expects that it will
continue to commit substantial resources to product development in the future.
See "-- Products -- Products Under Development."
The simulation software market for process industries is subject to rapid
technological change, changing customer requirements, frequent new product
introductions and evolving industry standards that may render existing products
and services obsolete. As a result, the Company's position in its existing
markets or other markets that it may enter could be eroded rapidly by product
advancements by its competitors. The life cycles of the Company's products are
difficult to estimate. The Company's future success will depend, in part, upon
its ability to enhance existing products and to develop new products on a timely
basis. In addition, its products must address increasingly sophisticated
customer needs and keep pace with technological developments, and conform to
evolving industry standards. There can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new products, or that new products and product
enhancements will meet the requirements of the marketplace or achieve market
acceptance. If the Company is unable to develop and introduce products in a
timely manner in response to changing market conditions or customer
requirements, the Company's business, operating results and financial condition
would be materially and adversely affected.
The Company has in the past experienced delays in the release dates of
enhancements to certain of its products. If release dates of any future product
enhancements or new products are delayed or, if when released, they fail to
achieve market acceptance, the Company's business, operating results and
financial condition would be materially adversely affected. In addition, the
introduction or announcement of new product offerings or enhancements by the
Company or the Company's competitors may cause customers to defer or forgo
purchases of current versions of its products, which could in turn have a
material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors."
COMPETITION
The market for commercial simulation software used in the petroleum,
chemical and other process industries is intensely competitive and characterized
by rapidly changing technology, evolving industry standards, frequent new
product introductions and rapidly changing customer requirements. The Company
experiences significant competition from potential customers' decisions to
internally develop their own process design, simulation and optimization
applications as opposed to purchasing commercial software products such as the
Company's. As a result, the Company must continuously educate existing and
prospective customers about the advantages of the Company's products. There can
be no assurance that these customers or potential customers will perceive
sufficient value in the Company's products to justify purchasing them. In
addition, customers or potential customers could enter into strategic
relationships with one or more of the Company's competitors to develop, market
and sell competing products and services.
The Company has experienced and expects to continue to experience increased
competition from current and future competitors, many of whom have significantly
greater financial, technical, marketing and other
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<PAGE> 36
resources than the Company. The Company's current direct competitors, include
Aspen Technology, Inc., Hyprotech Ltd. and Chemstations, Inc., and, with respect
to the Company's technology and consulting services, the Hi-Spec division of
Honeywell, Inc., the Setpoint and DMCC divisions of Aspen Technology, Inc. and
ABB Simcon Inc. The Company's competitors may be able to respond more quickly to
new or emerging technologies and changes in customer requirements or to devote
greater resources to the development, promotion and sale of their products than
the Company. Also, many current and potential competitors have greater name
recognition and more extensive customer bases that could be leveraged, thereby
gaining market share to the Company's detriment. The Company expects to face
additional competition as other established and emerging companies enter the
commercial simulation software market and new products and technologies are
introduced. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins and loss of market share, any of which
could materially adversely affect the Company's business, operating results and
financial condition. In addition, current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with third parties, thereby increasing the ability of their products to
address the needs of the Company's current or prospective customers.
Accordingly, it is possible that new competitors or alliances among current and
new competitors may emerge and rapidly gain significant market share. Such
competition could materially adversely affect the Company's ability to sell
additional licenses and maintenance and support renewals on terms favorable to
the Company. Further, competitive pressures could require the Company to reduce
the price of licenses for its products and related services, which could
materially adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and the failure to
do so would have a material adverse effect upon the Company's business,
operating results and financial condition.
The principal competitive factors in the Company's markets include:
accuracy of modeling, enhancing the technology's ease of use, the ability to
continually meet the customers' needs to leverage process information across the
enterprise and to link operations information with enterprise applications,
continually increase the size and complexity of processes that can be modeled
accurately and in a timely manner, the need to continue to leverage the
customers' operations and information technology strategies, customer support,
price, hardware flexibility and vendor financial stability. The Company believes
that the required knowledge of evolving software and hardware technologies and
the need to leverage these, the level of development effort, and the chemical
engineering and modeling expertise required to enter and succeed in the
simulation technology industry represent significant barriers against new
competitors. See "Risk Factors -- Competition."
PROPRIETARY RIGHTS
To date, the Company has relied upon a combination of copyright, trade
secret and trademark laws to protect its proprietary technology. PRO/II,
PROVISION, PROVISION TOOLKIT, PIPEPHASE, NETOPT, HEXTRAN, INPLANT, DATACON,
OpenYield, PROTISS and ROM are trademarks of the Company. The Company enters
into confidentiality agreements with its employees, developers, distributors and
customers and limits access to and distribution of the source code to its
software and other proprietary information. Policing unauthorized use of the
Company's products is difficult. There can be no assurance that the steps taken
by the Company in this regard will be adequate to prevent misappropriation of
its technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology.
In the future, the Company may receive communications from third parties or
have other reasons to seek licenses under third-party intellectual property
rights. In such cases, the Company may evaluate whether to obtain such licenses.
However, there can be no assurance that such licenses will be available or if
such licenses are made available, that the terms will not have a material
adverse effect on the Company's results of operations.
Certain technology used in the Company's products, including OpenYield,
Visual Flare, NETOPT, PROTISS and ROMEO, is licensed from third parties. These
licenses generally require the Company to pay royalties and to fulfill
confidentiality obligations. The Company believes that there are alternative
sources for each of the material components of technology licensed by the
Company from third parties. However, the
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<PAGE> 37
termination of any of such licenses, or the failure of the third party licensors
to adequately maintain or update their products, could result in delay in the
Company's ability to ship certain of its products while it seeks to implement
technology offered by alternative sources. Any required replacement licenses
could prove costly. Also, any such delay, to the extent it becomes extended or
occurs at or near the end of a fiscal quarter, could result in a material
adverse effect on the Company's results of operations. While it may be necessary
or desirable in the future to obtain other licenses relating to one or more of
the Company's products or relating to current or future technologies, there can
be no assurance that the Company will be able to do so on commercially
reasonable terms or at all.
EMPLOYEES
As of June 30, 1996, the Company had a total of 243 employees, including 88
in research and development, 113 in sales and marketing and related customer
support services and 42 in general and administrative. Of these employees, 191
were located in the United States, 33 in Europe, six in South America and 13 in
Asia. The Company also employs contract and temporary employees from time to
time. None of the Company's employees is represented by a collective bargaining
agreement, nor has the Company experienced any work stoppage. The Company
considers its relations with its employees to be good.
The Company currently subcontracts certain aspects of its research and
development to outside contractors. The Company may in the future experience
problems with its contractors, such as quality or on-time delivery problems. In
addition, certain of these contractors are located in India, and the Company may
therefore suffer adverse consequences as a result of communication, cultural or
political barriers or because the laws of other countries may be less protective
of the Company's intellectual property than are the laws of the United States.
In addition, the Company may in the future experience pricing pressure from its
contractors. To date, the Company has had only limited experience with the use
of research and development contractors. There can be no assurance that the
Company will be able to manage its contract developers effectively or that these
developers will meet the Company's future requirements for timely delivery of
high-quality products.
FACILITIES
The Company's principal administrative, sales, marketing and product
development facility occupies approximately 60,000 square feet in Brea,
California pursuant to a lease which expires in April 2008. In addition, the
Company also leases sales and support offices in Houston, Texas, Denver,
Colorado and Newtown, Pennsylvania. The Company also maintains international
offices in the United Kingdom, Germany, Egypt, Japan, Singapore and Venezuela.
The Company believes that its existing facilities are adequate for its current
needs and that suitable additional or alternative space will be available in the
future on commercially reasonable terms as needed.
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<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
the date of this Prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Charles R. Harris...................... 47 President and Chief Executive Officer and Director
L. Ronald Trepp........................ 58 Vice President, Finance and Chief Financial Officer
Daniel T. Nichols...................... 47 Vice President, Human Resources and Administration
Dirk M. Pfeiffer....................... 38 Vice President, Sales, Marketing and Engineering
Services
Katherine Sullivan Abrams.............. 57 Vice President, Research and Development
Dr. Narendra K. Gupta(1)(2)............ 47 Director
Walter G. Kortschak(1)(2).............. 37 Director
</TABLE>
- ---------------
(1) Member of Audit Committee of the Board of Directors
(2) Member of Compensation Committee of the Board of Directors
Charles R. Harris has served as President and Chief Executive Officer and
as a director of the Company since July 1995. From September 1994 to June 1995,
Mr. Harris was an independent consultant. From April 1993 to August 1994, Mr.
Harris was employed by Computervision Corp., a computer modeling equipment
provider ("Computervision"), as Vice President of the Industry Business Group
and a Member of the Management Committee. From 1980 to 1993, Mr. Harris was
employed by Hewlett-Packard Company, a computer and instrument manufacturer
("Hewlett-Packard") as Global Account Manager for General Motors/Electronic Data
Systems. Mr. Harris holds a B.A. degree and an M.S. degree from Emory University
in Georgia.
L. Ronald Trepp has served as Vice President, Finance and Chief Financial
Officer of the Company since June 1996. From December 1991 to June 1996, Mr.
Trepp was employed as Vice President, Finance and Chief Financial Officer of
Cimco, Inc., an injection molded parts and engineered resins company. From
August 1987 to December 1991, Mr. Trepp was employed by Computer Communications,
Inc., a data communications company, as Executive Vice President, Finance and
Chief Financial Officer. Mr. Trepp holds a B.S. degree and an M.B.A. degree from
the University of California, Los Angeles.
Daniel T. Nichols has served as Vice President, Human Resources and
Administration of the Company since February 1996. From February 1995 to
February 1996, Mr. Nichols was employed by Aspen Technology, Inc., a process
simulation software company, as Director of Human Resources. From April 1990 to
February 1995, Mr. Nichols was employed at Computervision, most recently as
Director of Technical and Professional Support. Mr. Nichols holds a B.S. degree
from the University of Massachusetts.
Dirk M. Pfeiffer has served as Vice President, Sales, Marketing and
Engineering Services of the Company since September 1995. From January 1993 to
June 1995, Mr. Pfeiffer was employed by SAP, an enterprise software company, as
Director of Sales and Marketing for the oil and gas industry. From September
1987 to December 1992, Mr. Pfeiffer was employed by Hewlett-Packard as the
European Account Manager for General Motors, Electronic Data Systems. Mr.
Pfeiffer holds a M.B.A. degree from the University of Cologne in Germany.
Katherine Sullivan Abrams became a consultant to the Company in August 1995
before joining the Company full-time as Vice President, Research and Development
of the Company in November 1995. From 1984 to February 1995, Ms. Abrams held
senior management positions with Computervision's Software Development business
unit, most recently as Director of Corporate Strategic Account Management.
Previously she had ten years of field and product development experience with
IBM. Ms. Abrams holds a B.S. degree from Cornell University.
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<PAGE> 39
Dr. Narendra K. Gupta has been a director of the Company since March 1994.
Dr. Gupta co-founded Integrated Systems Inc., a real-time software company, in
April 1980 and currently serves as its Chairman of the Board. Dr. Gupta is also
a director of Digital Link Corp., a data communications equipment manufacturer.
Dr. Gupta holds a M.S. degree from California Institute of Technology and a
Ph.D. from Stanford University.
Mr. Walter G. Kortschak has been a director of the Company since December
1993. Since August 1991, he has been a general partner of Summit Partners L.P.
where he has been employed since June 1989. Summit Partners L.P. and its
affiliates manage a number of venture capital funds, including Summit Ventures
III, L.P. and Summit Investors II, L.P., which are principal stockholders of the
Company. He is also a director of Diamond Multimedia Systems, Inc., HMT
Technology Corporation, McAfee Associates, Inc. and Mecon, Inc. and serves as a
director of several privately-held companies. Mr. Kortschak received a B.S.
degree from Oregon State University, an M.S. degree from the California
Institute of Technology and an M.B.A. degree from the University of California,
Los Angeles.
The Company is seeking to fill two vacancies on its Board of Directors in
the near term. All directors hold office until the next annual meeting of
stockholders or until their successors have been elected and qualified.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee and a Compensation Committee,
each of which consists of Dr. Gupta and Mr. Kortschak. The Audit Committee was
established in March 1992 and is responsible for reviewing the results and scope
of the audit and other services provided by the Company's independent auditors.
The Compensation Committee was established in June 1995 and is responsible for
the review and establishment of the Company's compensation programs for
executive officers and other employees of the Company and administers the
Company's stock plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of Dr. Gupta and Mr. Kortschak,
neither of whom is an officer of the Company. No interlocking relationship
exists between any member of the Company's board of directors or the
Compensation Committee and any member of the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past. Mr. Kortschak is a general partner of an affiliate of
Summit Partners III, L.P., the general partner of Summit Ventures III, L.P., and
Summit Investors II, L.P. See "Certain Transactions" for a discussion of
transactions between the Company and Summit Ventures III, L.P. and Summit
Investors II, L.P.
DIRECTOR COMPENSATION
Other than Dr. Gupta, members of the Company's Board of Directors do not
receive compensation for their service as directors. Dr. Gupta receives $500 for
each Board or committee meeting he attends. In addition, Dr. Gupta is reimbursed
for his out-of-pocket expenses incurred in attending Board and committee
meetings. Directors have in the past been granted stock options under the
Company's 1994 Stock Option Plan.
In addition, non-employee directors are entitled to participate in the 1996
Director Option Plan (the "Director Plan"). The Director Plan provides for the
automatic grant of an option for 20,000 shares of Common Stock (the "First
Option") to each non-employee director on the earlier of: (i) the effective date
of the Director Plan, or (ii) the date on which the person first becomes a
non-employee director, unless immediately prior to becoming a non-employee
director, such person was a director of the Company. After the First Option is
granted to the non-employee director, he or she shall automatically be granted
an option to purchase 5,000 shares (a "Subsequent Option") each year on the date
of the annual stockholder's meeting of the Company at which such non-employee
director is re-elected as a director, if on such date he or she shall have
served on the Board for at least six months. Each First Option and each
Subsequent Option shall have a term of 10 years and the shares subject to the
option shall vest and become exercisable at a rate of 25% on the first
anniversary date of grant and at a rate of 1/48th of the shares per month
thereafter. The exercise prices of the First Option and each Subsequent Option
shall be 100% of the fair market value per share of the Common Stock, generally
determined with reference to the closing price of the Common Stock as reported
on the Nasdaq National Market on the date of grant.
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<PAGE> 40
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid by the
Company to its Chief Executive Officer and the four most highly compensated
other executive officers of the Company (collectively, the "Named Executive
Officers") for services rendered in all capacities to the Company during the
Company's fiscal year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) SARS (#) ($)(2)
- ----------------------------------------- ---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Harris........................ 1995 $86,413(3) $37,500 $148,670(4) 250,000 $4,583
President and Chief Executive Officer
Dr. Yui L. Wang(5)....................... 1995 173,826 -- -- -- 7,440
Former Chairman of the Board and Chief
Executive Officer
Dirk M. Pfeiffer......................... 1995 43,750(3) 37,500 -- 125,000 --
Vice President, Sales, Marketing and
Engineering Services
Richard N. Campbell(6)................... 1995 90,672 11,000 -- 20,000 10,391
Vice President, Finance and Controller
Katherine Sullivan Abrams................ 1995 18,667(3) 8,800 22,500(7) 20,000 --
Vice President, Research and Development
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other annual compensation in the form of perquisites and other personal
benefits has been omitted in those cases where the aggregate amount of such
perquisites and other personal benefits constituted less than the lesser of
$50,000 or 10% of the total annual salary and bonus for the Named Executive
Officer for such year.
(2) Represents premiums paid by the Company on a life insurance policy and a
health insurance policy for the benefit of the Named Executive Officer.
(3) Amounts based on annual salary of $175,000 for Charles R. Harris from July
1, 1995, $150,000 for Dirk M. Pfeiffer from September 15, 1995 and $110,000
for Katherine Sullivan Abrams from November 1, 1995.
(4) Represents amounts paid in connection with the reimbursement by the Company
of certain relocation expenses.
(5) Represents amounts received by Dr. Wang in his capacity as Chairman of the
Board. Dr. Wang also served as President and Chief Executive Officer of the
Company through June 1995. Dr. Wang resigned as Chairman of the Board in
May 1996.
(6) In June 1996, Mr. Campbell resigned as Vice President, Finance and
Controller.
(7) Represents compensation for services rendered as a consultant to the
Company.
39
<PAGE> 41
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
under the Company's 1994 Stock Option Plan granted to the Named Executive
Officers during fiscal 1995.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM($)(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#) FIRST YEAR(1) ($/SHARE) DATE 5% 10%
- ---------------------------- ------------ -------------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Harris........... 250,000 43% $2.67 7/4/05 $419,787 $1,063,823
Dr. Yui L. Wang............. -- -- -- -- -- --
Dirk M. Pfeiffer............ 125,000 22% 2.67 9/17/05 209,894 531,912
Richard N. Campbell(3)...... 20,000 3% 2.67 10/29/05 33,583 85,200
Katherine Sullivan Abrams... 20,000 3% 2.67 10/31/05 33,583 85,200
</TABLE>
- ---------------
(1) Based on options to purchase 575,000 shares of Common Stock granted during
fiscal 1995.
(2) Potential realizable value is based on the assumption that the price of the
Common Stock appreciates at the annual rate shown, compounded annually,
from the date of grant until the end of the 10-year option term. The 5% and
10% assumed annual compound rates of stock price appreciation are mandated
by rules promulgated by the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future Common Stock
prices.
(3) In June 1996, Mr. Campbell resigned as an officer and employee of the
Company.
The following table sets forth information with respect to the number of
options and the aggregate value of in-the-money options held by each Named
Executive Officer at December 31, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR-END FISCAL YEAR-END
(#) ($)(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles R. Harris.......................... -- 250,000 -- $ 675,000
Dr. Yui L. Wang............................ -- -- -- --
Dirk M. Pfeiffer........................... -- 125,000 -- 337,500
Richard N. Campbell(2)..................... -- -- -- --
Katherine Sullivan Abrams.................. -- 20,000 -- 54,000
</TABLE>
- ---------------
(1) Based on the fair market value of the Company's Common Stock at December 31,
1995, $5.37 per share (as determined by the Company's Board of Directors),
less the exercise price payable for such shares.
(2) In June 1996, Mr. Campbell resigned as an officer and employee of the
Company.
STOCK PLANS
1994 Stock Option Plan. The Company's 1994 Stock Option Plan (the "1994
Plan") provides for the granting to employees and consultants of nonstatutory
stock options. The 1994 Plan was approved by the Board of Directors in March
1994 and by the stockholders in May 1994. A total of 1,666,667 shares of Common
Stock were reserved for issuance pursuant to the 1994 Plan. Unless terminated
sooner, the 1994 Plan will terminate automatically in March 2004.
40
<PAGE> 42
The 1994 Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"), which Committee is required to be constituted to
comply with Section 16(b) of the Securities Exchange Act of 1934, as amended,
and applicable laws. The Committee has the power to determine the terms of the
options granted, including the exercise price, the number of shares subject to
each option and the exercisability thereof, and the form of consideration
payable upon exercise. In addition, the Board has the authority to amend,
suspend or terminate the 1994 Plan, provided that no such action may affect any
share of Common Stock previously issued and sold or any option previously
granted under the 1994 Plan. Options granted under the 1994 Plan are not
generally transferable by the optionee, and each option is exercisable during
the lifetime of the optionee only by such optionee. Options granted under the
1994 Plan must be exercised within thirty days of the end of optionee's status
as an employee or consultant of the Company, within six months of such
optionee's termination by death or disability and within ninety days of such
optionee's termination by retirement. In no event may an option granted under
the 1994 Plan be exercised later than the expiration of the option's ten-year
term. The exercise price of options granted under the 1994 Plan is determined by
the Committee, but may not be less than 85% of the fair market value of the
Common Stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any option granted
must equal at least 110% of the fair market value on the date of grant. The term
of options granted under the 1994 Plan may not exceed ten years.
The 1994 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets or
a like transaction involving the Company, each optionee shall have the right to
exercise his or her option to the extent that it has vested as of the date of
such transaction. In addition, if the successor corporation does not assume or
substitute for the options granted under the 1994 Plan, each optionee shall have
the right to exercise prior to such transaction 50% of the unvested portion of
his or her option.
As of June 30, 1996, 25,834 shares of Common Stock had been issued upon the
exercise of options granted under the 1994 Plan, options to purchase 1,514,166
shares of Common Stock at a weighted average exercise price of $4.26 per share
were outstanding and 126,667 shares remained available for future option grants.
1996 Stock Plan. The Company's 1996 Stock Plan (the "1996 Plan") provides
for the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), and for the granting to employees and consultants of
nonstatutory stock options and stock purchase rights ("SPRs"). The 1996 Plan was
approved by the Board of Directors in May 1996. The Company will seek
stockholder approval of the 1996 Plan prior to the effective date of the
offering. Unless terminated sooner, the 1996 Plan will terminate automatically
in May 2006. A total of 1,000,000 shares of Common Stock are currently reserved
for issuance pursuant to the 1996 Plan.
The 1996 Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"), which Committee shall, in the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, consist of two or more "outside directors" within
the meaning of Section 162(m) of the Code. The Committee has the power to
determine the terms of the options or SPRs granted, including the exercise
price, the number of shares subject to each option or SPR, the exercisability
thereof, and the form of consideration payable upon such exercise. In addition,
the Committee has the authority to amend, suspend or terminate the 1996 Plan,
provided that no such action may affect any share of Common Stock previously
issued and sold or any option previously granted under the 1996 Plan. Options
and SPRs granted under the 1996 Plan are not generally transferable by the
optionee, and each option and SPR is exercisable during the lifetime of the
optionee only by such optionee. Options granted under the 1996 Plan must
generally be exercised within three months of the end of optionee's status as an
employee or consultant of the Company, or within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's ten-year term. In the case of SPRs, unless the
Committee determines otherwise, the Restricted Stock Purchase Agreement shall
grant the Company a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's employment with the Company for any
reason (including death or disability). The purchase price for shares
repurchased
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<PAGE> 43
pursuant to the Restricted Stock Purchase Agreement shall be the original price
paid by the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at a rate determined
by the Committee. The exercise price of all incentive stock options granted
under the 1996 Plan must be at least equal to the fair market value of the
Common Stock on the date of grant. The exercise price of nonstatutory stock
options and SPRs granted under the 1996 Plan is determined by the Committee, but
with respect to nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the exercise price must at least be equal to the fair market value of the
Common Stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any incentive stock
option granted must equal at least 110% of the fair market value on the grant
date and the term of such incentive stock option must not exceed five years. The
term of all other options granted under the 1996 Plan may not exceed ten years.
The 1996 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets or
a like transaction involving the Company, each option shall be assumed or an
equivalent option substituted by the successor corporation. If the outstanding
options are not assumed or substituted for as described in the preceding
sentence, the Committee shall provide for the Optionee to have the right to
exercise the option or SPR as to all of the optioned stock, including shares as
to which it would not otherwise be exercisable. If the plan administrator makes
an option or SPR exercisable in full in the event of a merger or sale of assets,
the plan administrator shall notify the optionee that the option or SPR shall be
fully exercisable for a period of fifteen (15) days from the date of such
notice, and the option or SPR will terminate upon expiration of such period.
1996 Employee Stock Purchase Plans. The Company has adopted employee stock
purchase plans for U.S. and non-U.S. employees. Each plan provides for the grant
of 200,000 shares of Common Stock, less the number of shares granted under the
other plan, so that the total number of shares of Common Stock subject to both
plans is 200,000 shares. The Company's 1996 Employee Stock Purchase Plan for
U.S. Employees (the "U.S. Purchase Plan") was adopted by the Board of Directors
in May 1996. The Company will seek stockholder approval of the U.S. Purchase
Plan prior to the effective date of the offering but will not seek Stockholder
approval for the Employee Stock Purchase Plan for Non-U.S. Employees (the
"Foreign Purchase Plan").
The U.S. Purchase Plan, which is intended to qualify under Section 423 of
the Code, has two six-month offering periods each year beginning on the first
trading day on or after January 1 and July 1, respectively, except for the first
such offering period which commences on the first trading day on or after the
effective date of this Offering and ends on the last trading day on or before
June 30, 1997. The U.S. Purchase Plan is administered by the Board of Directors
or by a committee appointed by the Board. Employees are eligible to participate
if they are customarily employed by the Company or any participating subsidiary
for at least 20 hours per week and more than five months in any calendar year.
The U.S. Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions of up to 10% of an employee's compensation (including
commissions and overtime, but excluding other bonuses and incentive
compensation), up to a maximum of $25,000 for all offering periods ending within
the same calendar year. The price of stock purchased under the U.S. Purchase
Plan is 85% of the lower of the fair market value of the Common Stock at the
beginning or at the end of each offering period. Employees may end their
participation at any time during an offering period, and they will be repaid
their payroll deductions to date. Participation ends automatically upon
termination of employment with the Company.
Rights granted under the U.S. Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the U.S. Purchase Plan. The U.S. Purchase Plan provides
that, in the event of a merger of the Company with or into another corporation
or a sale of substantially all of the Company's assets, the Board of Directors
shall shorten the offering period then in progress (so that employees' rights to
purchase stock under the Plan are exercised prior to the merger or sale of
assets). The U.S. Purchase Plan will terminate in May 2006. The Board of
Directors has the authority to amend or terminate the U.S. Purchase Plan, except
that no such action may adversely affect any outstanding
42
<PAGE> 44
rights to purchase stock under the U.S. Purchase Plan. The Foreign Purchase Plan
is not intended to qualify under Section 423 of the Code but contains terms
substantially similar to those of the U.S. Purchase Plan.
1996 Director Option Plan. The Company has reserved an aggregate of
125,000 shares of Common Stock for issuance under its 1996 Director Option Plan
(the "Director Plan"). The Director Plan was adopted by the Board of Directors
in May 1996, but will not become effective until the effective date of this
offering. The Director Plan provides for the automatic grant of an option for
20,000 shares of Common Stock (the "First Option") to each non-employee director
on the earlier of: (i) the effective date of the Director Plan, or (ii) the date
on which the person first becomes a non-employee director, unless immediately
prior to becoming a non-employee director, such person was a director of the
Company. After the First Option is granted to the non-employee director, he or
she shall automatically be granted an option to purchase 5,000 shares (a
"Subsequent Option") each year on the date of the annual stockholder's meeting
of the Company at which such non-employee director is re-elected as a director,
if on such date he or she shall have served on the Board for at least six
months. Each First Option and each Subsequent Option shall have a term of 10
years and the shares subject to the option shall vest and become exercisable at
a rate of 25% on the first anniversary date of grant and at a rate of 1/48th of
the shares per month thereafter. The exercise prices of the First Option and
each Subsequent Option shall be 100% of the fair market value per share of the
Common Stock, generally determined with reference to the closing price of the
Common Stock as reported on the Nasdaq National Market on the date of grant.
In the event of a merger of the Company or the sale of substantially all of
the assets of the Company, each option may be assumed or an equivalent option
substituted by the successor corporation. If an option is assumed or substituted
for, it shall continue to vest as provided in the Director Plan. However, if a
non-employee director's status as a director of the Company or the successor
corporation, as applicable, is terminated other than on a voluntary resignation
by the non-employee director, each option granted to such non-employee director
shall become fully vested and exercisable. If the successor does not agree to
assume or substitute the option, each option shall also become fully vested and
exercisable for a period of thirty days from the date the Board notifies the
optionee of the option's full exercisability, after which period the option
shall terminate. Options granted under the Director Plan must be exercised
within three months of the end of the optionee's tenure as a director of the
Company, or within twelve months after such director's termination by death or
disability, but in no event later than the expiration of the option's ten-year
term. No option granted under the Director Plan is transferable by the optionee
other than by will or the laws of descent and distribution, and each option is
exercisable, during the lifetime of the optionee, only by such optionee.
401(K) PLAN
The Company has a tax-qualified retirement plan (the "401(k) Plan")
covering substantially all of the Company's employees. The 401(k) Plan was
originally established as a stock bonus plan. Later, the plan was amended to be
a combined stock bonus/money purchase pension plan. Certain accounts accrued
under the 401(k) Plan in its earlier versions are still maintained for the
benefit of some participants. Pre-1994 Company stock accounts under the 401(k)
Plan continue to hold 2,258,090 shares of Company stock, or 31.7% of the total
outstanding shares. Following this offering, such accounts under the 401(k) Plan
will hold 2,118,781 shares of Company stock, or 23.0% of the total outstanding
shares. Currently, employees may elect to defer up to 15% of their compensation,
or the statutorily prescribed limit, if less, to the 401(k) Plan. The Company
matches the first 5% of an employee's compensation deferred to the 401(k) Plan
based on a sliding scale, with employees receiving less compensation receiving a
greater matching contribution percentage. The 401(k) Plan has a profit sharing
element whereby the Company can make a contribution in an amount to be
determined annually by the Board of Directors. The profit sharing contribution,
if any, is allocated prorata based on compensation to all eligible 401(k) Plan
participants. An employee's interest in his or her deferrals are 100% vested
when contributed. An employee's interest in matching contributions and profit
sharing contributions vest over 5 years from date of employment. The 401(k) Plan
is intended to qualify under Sections 401(a) and 501(a) of the Code. As such,
contributions to the 401(k) Plan and earnings on those contributions are not
taxable to the employees until distributed from the 401(k) Plan, and all
contributions are deductible by the Company when made.
43
<PAGE> 45
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's charter limits the monetary liability of its directors to the
Company or its stockholders for breach of such director's fiduciary duty to the
fullest extent permitted by the Delaware General Corporation Law (the "DGCL")
or, if the DGCL is not applicable, to the fullest extent permissible under
applicable law. The DGCL does not permit such a limitation on the personal
liability of a director (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) under section 174 of the DGCL; or (iv) for any transaction from which the
director derived an improper personal benefit. Under the Company's by-laws, each
person who was or is a party or is threatened to be made a party to, or is
involved in, any proceeding by reason of the fact that he or she is or was a
director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation or
other enterprise, shall be indemnified and held harmless by the Company to the
fullest extent permitted by the DGCL against all costs, charges, expenses,
liabilities and losses (including attorneys' fees) reasonably incurred or
suffered by such person in connection with such proceeding. Such right to
indemnification includes the right to be paid by the Company the expenses
incurred in defending any such proceeding in advance of its final disposition.
The Board of Directors has discretion to provide indemnification to employees
and agents of the Company with the same scope and effect as the foregoing
indemnification of directors and officers. The foregoing right to
indemnification and advancement of expenses under the Company's by-laws is not
exclusive of any other right which any person may have or acquire under the
Company's charter, any statute, agreement or otherwise. In addition, the
Company's charter authorizes the Company by bylaw, agreement or otherwise to
indemnify directors, officers, employees and agents in excess of the
indemnification permitted by applicable law.
In addition, the Company has entered into indemnification agreements with
each of its directors and executive officers and has obtained a directors' and
officers' liability insurance policy that insures such persons against the cost
of defense, settlement or payment of judgments under certain circumstances. As
of the date of this Prospectus, there is no pending litigation or proceeding
involving a director or officer of the Company as to which indemnification is
being sought, nor is the Company aware of any pending or threatened litigation
that may result in claims for indemnification by any director or officer.
44
<PAGE> 46
CERTAIN TRANSACTIONS
In September 1992, the Company entered into a lease agreement with respect
to its headquarters with Brea Partners, a limited partnership in which the
Company has a 10% limited partnership interest and BVW Investments has a 34.6%
limited partnership interest. BVW Investments is a general partnership among the
Company's founders, N. Fred Brannock, Vincent S. Verneuil, Jr. and Dr. Yui L.
Wang. Mr. Brannock and Dr. Wang are former directors of the Company. The Company
believes that the lease agreement is on terms no less favorable to the Company
than could be obtained from an independent third party.
In December 1993, the Company entered into employment agreements with
Vincent S. Verneuil, Jr. and Dr. Yui L. Wang. The agreement with Mr. Verneuil
provides for an annual salary in the amount of $147,000, $155,920, $162,052 and
$168,534 for the calendar years 1993, 1994, 1995 and 1996, respectively. The
agreement with Dr. Wang provides for an annual salary in the amount of $162,000,
$171,720, $178,588 and $185,732 for the calendar years 1993, 1994, 1995 and
1996, respectively. Such agreements also provide for participation in the
Company's benefit plans. Such agreements terminate December 17, 1996 or upon the
earlier occurrence of certain other events. In May 1996, the Company entered
into resignation agreements with Mr. Verneuil and Dr. Wang pursuant to which Mr.
Verneuil and Dr. Wang resigned as Secretary and Chairman of the Board of the
Company, respectively, and the Company has agreed to pay Mr. Verneuil an amount
of approximately $278,000.
In December 1993, Summit Ventures III, L.P., Summit Investors II, L.P.,
Enterprise Partners II Associates, L.P. and Enterprise Partners II, L.P.
(collectively, the "Investors") purchased an aggregate of 1,666,667 shares of
the Company's Common Stock at a purchase price of $2.85 per share and acquired
warrants to purchase an aggregate of 438,598 shares of the Company's Common
Stock, which warrants were subsequently amended in August 1996. In connection
with such purchases, the Company entered into an agreement with the Investors
and its stockholders pursuant to which the Investors and the stockholders have
certain rights with respect to representation on the Company's Board of
Directors, restrictions on transfer of shares and rights to require the Company
to repurchase shares held by them. Such agreement shall expire upon the closing
of the offering.
In December 1994, the Company entered into a settlement and general release
agreement with Eugene L. Goda, former Chief Executive Officer and President of
the Company. Pursuant to such agreement, the Company paid Mr. Goda an aggregate
of $320,000.
45
<PAGE> 47
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of the date of this Prospectus
and as adjusted to reflect the sale of the shares of Common Stock offered hereby
with respect to (i) each person known by the Company to own beneficially more
than 5% of the outstanding shares of Common Stock, (ii) each Selling
Stockholder, (iii) each of the Company's directors, (iv) each of the Named
Executive Officers and (v) all executive officers and directors as a group.
Except as otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned. Unless otherwise
indicated, the address for each stockholder is c/o Simulation Sciences Inc., 601
Valencia Avenue, Suite 100, Brea, California 92823.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING SHARES TO BE AFTER THE OFFERING
5% STOCKHOLDERS, DIRECTORS AND EXECUTIVE ------------------ SOLD IN THE ------------------
OFFICERS NUMBER PERCENT OFFERING NUMBER PERCENT
- ----------------------------------------------- -------- ------- ------------ -------- -------
<S> <C> <C> <C> <C> <C>
Summit Ventures III, L.P.(1)
499 Hamilton Avenue, Suite 200
Palo Alto, CA 94301.......................... 1,657,180 23.5% 470,304 1,186,876 12.2%
Summit Investors II, L.P.(2)
499 Hamilton Avenue, Suite 200
Palo Alto, CA 94301.......................... 27,032 * 7,696 19,336 *
Enterprise Partners II, L.P.(3)
5000 Birch Street, Suite 6200
Newport Beach, CA 92660...................... 385,966 5.7 -- 385,966 4.1
Enterprise Partners II Associates, L.P.(4)
5000 Birch Street, Suite 6200
Newport Beach, CA 92660...................... 35,088 * -- 35,088 *
Dr. Yui L. Wang(5)............................. 1,220,107 18.2 134,900 1,085,207 11.5
N. Fred Brannock(6)............................ 866,309 12.9 59,625 806,684 8.6
Vincent S. Verneuil, Jr.(7).................... 866,309 12.9 79,700 786,609 8.4
401(k) Plan(8)................................. 2,258,090 33.7 139,275 2,118,815 22.5
Charles R. Harris(9)........................... 50,000 * -- 50,000 *
Dirk M. Pfeiffer(10)........................... 25,000 * -- 25,000 *
Katherine Sullivan Abrams(11).................. 4,000 * -- 4,000 *
Dr. Narendra K. Gupta(12)...................... 9,334 * -- 9,334 *
Walter G. Kortschak(13)........................ 1,684,212 23.9 478,000 1,206,212 12.4
All executive officers and directors as a group
(7 persons)(14).............................. 1,772,546 24.9 -- 1,294,546 13.2
OTHER SELLING STOCKHOLDER
Thomas L. Ringer(15)........................... 25,834 * 8,500 17,334 *
</TABLE>
- ---------------
* Less than one percent of the outstanding Common Stock.
(1) Includes 1,311,934 shares of Common Stock issuable upon conversion of
shares of Preferred Stock on a one-for-one basis, which will occur
automatically upon the closing of the offering, and 345,246 shares of
Common Stock underlying outstanding warrants. Summit Partners III, L.P. is
the general partner of Summit Ventures III, L.P. The general partner of
Summit Partners III, L.P. is Stamps, Woodsum & Co. III, a general
partnership. The general partners of Stamps, Woodsum & Co. III are Gregory
M. Avis, E. Roe Stamps, IV, Stephen G. Woodsum, Walter G. Kortschak, Martin
J. Mannion, Thomas S. Roberts, Bruce R. Evans, John A. Genest and Ernest K.
Jacquet (collectively, the "Summit General Partners"). Each of the Summit
General Partners, including Mr. Kortschak, a director of the Company,
exercises shared investment and voting power with respect to such shares,
but disclaims beneficial ownership of such shares.
(2) Includes 21,400 shares of Common Stock issuable upon conversion of shares
of Preferred Stock on a one-for-one basis, which will occur automatically
upon the closing of the offering, and 5,632 shares of Common Stock
underlying outstanding warrants. The general partners of Summit Investors
II, L.P. are the Summit General Partners. Each of the Summit General
Partners, including Mr. Kortschak, a director of the Company, exercises
shared investment and voting power with respect to such shares, but
disclaims beneficial ownership of such shares.
(3) Includes 305,556 shares of Common Stock issuable upon conversion of shares
of Preferred Stock on a one-for-one basis, which will occur automatically
upon the closing of this offering, and 80,410 shares of Common Stock
underlying outstanding warrants. The general partner of Enterprise Partners
II, L.P. and Enterprise Partners II Associates, L.P. is Enterprise
Management Partners II, L.P. The general partners of Enterprise Management
46
<PAGE> 48
Partners II, L.P. are Charles D. Martin, James H. Berglund, Andrew E.
Senyei and James P. Gauer, each of whom exercises shared voting and
investment power over the beneficial holdings of such entity and of
Enterprise Partners II Associates, L.P. Each of Messrs. Martin, Berglund,
Senyei and Gauer disclaims beneficial ownership of such shares and the
shares held of record by Enterprise Partners II Associates, L.P.
(4) Includes 27,778 shares of Common Stock issuable upon conversion of shares
of Preferred Stock on a one-for-one basis, which will occur automatically
upon the closing of this offering, and 7,310 shares of Common Stock
underlying outstanding warrants. See footnote (3) above for the natural
persons that exercise voting and investment power over such shares.
(5) Represents 1,149,409 shares held of record by various trusts for the
benefit of members of Mr.Wang's immediate family and 70,698 shares held of
record by the Company's 401(k) Plan. Dr. Wang served as Chairman of Board
of Directors until May 1996 and served as President and Chief Executive
Officer of the Company from December 1994 until June 1995. Assuming the
over-allotment option is exercised in full, Dr. Wang will beneficially own
1,064,972 or 11.3% of the outstanding shares of Common Stock after the
offering.
(6) Represents 796,251 shares held of record by various trusts for the benefit
of members of Mr. Brannock's immediate family and 70,058 shares held of
record by the Company's 401(k) Plan. Mr. Brannock served as Director of the
Company until May 1996 and served as Vice President of the Company until
November 1994. Assuming the over-allotment option is exercised in full, Mr.
Brannock will beneficially own 797,740 or 8.5% of the outstanding shares of
Common Stock after the offering.
(7) Represents 796,251 shares held of record by various trusts for the benefit
of Mr. Verneuil's immediate family, and 70,058 shares held of record by the
Company's 401(k) Plan. Mr. Verneuil served as Vice President and Secretary
of the Company until May 1996. Assuming the over-allotment option is
exercised in full, Mr. Verneuil will beneficially own 774,654 or 8.2% of
the outstanding shares of Common Stock after the offering.
(8) Represents shares held of record by the Company's 401(k) Plan which are
beneficially owned by employees and former employees of the Company.
(9) Represents 50,000 shares of Common Stock issuable upon exercise of stock
options that become exercisable within 60 days of the date of this
Prospectus.
(10) Represents 25,000 shares of Common Stock issuable upon exercise of stock
options that become exercisable within 60 days of the date of this
Prospectus.
(11) Represents 4,000 shares of Common Stock issuable upon exercise of stock
options that become exercisable within 60 days of the date of this
Prospectus.
(12) Represents 9,334 shares of Common Stock issuable upon exercise of stock
options that become exercisable within 60 days of the date of this
Prospectus.
(13) Mr. Kortschak, a director of the Company is a general partner of Stamps,
Woodsum & Co. III, an affiliate of Summit Ventures III, L.P., and a general
partner of Summit Investors II, L.P. Mr. Kortschak exercises shared
investment and voting power with respect to such shares, but disclaims
beneficial ownership of such shares.
(14) Includes 80,334 shares subject to stock options held by directors and
officers that are exercisable within 60 days of the date of this
Prospectus.
(15) Represents shares obtained in May 1996 through exercise of options pursuant
to the Company's 1994 Stock Option Plan. Mr. Ringer is a former director of
the Company.
47
<PAGE> 49
DESCRIPTION OF CAPITAL STOCK
Following the completion of the offering, the authorized capital stock of
the Company shall consist of 30,000,000 shares of Common Stock, $.001 par value,
and 5,000,000 shares of Preferred Stock, $.001 par value.
COMMON STOCK
As of the date of this Prospectus, there are 6,700,503 shares of Common
Stock outstanding (assuming conversion of all outstanding Preferred Stock and
exercise of stock options after June 30, 1996) held of record by five
stockholders. The holders of Common Stock are entitled to one vote per share on
all matters to be voted on by the stockholders. Subject to the rights of the
holders of the Preferred Stock, the holders of Common Stock are entitled to
receive ratably such dividends as may be declared from time to time by the Board
of Directors out of funds legally available therefor. In the event of the
liquidation, dissolution or winding up of the Company, the holders of the Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to the prior liquidation rights of holders of the Preferred
Stock described below. The Common Stock has no preemptive or other similar
rights, and there are no redemption or sinking fund provisions applicable to the
Common Stock. As of the date of this Prospectus, all of the outstanding shares
of Common Stock are, and the shares of Common Stock offered hereby will be,
fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the Preferred Stock in
one or more series and to fix the price, rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares consisting of any series or the designation
of such series without further vote or action by the stockholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. Upon consummation of this offering, no shares of
Preferred Stock will be outstanding. The Company has no present intention to
issue shares of Preferred Stock.
REGISTRATION RIGHTS
Under the terms of the Registration Rights Agreement, the Investors, the
Founders and the 401(k) Plan, who in the aggregate will hold 6,369,026 shares of
Common Stock following this offering (the "Registrable Shares"), have certain
rights with respect to the registration of such shares of Common Stock under the
Securities Act. Under the Registration Rights Agreement, holders of 40% or more
of the Registrable Shares held by the Investors on two occasions may request
that the Company effect a registration and public offering under the Securities
Act of the Registrable Shares, subject to certain conditions, including the
right of the Company to defer the public offering for up to 90 days. In the
event that the Company proposes to register any of its Common Stock under the
Securities Act, holders of Registrable Shares are entitled to receive notice
thereof and to include in such registration all or part of the Registrable
Shares that they hold, subject to certain conditions, including the right of the
underwriters to limit the number of shares of Common Stock to be included in the
underwritten public offering. Furthermore, following this offering the Investors
have the right to request registrations on Form S-3 until the fifth anniversary
of this offering, subject to certain conditions.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS
The Company's Charter provides that all stockholder action must be effected
at a duly called meeting or by unanimous written consent. The Bylaws also
provide that the Company's stockholders may call a special meeting of
stockholders only upon a request of stockholders owning at least 50% of the
Company's outstanding capital stock. These provisions are intended to enhance
the likelihood of continued stability in the composition of the Board of
Directors and in the policies furnished by the Board of Directors and to
discourage certain
48
<PAGE> 50
types of transactions that may involve an actual or threatened change of control
of the Company. These provisions are also designed to reduce the vulnerability
of the Company to an unsolicited acquisition proposal and to discourage certain
tactics that may be used in proxy fights. These provisions of the Bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. Such provisions could also have the effect of
discouraging others from making tender offers for the Company's shares and, as a
consequence, they also may inhibit fluctuations in the market price of the
Company's shares that could result from actual or rumored takeover attempts.
Such provisions also may have the effect of preventing changes in the management
of the Company.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested holder; (ii)
upon consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of the stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder, (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder, (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder or (v) the receipt by the
interested stockholder of the benefit of any loss, advances, guarantees, pledges
or other financial benefits by or through the corporation. In general, Section
203 defines an interested stockholder as an entity or person beneficially owning
15% or more of the outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by such entity or person.
See "Risk Factors -- Antitakeover effects of the Company's Charter, Bylaws and
Section 203 of the Delaware General Corporation Law."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Harris Trust
Company of California.
49
<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Company's
Common Stock. Sales of substantial amounts of Common Stock in the public market
could adversely affect the market price of the Common Stock.
Upon completion of this offering, the Company will have 9,400,503 shares of
Common Stock outstanding. Of these outstanding shares, the 3,600,000 shares sold
in this offering will be freely transferable without restriction or further
registration under the Securities Act, unless they are held by "affiliates" of
the Company within the meaning of Rule 144 promulgated under the Securities Act
as currently in effect. Of the remaining 5,800,503 shares held by existing
stockholders, 25,334 shares are "restricted shares" within the meaning of Rule
144 and may not be sold in the absence of registration under the Securities Act
or an exemption therefrom, and 5,775,169 shares are eligible for sale without
restriction or further registration under Rule 144, unless they are held by
"affiliates" of the Company or subject to a "lock-up" agreement summarized
below.
The 25,334 "restricted shares" held by existing stockholders will be
eligible for sale without restriction or further registration beginning 90 days
after the date of this Prospectus under Rule 701, unless they are subject to a
"lock-up" agreement summarized below.
All holders of the Company's Common Stock, including all officers and
directors of the Company, have agreed with the Representatives of the
Underwriters and/or the Company that, until 180 days after the effective date of
this offering, they will not directly or indirectly offer, sell, pledge,
contract to sell (including any short sale), grant any option to purchase or
otherwise dispose of any shares of Common Stock (including, without limitation,
shares of Common Stock of the Company which may be deemed to be beneficially
owned by the undersigned on the date hereof in accordance with the rules and
regulations of the Securities and Exchange Commission (the "SEC") and shares of
Common Stock which may be issued upon exercise of a stock option or warrant) or
enter into any hedging transaction relating to the Common Stock. The Company has
agreed with the Representatives not to release any holders from such agreements
without the prior consent of Alex. Brown & Sons Incorporated. The Company has
also agreed not to sell, offer to sell, contract to sell, grant any option to
purchase or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or any rights
to acquire Common Stock for a period of 180 days after the effective date of
this offering without the prior written consent of Alex. Brown & Sons
Incorporated, subject to certain limited exceptions. The lockup agreements may
be released at any time as to all or any portion of the shares subject to such
agreements at the sole discretion of Alex. Brown & Sons Incorporated.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including any person who may be deemed to be an
"affiliate" of the Company, is entitled to sell within any three month period
"restricted shares" beneficially owned by him or her in an amount that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume in shares of Common Stock during the four
calendar weeks preceding such sale, provided that at least two years have
elapsed since such shares were acquired from the Company or an affiliate of the
Company. Sales are also subject to certain requirements as to the manner of
sale, notice and the availability of current public information regarding the
Company. However, a person who has not been an "affiliate" of the Company at any
time within three months prior to the sale is entitled to sell his or her shares
without regard to the volume limitations or other requirements of Rule 144,
provided that at least three years have elapsed since such shares were acquired
from the Company or an affiliate of the Company. In addition, the SEC has
proposed revisions to Rule 144 and Rule 144(k), the effect of which would be to
shorten the holding period under Rule 144 from two years to one year and to
shorten the holding period under Rule 144(k) from three years to two years. If
enacted, these proposed revisions would increase, potentially substantially, the
number of shares that would be available for sale in the public market 180 days
after the Effective Date. Any shares subject to lock-up agreements may be
released at any time without notice by the Underwriters. In general, under Rule
701, any employee, consultant or advisor of the Company who purchases shares
from the Company in connection with a compensatory stock or option plan or other
written agreement related to compensation is eligible to resell
50
<PAGE> 52
such shares 90 days after the effective date of the offering in reliance on Rule
144, but without compliance with certain restrictions contained in Rule 144.
As of the date of this Prospectus, the Company had reserved an aggregate of
1,666,667 shares of Common Stock for issuance pursuant to its 1994 Stock Option
Plan, and options to purchase 1,520,833 shares were outstanding under such plan,
and the Company had reserved an aggregate of 1,000,000, 125,000 and 200,000
shares, respectively, for issuance under its 1996 Stock Plan, 1996 Director
Option Plan and Employee Stock Purchase Plans. In addition, 413,167 shares of
Common Stock subject to vested stock options under the 1994 Stock Option Plan
will be eligible for sale upon expiration of the lock-up agreements. As soon as
practicable following the offering, the Company intends to file a registration
statement on Form S-8 under the Securities Act to register shares of Common
Stock reserved for issuance under the plans. Such registration statement will
automatically become effective immediately upon filing with the SEC, and such
shares will thereafter be freely transferable, subject to the lock-up agreements
summarized above. See "Risk Factors -- Shares Eligible for Future Sale."
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<PAGE> 53
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and Wessels, Arnold & Henderson, L.L.C., have
severally agreed to purchase from the Company and the Selling Stockholders the
following respective number of shares of Common Stock (or warrants immediately
exercisable therefor) at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---------------------------------------------------------- ----------------
<S> <C>
Alex. Brown & Sons Incorporated...........................
Wessels, Arnold & Henderson, L.L.C........................
----------------
Total................................................... 3,600,000
=============
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.
The Company has been advised by Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow and such dealers may reallow
a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representatives of the Underwriters.
The Company and certain Selling Stockholders have granted to the
Underwriters an option, exercisable no later than 30 days after the date of this
Prospectus, to purchase up to an aggregate of 540,000 additional shares of
Common Stock at the initial public offering price, less the underwriting
discount, set forth on the cover page of this Prospectus. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriters name in the above table
bears to the total number of shares of Common Stock offered hereby, and the
Company and the Selling Stockholders will be obligated, pursuant to the option,
to sell shares to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of Common Stock offered hereby. If purchased,
the Underwriters will offer such additional shares on the same terms as those on
which the 3,600,000 shares are being offered.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm orders to any account over which they
exercise discretionary authority.
All holders of the Company's Common Stock, including all officers and
directors of the Company, have agreed with the Representatives of the
Underwriters and/or the Company that, until 180 days after the effective date of
this offering, they will not directly or indirectly offer, sell, pledge,
contract to sell (including
52
<PAGE> 54
any short sale), grant any option to purchase or otherwise dispose of any shares
of Common Stock (including, without limitation, shares of Common Stock of the
Company which may be deemed to be beneficially owned by the undersigned on the
date hereof in accordance with the rules and regulations of the SEC and shares
of Common Stock which may be issued upon exercise of a stock option or warrant)
or enter into any hedging transaction relating to the Common Stock. The Company
has agreed with the Representatives not to release any holders from such
agreements without the prior consent of Alex. Brown & Sons Incorporated. The
Company has also agreed not to sell, offer to sell, contract to sell, grant any
option to purchase or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
any rights to acquire Common Stock for a period of 180 days after the effective
date of this offering without the prior written consent of Alex. Brown & Sons
Incorporated, subject to certain limited exceptions. The lockup agreements may
be released at any time as to all or any portion of the shares subject to such
agreements at the sole discretion of Alex. Brown & Sons Incorporated.
Prior to the offering there has been no public market for the Common Stock.
Consequently, the initial public offering price for the Common Stock will be
determined by negotiation among the Company and the Representatives. Among the
factors to be considered are prevailing market conditions, the results of
operations of the Company in recent periods, market capitalizations and stage of
development of other companies which the Company and the representative of the
Underwriters believe to be comparable to the Company, estimates of the business
potential of the Company, the present state of the Company's development, the
Company's management and other factors deemed relevant. The estimated initial
public offering price range set forth on the cover of this Prospectus is subject
to change as a result of market conditions and other factors.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholders by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Jeffrey D. Saper, a member of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, is Secretary of the
Company. Certain legal matters in connection with this offering will be passed
upon for the Underwriters by Morrison & Foerster LLP, Irvine, California.
EXPERTS
The consolidated financial statements and schedule of the Company included
in this Prospectus and elsewhere in the Registration Statement as of December
31, 1994 and 1995 and June 30, 1996 and for the years ended December 31, 1994
and 1995 and the six months ended June 30, 1996 have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing elsewhere
herein and in the Registration Statement and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
53
<PAGE> 55
ADDITIONAL INFORMATION
A Registration Statement on Form S-1 under the Securities Act, including
amendments thereto, relating to the Common Stock offered hereby has been filed
by the Company with the SEC, Washington, D.C. This Prospectus does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto. For further information with respect to the Company and
the Common Stock offered hereby, reference is made to such Registration
Statement and exhibits and schedules filed as a part thereof. A copy of the
Registration Statement may be inspected by anyone without charge at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any portion of the Registration Statement may be obtained from
the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, upon payment of prescribed fees. The SEC maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
54
<PAGE> 56
SIMULATION SCIENCES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report......................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and 1995, and June 30, 1996...... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1995 (Unaudited) and 1996................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995 and the six months ended June 30, 1996......................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1995 (Unaudited) and 1996................... F-6
Notes to Consolidated Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Simulation Sciences Inc.:
We have audited the accompanying consolidated balance sheets of Simulation
Sciences Inc. and subsidiaries (the Company) as of December 31, 1994 and 1995
and June 30, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995 and the six months ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Simulation
Sciences Inc. and subsidiaries as of December 31, 1994 and 1995 and June 30,
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 and the six months ended June
30, 1996 in conformity with generally accepted accounting principles.
August 2, 1996 (except for paragraphs 14 and 15 of Note 4,
for which the date is October , 1996)
The accompanying consolidated financial statements include the effects of a
reverse stock split of the Company's common stock approved by the Company's
Board of Directors in May 1996, anticipated to be effective prior to the closing
of this offering. The above opinion is in the form which will be signed by
Deloitte & Touche LLP upon consummation of the reverse stock split, which is
described in Note 4 of the notes to the consolidated financial statements, and
assuming that, from October 4, 1996 to the date of such reverse stock split, no
other events will have occurred that would affect the accompanying consolidated
financial statements and notes thereto.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Costa Mesa, California
October 4, 1996
F-2
<PAGE> 58
SIMULATION SCIENCES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995 JUNE 30, 1996
---------- ---------- -----------------------
<S> <C> <C> <C> <C>
ACTUAL PRO FORMA
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1).................... $3,905,817 $5,442,283 $1,693,032
Short-term investments (Note 1)....................... 114,531 14,531 14,531
Accounts receivable, less allowance for doubtful
accounts of $427,944, $456,387 and $751,969 at
December 31, 1994, 1995 and June 30, 1996,
respectively........................................ 5,847,681 8,869,483 9,271,367
Unbilled accounts receivable (Note 1)................. 279,564 250,514 160,095
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 6)...................... 532,979
Income tax refund receivable (Note 7)................. 713,889 968,552 412,917
Deferred income taxes (Note 7)........................ 1,372,209 2,170,741 2,170,741
Prepaid expenses and other current assets............. 358,565 411,760 467,735
----------- ----------- -----------
Total current assets.............................. 13,125,235 18,127,864 14,190,418
LONG-TERM INSTALLMENTS RECEIVABLE, net of unamortized
discount of $154,932 at June 30, 1996 (Note 1)...... 2,685,816
PROPERTY AND EQUIPMENT (Note 1):
Computer equipment and programs....................... 3,621,406 4,126,674 5,429,138
Furniture and fixtures................................ 2,487,253 3,171,422 3,254,671
----------- ----------- -----------
6,108,659 7,298,096 8,683,809
Less accumulated depreciation......................... (4,263,722) (4,956,783) (5,312,530)
----------- ----------- -----------
Property and equipment, net......................... 1,844,937 2,341,313 3,371,279
OTHER ASSETS (Note 1)................................. 342,611 552,014 1,815,096
DEFERRED INCOME TAXES (Note 7)........................ 979,750 533,191 533,191
----------- ----------- -----------
$16,292,533 $21,554,382 $22,595,800
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $1,124,745 $1,401,529 $1,017,540
Accrued vacation and bonus payable.................... 552,266 1,103,794 1,091,479
Other accrued liabilities............................. 1,678,199 2,345,523 3,044,446
Income taxes payable (Note 7)......................... 504,867 1,087,698 1,142,544
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 6)...................... 219,526 209,639
Deferred revenue (Note 1)............................. 3,945,527 5,554,699 5,368,277
----------- ----------- -----------
Total current liabilities......................... 7,805,604 11,712,769 11,873,925
COMMITMENTS (Note 8)
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.001
par value; 5,000,000 shares authorized, 1,666,668
shares issued and outstanding at December 31, 1994
and 1995 and June 30, 1996.......................... 4,802,120 4,802,120 4,802,120
STOCKHOLDERS' EQUITY (Notes 4 and 5):
Common stock, $.001 par value; 30,000,000 shares
authorized; 5,000,000, 5,000,000 and 5,025,835
shares issued and outstanding at December 31, 1994
and 1995 and June 30, 1996, respectively, 6,692,503
pro forma shares at June 30, 1996................... 5,000 5,000 5,026 $ 6,693
Additional paid-in capital............................ 1,470,402 1,470,402 1,540,599 6,341,052
Retained earnings..................................... 2,209,407 3,564,091 4,374,130 4,374,130
----------- ----------- -----------
Total stockholders' equity........................ 3,684,809 5,039,493 5,919,755 $10,721,875
----------- ----------- -----------
$16,292,533 $21,554,382 $22,595,800
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 59
SIMULATION SCIENCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUE (Notes 1 and 9):
Software license revenue.................. $25,048,480 $25,608,641 $29,888,672 $13,953,002 $19,636,493
Services and other revenue................ 3,095,551 2,643,523 3,230,639 1,293,384 2,154,484
----------- ----------- ----------- ---------- -----------
Total revenue......................... 28,144,031 28,252,164 33,119,311 15,246,386 21,790,977
COST OF SALES:
Cost of software license revenue.......... 2,886,592 3,989,665 3,509,514 1,705,221 1,778,479
Cost of services and other revenue........ 1,243,664 2,697,857 3,250,878 1,394,398 1,552,462
----------- ----------- ----------- ---------- -----------
Total cost of revenue................. 4,130,256 6,687,522 6,760,392 3,099,619 3,330,941
----------- ----------- ----------- ---------- -----------
GROSS PROFIT.............................. 24,013,775 21,564,642 26,358,919 12,146,767 18,460,036
OPERATING EXPENSES (Notes 1, 5 and 8):
Sales and marketing....................... 9,842,083 10,473,325 11,662,381 5,663,499 7,338,579
Research and development.................. 8,230,140 9,633,982 8,621,381 4,330,601 6,844,944
General and administrative................ 3,784,907 3,858,002 3,868,506 1,368,370 3,066,513
----------- ----------- ----------- ---------- -----------
Total operating expenses.............. 21,857,130 23,965,309 24,152,268 11,362,470 17,250,036
----------- ----------- ----------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS............. 2,156,645 (2,400,667) 2,206,651 784,297 1,210,000
INTEREST AND OTHER INCOME................. 312,660 193,247 99,905 271,786 163,253
----------- ----------- ----------- ---------- -----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES........................ 2,469,305 (2,207,420) 2,306,556 1,056,083 1,373,253
PROVISION (BENEFIT) FOR INCOME TAXES (Note
7)...................................... 865,567 (565,343) 951,872 435,825 563,214
----------- ----------- ----------- ---------- -----------
NET INCOME (LOSS)......................... $1,603,738 $(1,642,077) $1,354,684 $ 620,258 $ 810,039
----------- ----------- ----------- ---------- -----------
PRO FORMA NET INCOME PER SHARE............ $ .17 $ .10
----------- -----------
PRO FORMA WEIGHTED AVERAGE COMMON
SHARES.................................. 7,788,831 7,788,831
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 60
SIMULATION SCIENCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balances as of January 1, 1993.......................... 6,827,941 $ 6,828 $1,097,976 $7,002,359 $ 8,107,163
Contribution by a stockholder of 100% ownership interest
in affiliate (Note 5)................................. 615,985 615,985
Repurchase of common stock (Note 4)..................... (1,827,940) (1,828) (243,559) (4,754,613) (5,000,000)
Net income.............................................. 1,603,738 1,603,738
--------- ---------- ---------- ---------- --------
Balances as of December 31, 1993........................ 5,000,001 5,000 1,470,402 3,851,484 5,326,886
Net loss................................................ (1,642,077) (1,642,077)
--------- ---------- ---------- ---------- --------
Balances as of December 31, 1994........................ 5,000,001 5,000 1,470,402 2,209,407 3,684,809
Net income.............................................. 1,354,684 1,354,684
--------- ---------- ---------- ---------- --------
Balances as of December 31, 1995........................ 5,000,001 5,000 1,470,402 3,564,091 5,039,493
Stock option exercises (Note 4)......................... 25,834 26 70,197 70,223
Net income.............................................. 810,039 810,039
--------- ---------- ---------- ---------- --------
Balances as of June 30, 1996............................ 5,025,835 $ 5,026 $1,540,599 $4,374,130 $ 5,919,755
--------- ---------- ---------- ---------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 61
SIMULATION SCIENCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1993 1994 1995 1996
---------- ---------- ---------- 1995 ----------
----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $1,603,738 $(1,642,077) $1,354,684 $ 620,258 $ 810,039
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization of
property and equipment....................... 811,648 885,005 693,060 209,019 355,747
Provision for doubtful accounts................ 213,540 120,404 28,443 443 295,582
Deferred income taxes.......................... (432,948) (1,014,737) (351,973) 87
Increase in cash surrender value of officers'
life insurance policies...................... (73,039)
Change in operating assets and liabilities:
Accounts receivable.......................... (45,690) (1,469,055) (3,050,245) 192,006 (697,466)
Unbilled accounts receivable................. 297,791 298,515 29,050 (145,423) 90,419
Costs and estimated earnings in excess of
billing on uncompleted contracts........... (421,613) (111,366) 532,979 154,433
Income taxes refund receivable............... (713,889) (254,663) 555,635
Prepaid expenses and other current assets.... (284,620) (15,958) (53,195) 140,588 (55,975)
Other assets................................. (112,770) 6,303 (209,403) (305,415) (1,263,082)
Accounts payable............................. 584,194 102,361 276,784 (592,055) (383,989)
Accrued vacation and bonus payable........... 78,086 84,379 551,528 228,120 (12,315)
Other accrued liabilities.................... 1,087,846 426,440 667,324 (278,165) 698,923
Accrued employee stock ownership
plan contribution.......................... (935,485) (487,675)
Income taxes payable......................... 233,477 (128,595) 582,831 133,520 54,846
Due to related party......................... (122,484)
Billings in excess of costs and estimated
earnings on uncompleted contracts.......... (444,090) 219,526 (9,887)
Deferred revenue............................. 497,042 1,143,930 1,609,172 508,020 (186,422)
----------- ----------- ----------- ---------- -----------
Net cash provided by (used in) operating
activities............................... 2,534,623 (2,516,015) 2,625,902 865,436 252,055
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............. (1,155,543) (1,316,582) (1,227,460) (373,399) (1,385,713)
Proceeds from disposition of property and
equipment...................................... 578,471 38,024
Purchases of marketable securities............... (604,349) (100,000)
Proceeds from sale of marketable securities...... 426,981 609,022 100,000 100,000
Purchase of shares of affiliate.................. (1,000)
Long-term installments receivable................ (2,685,816)
Proceeds from officers' life insurance
policies....................................... 583,379
----------- ----------- ----------- ---------- -----------
Net cash (used in) provided by investing
activities............................... (1,333,911) 354,290 (1,089,436) (273,399) (4,071,529)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable........................ (30,000)
Proceeds from issuance of preferred stock........ 5,000,000
Cost of preferred stock issuance................. (197,880)
Repurchase of common stock....................... (5,000,000)
Cash received as part contribution of ownership
interest in affiliate.......................... 321,605
Proceeds from stock option exercises............. 70,223
----------- ----------- ----------- ---------- -----------
Net cash provided by financing
activities............................... 93,725 70,223
----------- ----------- ----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 1,294,437 (2,161,725) 1,536,466 592,037 (3,749,251)
CASH AND CASH EQUIVALENTS,
beginning...................................... 4,773,105 6,067,542 3,905,817 3,905,817 5,442,283
----------- ----------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS, ending................ $6,067,542 $3,905,817 $5,442,283 $4,497,854 $1,693,032
=========== =========== =========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -- Income taxes paid............... $ 502,121 $ 453,460 $ 270,142 $ 95,581 $ 240,217
=========== =========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 62
SIMULATION SCIENCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General and Nature of Operations -- Simulation Sciences Inc. is engaged
primarily in the development and marketing of computer software for simulation
applications primarily for the oil refinery and chemical industries all over the
world. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses and losses have approximated management's expectations.
The accompanying consolidated financial statements include the accounts of
Simulation Sciences Inc. and its wholly owned subsidiaries in Japan, Venezuela,
Germany and the United Kingdom (collectively, the Company). All significant
intercompany transactions and balances have been eliminated.
Unaudited Information -- The information set forth in these consolidated
financial statements for the six months ended June 30, 1995 is unaudited and
reflects all adjustments, consisting only of normal recurring adjustments, that,
in the opinion of management, are necessary to present fairly the financial
position and results of operations of the Company for the period. Results of
operations for the interim periods are not necessarily indicative of the results
of operations for the full fiscal year.
Cash Equivalents -- Cash equivalents generally represent highly liquid
investments purchased with an original maturity date of three months or less.
Short-Term Investments -- Short-term investments are valued at market value
and consist of certificates of deposit and marketable equity securities. The
Company accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. This statement specifies the accounting treatment of the
Company's investments in equity securities based on the investment
classifications defined in the statement. The Company has classified the equity
securities as available for sale, and in accordance with SFAS No. 115, they have
been recorded at market value as of December 31, 1994, 1995 and June 30, 1996.
The market value approximates the carrying amount at December 31, 1994, 1995 and
June 30, 1996.
Fair Value of Financial Instruments -- The recorded amounts of cash and
cash equivalents, investment securities, accounts receivable and accounts
payable at December 31, 1994 and 1995 and June 30, 1996 approximate fair value
in accordance with Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Value of Financial Instruments, due to the relatively
short period of time between origination of the instruments and their expected
realization.
Long-Term Installments Receivable -- Long-term installments receivable
represent the present value of future payments under noncancelable license
agreements which provide for payments in installments over a one- to five-year
period. A portion of the revenue from each installment payment is recognized as
interest income in the accompanying consolidated statements of operations. The
interest rate in effect at June 30, 1996 was 8%.
Property and Equipment -- Property and equipment are stated at cost and
depreciated using the straight-line method over the estimated useful lives of
the related assets, generally five years.
Other Assets -- Included in other assets at June 30, 1996 is purchased
research and development costs of $1,000,000. The Company has acquired the right
to use certain technology from a third party and intends to incorporate such
technology into a product which is presently under development. Also included in
other assets at June 30, 1996 are $376,263 of costs related to the Company's
initial public offering. Such costs will be offset against the proceeds of such
offering if successful. If unsuccessful, such costs will be expensed.
Software Development Costs -- Development costs related to new software
products and enhancements to existing software products are expensed as incurred
until technological feasibility has been established. After technological
feasibility is established, any additional costs would be capitalized in
accordance with
F-7
<PAGE> 63
SIMULATION SCIENCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed. Because the Company believes its current process for
developing software is essentially completed concurrently with the establishment
of technological feasibility, no costs have been capitalized as of December 31,
1994 or 1995 and June 30, 1996.
Revenue Recognition -- The Company recognizes revenue from product
licensing agreements in accordance with American Institute of Certified Public
Accountants Statement of Position No. 91-1, Software Revenue Recognition ("SOP
91-1"). SOP 91-1 generally requires recognition of license revenue upon shipment
or renewal and recognition of revenue for maintenance and customer support
ratably over the life of the contract. However, if license fees and maintenance
and customer support charges are not separately identified, then all revenue
from the contract must be recognized ratably over its life. More than 95% of the
Company's license contracts entered into before 1996 did not separately identify
both software license fees and charges for customer support obligations. As a
result, the Company recognized revenue from these contracts ratably over the
term of such contracts in accordance with SOP 91-1 ("Ratable Revenue"). The
remaining contracts identified the cost of maintenance and the license fee
separately and, under SOP 91-1, the Company recognized revenue from the license
portion of the contracts upon shipment or renewal ("License Revenue") and from
the service portion of the contracts ratably over their respective terms.
Accordingly, the revenue recognized under a contract resulting in License
Revenue recognition will be higher in the quarter of shipment or renewal, and
lower in later quarters, than that recognized under a contract resulting in
Ratable Revenue recognition. In 1996, the Company began increasing the number of
contracts for new and renewing customers that separately identify software
license fees and customer support charges, resulting in recognition of License
Revenue on an increased portion of contracts. Unbilled accounts receivable
related to license periods up to and including December 31, 1994 and 1995 and
June 30, 1996 under noncancelable license agreements amounted to $279,564,
$250,514, and $160,095, respectively, and has been recognized as revenue in
fiscal 1994, 1995 and the six months ended June 30, 1996.
Revenues from software product sales are recognized upon shipment of the
products to customers, and revenues from related customer software support
programs are recognized ratably over terms specified in the sale agreement. The
Company accounts for insignificant vendor obligations by deferring a portion of
the revenue and recognizing it either ratably as the obligations are fulfilled
or when the related services are performed.
Revenues related to development contracts are recognized on the
percentage-of-completion method, based generally on the ratio of software
engineering costs incurred to date to estimated total software engineering costs
at completion. Losses on contracts, if any, are recognized when such losses are
determined. Revenues from royalty agreements are recognized when earned.
Income Taxes -- The Company accounts for income taxes under the provisions
of SFAS No. 109, Accounting for Income Taxes. This statement requires the
recognition of deferred tax assets and liabilities for the future consequences
of events that have been recognized in the Company's financial statements or tax
returns. Measurement of the deferred items is based on enacted tax laws. The
Company provides for income taxes during interim reporting periods based on an
estimate of taxable income for the fiscal year.
Foreign Currency Translation -- In accordance with SFAS No. 52, Foreign
Currency Translation, the United States dollar is considered to be the
functional currency for the Company's foreign subsidiaries, and translation
adjustments are included in other income in the Company's consolidated
statements of operations.
Pro Forma Information -- The Company is preparing for an initial public
offering of its common stock which, upon completion, will result in the
conversion of all outstanding shares of preferred stock into shares of common
stock (Note 4). The accompanying pro forma information, which is unaudited,
gives effect to the conversion of all outstanding shares of preferred stock into
common stock at or prior to the closing of the offering.
F-8
<PAGE> 64
SIMULATION SCIENCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro Forma Net Income Per Share -- Pro forma net income per share is
computed by dividing net income by the weighted average number of common and
common equivalent shares outstanding. Weighted average common and common
equivalent shares include common shares, warrants to purchase shares of common
stock, stock options using the treasury stock method, and the pro forma
conversion of all outstanding shares of preferred stock into shares of common
stock.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
Topic 4D, stock options granted during the twelve months prior to the date of
the initial filing of the Company's Form S-1 Registration Statement have been
included in the calculation of common equivalent shares using the treasury stock
method as if they were outstanding for all periods presented.
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 periods. Actual results could differ from those estimates.
Concentration of Revenues in the Petroleum Industry -- The Company derives
a substantial majority of its revenues from software licenses to companies in
the petroleum industry, which is highly cyclical. Accordingly, the Company's
future success is dependent upon the continued demand for computer-aided
chemical engineering software by companies in the petroleum industry. The
Company believes that economic downturns in the U.S., Europe, Japan and Asia and
pricing pressures experienced by petroleum companies in connection with cost
containment measures have led to delays and reductions in certain capital and
operating expenditures by many of such companies worldwide. The Company's
revenues have in the past been, and may in the future be, subject to substantial
period-to-period fluctuations as a consequence of such industry patterns,
general domestic and foreign economic conditions and other factors affecting
spending in the petroleum industry. There can be no assurance that such factors
will not have a material adverse effect on the Company's business, operating
results and financial condition.
2. CASH SURRENDER VALUE OF OFFICERS' LIFE INSURANCE POLICIES
The Company was the beneficiary of life insurance policies related to
officers of the Company. The policies had a face value of $7,600,000 and a cash
surrender value of $583,379 as of December 31, 1993. During 1994, these policies
were canceled and the cash surrender value was received.
3. REVOLVING LINE OF CREDIT
In July 1995, the Company entered into a secured lending arrangement (the
"Agreement") with Bank of America National Trust and Savings Association (the
"Bank"), providing for a $3.0 million revolving line of credit bearing interest
at the Bank's prime rate, collateralized by substantially all of the assets of
the Company. The Agreement expires in September 1996 and has certain financial
and other covenants. At June 30, 1996, there were no borrowings outstanding
under the Agreement and the Company was not in compliance with two of the
covenants. The Company received a letter waiving the breached covenants through
June 30, 1996 and intends to renew the agreement under substantially the same
terms and conditions as its present Agreement.
4. STOCKHOLDERS' EQUITY
On December 17, 1993, in a private placement offering, the Company sold
1,666,668 shares of Series A convertible preferred stock ($.001 par value) at a
price of $3.00 per share, raising proceeds of $4,802,120, net of offering costs
of $197,880. In connection with this offering, the Company also issued warrants
to the holders of Series A Convertible Preferred Stock to purchase 438,598
shares of the Company's common stock for $2.85 per share. Such warrants remain
outstanding at June 30, 1996 (Note 1).
F-9
<PAGE> 65
SIMULATION SCIENCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The holders of Series A convertible preferred stock are entitled to receive
cumulative dividends at the rate of $.24 per share, per annum when and if
declared by the Board of Directors. No dividends have been declared to date.
Series A convertible preferred stock, including any accrued but unpaid
dividends, may be converted at the option of the holder into common stock of the
Company, assuming a preferred stock value of $3.00 and considering the fair
market value of the Company's common stock at the time of conversion, subject to
adjustment as defined.
Unless an initial public offering (meeting certain specifications) has
occurred, the holders of the preferred stock and related warrants and any common
stock issued upon conversion of the preferred stock or the warrants can require
that the Company repurchase such securities upon a sale of substantially all the
Company's assets, certain mergers and corporate reorganizations, or in December
1999 (with a two-year payout, if needed). Such repurchase would occur at the
higher of fair market value or the initial purchase price. It is anticipated
that all of the outstanding shares of preferred stock will be converted into
common stock on a share for share basis at or prior to the Company's initial
public offering (Note 1).
Preferred stockholders have liquidation preference over the common
stockholders in the event of liquidation, dissolution, merger or sale of the
Company. Liquidation preference per share is equal to $3.00, plus declared but
unpaid dividends, subject to adjustment as defined. Because there is no
mandatory redemption of the Series A convertible preferred stock, no accretion
of additional amounts to the carrying values of such preferred stock was
recorded.
On December 17, 1993, the Company repurchased from its stockholders
1,827,940 shares of common stock for $5,000,000. Upon repurchase by the Company,
the shares were canceled.
Effective March 2, 1994, the Company adopted the Simulation Sciences Inc.
1994 Stock Option Plan which provides for up to 1,666,667 options to purchase
common stock of the Company at market price as of the date of grant. The options
are to be issued to key employees and directors as determined by the Company's
Board of Directors. Such options vest ratably over five years. The following
table summarizes activity under the Stock Option Plan.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF PRICE OPTIONS
SHARES PER SHARE EXERCISABLE
--------- ----------- -----------
<S> <C> <C> <C>
BALANCE, January 1, 1994.......................... -- $ -- --
Granted........................................... 500,667 2.73
--------- ----------
BALANCE, December 31, 1994........................ 500,667 2.73
Granted........................................... 585,000 2.67
Canceled.......................................... (171,667) 2.73
--------- ----------
BALANCE, December 31, 1995........................ 914,000 2.67-2.73 65,800
-------
Granted........................................... 626,000 5.37-7.50
Exercised......................................... (25,834) 2.73
--------- ---------- -------
BALANCE, June 30, 1996............................ 1,514,166 $2.67-$7.50 160,600
========= ========== =======
</TABLE>
Subsequent to June 30, 1996, options to purchase 8,000 shares were
exercised at $2.73, options to purchase 26,667 shares at $7.50 per share were
granted and options for 12,000 shares at $2.73 were cancelled.
F-10
<PAGE> 66
SIMULATION SCIENCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1996 126,667 shares were available for grant under the Option
Plan.
On May 2, 1996, the Company's Board of Directors approved the 1996 Stock
Option Plan (the "1996 Plan"), the 1996 Employee Stock Purchase Plan (the
"ESPP") and the 1996 Director Option Plan (the "Director Plan"). The 1996 Plan,
the ESPP and the Director Plan will not be become effective until the date of a
public offering of the Company's stock.
1996 Stock Plan. The 1996 Plan provides for the granting to employees of
incentive stock options and for the granting to employees and consultants of
nonstatutory stock options and stock purchase rights ("SPRs"). The 1996 Plan may
be administered by the Board of Directors or a committee of the Board (the
"Committee") which has the power to determine the terms of the options or SPRs
granted, including the exercise price, the number of shares subject to each
option or SPR, the exercisability thereof, and the form of consideration payable
upon such exercise. In addition, the Committee has the authority to amend,
suspend or terminate the 1996 Plan, provided that no such action may affect any
share of Common Stock previously issued and sold or any option previously
granted under the 1996 Plan. Options and SPRs granted under the 1996 Plan are
not generally transferable by the optionee, and each option and SPR is
exercisable during the lifetime of the optionee only by such optionee. Options
granted under the 1996 Plan must generally be exercised within three months of
the end of the optionee's status as an employee or consultant of the Company or
within twelve months after such optionee's termination by death or disability,
but in no event later than the expiration of the option's ten-year term. In the
case of SPRs, unless the Committee determines otherwise, the Restricted Stock
Purchase Agreement shall grant the Company a repurchase option exercisable upon
the voluntary or involuntary termination of the purchaser's employment with the
Company for any reason (including death or disability). The purchase price for
shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be
the original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company. The repurchase option shall lapse
at a rate determined by the Committee. The exercise price of all incentive stock
options granted under the 1996 Plan must be at least equal to the fair market
value of the Common Stock on the date of grant. The exercise price of
nonstatutory stock options and SPRs granted under the 1996 Plan is determined by
the Committee, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section 162(m)
of the Code, the exercise price must at least be equal to the fair market value
of the Common Stock on the date of grant. With respect to any participant who
owns stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any incentive stock
option granted must equal at least 110% of the fair market value on the grant
date and the term of such incentive stock option must not exceed five years. The
term of all other options granted under the 1996 Plan may not exceed ten years.
The 1996 Plan provides that in the event of a merger of the Company with or into
another corporation, a sale of substantially all of the Company's assets or a
like transaction involving the Company, each option shall be assumed or an
equivalent option substituted by the successor corporation. If the outstanding
options are not assumed or substituted for as described in the preceding
sentence, the Committee shall provide for the Optionee to have the right to
exercise the option or SPR as to all of the optioned stock, including shares as
to which it would not otherwise be exercisable. If the plan administrator makes
an option or SPR exercisable in full in the event of a merger or sale of assets,
the plan administrator shall notify the optionee that the option or SPR shall be
fully exercisable for a period of fifteen (15) days from the date of such
notice, and the option or SPR will terminate upon the expiration of such period.
1996 Employee Stock Purchase Plans. The U.S. Purchase Plan, which is
intended to qualify under Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"), has two six-month offering periods each year beginning on
the first trading day on or after January 1 and July 1, respectively, except for
the first such offering period which commences on the first trading day on or
after the effective date of this Offering and ends on the last trading day on or
before June 30, 1997. The U.S. Purchase Plan is administered by the Board of
Directors or by a committee appointed by the Board. Employees are eligible to
participate if
F-11
<PAGE> 67
SIMULATION SCIENCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
they are customarily employed by the Company or any participating subsidiary for
at least 20 hours per week and more than five months in any calendar year. The
U.S. Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions of up to 10% of an employee's compensation (including
commissions and overtime, but excluding other bonuses and incentive
compensation), up to a maximum of $20,000 for all offering periods ending within
the same calendar year. The price of stock purchased under the U.S. Purchase
Plan is 85% of the lower of the fair market value of the Common Stock at the
beginning or at the end of each offering period. Employees may end their
participation at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with the Company. Rights granted under the U.S. Purchase Plan are not
transferable by a participant other than by will, the laws of descent and
distribution, or as otherwise provided under the U.S. Purchase Plan. The U.S.
Purchase Plan provides that, in the event of a merger of the Company with or
into another corporation or a sale of substantially all of the Company's assets,
the Board of Directors shall shorten the offering period then in progress (so
that employees' rights to purchase stock under the Plan are exercised prior to
the merger or sale of assets). The Board of Directors has the authority to amend
or terminate the U.S. Purchase Plan, except that no such action may adversely
affect any outstanding rights to purchase stock under the U.S. Purchase Plan.
The Foreign Purchase Plan is not intended to qualify under Section 423 of
the Code, but the terms of the Foreign Purchase Plan are substantially similar
to those of the U.S. Purchase plan.
1996 Director Option Plan. Non-employee directors are entitled to
participate in the Director Plan. The Director Plan provides for the automatic
grant of an option for 20,000 shares of Common Stock (the "First Option") to
each non-employee director on the earlier of: (i) the effective date of the
Director Plan, or (ii) the date on which the person first becomes a non-employee
director, unless immediately prior to becoming a non-employee director, such
person was a director of the Company. After the First Option is granted to the
non-employee director, he or she shall automatically be granted an option to
purchase 5,000 shares (a "Subsequent Option") each year on the date of the
annual stockholder's meeting of the Company at which such non-employee director
is re-elected as a director, if on such date he or she shall have served on the
Board for at least six months. Each First Option and each Subsequent Option
shall have a term of 10 years and the shares subject to the option shall vest
and become exercisable as to 25% of the shares subject to the option on each of
the first four anniversaries after its date of grant. The exercise prices of the
First Option and each Subsequent Option shall be 100% of the fair market value
per share of the Common Stock, generally determined with reference to the
closing price of the Common Stock as reported on the Nasdaq National Market on
the date of grant.
Stock Split -- On May 2, 1996, the Company's Board of Directors approved a
1-for-3 reverse stock split of the Company's common stock to become effective
prior to the closing of the offering. All share, per share and conversion
amounts relating to common stock, preferred stock, warrants and stock options
included in the accompanying consolidated financial statements and footnotes
have been restated to reflect the stock split for all periods presented.
Reincorporation -- The Company reincorporated in the State of Delaware in
September 1996.
In 1993, the Company had a profit sharing plan and a defined contribution
money purchase pension plan covering substantially all employees. Both plans
were combined in an employee stock ownership plan (the "ESOP"). As of December
31, 1993, the ESOP owned 2,258,090 shares (27%) of the Company's common stock,
which were acquired from the three major stockholders of the Company. Total
pension and profit sharing expense was $837,675 for the year ended December 31,
1993.
On January 1, 1994, the ESOP was amended and restated to provide for the
combination of the plans into a 401(k) plan. The Company matches participating
employee (participant) contributions of up to 5% of
F-12
<PAGE> 68
SIMULATION SCIENCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation at rates up to 100%, depending on the participant's compensation.
During the year ended December 31, 1994 and 1995, matching contributions totaled
$124,838 and $111,092, respectively.
Recently Issued Accounting Standard -- In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based
Compensation, which requires adoption of the disclosure provisions no later than
fiscal years beginning after December 15, 1995 and adoptions of the recognition
and measurement provisions for non-employee transactions no later than after
December 15, 1995. The new standard defines a fair value method of accounting
for stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of this
award and is recognized over the service period, which is usually the vesting
period.
Pursuant to the new standard, companies are encouraged, but not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, but would be required to disclose in a note to the
financial statements pro forma net income, and if presented, net income per
share as if the Company had applied the new method of accounting. The accounting
requirements of the new method are effective for all employee awards granted
after the beginning of the fiscal year of adoption.
The Company has determined that it will not change to the fair value method
and will continue to use Accounting Principles Board Opinion No. 25 for
measurement and recognition of employee stock-based transactions.
5. RELATED PARTY TRANSACTIONS
For the eight-month period ended August 31, 1993, the Company paid service
fees totaling $1,431,070 to SimSci International Inc. (previously 100% owned by
one of the stockholders of the Company).
Effective August 31, 1993, the stockholder contributed 100% of the
outstanding stock of SimSci International Inc. to the Company in exchange for
$1,000. Accordingly, the Company has recorded a contribution to additional
paid-in capital of $615,985 as a result of this transaction. The contribution
was comprised substantially of cash ($321,605), property ($204,750) and the
forgiveness of a receivable ($89,630).
6. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS
(BILLINGS IN EXCESS OF COST AND ESTIMATED EARNINGS ON UNCOMPLETED
CONTRACTS)
Contracts in progress consist of the following:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------ JUNE 30,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Costs incurred on uncompleted contracts.......... $1,706,898 $1,490,418 $1,107,664
Estimated earnings............................... 414,161 487,430 1,240,453
----------- ----------- -----------
2,121,059 1,977,848 2,348,117
Less billings to date............................ (1,588,080) (2,197,374) (2,557,756)
----------- ----------- -----------
Costs and estimated earnings in excess of
billings on uncompleted contracts (billings in
excess of cost and estimated earnings on
uncompleted contracts)......................... $ 532,979 $ (219,526) $ (209,639)
=========== =========== ===========
</TABLE>
F-13
<PAGE> 69
SIMULATION SCIENCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
--------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal.................................. $ 529,990 $ (561,110) $ 224,311
State.................................... 149,570 78,964 228,876
Foreign.................................. 618,955 931,540 850,658
---------- ----------- ----------
1,298,515 449,394 1,303,845
Deferred federal and state................. (432,948) (1,014,737) (351,973)
---------- ----------- ----------
$ 865,567 $ (565,343) $ 951,872
========== =========== ==========
</TABLE>
A reconciliation of the Company's effective tax rate compared to the
statutory federal rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
---- ----- ----
<S> <C> <C> <C>
Income taxes at the statutory federal rate.............. 34.0% (34.0)% 35.0%
State taxes, net of federal benefit..................... 3.9 (0.7) 3.9
Foreign tax rate differential........................... (4.1) 10.7 (2.2)
Dividends from foreign subsidiaries..................... 4.4
Other................................................... 1.2 (1.6) 0.2
---- ----- ----
35.0% (25.6)% 41.3%
==== ===== ====
</TABLE>
The Company provides deferred income taxes for temporary differences
between assets and liabilities recognized for financial reporting purposes and
income tax purposes. The income tax effects of these temporary differences
representing significant portions of the deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS:
Deferred revenues............................................. $1,044,152 $1,968,207
Domestic loss carryforwards................................... 1,147,208
Accrued expenses.............................................. 476,550 737,158
Tax credit carryovers......................................... 338,333
---------- ----------
Total deferred tax assets................................... $2,667,910 $3,043,698
========== ==========
DEFERRED TAX LIABILITIES:
Depreciable assets............................................ $(201,576) $(191,246)
Deferred state taxes.......................................... (100,805) (134,950)
Other......................................................... (13,570) (13,570)
---------- ----------
Total deferred tax liabilities.............................. (315,951) (339,766)
---------- ----------
Net deferred tax asset...................................... $2,351,959 $2,703,932
========== ==========
</TABLE>
F-14
<PAGE> 70
SIMULATION SCIENCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASES
As of December 31, 1995, the Company has various operating lease
commitments expiring through 2008 for office space and rental equipment, as
follows:
<TABLE>
<S> <C>
Year ending December 31:
1996.............................................. $ 844,059
1997.............................................. 1,637,323
1998.............................................. 1,092,217
1999.............................................. 1,091,365
2000.............................................. 1,059,901
2001.............................................. 608,854
Thereafter........................................ 4,555,710
-----------
$10,889,429
===========
</TABLE>
Rent expense was $1,558,962, $1,832,491 and $1,828,365 for the years ended
December 31, 1993, 1994 and 1995, respectively, and $922,767 and $977,747 for
the six months ended June 30, 1995 and 1996, respectively. Certain stockholders
of the Company, in connection with their involvement in a partnership, acquired
a 44% interest in the Company's main office facility in October 1992. Total rent
expense incurred by the Company to such partnership amounted to $521,384,
$425,020 and $482,973 for the years ended December 31, 1993, 1994 and 1995,
respectively, and $240,097 and $318,455 for the six months ended June 30, 1995
and 1996, respectively. The Company's lease with the partnership expires in
2008.
9. GEOGRAPHICAL INFORMATION
Revenue, income (loss) before income taxes and identifiable assets for the
Company's North American, European and Asian operations are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1993 1994 1995 1996
---------- ---------- ---------- 1995 ----------
----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE
North America:
Customers............ $11,429,913 $10,261,017 $11,095,791 $5,623,427 $7,876,495
Intercompany......... 2,073,080 1,911,727 2,543,834 1,205,388 2,236,146
----------- ----------- ----------- ----------- -----------
13,502,993 12,172,744 13,639,625 6,828,815 10,112,641
Europe/Middle
East/Africa:
Customers............ 9,023,205 9,726,969 11,416,180 5,140,345 6,370,523
Intercompany......... 1,053,755 3,144,229 3,921,029 1,912,922 2,437,639
----------- ----------- ----------- ----------- -----------
10,076,960.. 12,871,198 15,337,209 7,053,267 8,808,162
Japan:
Customers............ 3,224,397 3,994,161 5,109,689 2,274,321 4,114,769
Intercompany......... 190,062 363,991 361,440 168,743 148,298
----------- ----------- ----------- ----------- -----------
3,414,459 4,358,152 5,471,129 2,443,064 4,263,067
</TABLE>
F-15
<PAGE> 71
SIMULATION SCIENCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1996
----------- ----------- ----------- 1995 -----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Pacific Rim:
Customers............ 3,013,534 2,659,705 3,483,764 1,335,549 2,062,890
Intercompany......... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
3,013,534 2,659,705 3,483,784 1,335,549 2,062,890
Other*:
Customers............ 1,452,982 1,610,312 2,013,867 872,744 1,366,294
Intercompany......... 1,366,235 510,311 610,087 293,927 213,464
----------- ----------- ----------- ----------- -----------
2,819,217 2,120,623 2,623,954 1,166,671 1,579,758
Eliminations........... (4,683,132) (5,930,258) (7,436,390) (3,580,980) (5,035,541)
----------- ----------- ----------- ----------- -----------
$28,144,031 $28,252,164 $33,119,311 $15,246,386 $21,790,977
=========== =========== =========== =========== ===========
INCOME (LOSS) BEFORE
TAXES:
United States.......... $2,253,639 $(2,635,451) $1,474,826 $ 678,667 $ (32,791)
Japan.................. 70,953 194,170 282,149 172,717 460,372
Other.................. 144,713 233,861 549,581 204,699 944,672
----------- ----------- ----------- ----------- -----------
$2,469,305 $(2,207,420) $2,306,556 $1,056,083 $1,372,253
=========== =========== =========== =========== ===========
ASSETS:
United States.......... $17,391,713 $15,316,479 $20,419,549 $15,779,201 $20,853,847
Japan.................. 1,838,084 2,088,026 2,049,995 2,408,379 1,778,246
Other.................. 378,441 442,366 858,925 598,310 2,478,268
Eliminations........... (2,669,569) (1,554,338) (1,774,087) (2,037,660) (2,514,561)
----------- ----------- ----------- ----------- -----------
$16,938,669 $16,292,533 $21,554,382 $16,748,230 $22,595,800
=========== =========== =========== =========== ===========
</TABLE>
* Consists primarily of sales into Latin American countries.
F-16
<PAGE> 72
DESCRIPTION OF GRAPHICS
The graphic depicts the complete manufacturing cycle in the process
industry from the extraction of raw materials to the production of finished
products such as gasoline, paint, adhesives, etc. The graphic is comprised of
three main sections; top, middle and bottom. The top section includes the logo
of the Company and the following description: "SimSci is a leading provider of
commercial simulation software and related services to the process industries,
including the petroleum, petrochemical and industrial chemicals process
industries and the engineering and construction firms that support these
industries." The middle section is a graphic showing a broad circular arrow with
various icons and descriptive headings depicting the processing of materials
into finished products. The bottom section is comprised of the following
description: "SimSci's simulation software products and services are designed to
provide the information necessary to increase profitability by reducing capital
investment costs, improving plant yields and enhancing management decision
making."
The middle section is described here in more detail. As indicated, the
middle section shows a broad arrow in a circular configuration upon which six
smaller pictures or icons are superimposed with corresponding headings and
descriptions. The circular arrow surrounds a central picture of the Company's
logo and a computer monitor containing a screen capture from the Company's
software. Between the outer circular arrow and the central picture are four
two-way arrows; one over the central picture, one under, one at the left and one
at the right. These arrows point between the central picture and surrounding
circular arrow. Starting at the beginning of the broad circular arrow at the top
left of the graphic the first icon superimposed depicts an oil derrick and crude
oil below the earth's surface with the subheading: "Natural Resources." The
description following is: "Fluid Flow Simulation and Optimization." The second
icon depicts a pipeline with the subheading: "Raw Materials" and the
description: "Network Optimization and Materials Selection." The third icon
depicts a refinery with the subheading: "Raw Materials Processing" and the
description: "Process Design and Retrofitting; Process Simulation and
Optimization." The fourth icon depicts a processing plant and chemical reactors
with the subheading: "Intermediate Products and Processing" and the description:
"Operations Debottlenecking and Troubleshooting; Plant Simulation and
Optimization." The fifth icon depicts several finished products with the
subheading: "Finished Products" and the description: "Environmental Impact
Assessment and Safety Assurance." The sixth and final icon depicts several
individuals around a conference table with the subheading: "Corporate Planning"
and the description: "Scheduling, Planning and Enterprise Modeling."
<PAGE> 73
------------------------------------------------------
------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 5
Use of Proceeds........................ 13
Dividend Policy........................ 13
Capitalization......................... 14
Dilution............................... 15
Selected Consolidated Financial Data... 16
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 17
Business............................... 25
Management............................. 37
Certain Transactions................... 45
Principal and Selling Stockholders..... 46
Description of Capital Stock........... 48
Shares Eligible for Future Sale........ 50
Underwriting........................... 52
Legal Matters.......................... 53
Experts................................ 53
Additional Information................. 54
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
3,600,000 SHARES
LOGO
COMMON STOCK
-------------------
PROSPECTUS
-------------------
ALEX. BROWN & SONS
INCORPORATED
WESSELS, ARNOLD & HENDERSON
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 74
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee..................................................... $ 14,276
NASD filing fee.......................................................... 4,640
Nasdaq National Market listing fee....................................... 50,000
Blue sky fees and expenses............................................... 12,000
Printing and engraving expenses.......................................... 125,000
Legal fees and expenses.................................................. 300,000
Accounting fees and expenses............................................. 190,000
Transfer agent and registrar fees........................................ 10,000
D&O Premium Increase..................................................... 250,000
Miscellaneous............................................................ 44,084
----------
Total............................................................... $1,000,000
=========
</TABLE>
The Company will bear all of the foregoing fees and expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law (the
"DGCL"), Article IX of the Company's Restated Certificate of Incorporation (the
"Restated Certificate of Incorporation") (filed as Exhibit 3.3 to this
Registration Statement) eliminates the liability of the Company's directors to
the Company or its stockholders, except for liabilities related to breach of
duty of loyalty, actions not in good faith and certain other liabilities.
Section 145 of the DGCL provides for indemnification by the Company of its
directors and officers. In addition, Article VI of the Company's Bylaws (filed
as Exhibit 3.4 to this Registration Statement) requires the Company to indemnify
any current or former director or officer to the fullest extent permitted by the
DGCL. In addition, the Company has entered into indemnity agreements with its
directors and executive officers (a form of which is filed as Exhibit 10.1 to
this Registration Statement) that obligate the Company to indemnify such
directors and executive officers to the fullest extent permitted by the DGCL.
The Company also maintains officers' and directors' liability insurance, which
insures against the liabilities that officers and directors of the Company may
incur in such capacities.
Reference is made to the form of Underwriting Agreement filed as Exhibit
1.1 to this Registration Statement, which provides for indemnification of the
directors and officers of the Company signing the Registration Statement and
certain controlling persons of the Company against certain liabilities,
including those arising under the Securities Act of 1933, as amended (the
"Securities Act"), in certain instances by the Underwriters.
II-1
<PAGE> 75
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has issued and sold the
following unregistered securities (adjusted to give effect to the one-for-three
reverse stock split to be effected prior to the closing of the offering):
(1) On December 17, 1993 the Registrant sold and issued 1,666,668
shares of Series A Convertible Preferred Stock and warrants for the
purchase of 438,598 shares of the Registrant's Common Stock at $2.85 per
share to certain Stockholders for cash in the aggregate amount of
$5,000,000.
(2) The Company granted incentive stock options or non-statutory stock
options to employees, directors and consultants under its 1994 Stock Option
Plan for 1,520,833 shares of the Company's Common Stock at exercise prices
ranging from $2.67 to $7.50 per share. Pursuant to the exercise of stock
options granted under the 1994 Stock Option Plan, the Company issued an
aggregate of 33,834 shares of its Common Stock to employees, directors and
consultants of the Company for consideration in the aggregate amount of
$92,366.
The sales and issuances of securities described in paragraph (1) were
deemed to be exempt from registration under the Securities Act, principally by
virtue of Section 4(2) thereof as transactions by an issuer not involving a
public offering.
The sales and issuances of securities described in paragraph (2) above were
deemed to be exempt from registration under the Securities Act by virtue of Rule
701 of the Securities Act.
The purchasers of such securities in each case represented their intention
to acquire the securities for investment only and not with a view to a sale or
distribution thereof and appropriate legends were affixed to securities issued
in such transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1* Certificate of Incorporation of the Registrant, as currently in effect
(previously filed as Exhibit 3.2)
3.2 Form of Restated Certificate of Incorporation of the Registrant to be effective
after the closing of the offering made pursuant to the Registration Statement
3.3* Bylaws of the Registrant (previously filed as Exhibit 3.4)
3.4* Form of Amended and Restated Bylaws to be effective after the closing of the
offering made pursuant to the Registration Statement
4.1** Form of specimen certificate for the Registrant's Common Stock
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation (including
the consent of such firm) regarding legality of securities being offered
10.1* Form of Indemnification Agreement entered into by the Registrant with each of its
directors and executive officers
10.2* 401(k) Plan
10.3* 1994 Stock Option Plan and related agreements
10.4 1996 Stock Plan and related agreements
10.5 1996 Employee Stock Purchase Plan For U.S. Employees and related agreements
10.6 1996 Employee Stock Purchase Plan For Non-U.S. Employees and related agreements
10.7 1996 Director Option Plan and related agreements
10.8* Registration Rights Agreement dated December 17, 1993
10.9* Standard Office Lease dated September 1, 1992 between the Registrant and Brea
Partners, as amended
</TABLE>
II-2
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------
<C> <S>
10.10* Stock Purchase and Investment Agreement dated December 17, 1993 by and among the
Registrant, certain stockholders and Northern Trust Bank of California, N.A. as
Trustee of the Registrant's Employee Stock Ownership Plan and Money Purchase
Pension Plan
10.11*+ Product Development and Marketing Agreement dated July 31, 1991 between the
Registrant and Special Analysis and Simulation Technology Limited
10.12*+ Software License Agreement dated September 1, 1995 between Mobil Oil Corporation
and the Registrant
10.13*+ Software Development and Licensing Agreement dated February 22, 1996 between
Shell Oil Products Company and the Registrant
10.14* Retirement Agreement entered into by the Registrant and Vincent S. Verneuil, Jr.
11.1 Statement Re Computation of Per Share Earnings
21.1* List of Subsidiaries
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included
as part of Exhibit 5.1 hereto)
23.2 Consent of Deloitte & Touche LLP, independent auditors
24.1* Powers of Attorney
27.1* Financial Data Schedule
</TABLE>
- ------------------
* Previously filed
** To be filed by amendment.
+ Confidential treatment requested for portions of this document.
(b) Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts Schedules not listed above
have been omitted because the information required to be set forth therein is
not applicable or is shown in the financial statements or the notes thereto.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the DGCL, the Certificate of Incorporation and Bylaws, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in such Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in such
Securities Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
a) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
b) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Brea, State
of California, on the 3rd day of October, 1996.
SIMULATION SCIENCES INC.
By: /s/ CHARLES R. HARRIS
------------------------------------
Charles R. Harris
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed on the 3rd day of October, 1996 by the
following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<C> <S>
/s/ CHARLES R. President and Chief Executive Officer
HARRIS (Principal Executive Officer) and Director
- ---------------------------------------------
Charles R. Harris
/s/ L. RONALD Vice President, Finance and Chief Financial
TREPP* Officer (Principal Financial and
- --------------------------------------------- Accounting Officer)
L. Ronald Trepp
/s/ NARENDRA K. GUPTA* Director
- ---------------------------------------------
Narendra K. Gupta
/s/ WALTER G. KORTSCHAK* Director
- ---------------------------------------------
Walter G. Kortschak
*By /s/ CHARLES R. HARRIS
- ---------------------------------------------
Charles R. Harris
Attorney-in-fact
</TABLE>
II-4
<PAGE> 78
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGED TO BALANCE AT
DESCRIPTION OF PERIOD COSTS AND EXPENSES DEDUCTIONS END OF PERIOD
- --------------------------------------------- ---------- ------------------ ---------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1994............... $ 307,539 $120,405 $ $ 427,944
Year ended December 31, 1995............... 427,944 28,443 456,387
Six months ended June 30, 1996............. 456,387 295,582 751,969
</TABLE>
S-1
<PAGE> 79
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. EXHIBIT PAGE NUMBER
- ----------- ----------------------------------------------------------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1* Certificate of Incorporation of the Registrant, as currently in effect
(previously filed as Exhibit 3.2)
3.2 Form of Restated Certificate of Incorporation of the Registrant to be
effective after the closing of the offering made pursuant to the
Registration Statement
3.3* Bylaws of the Registrant (previously filed as Exhibit 3.4)
3.4* Form of Amended and Restated Bylaws to be effective after the closing
of the offering made pursuant to the Registration Statement
4.1** Form of specimen certificate for the Registrant's Common Stock
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(including the consent of such firm) regarding legality of securities
being offered
10.1* Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers
10.2* 401(k) Plan
10.3* 1994 Stock Option Plan and related agreements
10.4 1996 Stock Plan and related agreements
10.5 1996 Employee Stock Purchase Plan For U.S. Employees and related
agreements
10.6 1996 Employee Stock Purchase Plan For Non-U.S. Employees and related
agreements
10.7 1996 Director Option Plan and related agreements
10.8* Registration Rights Agreement dated December 17, 1993
10.9* Standard Office Lease dated September 1, 1992 between the Registrant
and Brea Partners, as amended
10.10* Stock Purchase and Investment Agreement dated December 17, 1993 by and
among the Registrant, certain stockholders and Northern Trust Bank of
California, N.A. as Trustee of the Registrant's Employee Stock
Ownership Plan and Money Purchase Pension Plan
10.11*+ Product Development and Marketing Agreement dated July 31, 1991
between the Registrant and Special Analysis and Simulation Technology
Limited
10.12*+ Software License Agreement dated September 1, 1995 between Mobil Oil
Corporation and the Registrant
10.13*+ Software Development and Licensing Agreement dated February 22, 1996
between Shell Oil Products Company and the Registrant
10.14* Retirement Agreement entered into by the Registrant and Vincent S.
Verneuil, Jr.
11.1 Statement Re Computation of Per Share Earnings
21.1* List of Subsidiaries
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included as part of Exhibit 5.1 hereto)
23.2 Consent of Deloitte & Touche LLP, independent auditors
24.1* Powers of Attorney
27.1* Financial Data Schedule
</TABLE>
- ------------------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment requested for portions of this document.
<PAGE> 1
Exhibit 1.1
3,600,000 Shares
SIMULATION SCIENCES INC.
Common Stock
($0.001 Par Value)
UNDERWRITING AGREEMENT
October __, 1996
Alex. Brown & Sons Incorporated
Wessels, Arnold & Henderson, L.L.C.
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Gentlemen:
Simulation Sciences Inc., a Delaware corporation (the "Company"), and
certain Stockholders of the Company (the "Selling Stockholders") propose to sell
to the several underwriters (the "Underwriters") named in Schedule I hereto for
whom you are acting as representatives (the "Representatives") an aggregate of
3,450,000 shares of the Company's Common Stock, $0.001 par value (the "Firm
Shares"), of which 2,700,000 shares will be sold by the Company, and 900,000
shares will be sold by the Selling Stockholders. The respective amounts of the
Firm Shares to be so purchased by the several Underwriters are set forth
opposite their names in Schedule I hereto, and the respective amounts to be sold
by the Selling Stockholders are set forth opposite their names in Schedule II
hereto. The Company and the Selling Stockholders are sometimes referred to
herein collectively as the "Sellers." The Company and certain Selling
Stockholders also propose to sell at the Underwriters' option an aggregate of up
to 540,000 additional shares of the Company's Common Stock (the "Option Shares")
as set forth below.
As the Representatives, you have advised the Company and the Selling
Stockholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in Schedule I, plus their pro rata portion
of the Option Shares if you elect to exercise the over-allotment option in whole
or in part
1
<PAGE> 2
for the accounts of the several Underwriters. The Firm Shares and the Option
Shares (to the extent the aforementioned option is exercised) are herein
collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
STOCKHOLDERS.
(a) The Company represents and warrants to each of the
Underwriters as follows:
(i) A registration statement on Form S-1 (File No.
333-11017) with respect to the Shares has been carefully prepared by the Company
in conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission. Copies of such registration statement, including any
amendments thereto, the preliminary prospectuses (meeting the requirements of
the Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have heretofore been
delivered by the Company to you. Such registration statement, together with any
registration statement filed by the Company pursuant to Rule 462 (b) of the Act,
herein referred to as the "Registration Statement," which shall be deemed to
include all information omitted therefrom in reliance upon Rule 430A and
contained in the Prospectus referred to below, has become effective under the
Act and no post-effective amendment to the Registration Statement has been filed
as of the date of this Agreement. "Prospectus" means (a) the form of prospectus
first filed with the Commission pursuant to Rule 424(b) or (b) the last
preliminary prospectus included in the Registration Statement filed prior to the
time it becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Shares, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus
included in the Registration Statement prior to the time it becomes effective is
herein referred to as a "Preliminary Prospectus." Any reference herein to the
Registration Statement, any Preliminary Prospectus or to the Prospectus shall be
deemed to refer to and include any documents incorporated by reference therein,
and, in the case of any reference herein to any Prospectus, also shall be deemed
to include any documents incorporated by reference therein, and any supplements
or amendments thereto, filed with the Commission after the date of filing of the
Prospectus under Rules 424(b) or 430A, and prior to the termination of the
offering of the Shares by the Underwriters.
(ii) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement. Each of the
subsidiaries of the Company as listed in Exhibit 21 to Item 16(a) of the
2
<PAGE> 3
Registration Statement (collectively, the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement. The Subsidiaries are the only subsidiaries,
direct or indirect, of the Company. The Company and each of the Subsidiaries are
duly qualified to transact business in all jurisdictions in which the conduct of
their business requires such qualification, except for those jurisdictions where
the failure to be so qualified would not, either singly or in the aggregate,
have a material adverse effect on the Company's business financial condition or
operating results. The outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
non-assessable and are owned by the Company or another Subsidiary free and clear
of all liens, encumbrances and equities and claims; and no options, warrants or
other rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into shares of capital stock or ownership
interests in the Subsidiaries are outstanding.
(iii) The outstanding shares of Common Stock of the
Company, including all shares to be sold by the Selling Stockholders, have been
duly authorized and validly issued and are fully paid and non-assessable; the
portion of the Shares to be issued and sold by the Company have been duly
authorized and when issued and paid for as contemplated herein will be validly
issued, fully paid and non-assessable; and no preemptive rights of stockholders
exist with respect to any of the Shares or the issue and sale thereof. Neither
the filing of the Registration Statement nor the offering or sale of the Shares
as contemplated by this Agreement gives rise to any rights, other than those
which have been waived or satisfied, for or relating to the registration of any
shares of Common Stock.
(iv) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. All of the Shares
conform to the description thereof contained in the Registration Statement. The
form of certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.
(v) The Commission has not notified the Company that
it has issued an order preventing or suspending the use of any Prospectus
relating to the proposed offering of the Shares nor has it notified the Company
that it has instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and will
conform to the requirements of the Act and the Rules and Regulations. The
Registration Statement and any amendment thereto do not contain, and will not
contain, any untrue statement of a material fact and do not omit, and will not
omit, to state any material fact required to be stated therein or necessary to
make the statements therein not misleading. The Prospectus and any amendments
and supplements thereto do not contain, and will not contain, any untrue
statement of material fact; and do not omit, and will not omit, to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were
3
<PAGE> 4
made, not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted from the
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of any Underwriter through the Representatives,
specifically for use in the preparation thereof.
(vi) The consolidated financial statements of the
Company and the Subsidiaries, together with related notes and schedules as set
forth in the Registration Statement, present fairly the financial position and
the results of operations and cash flows of the Company and the consolidated
Subsidiaries, at the indicated dates and for the indicated periods. Such
financial statements and related schedules have been prepared in accordance with
generally accepted principles of accounting, consistently applied throughout the
periods involved, except as disclosed herein, and all adjustments necessary for
a fair presentation of results for such periods have been made. The summary
financial and statistical data included in the Registration Statement presents
fairly the information shown therein and such data has been compiled on a basis
consistent with the financial statements presented therein and the books and
records of the Company. The pro forma financial information included in the
Registration Statement and the Prospectus present fairly the information shown
therein, have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements, have been properly
compiled on the pro forma bases described therein, and, in the opinion of the
Company, the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions or
circumstances referred to therein.
(vii) Deloitte & Touche LLP, who have certified
certain of the financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants as required by the
Act and the Rules and Regulations.
(viii) There is no action, suit, claim or proceeding
pending or, to the knowledge of the Company, threatened against the Company or
any of the Subsidiaries before any court or administrative agency or otherwise
which if determined adversely to the Company or any of its Subsidiaries might
result in any material adverse change in the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and of the Subsidiaries taken as a whole or to prevent
the consummation of the transactions contemplated hereby, except as set forth in
the Registration Statement.
(ix) The Company and the Subsidiaries have good and
marketable title to all of the properties and assets reflected in the financial
statements (or as described in the Registration Statement) hereinabove
described, subject to no lien, mortgage, pledge, charge or encumbrance of any
kind except those reflected in such financial statements (or as described in the
Registration Statement) or which are not material to the business of the
Company. The Company and the Subsidiaries occupy their leased properties under
valid and binding leases conforming in all material respects to the description
thereof set forth in the Registration Statement.
4
<PAGE> 5
(x) The Company and the Subsidiaries have filed all
Federal, State, local and foreign income tax returns which have been required to
be filed and have paid all taxes indicated by said returns and all assessments
received by them or any of them to the extent that such taxes have become due.
All tax liabilities have been adequately provided for in the financial
statements of the Company.
(xi) Since the respective dates as of which
information is given in the Registration Statement, as it may be amended or
supplemented, there has not been any material adverse change or, to the
knowledge of the Company, any development involving a prospective material
adverse change in or affecting the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise), or prospects of
the Company and its Subsidiaries taken as a whole, whether or not occurring in
the ordinary course of business, and there has not been any material transaction
entered into or any material transaction that is probable of being entered into
by the Company or the Subsidiaries, other than transactions in the ordinary
course of business and changes and transactions described in the Registration
Statement, as it may be amended or supplemented. The Company and the
Subsidiaries have no material contingent obligations which are not disclosed in
the Company's financial statements which are included in the Registration
Statement.
(xii) Neither the Company nor any of the Subsidiaries
is or with the giving of notice or lapse of time or both, will be, in violation
of or in default under its Charter or Bylaws or under any agreement, lease,
contract, indenture or other instrument or obligation to which it is a party or
by which it, or any of its properties, is bound and which violation or default
is of material significance in respect of the condition, financial or otherwise
of the Company and its Subsidiaries taken as a whole or the business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and the Subsidiaries taken as a whole.
The execution and delivery of this Agreement and the consummation of the
transactions herein contemplated and the fulfillment of the terms hereof will
not conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company or any Subsidiary is a party, or of
the Charter or Bylaws of the Company or any order, rule or regulation applicable
to the Company or any Subsidiary of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction, except for
such conflicts, breaches or defaults which, either singly or in the aggregate,
would not be of material significance in respect of the condition, financial or
otherwise of the Company and its Subsidiaries taken as a whole or the business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and the Subsidiaries taken as a whole.
(xiii) Each approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and
5
<PAGE> 6
the consummation of the transactions herein contemplated (except such additional
steps as may be required by the Commission, the National Association of
Securities Dealers, Inc. (the "NASD") or such additional steps as may be
necessary to qualify the Shares for public offering by the Underwriters under
state securities or Blue Sky laws) has been obtained or made and is in full
force and effect.
(xiv) The Company and each of the Subsidiaries holds
all material licenses, certificates and permits from governmental authorities
which are necessary to the conduct of their businesses; and neither the Company
nor any of the Subsidiaries has infringed any patents, patent rights, trade
names, trademarks or copyrights, which infringement is material to the business
of the Company and the Subsidiaries taken as a whole. The Company knows of no
material infringement by others of patents, patent rights, trade names,
trademarks or copyrights owned by or licensed to the Company.
(xv) Neither the Company, nor to the Company's best
knowledge, any of its affiliates, has taken or may take, directly or indirectly,
any action designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of the
Shares.
(xvi) Neither the Company nor any Subsidiary is an
"investment company" within the meaning of such term under the Investment
Company Act of 1940 and the rules and regulations of the Commission thereunder.
(xvii) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xviii) The Company and each of its Subsidiaries
carry, or are covered by, insurance in such amounts and covering such risks as
is adequate for the conduct of their respective businesses and the value of
their respective properties and as is customary for companies engaged in similar
industries.
(xix) The Company is in compliance in all material
respects with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for
which the Company would have any material liability; the Company has not
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incurred and does not expect to incur material liability under (i) Title IV of
ERISA with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the "Code");
and each "pension plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is so qualified in all
material respects and, to the knowledge of the Company, nothing has occurred,
whether by action or by failure to act, which would cause the loss of such
qualification.
(xx) The Company confirms as of the date hereof that
it is in material compliance with all provisions of Section 1 of Laws of
Florida, Chapter 92-198, An Act Relating to Disclosure of doing Business with
Cuba, and the Company further agrees that if it commences engaging in business
with the government of Cuba or with any person or affiliate located in Cuba
after the date the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's
business with Cuba or with any person or affiliate located in Cuba changes in
any material way, the Company will provide the Department notice of such
business or change, as appropriate, in a form acceptable to the Department.
(b) Each of the Selling Stockholders severally represents and
warrants as follows:
(i) Such Selling Stockholder now has and at the
Closing Date and the Option Closing Date, as the case may be (as such dates are
hereinafter defined), will have good and marketable title to the Firm Shares and
the Option Shares to be sold by such Selling Stockholder, free and clear of any
liens, encumbrances, equities and claims, and full right, power and authority to
effect the sale and delivery of such Firm Shares and Option Shares; and upon the
delivery of, against payment for, such Firm Shares and Option Shares pursuant to
this Agreement, the Underwriters will acquire good and marketable title thereto,
free and clear of any liens, encumbrances, equities and claims.
(ii) Such Selling Stockholder has full right, power
and authority to execute and deliver this Agreement, the Irrevocable Power of
Attorney (the "Power of Attorney"), and the Letter of Transmittal and Custody
Agreement (the "Custody Agreement") referred to below, and to perform its
obligations under such Agreements. The execution and delivery of this Agreement
and the consummation by such Selling Stockholder of the transactions herein
contemplated and the fulfillment by such Selling Stockholder of the terms hereof
will not require any consent, approval, authorization, or other order of any
court, regulatory body, administrative agency or other governmental body (except
as may be required under the Act, state securities laws or Blue Sky laws) and
will not result in a breach of any of the terms and provisions of, or constitute
a default under, organizational documents of such Selling Stockholder, if not an
individual, or any indenture, mortgage, deed of trust or other agreement or
instrument to which
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<PAGE> 8
such Selling Stockholder is a party, or of any order, rule or regulation
applicable to such Selling Stockholder of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
(iii) Such Selling Stockholder has not taken and will
not take, directly or indirectly, any action designed to, or which has
constituted, or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Common Stock of the
Company and, other than as permitted by the Act, the Selling Stockholder will
not distribute any prospectus or other offering material in connection with the
offering of the Shares.
(iv) Without having undertaken to determine
independently the accuracy or completeness of either the representations and
warranties of the Company contained herein or the information contained in the
Registration Statement, such Selling Stockholder has no reason to believe that
the representations and warranties of the Company contained in this Section 1
are not true and correct, is familiar with the Registration Statement and has no
knowledge of any material fact, condition or information not disclosed in the
Registration Statement which has adversely affected or may adversely affect the
business of the Company or any of the Subsidiaries; and the sale of the Firm
Shares and the Option Shares by such Selling Stockholder pursuant hereto is not
prompted by any information concerning the Company or any of the Subsidiaries
which is not set forth in the Registration Statement. The information pertaining
to such Selling Stockholder under the caption "Principal and Selling
Stockholders" in the Prospectus is complete and accurate in all material
respects.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties and
covenants herein contained, and subject to the conditions herein set forth, the
Sellers agree to sell to the Underwriters and each Underwriter agrees, severally
and not jointly, subject to adjustments in accordance with Section 9 hereof to
purchase, at a price of $_____ net price per share, the number of Firm Shares
set forth opposite the name of each Underwriter in Schedule I hereof. The number
of Firm Shares to be purchased by each Underwriter from each Seller shall be as
nearly as practicable in the same proportion to the total number of Firm Shares
being sold by each Seller as the number of Firm Shares being purchased by each
Underwriter bears to the total number of Firm Shares to be sold hereunder. The
obligations of the Company and of each of the Selling Stockholders shall be
several and not joint.
(b) Certificates in negotiable form for the total number of
the Shares to be sold hereunder by the Selling Stockholders have been placed in
custody with Harris Trust Company of California as custodian (the "Custodian")
pursuant to the Custody Agreement executed by each Selling Shareholder for
delivery of all Firm Shares and any Option Shares to be sold hereunder by the
Selling Stockholders. Each of the Selling Stockholders specifically agrees that
the Firm Shares and any Option Shares represented by the certificates held in
custody for the Selling
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<PAGE> 9
Stockholders under the Custodian Agreement are subject to the interests of the
Underwriters hereunder, that the arrangements made by the Selling Stockholders
for such custody are to that extent irrevocable, and that the obligations of the
Selling Stockholders hereunder shall not be terminable by any act or deed of the
Selling Stockholders (or by any other person, firm or corporation including the
Company, the Custodian or the Underwriters) or by operation of law (including
the death of an individual Selling Stockholder or the dissolution of a corporate
Selling Stockholder) or by the occurrence of any other event or events, except
as set forth in the Custodian Agreement. If any such event should occur prior to
the delivery to the Underwriters of the Firm Shares or the Option Shares
hereunder, certificates for the Firm Shares or the Options Shares, as the case
may be, shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such event has not occurred. The Custodian is
authorized to receive and acknowledge receipt of the proceeds of sale of the
Shares held by it against delivery of such Shares.
(c) Payment for the Firm Shares to be sold hereunder is to be
made in New York Clearing House funds by certified or bank cashier's checks
drawn to the order of the Company for the shares to be sold by it and to the
order of "Harris Trust Company of California, as Custodian" for the shares to be
sold by the Selling Stockholders, in each case against delivery of certificates
therefor to the Representatives for the several accounts of the Underwriters.
Such payment and delivery are to be made at the offices of Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland, at 10:00 a.m.,
Baltimore time, on the third business day after the date of this Agreement or at
such other time and date not later than five business days thereafter as you and
the Company shall agree upon, such time and date being herein referred to as the
"Closing Date." (As used herein, "business day" means a day on which the New
York Stock Exchange is open for trading and on which banks in New York are open
for business and not permitted by law or executive order to be closed.) The
certificates for the Firm Shares will be delivered in such denominations and in
such registrations as the Representatives request in writing not later than the
second full business day prior to the Closing Date, and will be made available
for inspection by the Representatives at least one business day prior to the
Closing Date.
(d) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company and certain Selling Stockholders listed on Schedule III
hereto hereby grant an option to the several Underwriters to purchase the Option
Shares at the price per share as set forth in the first paragraph of this
Section 2. The maximum number of Option Shares to be sold by the Company and the
Selling Stockholders is set forth opposite their respective names on Schedule
III hereto. The option granted hereby may be exercised in whole or in part by
giving written notice (i) at any time before the Closing Date and (ii) only once
thereafter within 30 days after the date of this Agreement, by you, as
Representatives of the several Underwriters, to the Company, the
Attorney-in-Fact, and the Custodian setting forth the number of Option Shares as
to which the several Underwriters are exercising the option, the names and
denominations in which the Option Shares are to be registered and the time and
date at which such certificates are to be delivered. If the option
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<PAGE> 10
granted hereby is exercised in part, the respective number of Option Shares to
be sold by the Company and each of the Selling Stockholders listed in Schedule
III hereto shall be determined on a pro rata basis in accordance with the
percentages set forth opposite their names on Schedule II hereto, adjusted by
you in such manner as to avoid fractional shares. The time and date at which
certificates for Option Shares are to be delivered shall be determined by the
Representatives but shall not be earlier than three nor later than 10 full
business days after the exercise of such option, nor in any event prior to the
Closing Date (such time and date being herein referred to as the "Option Closing
Date"). If the date of exercise of the option is three or more days before the
Closing Date, the notice of exercise shall set the Closing Date as the Option
Closing Date. The number of Option Shares to be purchased by each Underwriter
shall be in the same proportion to the total number of Option Shares being
purchased as the number of Firm Shares being purchased by such Underwriter bears
to the total number of Firm Shares, adjusted by you in such manner as to avoid
fractional shares. The option with respect to the Option Shares granted
hereunder may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters. You, as Representatives of the several Underwriters,
may cancel such option at any time prior to its expiration by giving written
notice of such cancellation to the Company and the Attorney-in-Fact. To the
extent, if any, that the option is exercised, payment for the Option Shares
shall be made on the Option Closing Date in New York Clearing House funds by
certified or bank cashier's check drawn to the order of the Company for the
Option Shares to be sold by it and to the order of "Harris Trust Company of
California, as Custodian" for the Option Shares to be sold by the Selling
Stockholders against delivery of certificates therefor at the offices of Alex.
Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland.
(e) If on the Closing Date or Option Closing Date, as the case
may be, any Selling Stockholder fails to sell the Firm Shares or Option Shares
which such Selling Stockholder has agreed to sell on such date as set forth in
Schedule II hereto, the Company agrees that it will sell or arrange for the sale
of that number of shares of Common Stock to the Underwriters which represents
Firm Shares or the Option Shares which such Selling Stockholder has failed to so
sell, as set forth in Schedule II hereto, or such lesser number as may be
requested by the Representatives.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make
a public offering of the Firm Shares as soon as the Representatives deem it
advisable to do so. The Firm Shares are to be initially offered to the public at
the initial public offering price set forth in the Prospectus. The
Representatives may from time to time thereafter change the public offering
price and other selling terms. To the extent, if at all, that any Option Shares
are purchased pursuant to Section 2 hereof, the Underwriters will offer them to
the public on the foregoing terms.
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It is further understood that you will act as the
Representatives for the Underwriters in the offering and sale of the Shares in
accordance with a Master Agreement Among Underwriters entered into by you and
the several other Underwriters.
4. COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDERS.
(a) The Company covenants and agrees with the several
Underwriters that:
(i) The Company will (A) use its best efforts to
cause the Registration Statement to become effective or, if the procedure in
Rule 430A of the Rules and Regulations is followed, to prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus
in a form approved by the Representatives containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A of the Rules and Regulations and (B) not file any amendment to the
Registration Statement or supplement to the Prospectus of which the
Representatives shall not previously have been advised and furnished with a copy
or to which the Representatives shall have reasonably objected in writing or
which is not in compliance with the Rules and Regulations.
(ii) The Company will advise the Representatives
promptly (A) when the Registration Statement or any post-effective amendment
thereto shall have become effective, (B) of receipt of any comments from the
Commission, (C) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any additional
information, and (D) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of the
Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(iii) The Company will cooperate with the
Representatives in endeavoring to qualify the Shares for sale under the
securities laws of such jurisdictions as the Representatives may reasonably have
designated in writing and will make such applications, file such documents, and
furnish such information as may be reasonably required for that purpose,
provided the Company shall not be required to qualify as a foreign corporation
or to file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company will,
from time to time, prepare and file such statements, reports, and other
documents, as are or may be required to continue such qualifications in effect
for so long a period as the Representatives may reasonably request for
distribution of the Shares.
(iv) The Company will deliver to, or upon the order
of, the Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period when
delivery of a Prospectus is required under the Act, as
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many copies of the Prospectus in final form, or as thereafter amended or
supplemented, as the Representatives may reasonably request. The Company will
deliver to the Representatives at or before the Closing Date, four signed copies
of the Registration Statement and all amendments thereto including all exhibits
filed therewith, and will deliver to the Representatives such number of copies
of the Registration Statement (including such number of copies of the exhibits
filed therewith that may reasonably be requested), and of all amendments
thereto, as the Representatives may reasonably request.
(v) The Company will comply with the Act and the
Rules and Regulations, and the Securities Exchange Act of 1934 (the "Exchange
Act"), and the rules and regulations of the Commission thereunder, so as to
permit the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the reasonable
opinion of the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a purchaser,
not misleading, or, if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will prepare and file
with the Commission an appropriate amendment to the Registration Statement or
supplement to the Prospectus so that the Prospectus as so amended or
supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with the law.
(vi) The Company will make generally available to its
security holders, as soon as it is practicable to do so, but in any event not
later than 15 months after the effective date of the Registration Statement, an
earning statement (which need not be audited) in reasonable detail, covering a
period of at least 12 consecutive months beginning after the effective date of
the Registration Statement, which earning statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so made
available.
(vii) The Company will, for a period of five years
from the Closing Date, deliver to the Representatives copies of annual reports
and copies of all other documents, reports and information furnished by the
Company to its stockholders or filed with any securities exchange pursuant to
the requirements of such exchange or with the Commission pursuant to the Act or
the Securities Exchange Act of 1934, as amended. The Company will deliver to the
Representatives similar reports with respect to significant subsidiaries, as
that term is defined in the Rules and Regulations, which are not consolidated in
the Company's financial statements.
(viii) No offering, sale, short sale or other
disposition of any shares of Common Stock of the Company or other securities
convertible into or exchangeable or exercisable for shares of Common Stock or
derivative of Common Stock (or agreement for such) will be made for a period of
180 days after the date of this Agreement, directly or indirectly,
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by the Company otherwise than hereunder or with the prior written consent of
Alex. Brown & Sons Incorporated.
(ix) The Company will use its best efforts to list,
subject to notice of issuance, the Shares on the Nasdaq National Market.
(x) The Company has caused each officer and director
and all Stockholders of the Company to furnish to you, on or prior to the date
of this agreement, a letter or letters, in form and substance satisfactory to
the Underwriters, pursuant to which each such person shall agree not to offer,
sell, sell short or otherwise dispose of any shares of Common Stock of the
Company or other capital stock of the Company, or any other securities
convertible, exchangeable or exercisable for Common Shares or derivative of
Common Shares owned by such person or request the registration for the offer or
sale of any of the foregoing (or as to which such person has the right to direct
the disposition of) for a period of 180 days after the date of this Agreement,
directly or indirectly, except with the prior written consent of Alex. Brown &
Sons Incorporated ("Lockup Agreements"); provided, however, that Alex. Brown &
Sons Incorporated agrees that it will not enforce such agreement against any
stockholder of the Company in connection with the sale or other disposition of
shares of Common Stock of the Company in connection with the closing of a sale
of the Company effected by (i) a statutory merger of the Company with and into
another entity approved by the legally required vote of the Company's
stockholders or (ii) sale of all of the Company's outstanding stock to a person
or group of persons acting in concert.
(xi) The Company shall apply the net proceeds of its
sale of the Shares as set forth in the Prospectus and shall file such reports
with the Commission with respect to the sale of the Shares and the application
of the proceeds therefrom as may be required in accordance with Rule 463 under
the Act.
(xii) The Company shall not invest, or otherwise use
the proceeds received by the Company from its sale of the Shares in such a
manner as would require the Company or any of the Subsidiaries to register as an
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act").
(xiii) The Company will maintain a transfer agent
and, if necessary under the jurisdiction of incorporation of the Company, a
registrar for the Common Stock.
(xiv) The Company will not take, directly or
indirectly, any action designed to cause or result in, or that has constituted
or might reasonably be expected to constitute, the stabilization or manipulation
of the price of any securities of the Company.
(b) Each of the Selling Stockholders covenants and agrees with
the several Underwriters that:
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(i) No offering, sale, short sale or other
disposition of any shares of Common Stock of the Company or other capital stock
of the Company or other securities convertible, exchangeable or exercisable for
Common Stock or derivative of Common Stock owned by the Selling Stockholder or
request the registration for the offer or sale of any of the foregoing (or as to
which the Selling Stockholder has the right to direct the disposition of) will
be made for a period of 180 days after the date of this Agreement, directly or
indirectly, by such Selling Stockholder otherwise than hereunder or with the
prior written consent of Alex. Brown & Sons Incorporated; provided, however,
that Alex. Brown & Sons Incorporated agrees that it will not enforce such
agreement against any stockholder of the Company in connection with the sale or
other disposition of shares of Common Stock of the Company in connection with
the closing of a sale of the Company effected by (i) a statutory merger of the
Company with and into another entity approved by the legally required vote of
the Company's stockholders or (ii) sale of all of the Company's outstanding
stock to a person or group of persons acting in concert.
(ii) In order to document the Underwriters'
compliance with the reporting and withholding provisions of the Tax Equity and
Fiscal Responsibility Act of 1982 and the Interest and Dividend Tax Compliance
Act of 1983 with respect to the transactions herein contemplated, each of the
Selling Stockholders agrees to deliver to you prior to or at the Closing Date a
properly completed and executed United States Treasury Department Form W-9 (or
other applicable form or statement specified by Treasury Department regulations
in lieu thereof).
(iii) Such Selling Stockholder will not take,
directly or indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the stabilization or
manipulation of the price of any securities of the Company.
5. COSTS AND EXPENSES.
The Company will pay all costs, expenses and fees incident
to the performance of the obligations of the Sellers under this Agreement,
including, without limiting the generality of the foregoing, the following:
accounting fees of the Company; the fees and disbursements of counsel the
Company and the Selling Stockholders; the cost of printing and delivering to, or
as requested by, the Underwriters copies of the Registration Statement,
Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters'
Selling Memorandum, the Underwriters' Invitation Letter, the Listing
Application, the Blue Sky Survey and any supplements or amendments thereto; the
filing fees of the Commission; the filing fees and expenses (including legal
fees and disbursements) incident to securing any required review by the National
Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of
the Shares; the Nasdaq National Market; and the expenses, including the fees and
disbursements of counsel for the Underwriters, incurred in connection with the
qualification of the Shares under State securities or Blue Sky laws. The Company
agrees to pay all costs and expenses of the Underwriters, including the fees and
disbursements of counsel for the Underwriters, incident to the offer and sale of
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directed shares of the Common Stock by the Underwriters to employees and persons
having business relationships with the Company and its Subsidiaries. The Sellers
shall not, however, be required to pay for any of the Underwriters expenses
(other than those related to qualification under NASD regulation and State
securities or Blue Sky laws) except that, if this Agreement shall not be
consummated because the conditions in Section 6 hereof are not satisfied, or
because this Agreement is terminated by the Representatives pursuant to Section
11 hereof, or by reason of any failure, refusal or inability on the part of the
Company or the Selling Stockholders to perform any undertaking or satisfy any
condition of this Agreement or to comply with any of the terms hereof on their
part to be performed, unless such failure to satisfy said condition or to comply
with said terms be due to the default or omission of any Underwriter, then the
Company shall reimburse the several Underwriters for reasonable out-of-pocket
expenses, including fees and disbursements of counsel, reasonably incurred in
connection with investigating, marketing and proposing to market the Shares or
in contemplation of performing their obligations hereunder; but the Company and
the Selling Stockholders shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from the sale
by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm
Shares on the Closing Date and the Option Shares, if any, on the Option Closing
Date are subject to the accuracy, as of the Closing Date or the Option Closing
Date, as the case may be, of the representations and warranties of the Company
and the Selling Stockholders contained herein, and to the performance by the
Company and the Selling Stockholders of their covenants and obligations
hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective
amendments thereto shall have become effective and any and all filings required
by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and
any request of the Commission for additional information (to be included in the
Registration Statement or otherwise) shall have been disclosed to the
Representatives and complied with to their reasonable satisfaction. No stop
order suspending the effectiveness of the Registration Statement, as amended
from time to time, shall have been issued and no proceedings for that purpose
shall have been taken or, to the knowledge of the Company or the Selling
Stockholders, shall be contemplated by the Commission and no injunction,
restraining order, or order of any nature by a Federal or state court of
competent jurisdiction shall have been issued as of the Closing Date which would
prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, the opinion of Wilson
Sonsini Goodrich & Rosati, P.C., counsel for the Company and the Selling
Stockholders, dated the Closing Date or the Option Closing
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Date, as the case may be, addressed to the Underwriters (and stating that it may
be relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement; each of the
Subsidiaries has been duly organized and is validly existing as a corporation in
good standing under the laws of the jurisdiction of its incorporation, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement; the Company and each of the
Subsidiaries are duly qualified to transact business in all jurisdictions in
which the conduct of their business requires such qualification, or in which the
failure to qualify would have a materially adverse effect upon the business of
the Company and the Subsidiaries taken as a whole; and the outstanding shares of
capital stock of each of the Subsidiaries have been duly authorized and validly
issued and are fully paid and non-assessable and are owned by the Company or a
Subsidiary; and, to the best of such counsel's knowledge, the outstanding shares
of capital stock of each of the Subsidiaries is owned free and clear of all
liens, encumbrances and equities and claims, and no options, warrants or other
rights to purchase, agreements or other obligations to issue or other rights to
convert any obligations into any shares of capital stock or of ownership
interests in the Subsidiaries are outstanding.
(ii) The Company has authorized and outstanding
capital stock as set forth under the caption "Capitalization" in the Prospectus;
the authorized shares of the Company's Common Stock have been duly authorized;
the outstanding shares of the Company's Common Stock, including the Shares to be
sold by the Selling Stockholders have been duly authorized and validly issued
and are fully paid and non-assessable; all of the Shares conform in all material
respects to the description thereof under "Description of Capital Stock"
contained in the Prospectus; the certificates for the Shares, assuming they are
in the form filed with the Commission, are in due and proper form; the shares of
Common Stock, including the Option Shares, if any, to be sold by the Company
pursuant to this Agreement have been duly authorized and will be validly issued,
fully paid and non-assessable when issued and paid for as contemplated by this
Agreement; and no preemptive rights of stockholders exist with respect to any of
the Shares or the issue or sale thereof in the Company's Charter or Bylaws or,
to the knowledge of such counsel, otherwise.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no outstanding
securities of the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of the Company
and there are no outstanding or authorized options, warrants or rights of any
character obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no
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holder of any securities of the Company or any other person has the right,
contractual or otherwise, which has not been satisfied or effectively waived, to
cause the Company to sell or otherwise issue to them, or to permit them to
underwrite the sale of, any of the Shares or the right to have any Common Shares
or other securities of the Company included in the Registration Statement or the
right, as a result of the filing of the Registration Statement, to require
registration under the Act of any shares of Common Stock or other securities of
the Company.
(iv) The Registration Statement has become effective
under the Act and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending or
threatened under the Act.
(v) The Registration Statement, the Prospectus and
each amendment or supplement thereto complies as to form in all material
respects with the requirements of the Act and the applicable rules and
regulations thereunder (except that such counsel need express no opinion as to
the financial statements and related schedules therein).
(vi) The statements under the captions
"Capitalization," "Description of Capital Stock" and "Shares Eligible for Future
Sale" in the Prospectus, insofar as such statements constitute a summary of
documents referred to therein or matters of law, fairly summarize in all
material respects the information called for with respect to such documents and
matters.
(vii) Such counsel does not know of any contracts or
documents required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or the Prospectus which are no so filed
or described as required, and such contracts and documents as are summarized in
the Registration Statement or the Prospectus are fairly summarized in all
material respects.
(viii) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the Company or any of the
Subsidiaries except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and
the consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Charter or Bylaws of the Company, or any
agreement or instrument known to such counsel to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiaries may
be bound.
(x) This Agreement has been duly authorized, executed
and delivered by the Company.
(xi) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in
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connection with the execution and delivery of this Agreement and the
consummation of the transactions herein contemplated (other than as may be
required by the NASD or as required by State securities and Blue Sky laws as to
which such counsel need express no opinion) except such as have been obtained or
made, specifying the same.
(xii) The Company is not, and will not become, as a
result of the consummation of the transactions contemplated by this Agreement,
and application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the 1940 Act.
(xiii) This Agreement has been duly authorized,
executed and delivered on behalf of the Selling Stockholders.
(xiv) Each Selling Stockholder has full legal right,
power and authority, and any approval required by law (other than as required by
State securities and Blue Sky laws as to which such counsel need express no
opinion), to sell, assign, transfer and deliver the portion of the Shares to be
sold by such Selling Stockholder.
(xv) The Custody Agreement and the Power of Attorney
executed and delivered by each Selling Stockholder is valid and binding.
(xvi) The Underwriters (assuming that they are bona
fide purchasers within the meaning of the Uniform Commercial Code) have acquired
good and marketable title to the Shares being sold by each Selling Stockholder
on the Closing Date, and the Option Closing Date, as the case may be, free and
clear of all liens, encumbrances, equities and claims.
In rendering such opinion Wilson Sonsini Goodrich & Rosati, P.C.
may rely as to matters governed by the laws of states other than Delaware and
California or Federal laws on local counsel in such jurisdictions, provided that
in each case Wilson Sonsini Goodrich & Rosati, P.C. shall state that they
believe that they and the Underwriters are justified in relying on such other
counsel. In addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that (i) the Registration Statement, at the
time it became effective under the Act (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the Act) and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and (ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein). With respect to such
statement, Wilson Sonsini Goodrich & Rosati, P.C. may state that their
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belief is based upon the procedures set forth therein, but is without
independent check and verification.
(c) The Representatives shall have received from Morrison &
Foerster LLP, counsel for the Underwriters, an opinion dated the Closing Date or
the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (ii), (iii), (iv) and (ix) of Paragraph (b) of this
Section 6, and that the Company is a duly organized and validly existing
corporation under the laws of the State of Delaware. In rendering such opinion,
Morrison & Foerster LLP may rely as to all matters governed other than by the
laws of the State of California or Delaware or Federal laws on the opinion of
counsel referred to in Paragraph (b) of this Section 6. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that nothing has come to the attention of such counsel which leads them
to believe that (i) the Registration Statement, or any amendment thereto, as of
the time it became effective under the Act (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the Act) as of
the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and (ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact, necessary in order to make the
statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein). With respect to such
statement, Morrison & Foerster LLP may state that their belief is based upon the
procedures set forth therein, but is without independent check and verification.
(d) The Representatives shall have received at or prior to the
Closing Date from Morrison & Foerster, LLP a memorandum or summary, in form and
substance satisfactory to the Representatives, with respect to the qualification
for offering and sale by the Underwriters of the Shares under the State
securities or Blue Sky laws of such jurisdictions as the Representatives may
reasonably have designated to the Company.
(e) You shall have received, on each of the dates hereof, the
Closing Date and the Option Closing Date, as the case may be, a letter dated the
date hereof, the Closing Date or the Option Closing Date, as the case may be, in
form and substance satisfactory to you, of Deloitte & Touche LLP confirming that
they are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and stating that in their
opinion the financial statements and schedules examined by them and included in
the Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published Rules
and Regulations; and containing such other statements and information as is
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.
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<PAGE> 20
(f) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, a certificate or
certificates of the Chief Executive Officer and the Chief Financial Officer of
the Company to the effect that, as of the Closing Date or the Option Closing
Date, as the case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective
under the Act and no stop order suspending the effectiveness of the
Registrations Statement has been issued, and no proceedings for such purpose
have been taken or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the
Company contained in Section 1 hereof are true and correct as of the Closing
Date or the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant
to Rules 424 or 430A under the Act have been made;
(iv) He or she has carefully examined the
Registration Statement and the Prospectus and, in his or her opinion, as of the
effective date of the Registration Statement, the statements contained in the
Registration Statement were true and correct, and such Registration Statement
and Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading, and
since the effective date of the Registration Statement, no event has occurred
which should have been set forth in a supplement to or an amendment of the
Prospectus which has not been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been any material adverse change or, to his or her knowledge, any development
involving a prospective material adverse change in or affecting the condition,
financial or otherwise, of the Company and its Subsidiaries taken as a whole or
the earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and the
Subsidiaries taken as a whole, whether or not arising in the ordinary course of
business.
(g) The Company and the Selling Stockholders shall have
furnished to the Representatives such further certificates and documents
confirming the representations and warranties, covenants and conditions
contained herein and related matters as the Representatives may reasonably have
requested.
(h) The Firm Shares and Option Shares, if any, have been
approved for designation upon notice of issuance on the Nasdaq National Market.
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(i) The Lockup Agreements described in Section
4(a)(x) are in full force and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representatives and to Morrison Foerster
LLP, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representatives by notifying the Company and the Selling Stockholders of
such termination in writing or by telegram at or prior to the Closing Date or
the Option Closing Date, as the case may be.
In such event, the Selling Stockholders, the Company and the
Underwriters shall not be under any obligation to each other (except to the
extent provided in Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS.
The obligations of the Sellers to sell and deliver the portion of
the Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company and the Selling Stockholders, severally and
not jointly, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of the Act,
against any losses, claims, damages or liabilities to which such Underwriter or
any such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and will reimburse each Underwriter and
each such controlling person upon demand for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding; provided, however,
that the Company and the Selling Stockholders will not be liable in any such
case to the extent that any such loss,
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claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement, or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof; and provided, further, that no
Selling Stockholder (other than the Principal Stockholders, as defined below)
shall be required to provide indemnification hereunder until the person seeking
indemnification shall have first made a demand for payment on the Company with
respect to any loss, claim, damage or liability and the Company shall have
either rejected such demand or failed to make such requested payment within
ninety (90) days after receipt thereof. Notwithstanding the foregoing, each
Selling Stockholder (other than the Principal Stockholders) shall only be liable
under this Section 8 to the extent, and only to the extent, that any loss,
claim, damage or liability of any Underwriter, or controlling person, if any,
arises out of or is based upon (i) any untrue statement or omission, or any
alleged untrue statement or omission, made in the Registration Statement (or any
amendment thereto) in reliance upon and in conformity with information furnished
to the Company by or on behalf of such Selling Stockholder expressly for use in
the Registration Statement (or any amendment thereto) or any Preliminary
Prospectus (or any amendment or supplement thereto) or (ii) any breach of such
Selling Stockholder's representation and warranty made in Section 1(b)(iv)
hereof. The term "Principal Stockholders" shall mean Summit Ventures III, L.P.
and Summit Investors II, L.P. In no event, however, shall the liability of any
Selling Stockholder, including any Principal Stockholder, for indemnification
under this Section 8(a) exceed the net proceeds received by such Selling
Stockholder from the Underwriters in the offering. This indemnity agreement will
be in addition to any liability which the Company or the Selling Stockholders
may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify
and hold harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement, the Selling Stockholders, and each
person, if any, who controls the Company or the Selling Stockholders within the
meaning of the Act, against any losses, claims, damages or liabilities to which
the Company or any such director, officer, Selling Stockholder or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; and
will reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer, Selling Stockholder or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding; provided, however, that each Underwriter will
not be liable in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission has
been made in the Registration Statement, any Preliminary Prospectus, the
Prospectus or such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof. This indemnity
agreement will be in addition to any liability which such Underwriter may
otherwise have.
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(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available to any
party who shall fail to give notice as provided in this Section 8(c) if the
party to whom notice was not given was unaware of the proceeding to which such
notice would have related and was materially prejudiced by the failure to give
such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of the
provisions of Section 8(a) or (b). In case any such proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and by the Company and the Selling Stockholders in the case of
parties indemnified pursuant to Section 8(b). The indemnifying party shall not
be liable for any settlement of any proceeding effected without its written
consent but if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party from
and against any loss or liability by reason of such settlement or judgment. In
addition, the indemnifying party will not, without the prior written consent of
the indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
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(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law then each indemnifying
party shall contribute to such amount paid or payable by such indemnified party
in such proportion as is appropriate to reflect not only such relative benefits
but also the relative fault of the Company and the Selling Stockholders on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, (or
actions or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company and the Selling Stockholders
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Selling Stockholders on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholders and the Underwriters agree
that it would not be just and equitable if contributions pursuant to this
Section 8(d) were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 8(d). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) referred to above in this Section 8(d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (d), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares purchased by
such Underwriter, (ii) no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation, and (iii) no
Selling Stockholder shall be required to contribute any amount in excess of the
proceeds received by such Selling Stockholder from the Underwriters in the
offering. The Underwriters' obligations in this
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Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement,
any Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this Section 8
hereby consents to the jurisdiction of any court having jurisdiction over any
other contributing party, agrees that process issuing from such court may be
served upon him or it by any other contributing party and consents to the
service of such process and agrees that any other contributing party may join
him or it as an additional defendant in any such proceeding in which such other
contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may
be, any Underwriter shall fail to purchase and pay for the portion of the Shares
which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company or a Selling
Stockholder), you, as Representatives of the Underwriters, shall use your
reasonable efforts to procure within 36 hours thereafter one or more of the
other Underwriters, or any others, to purchase from the Company and the Selling
Stockholders such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case
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may be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company and the
Selling Stockholders or you as the Representatives of the Underwriters will have
the right, by written notice given within the next 36-hour period to the parties
to this Agreement, to terminate this Agreement without liability on the part of
the non-defaulting Underwriters or of the Company or of the Selling Stockholders
except to the extent provided in Section 8 hereof. In the event of a default by
any Underwriter or Underwriters, as set forth in this Section 9, the Closing
Date or Option Closing Date, as the case may be, may be postponed for such
period, not exceeding seven days, as you, as Representatives, may determine in
order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The term
"Underwriter" includes any person substituted for a defaulting Underwriter. Any
action taken under this Section 9 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or telegraphed
and confirmed as follows: if to the Underwriters, to Alex. Brown & Sons
Incorporated, 101 California Street, 46th Floor, San Francisco, C 94111,
Attention: Paul V. Barber, Principal; with a copy to Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202. Attention:
General Counsel; if to the Company or the Selling Stockholders, to Simulation
Sciences, Inc., 601 Valencia Avenue, Brea, CA 92823, Attention: President.
11. TERMINATION.
This Agreement may be terminated by you by notice to the Sellers as
follows:
(a) at any time prior to the earlier of (i) the time the
Shares are released by you for sale by notice to the Underwriters, or (ii) 11:30
a.m. on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the
following has occurred: (i) since the respective dates as of which information
is given in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, of the Company and its
Subsidiaries taken as a whole or the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects of
the Company and its Subsidiaries taken as a whole, whether or not arising in the
ordinary course of business, (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency or other national or international
calamity or crisis or change in economic or political conditions if the effect
of such outbreak, escalation, declaration, emergency, calamity, crisis or change
on the financial markets of the United States would, in your reasonable
judgment, make it impracticable to market the Shares
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or to enforce contracts for the sale of the Shares, or (iii) suspension of
trading in securities generally on the New York Stock Exchange or the American
Stock Exchange or limitation on prices (other than limitations on hours or
numbers of days of trading) for securities on either such Exchange, (iv) the
enactment, publication, decree or other promulgation of any statute, regulation,
rule or order of any court or other governmental authority which in your opinion
materially and adversely affects or may materially and adversely affect the
business or operations of the Company, (v) declaration of a banking moratorium
by United States or New York State authorities, (vi) the suspension of trading
of the Company's common stock by the Commission on the Nasdaq National Market or
(vii) the taking of any action by any governmental body or agency in respect of
its monetary or fiscal affairs which in your reasonable opinion has a material
adverse effect on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and the Selling Stockholders and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign merely because of such
purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company, the Selling Stockholders and the Underwriters
acknowledge and agree that the only information furnished or to be furnished by
any Underwriter to the Company for inclusion in any Prospectus or the
Registration Statement consists of the information set forth in the last
paragraph on the front cover page (insofar as such information relates to the
Underwriters), legends required by Item 502(d) of Regulation S-K under the Act
and the information under the caption "Underwriting" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Shares under
this Agreement.
This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
27
<PAGE> 28
This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Maryland.
If the foregoing letter is in accordance with your
understanding of our agreement, please sign and return to us the enclosed
duplicates hereof, whereupon it will become a binding agreement among the
Selling Stockholders, the Company and the several Underwriters in accordance
with its terms.
28
<PAGE> 29
Any person executing and delivering this Agreement as
Attorney-in-Fact for a Selling Stockholder represents by so doing that he has
been duly appointed as Attorney-in-Fact by such Selling Stockholder pursuant to
a validly existing and binding Power of Attorney which authorizes such
Attorney-in-Fact to take such action.
Very truly yours,
SIMULATION SCIENCES INC.
By:
Title: President
Selling Stockholders listed on Schedule II
By :
Title: Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
ALEX. BROWN & SONS INCORPORATED
As Representatives of the several
Underwriters listed on Schedule I
By: Alex. Brown & Sons Incorporated
By:
Authorized Officer
29
<PAGE> 30
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
Underwriter Number of Firm Shares to be Purchased
- ---------------------------------------- -------------------------------------
<S> <C>
Alex. Brown & Sons Incorporated -----------
Wessels, Arnold & Henderson, L.L.C.
Total __________
</TABLE>
<PAGE> 31
SCHEDULE II
SCHEDULE OF SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Selling Stockholder Number of Firm Shares to be Sold
- --------------------------- --------------------------------
<S> <C> <C>
Total __________
----------
</TABLE>
<PAGE> 32
SCHEDULE III
SCHEDULE OF OPTION SHARES
<TABLE>
<CAPTION>
Maximum Number of Option Percentage of Total Number of
Name of Seller Shares to be Sold Option Shares
- ----------------------- ------------------------ -----------------------------
<S> <C> <C> <C>
---------- ----------
Total __________ 100%
</TABLE>
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SIMULATION SCIENCES INC.
Pursuant to Section 245 of the
General Corporate Law of the State of Delaware
Simulation Sciences Inc., a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:
1. The name of the Corporation is Simulation Sciences Inc. (the
"Corporation"). The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on April 4, 1996.
2. The amendment and restatement of the Certificate of Incorporation
was proposed by the Corporation's Board of Directors and was duly approved by
the stockholders of the Corporation by written consent given in accordance with
the applicable provisions of Sections 228 and 242 of the Delaware General
Corporation Law.
3. Pursuant to Sections 242 and 245 of the General Corporation Law of
the State of Delaware, this Amended and Restated Certificate of Incorporation
restates, integrates and further amends the provisions of the Certificate of
Incorporation of this Corporation.
4. The text of the Certificate of Incorporation is hereby restated and
amended to read in its entirety as follows:
I.
The name of the corporation (the "Corporation") is Simulation Sciences
Inc.
II.
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington,
County of New Castle, Delaware 19801. The name of its registered agent at such
address is The Corporation Trust Company.
III.
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
-1-
<PAGE> 2
IV.
Section 1. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Thirty-Five Million (35,000,000)
shares of capital stock. Of such authorized shares, Thirty Million (30,000,000)
shares shall be designated "Common Stock," and have a par value of $.001 per
share, and Five Million (5,000,000) shares shall be designated "Preferred
Stock," and have a par value of $.001 per share.
Section 2. The Preferred Stock may be issued from time to time in one
or more series. The Board of Directors of the Corporation is authorized to
determine or alter the powers, preferences and rights and the qualifications,
limitations or restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock, and within the limitations or restrictions stated in
any resolution or resolutions of the Board of Directors originally fixing the
number of shares constituting any series, to increase or decrease (but not below
the number of shares of any such series then outstanding) the number of shares
of any such series subsequent to the issuance of shares of that series, to
determine the designation of any series, and to fix the number of shares of any
series. In case the number of shares of any series shall be so decreased, the
shares constituting such decrease shall resume the status which they had prior
to the adoption of the resolution originally fixing the number of shares of such
series.
V.
To the fullest extent permitted by the Delaware General Corporation Law
as the same exists or as it may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director. The Corporation
is authorized to provide by bylaw, agreement or otherwise for indemnification of
directors, officers, employees and agents for breach of duty to the Corporation
and its stockholders in excess of the indemnification otherwise permitted by
applicable law. Neither any amendment nor repeal of this Article, nor the
adoption of any provision of this Certificate of Incorporation inconsistent with
this Article, shall eliminate or reduce the effect of this Article in respect of
any matter occurring, or any cause of action, suit or claim that, but for this
Article, would accrue or arise, prior to such amendment, repeal or adoption of
an inconsistent provision.
VI.
Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the Corporation shall so provide.
VII.
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the Bylaws of the Corporation.
VIII.
-2-
<PAGE> 3
Stockholders of the Corporation may take action by written consent in
lieu of a meeting only by unanimous written consent.
IX.
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been signed this __ day of _______________, 1996.
SIMULATION SCIENCES INC.
By _____________________________________
Charles R. Harris
President and Chief Executive Officer
ATTEST:
____________________________
Jeffrey D. Saper, Secretary
-3-
<PAGE> 1
EXHIBIT 10.4
SIMULATION SCIENCES INC.
1996 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are:
- to attract and retain the best available personnel for positions
of substantial responsibility,
- to provide additional incentive to Employees, Directors and
Consultants, and
- to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the
Board in accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Simulation Sciences Inc., a California
corporation.
(h) "Consultant" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
<PAGE> 2
(j) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
-2-
<PAGE> 3
(p) "Notice of Grant" means a written or electronic notice
evidencing certain terms and conditions of an individual Option or Stock
Purchase Right grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
(s) "Option Agreement" means an agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
options are surrendered in exchange for options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this 1996 Stock Plan.
(y) "Restricted Stock" means shares of Common Stock acquired
pursuant to a grant of Stock Purchase Rights under Section 11 below.
(z) "Restricted Stock Purchase Agreement" means a written agreement
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
(cc) "Service Provider" means an Employee, Director or Consultant.
-3-
<PAGE> 4
(dd) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 1,000,000* Shares. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes
unexercisable without having been exercised in full, or is surrendered pursuant
to an Option Exchange Program, the unpurchased Shares which were subject thereto
shall become available for future grant or sale under the Plan (unless the Plan
has terminated); provided, however, that Shares that have actually been issued
under the Plan, whether upon exercise of an Option or Right, shall not be
returned to the Plan and shall not become available for future distribution
under the Plan, except that if Shares of Restricted Stock are repurchased by the
Company at their original purchase price, such Shares shall become available for
future grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. The Plan may be
administered by different Committees with respect to different groups of Service
Providers.
(ii) Section 162(m). To the extent that the Administrator
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
- --------
* Post reverse stock split.
-4-
<PAGE> 5
(iv) Other Administration. Other than as provided above, the
Plan shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or Stock Purchase Right or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
-5-
<PAGE> 6
(xi) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by an Optionee
to have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights
may be granted to Service Providers. Incentive Stock Options may be granted only
to Employees.
6. Limitations.
(a) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
-6-
<PAGE> 7
(i) No Service Provider shall be granted, in any fiscal year
of the Company, Options to purchase more than 500,000 Shares.*
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 400,000 Shares*
which shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 13.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall
become effective upon its adoption by the Board. It shall continue in effect for
a term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the
Option Agreement. In the case of an Incentive Stock Option, the term shall be
ten (10) years from the date of grant or such shorter term as may be provided in
the Option Agreement. Moreover, in the case of an Incentive Stock Option granted
to an Optionee who, at the time the Incentive Stock Option is granted, owns
stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of
- -------------------
* Post reverse stock split.
-7-
<PAGE> 8
stock of the Company or any Parent or Subsidiary, the per Share exercise price
shall be no less than 110% of the Fair Market Value per Share on the date of
grant.
(B) granted to any Employee other than an Employee described
in paragraph (A) immediately above, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price of less than 100% of the Fair Market Value per Share
on the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
-8-
<PAGE> 9
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence of
a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
-9-
<PAGE> 10
(c) Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If the
Option is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted
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<PAGE> 11
Stock purchase agreement shall be the original price paid by the purchaser and
may be paid by cancellation of any indebtedness of the purchaser to the Company.
The repurchase option shall lapse at a rate determined by the Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
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<PAGE> 12
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase
Right shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
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<PAGE> 13
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
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<PAGE> 14
1996 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
This Option may be exercised, in whole or in part, in accordance with
the following schedule:
[25% of the Shares subject to the Option shall vest twelve months after
the Vesting Commencement Date, and 1/48 of the Shares subject to the Option
shall vest each month thereafter, subject to the Optionee continuing to be a
Service Provider on such dates].
<PAGE> 15
Termination Period:
This Option may be exercised for _____ [days/months] after Optionee
ceases to be a Service Provider. Upon the death or Disability of the Optionee,
this Option may be exercised for such longer period as provided in the Plan. In
no event shall this Option be exercised later than the Term/Expiration Date as
provided above.
II. AGREEMENT
1. Grant of Option. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 15(c) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its term in
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by such aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
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<PAGE> 16
3. Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash;
(b) check;
(c) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan;
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, AND (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares; or
(e) with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit C, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit B. The Note shall bear interest at the "applicable federal rate"
prescribed under the Code and its regulations at time of purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the Security
Agreement.
4. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal tax consequences relating to
this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) Exercising the Option.
(i) Nonstatutory Stock Option. The Optionee may incur regular
federal income tax liability upon exercise of a NSO. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price. If the
Optionee is
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<PAGE> 17
an Employee or a former Employee, the Company will be required to withhold from
his or her compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(ii) Incentive Stock Option. If this Option qualifies as an ISO,
the Optionee will have no regular federal income tax liability upon its
exercise, although the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price will be
treated as an adjustment to alternative minimum taxable income for federal tax
purposes and may subject the Optionee to alternative minimum tax in the year of
exercise. In the event that the Optionee ceases to be an Employee but remains a
Service Provider, any Incentive Stock Option of the Optionee that remains
unexercised shall cease to qualify as an Incentive Stock Option and will be
treated for tax purposes as a Nonstatutory Stock Option on the date three (3)
months and one (1) day following such change of status.
(b) Disposition of Shares.
(i) NSO. If the Optionee holds NSO Shares for at least one
year, any gain realized on disposition of the Shares will be treated as
long-term capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one year
after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the lesser of (A) the difference
between the Fair Market Value of the Shares acquired on the date of exercise and
the aggregate Exercise Price, or (B) the difference between the sale price of
such Shares and the aggregate Exercise Price. Any additional gain will be taxed
as capital gain, short-term or long-term depending on the period that the ISO
Shares were held.
(c) Notice of Disqualifying Disposition of ISO Shares. If the
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of such disposition. The Optionee agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized from such early disposition of ISO Shares by payment in cash or out
of the current earnings paid to the Optionee.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely
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<PAGE> 18
to the Optionee's interest except by means of a writing signed by the Company
and Optionee. This agreement is governed by the internal substantive laws, but
not the choice of law rules, of California.
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
By your signature and the signature of the Company's representative
below, you and the Company agree that this Option is granted under and governed
by the terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
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<PAGE> 19
OPTIONEE: SIMULATION SCIENCES INC.
- ----------------------------------- -------------------------------------
Signature By
- ------------------------------------ -------------------------------------
Print Name Title
- ------------------------------------
Residence Address
- ------------------------------------
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<PAGE> 20
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and hereby approves the
terms and conditions of the Plan and this Option Agreement. In consideration of
the Company's granting his or her spouse the right to purchase Shares as set
forth in the Plan and this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.
---------------------------------------
Spouse of Optionee
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<PAGE> 21
EXHIBIT A
1996 STOCK PLAN
EXERCISE NOTICE
Simulation Sciences Inc.
601 S. Valencia Ave.
Brea, CA 92621
Attention: Corporate Secretary
1. Exercise of Option. Effective as of today, ________________, 199__,
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of Simulation Sciences Inc. (the "Company")
under and pursuant to the 1996 Stock Plan (the "Plan") and the Stock Option
Agreement dated , 19___ (the "Option Agreement"). The purchase price for the
Shares shall be $___________ , as required by the Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 13 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing
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<PAGE> 22
signed by the Company and Purchaser. This agreement is governed by the internal
substantive laws, but not the choice of law rules, of California.
Submitted by: Accepted by:
PURCHASER: SIMULATION SCIENCES INC.
- ---------------------------------- --------------------------------
Signature By
- ---------------------------------- --------------------------------
Print Name Its
Address: Address:
- --------------------------------- 601 S. Valencia Ave.
Brea, CA 92621
- ---------------------------------
--------------------------------
Date Received
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<PAGE> 23
EXHIBIT B
SECURITY AGREEMENT
This Security Agreement is made as of __________, 19___ between
Simulation Sciences Inc., a California corporation ("Pledgee"), and
_________________________ ("Pledgor").
Recitals
Pursuant to Pledgor's election to purchase Shares under the Option
Agreement dated ________ (the "Option"), between Pledgor and Pledgee under
Pledgee's 1996 Stock Plan, and Pledgor's election under the terms of the Option
to pay for such shares with his promissory note (the "Note"), Pledgor has
purchased _________ shares of Pledgee's Common Stock (the "Shares") at a price
of $________ per share, for a total purchase price of $__________. The Note and
the obligations thereunder are as set forth in Exhibit C to the Option.
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of
the transfer of the Shares to Pledgor under the Option Agreement, Pledgor,
pursuant to the California Commercial Code, hereby pledges all of such Shares
(herein sometimes referred to as the "Collateral") represented by certificate
number ______, duly endorsed in blank or with executed stock powers, and
herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"),
who shall hold said certificate subject to the terms and conditions of this
Security Agreement.
The pledged stock (together with an executed blank stock assignment for
use in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option, and the
Pledge-holder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.
2. Pledgor's Representations and Covenants. To induce Pledgee to enter
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
a. Payment of Indebtedness. Pledgor will pay the principal sum of
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.
b. Encumbrances. The Shares are free of all other encumbrances,
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
c. Margin Regulations. In the event that Pledgee's Common Stock is
now or later becomes margin-listed by the Federal Reserve Board and Pledgee is
classified as a "lender" within the
<PAGE> 24
meaning of the regulations under Part 207 of Title 12 of the Code of Federal
Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making
any amendments to the Note or providing any additional collateral as may be
necessary to comply with such regulations.
3. Voting Rights. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes are declared
or made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.
5. Options and Rights. In the event that, during the term of this
pledge, subscription Options or other rights or options shall be issued in
connection with the pledged Shares, such rights, Options and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and of
this Security Agreement in the event:
a. Payment of principal or interest on the Note shall be delinquent
for a period of 10 days or more; or
b. Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall
have the right to accelerate payment of the Note upon notice to Pledgor, and
Pledgee shall thereafter be entitled to pursue its remedies under the California
Commercial Code.
7. Release of Collateral. Subject to any applicable contrary rules
under Regulation G, there shall be released from this pledge a portion of the
pledged Shares held by Pledgeholder hereunder upon payments of the principal of
the Note. The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
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<PAGE> 25
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.
8. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. Term. The within pledge of Shares shall continue until the payment
of all indebtedness secured hereby, at which time the remaining pledged stock
shall be promptly delivered to Pledgor, subject to the provisions for prior
release of a portion of the Collateral as provided in paragraph 7 above.
10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.
11. Pledgeholder Liability. In the absence of willful or gross
negligence, Pledgeholder shall not be liable to any party for any of his acts,
or omissions to act, as Pledgeholder.
12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
13. Successors or Assigns. Pledgor and Pledgee agree that all of the
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein
shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.
14. Governing Law. This Security Agreement shall be interpreted and
governed under the internal substantive laws, but not the choice of law rules,
of California.
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<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"PLEDGOR" _________________________________
Signature
_________________________________
Print Name
Address: _________________________________
_________________________________
"PLEDGEE" SIMULATION SCIENCES INC.,
a California corporation
________________________________
Signature
________________________________
Print Name
________________________________
Title
"PLEDGEHOLDER" ________________________________
Secretary
Simulation Sciences Inc.
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<PAGE> 27
EXHIBIT C
NOTE
$_______________ [City, State]
______________, 19___
FOR VALUE RECEIVED, _______________ promises to pay to Simulation
Sciences Inc., a California corporation (the "Company"), or order, the principal
sum of _______________________ ($_____________), together with interest on the
unpaid principal hereof from the date hereof at the rate of _______________
percent (____%) per annum, compounded semiannually.
Principal and interest shall be due and payable on __________, 19___.
Should the undersigned fail to make full payment of principal or interest for a
period of 10 days or more after the due date thereof, the whole unpaid balance
on this Note of principal and interest shall become immediately due at the
option of the holder of this Note. Payments of principal and interest shall be
made in lawful money of the United States of America.
The undersigned may at any time prepay all or any portion of the
principal or interest owing hereunder.
This Note is subject to the terms of the Option, dated as of
________________. This Note is secured in part by a pledge of the Company's
Common Stock under the terms of a Security Agreement of even date herewith and
is subject to all the provisions thereof.
The holder of this Note shall have full recourse against the
undersigned, and shall not be required to proceed against the collateral
securing this Note in the event of default.
In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
____________________________________
____________________________________
<PAGE> 28
1996 STOCK PLAN
NOTICE OF GRANT OF STOCK PURCHASE RIGHT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Notice of Grant.
[Grantee's Name and Address]
You have been granted the right to purchase Common Stock of the
Company, subject to the Company's Repurchase Option and your ongoing status as a
Service Provider (as described in the Plan and the attached Restricted Stock
Purchase Agreement), as follows:
Grant Number _________________________
Date of Grant _________________________
Price Per Share $________________________
Total Number of Shares Subject _________________________
to This Stock Purchase Right
Expiration Date: _________________________
YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION DATE
OR IT WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES.
By your signature and the signature of the Company's representative below, you
and the Company agree that this Stock Purchase Right is granted under and
governed by the terms and conditions of the 1996 Stock Plan and the Restricted
Stock Purchase Agreement, attached hereto as Exhibit A-1, both of which are made
a part of this document. You further agree to execute the attached Restricted
Stock Purchase Agreement as a condition to purchasing any shares under this
Stock Purchase Right.
GRANTEE: SIMULATION SCIENCES INC.
- --------------------------- --------------------------------
Signature By
- --------------------------- --------------------------------
Print Name Title
<PAGE> 29
EXHIBIT A-1
1996 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Restricted Stock Purchase Agreement.
WHEREAS the Purchaser named in the Notice of Grant, (the "Purchaser")
is an Service Provider, and the Purchaser's continued participation is
considered by the Company to be important for the Company's continued growth;
and
WHEREAS in order to give the Purchaser an opportunity to acquire an
equity interest in the Company as an incentive for the Purchaser to participate
in the affairs of the Company, the Administrator has granted to the Purchaser a
Stock Purchase Right subject to the terms and conditions of the Plan and the
Notice of Grant, which are incorporated herein by reference, and pursuant to
this Restricted Stock Purchase Agreement (the "Agreement").
NOW THEREFORE, the parties agree as follows:
1. Sale of Stock. The Company hereby agrees to sell to the Purchaser
and the Purchaser hereby agrees to purchase shares of the Company's Common Stock
(the "Shares"), at the per Share purchase price and as otherwise described in
the Notice of Grant.
2. Payment of Purchase Price. The purchase price for the Shares may be
paid by delivery to the Company at the time of execution of this Agreement of
cash, a check, or some combination thereof.
3. Repurchase Option.
(a) In the event the Purchaser ceases to be a Service Provider for
any or no reason (including death or disability) before all of the Shares are
released from the Company's Repurchase Option (see Section 4), the Company
shall, upon the date of such termination (as reasonably fixed and determined by
the Company) have an irrevocable, exclusive option (the "Repurchase Option") for
a period of sixty (60) days from such date to repurchase up to that number of
shares which constitute the Unreleased Shares (as defined in Section 4) at the
original purchase price per share (the "Repurchase Price"). The Repurchase
Option shall be exercised by the Company by delivering written notice to the
Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) AND, at
the Company's option, (i) by delivering to the Purchaser or the Purchaser's
executor a check in the amount of the aggregate Repurchase Price, or (ii) by
cancelling an amount of the Purchaser's indebtedness to the Company equal to the
aggregate Repurchase Price, or (iii) by a combination of (i) and (ii) so that
the combined payment and cancellation of indebtedness equals the aggregate
Repurchase Price. Upon delivery of such notice and the payment of the aggregate
Repurchase Price, the Company shall become the legal and beneficial owner of the
Shares being repurchased and all
<PAGE> 30
rights and interests therein or relating thereto, and the Company shall have the
right to retain and transfer to its own name the number of Shares being
repurchased by the Company.
(b) Whenever the Company shall have the right to repurchase Shares
hereunder, the Company may designate and assign one or more employees, officers,
directors or shareholders of the Company or other persons or organizations to
exercise all or a part of the Company's purchase rights under this Agreement and
purchase all or a part of such Shares. If the Fair Market Value of the Shares to
be repurchased on the date of such designation or assignment (the "Repurchase
FMV") exceeds the aggregate Repurchase Price of such Shares, then each such
designee or assignee shall pay the Company cash equal to the difference between
the Repurchase FMV and the aggregate Repurchase Price of such Shares.
4. Release of Shares From Repurchase Option.
(a) _______________________ percent (______%) of the Shares shall be
released from the Company's Repurchase Option [one year] after the Date of Grant
and __________________ percent (______%) of the Shares [at the end of each month
thereafter], provided that the Purchaser does not cease to be a Service Provider
prior to the date of any such release.
(b) Any of the Shares that have not yet been released from the
Repurchase Option are referred to herein as "Unreleased Shares."
(c) The Shares that have been released from the Repurchase Option
shall be delivered to the Purchaser at the Purchaser's request (see Section 6).
5. Restriction on Transfer. Except for the escrow described in Section
6 or the transfer of the Shares to the Company or its assignees contemplated by
this Agreement, none of the Shares or any beneficial interest therein shall be
transferred, encumbered or otherwise disposed of in any way until such Shares
are released from the Company's Repurchase Option in accordance with the
provisions of this Agreement, other than by will or the laws of descent and
distribution.
6. Escrow of Shares.
(a) To ensure the availability for delivery of the Purchaser's
Unreleased Shares upon repurchase by the Company pursuant to the Repurchase
Option, the Purchaser shall, upon execution of this Agreement, deliver and
deposit with an escrow holder designated by the Company (the "Escrow Holder")
the share certificates representing the Unreleased Shares, together with the
stock assignment duly endorsed in blank, attached hereto as Exhibit A-2. The
Unreleased Shares and stock assignment shall be held by the Escrow Holder,
pursuant to the Joint Escrow Instructions of the Company and Purchaser attached
hereto as Exhibit A-3, until such time as the Company's Repurchase Option
expires. As a further condition to the Company's obligations under this
Agreement, the
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<PAGE> 31
Company may require the spouse of Purchaser, if any, to execute and deliver to
the Company the Consent of Spouse attached hereto as Exhibit A-4.
(b) The Escrow Holder shall not be liable for any act it may do or
omit to do with respect to holding the Unreleased Shares in escrow while acting
in good faith and in the exercise of its judgment.
(c) If the Company or any assignee exercises the Repurchase Option
hereunder, the Escrow Holder, upon receipt of written notice of such exercise
from the proposed transferee, shall take all steps necessary to accomplish such
transfer.
(d) When the Repurchase Option has been exercised or expires
unexercised or a portion of the Shares has been released from the Repurchase
Option, upon request the Escrow Holder shall promptly cause a new certificate to
be issued for the released Shares and shall deliver the certificate to the
Company or the Purchaser, as the case may be.
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a shareholder with respect to the Shares while they are held in
escrow, including without limitation, the right to vote the Shares and to
receive any cash dividends declared thereon. If, from time to time during the
term of the Repurchase Option, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of the Purchaser's ownership of the Shares shall be immediately subject
to this escrow, deposited with the Escrow Holder and included thereafter as
"Shares" for purposes of this Agreement and the Repurchase Option.
7. Legends. The share certificate evidencing the Shares, if any, issued
hereunder shall be endorsed with the following legend (in addition to any legend
required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
8. Adjustment for Stock Split. All references to the number of Shares
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
9. Tax Consequences. The Purchaser has reviewed with the Purchaser's
own tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. The Purchaser
is relying solely on such advisors and not on any statements
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<PAGE> 32
or representations of the Company or any of its agents. The Purchaser
understands that the Purchaser (and not the Company) shall be responsible for
the Purchaser's own tax liability that may arise as a result of the transactions
contemplated by this Agreement. The Purchaser understands that Section 83 of the
Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income
the difference between the purchase price for the Shares and the Fair Market
Value of the Shares as of the date any restrictions on the Shares lapse. In this
context, "restriction" includes the right of the Company to buy back the Shares
pursuant to the Repurchase Option. The Purchaser understands that the Purchaser
may elect to be taxed at the time the Shares are purchased rather than when and
as the Repurchase Option expires by filing an election under Section 83(b) of
the Code with the IRS within 30 days from the date of purchase. The form for
making this election is attached as Exhibit A-5 hereto.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER'S BEHALF.
10. General Provisions.
(a) This Agreement shall be governed by the internal substantive
laws, but not the choice of law rules of California. This Agreement, subject to
the terms and conditions of the Plan and the Notice of Grant, represents the
entire agreement between the parties with respect to the purchase of the Shares
by the Purchaser. Subject to Section 15(c) of the Plan, in the event of a
conflict between the terms and conditions of the Plan and the terms and
conditions of this Agreement, the terms and conditions of the Plan shall
prevail. Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Agreement.
(b) Any notice, demand or request required or permitted to be given
by either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or
deposited in the U.S. mail, First Class with postage prepaid, and addressed to
the parties at the addresses of the parties set forth at the end of this
Agreement or such other address as a party may request by notifying the other in
writing.
Any notice to the Escrow Holder shall be sent to the Company's
address with a copy to the other party hereto.
(c) The rights of the Company under this Agreement shall be
transferable to any one or more persons or entities, and all covenants and
agreements hereunder shall inure to the benefit of, and be enforceable by the
Company's successors and assigns. The rights and obligations of the Purchaser
under this Agreement may only be assigned with the prior written consent of the
Company.
(d) Either party's failure to enforce any provision of this
Agreement shall not in any way be construed as a waiver of any such provision,
nor prevent that party from thereafter enforcing
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<PAGE> 33
any other provision of this Agreement. The rights granted both parties hereunder
are cumulative and shall not constitute a waiver of either party's right to
assert any other legal remedy available to it.
(e) The Purchaser agrees upon request to execute any further
documents or instruments necessary or desirable to carry out the purposes or
intent of this Agreement.
(f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES
PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS A SERVICE
PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED OR
PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT
THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE
SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT
ALL, AND SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE PURCHASER'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
By Purchaser's signature below, Purchaser represents that he or she
is familiar with the terms and provisions of the Plan, and hereby accepts this
Agreement subject to all of the terms and provisions thereof. Purchaser has
reviewed the Plan and this Agreement in their entirety, has had an opportunity
to obtain the advice of counsel prior to executing this Agreement and fully
understands all provisions of this Agreement. Purchaser agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Agreement.
Purchaser further agrees to notify the Company upon any change in the residence
indicated in the Notice of Grant.
DATED: _____________________
PURCHASER: SIMULATION SCIENCES INC.
______________________________ ______________________________
Signature By
______________________________ ______________________________
Print Name Title
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<PAGE> 34
EXHIBIT A-2
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell,
assign and transfer unto ______________________________________ (__________)
shares of the Common Stock of Simulation Sciences Inc. standing in my name of
the books of said corporation represented by Certificate No. _____ herewith and
do hereby irrevocably constitute and appoint _________________ to transfer the
said stock on the books of the within named corporation with full power of
substitution in the premises.
This Stock Assignment may be used only in accordance with the
Restricted Stock Purchase Agreement (the "Agreement") between
________________________ and the undersigned dated ______________, 19__.
Dated: _______________, 19
Signature:______________________________
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise the
Repurchase Option, as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE> 35
EXHIBIT A-3
JOINT ESCROW INSTRUCTIONS
____________, 19__
Corporate Secretary
Simulation Sciences Inc.
601 S. Valencia Ave.
Brea, CA 92621
Dear ________________:
As Escrow Agent for both Simulation Sciences Inc., a California
corporation (the "Company"), and the undersigned purchaser of stock of the
Company (the "Purchaser"), you are hereby authorized and directed to hold the
documents delivered to you pursuant to the terms of that certain Restricted
Stock Purchase Agreement ("Agreement") between the Company and the undersigned,
in accordance with the following instructions:
1. In the event the Company and/or any assignee of the Company
(referred to collectively as the "Company") exercises the Company's Repurchase
Option set forth in the Agreement, the Company shall give to Purchaser and you a
written notice specifying the number of shares of stock to be purchased, the
purchase price, and the time for a closing hereunder at the principal office of
the Company. Purchaser and the Company hereby irrevocably authorize and direct
you to close the transaction contemplated by such notice in accordance with the
terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's Repurchase Option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a shareholder of the Company while the
stock is held by you.
<PAGE> 36
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's Repurchase Option has been exercised, you
shall deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's Repurchase Option.
Within 90 days after Purchaser ceases to be a Service Provider, you shall
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's Repurchase
Option.
5. If at the time of termination of this escrow you should have in
your possession any documents, securities, or other property belonging to
Purchaser, you shall deliver all of the same to Purchaser and shall be
discharged of all further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as
are specifically set forth herein and may rely and shall be protected in relying
or refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law, and are hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree, you
shall not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other
experts as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
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<PAGE> 37
12. Your responsibilities as Escrow Agent hereunder shall terminate if
you shall cease to be an officer or agent of the Company or if you shall resign
by written notice to each party. In the event of any such termination, the
Company shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in
connection with these Joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities held by you hereunder, you are authorized and directed to retain in
your possession without liability to anyone all or any part of said securities
until such disputes shall have been settled either by mutual written agreement
of the parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail with
postage and fees prepaid, addressed to each of the other parties thereunto
entitled at the following addresses or at such other addresses as a party may
designate by ten days' advance written notice to each of the other parties
hereto.
COMPANY: SIMULATION SCIENCES INC.
PURCHASER: ________________________________
________________________________
________________________________
ESCROW AGENT: Corporate Secretary
Simulation Sciences Inc.
601 S. Valencia Ave.
Brea, CA 92621
16. By signing these Joint Escrow Instructions, you become a party
hereto only for the purpose of said Joint Escrow Instructions; you do not become
a party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and permitted assigns.
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<PAGE> 38
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the internal substantive laws, but not the
choice of law rules, of California.
Very truly yours,
SIMULATION SCIENCES INC.
_____________________________________
By
_____________________________________
Title
PURCHASER:
_____________________________________
Signature
_____________________________________
Print Name
ESCROW AGENT:
_____________________________________
Corporate Secretary
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<PAGE> 39
EXHIBIT A-4
CONSENT OF SPOUSE
I, ____________________, spouse of ___________________, have read and
approve the foregoing Restricted Stock Purchase Agreement (the "Agreement"). In
consideration of the Company's grant to my spouse of the right to purchase
shares of Simulation Sciences Inc., as set forth in the Agreement, I hereby
appoint my spouse as my attorney-in-fact in respect to the exercise of any
rights under the Agreement and agree to be bound by the provisions of the
Agreement insofar as I may have any rights in said Agreement or any shares
issued pursuant thereto under the community property laws or similar laws
relating to marital property in effect in the state of our residence as of the
date of the signing of the foregoing Agreement.
Dated: _______________, 19
__________________________________________
Signature of Spouse
<PAGE> 40
EXHIBIT A-5
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
for the current taxable year the amount of any compensation taxable to taxpayer
in connection with his or her receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of
the undersigned are as follows:
NAME: TAXPAYER: SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows: shares (the "Shares") of the Common Stock of
Simulation Sciences Inc. (the "Company").
3. The date on which the property was transferred is: ________, 19__.
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, upon
certain events. This right lapses with regard to a portion of the
Shares based on the continued performance of services by the taxpayer
over time.
5. The fair market value at the time of transfer, determined without regard
to any restriction other than a restriction which by its terms will
never lapse, of such property is:
$_______________.
6. The amount (if any) paid for such property is:
$_______________.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
except with the consent of the Commissioner.
Dated: ___________________, 19____ _________________________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: ___________________, 19____ _________________________________________
Spouse of Taxpayer
<PAGE> 41
Employer to him periodically, either orally or in writing. Employer agrees
that material orders, directions, and policies shall be stated to Employee in
writing.
In addition, Employee shall be subject to and shall comply
with Employer's personnel policy as amended from time to time and applicable to
Employer's employees generally.
4. COMPENSATION.
(a) Employer agrees to pay Employee an annual salary
("Annual Salary"), payable semi-monthly, and calculated as follows:
Percent Increase
Salary Period Amount from Previous Year
------------- ------ ------------------
(b) Employee shall be eligible to participate in any
management bonus program designed for other executive level employees.
(c) Employee also shall be entitled to participation in
employee benefit plans, if any, covering pensions, profit sharing, group
insurance, or other fringe benefit programs maintained by Employer for its
employees generally; provided, however, that it is understood that Employee
shall neither participate in Employer's Stock option Plan nor have an
automobile allowance.
(d) The compensation described in this Agreement shall
constitute the entire compensation of Employee for the performance of services
by Employee for or on behalf of Employer under this Agreement.
(e) All compensation shall be subject to the customary
withholding tax and other employment taxes as required with respect to
compensation paid by a corporation to an employee. In addition, Employer
agrees to assume full responsibility for all payments required of employers
under applicable State workers' compensation, unemployment insurance and
disability laws and any other similar statutory requirements applicable to
employers.
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<PAGE> 42
5. TERMINATION. This Agreement and Employer's employment of
Employee shall continue until terminated by the earlier of (a) the expiration
of its Term or (b) the first to occur of any of the following events:
(i) Whenever Employee shall commit an act of dishonesty
involving theft, conversion, or misappropriation of the property of Employer or
of any other person or entity or falsification of Employer's records.
(ii) Whenever Employee shall commit any act which could
reasonably be deemed to involve a conflict of interest unless Employee has
received the prior approval of Employer's Board of Directors or unless such act
is subsequently ratified by Employer's board of directors.
(iii) Whenever Employee knowingly or deliberately exceeds
the authority delegated to him or the limitations placed on him by Employer's
Board of Directors unless such action is subsequently ratified by Employer's
Board of Directors.
(iv) Whenever Employee engages or participates in any
violation of law which results in a liability or penalty to Employer or its
officers or directors or shareholders.
(v) Whenever Employee engages in any conduct determined
in good faith and in the exercise of reasonable business judgment by Employer's
Board of Directors to be detrimental to the business goodwill or reputation or
welfare of Employer.
(vi) Whenever Employee shall fail to rectify a breach of
any of the terms, covenants, or conditions of this Agreement promptly after
written notice from Employer to cure such default;
(vii) on the death of Employee;
(viii) Whenever Employee becomes disabled and the disability
continues for the period indicated in paragraph 9 below;
(ix) Whenever, prior to the completion of an initial
public offering of the Employers shares of stock but after the-date of the
investment in Employer by certain investors pursuant to the Convertible
Preferred Stock and Warrant Purchase Agreement dated as of December 17, 1993, a
"Change in Control" occurs and Employee elects within three (3) months after
such Change in Control to terminate his employment. For the purposes of this
subparagraph 5(b)(ix), Change in Control shall mean a change in the ownership
of the Employer's stock such that Messrs. Brannock, Wang and Verneuil no
longer have the right to select, directly or indirectly, a majority of the
Board of Directors of Employer.
6. COMPENSATION UPON TERMINATION. Termination of this Agreement
pursuant to subparagraphs (b)(i) through (b)(vi) of paragraph 5 shall be
referred to herein as
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<PAGE> 43
termination "for cause." Upon termination of this Agreement, Employee shall be
entitled to received from Employer the following:
(a) ACCRUED COMPENSATION AND REIMBURSEMENT OF EXPENSES.
Within the time required by law but not later than thirty (30) days after
termination of this Agreement, for any reason, Employer shall pay to Employee
(i) all Annual Salary accrued under paragraph 4(a) above and (ii) all
reimbursable expenses accrued under paragraph 8 below, as of the date of
termination.
(b) TERMINATION FOR CAUSE. Upon termination of this
Agreement for cause, Employee shall not be entitled to any other separation
consideration (except as provided in paragraph 6(a)).
(c) OTHER TERMINATION. Upon termination of this
Agreement pursuant to paragraph 5 (b) (vii), (viii) or (ix), Employee shall be
entitled to additional compensation in an amount equal to twelve months of
Employees Annual Salary in effect at the time of such termination.
7. DISABILITY.
(a) If Employee shall become physically or mentally
incapacitated so as to become unable to perform the duties of his occupation,
as those duties relate to the business of Employer, to the same or to a
substantially similar extent as Employee performed those duties prior to the
occurrence of an injury or an illness hereafter occurring, then Employee shall
be considered disabled and shall be excused from rendering any services
hereunder during the continuance of the disability.
(b) After Employee's accrued vacation time has been
exhausted, Employee shall continue to receive his full Annual Salary during the
first one hundred twenty (120) days of his disability, less amounts received by
Employee from disability insurance, disability provisions of any retirement
plan, worker's compensation benefits, State disability insurance benefits, and
any other similar benefits or programs purchased by or contributed to by
Employer. Employee's salary for purposes of this subparagraph shall be that
Annual Salary to which he was entitled to at the onset of such disability. If
Employee's disability shall continue for one hundred twenty (120) days beyond
the exhaustion of his accrued vacation time, this Agreement shall terminate.
(c) If the Employee is disabled and shall thereafter, but
before termination of this Agreement, resume the performance of his duties
hereunder to substantially the same extent as was the case prior to his
disability and if such resumption of duties continues for a period of twelve
months, any subsequent disability incurred by the Employee shall be deemed a
new disability regardless of its nature or origin for the purposes of
disability benefits under the preceding subparagraph, otherwise any subsequent
disability shall be deemed a continuation of the prior disability.
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<PAGE> 44
8. EXPENSES. Employer shall pay all reasonable expenses for
offices, personnel, facilities, equipment, supplies, business license fees,
accounting services, legal services and such other items as are reasonably
required for the conduct of its business. Employer shall provide Employee an
office and related personnel, facilities and equipment which are commensurate
with his position with Employer.
9. CONTINUED BENEFITS. Following the termination of this
Agreement due to the expiration of its Term (but not due to an earlier
termination as provided in paragraph 5), Employer shall be entitled for a
two-year period to continued group health life and group disability insurance
for Employee and his dependents pursuant to Employer's group plans (as may be
amended from time to time), and in the event such continued participation is
not permitted by such plans, monthly cash payments in arrears in the amount
necessary to permit Employee and his dependents to obtain similar health
insurance but in no event to exceed 200 percent of the cost to Employer from
time to time for such similar group insurance.
10. ARBITRATION. Employer and Employee agree that any unresolved
dispute which may arise under the provisions of this Agreement shall be
submitted to arbitration in Orange County, California. The arbitration shall
be in conformity with and subject to provisions of the California Code of Civil
Procedure relating to arbitration as they stand amended at the time of the
proceeding, specifically including the right to discovery as contained in
Section 1283.05 of such Code.
11. NO ACT CONTRARY TO LAW. Nothing contained in this Agreement
shall be construed to require the commission of any act contrary to law, and
whenever there is any conflict between any provision of this Agreement and any
statute, law ordinance, or regulation, contrary to which the parties have no
legal right to contract, then the latter shall prevail; but in such an event,
the provisions of this Agreement so affected shall be curtailed and limited
only to the extent necessary to bring it within said legal requirements.
12. NOTICES. Any notice or other communication herein required to
be given shall be in writing and shall be personally served or sent by United
States registered or certified mail, return receipt requested, postage prepaid
and properly addressed, and shall be deemed to have been given when received
(and in the case of personal service, receipt thereof acknowledged). For
purposes hereof, Employer's address is 601 South Valencia Avenue, Brea,
California 92621 and Employee's address shall be his last known address
appearing in the personnel records of Employer or, in either case, at such
other address as either party may designate in writing.
13. ATTORNEYS' FEES. If either party brings any action or
proceeding to enforce, protect, or establish any right or remedy respecting
this Agreement or the relationship hereby contemplated, the prevailing party
shall be entitled to recover reasonable attorneys' fees. Arbitration is a
proceeding for purposes of this provision.
14. LIFE INSURANCE. Employer shall have the right to take out
life insurance or other insurance with respect to Employee, at Employer's cost
and for Employer's benefit, and Employee
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<PAGE> 45
shall have no interest in or right to the insurance policies or their proceeds.
Employee agrees to cooperate with Employer in obtaining such insurance, and
will timely submit to any required medical or other examinations.
15. COVENANTS AND CONDITIONS. If any provision of this Agreement
is held by a court to be invalid, illegal, or unenforceable by reason of any
rule of law or public policy, all other provisions of this Agreement shall
nevertheless remain in effect. No provision of this Agreement shall be deemed
dependent on any other provision unless so expressed herein.
16. MISCELLANEOUS.
(a) This Agreement is drawn to be effective in California
and shall be construed in accordance with California law. The parties
acknowledge that they may wish to mutually renegotiate this Agreement at some
future date in order to provide for Employer to have an opportunity to work
part-time. No change in the terms of this Agreement shall be effective unless
agreed upon by both parties in writing and signed by Employee and a duly
authorized representative of Employer. A waiver of any term or condition of
this Agreement shall not be construed as a general waiver by Employer, and
Employer shall be free to reinstate any such term or condition with or without
notice to Employee.
(b) Employee's rights and obligations under this
Agreement are personal and not assignable. This Agreement contains the entire
agreement and understanding between the parties respecting the employment of
Employee, and shall be binding on and inure to the benefit of the heirs,
personal representatives, successors, and assigns of the parties, subject,
however, to the restrictions on assignment contained here.
(c) The paragraph headings used in this Agreement are for
reference and convenience only, and shall not in any way limit or amplify the
terms and provisions hereof, nor enter into the interpretation of this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement.
EMPLOYER: SIMULATION SCIENCES, INC.,
a California corporation
___________________________________
By:
EMPLOYEE: ___________________________________
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<PAGE> 1
Exhibit 10.5
SIMULATION SCIENCES INC.
EMPLOYEE STOCK PURCHASE PLAN FOR U.S. EMPLOYEES
(AS ADOPTED IN MAY OF 1996)
The following constitute the provisions of the Simulation Sciences Inc.
Employee Stock Purchase Plan for U.S. Employees.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that Section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean Simulation Sciences Inc. and any
Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
earnings, commissions and overtime, but exclusive of payments for shift premium,
incentive compensation, incentive payments, bonuses, allowances and other
compensation.
(f) "Designated Subsidiaries" shall mean the Subsidiaries
which have been designated by the Board from time to time in its sole discretion
as eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an employee of
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
<PAGE> 2
(h) "Enrollment Date" shall mean the first day of each
Offering Period.
(i) "Exercise Date" shall mean the last Trading Day of each
Offering Period.
(j) "Fair Market Value" shall mean, as of any date, the value
of Common Stock determined as follows:
(1) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation The
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable, or;
(2) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;
(3) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board.
(4) For purposes of the Enrollment date under the
first Offering Period under the Plan, the Fair Market Value shall be the initial
price to the public as set forth in the final Prospectus included within the
Registration Statement in Form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Company's Common Stock.
(k) "Offering Period" shall mean a period of approximately six
(6) months, commencing on the first Trading Day on or after January 1 and
terminating on the last Trading Day in the period ending the following June 30,
or commencing on the first Trading Day on or after July 1 and terminating on the
last Trading Day in the period ending the following December 31, during which an
option granted pursuant to the Plan may be exercised; provided, however, that
the first Offering Period shall be the period commencing on the first Trading
Day after the effective date of the Company's initial public offering of its
Common Stock registered with the Securities and Exchange Commission and
terminating on the last Trading Day on or before June 30, 1997. The duration of
Offering Periods may be changed pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan for
U.S. Employees, as it may be amended from time to time.
(m) "Purchase Price" shall mean an amount equal to 85% of the
Fair Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever price is lower.
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<PAGE> 3
(n) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(o) "Subsidiary" shall mean a corporation, domestic or
foreign, of which not less than 50% of the voting shares are held by the Company
or a Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
(p) "Trading Day" shall mean a day on which national stock
exchanges and The Nasdaq Stock Market are open for trading.
3. Eligibility.
(a) Any Employee who has been employed by the Company for
thirty (30) days or more on a given Enrollment Date shall be eligible to
participate in the Plan.
(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the Plan (i) to
the extent that, immediately after the grant, such Employee (or any other person
whose stock would be attributed to such Employee pursuant to Section 424(d) of
the Code) would own capital stock of the Company and/or hold outstanding options
to purchase such stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of the capital stock of the
Company or of any Subsidiary, or (ii) to the extent that his or her rights to
purchase stock under all employee stock purchase plans of the Company and its
Subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) worth of stock (determined at the fair market value of the shares at
the time such option is granted) for each calendar year in which such option is
outstanding at any time.
4. Offering Periods. The Plan shall be implemented by consecutive
Offering Periods with a new Offering Period commencing on the first Trading Day
on or after January 1 and July 1 each year, or on such other date as the Board
shall determine, and continuing thereafter until terminated in accordance with
Section 19 hereof. The first Offering Period shall commence on the effective
date of the Company's initial public offering of its Common Stock registered
with the Securities and Exchange Commission and shall terminate the following
June 30, 1997. The Board shall have the power to change the duration of Offering
Periods (including the commencement dates thereof) with respect to future
offerings without shareholder approval if such change is announced at least
fifteen (15) days prior to the scheduled beginning of the first Offering Period
to be affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan
by completing a subscription agreement authorizing payroll deductions in the
form of Exhibit A to this Plan and filing it with the Company's payroll office
ten (10) days prior to the applicable Enrollment Date.
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<PAGE> 4
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
(c) Notwithstanding anything to the contrary contained herein,
an Employee's enrollment in the Plan shall also constitute enrollment in the
Company's Employee Stock Purchase Plan for Non-U.S. Employees (the "Foreign
ESPP") as of the Enrollment Date of the current Offering Period under the
Foreign ESPP. Such Employee's payroll deductions with respect to the Foreign
ESPP prior to the effective date of a transfer of the Employee to the Company or
a Designated Subsidiary that results in the Employee ceasing to be an Employee
for U.S. tax purposes shall be zero percent (0%), and such Employee's payroll
deductions with respect to the Foreign ESPP following the effective date of the
Employee's transfer may be at the same rate as the Employee's rate of payroll
deductions with respect to this Plan prior to such transfer, or may be adjusted
by the Employee pursuant to Section 6 of the Foreign ESPP. Such Employee's
payroll deductions with respect to this Plan shall be zero percent (0%) as of
the effective date of such transfer.
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not less than two percent (2%) nor more
than ten percent (2 - 10%) of the Compensation which he or she receives on each
pay day during the Offering Period.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may not change the rate of his or her
payroll deductions during the Offering Period but may discontinue his or her
participation in the Plan as provided in Section 10 hereof. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, a participant's payroll
deductions shall be decreased to zero percent (0%) at such time during any
Offering Period that the aggregate of all payroll deductions accumulated with
respect to such Offering Period equals $10,000. Payroll deductions shall
recommence at the rate provided in such participant's subscription agreement at
the beginning of the following Offering Period, unless terminated by the
participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part,
or at the time some or all of the Company's Common Stock issued under the Plan
is disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary
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<PAGE> 5
for the Company to meet applicable withholding obligations, including any
withholding required to make available to the Company any tax deductions or
benefits attributable to sale or early disposition of Common Stock by the
Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period,
each eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Offering Period more than one
thousand shares (1,000) of the Company's Common Stock, and provided further that
such purchase shall be subject to the limitations set forth in Sections 3(b),
6(d), and 12 hereof. Exercise of the option shall occur as provided in Section 8
hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The
Option shall expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Offering Period. Any other monies left over in a participant's account after the
Exercise Date shall be returned to the participant. During a participant's
lifetime, a participant's option to purchase shares hereunder is exercisable
only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company at its discretion shall either
arrange for the delivery to each participant, as appropriate, of a certificate
representing the shares purchased upon exercise of his or her option or credit
the shares purchased to an account in the participant's name with a brokerage
firm selected by the Board to hold the shares in street name.
10. Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
deductions credited to his or her account shall be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
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<PAGE> 6
(b) Upon a participant's ceasing to be an Employee for any
reason, he or she shall be deemed to have elected to withdraw from the Plan and
the payroll deductions credited to such participant's account during the
Offering Period but not yet used to exercise the option shall be returned to
such participant or, in the case of his or her death, to the person or persons
entitled thereto under Section 14 hereof, and such participant's option shall be
automatically terminated. The preceding sentence notwithstanding, a participant
who receives payment in lieu of notice of termination of employment shall be
treated as continuing to be an Employee for the participant's customary number
of hours per week of employment during the period in which the participant is
subject to such payment in lieu of notice.
(c) A participant's withdrawal from an Offering Period shall
not have any effect upon his or her eligibility to participate in any similar
plan which may hereafter be adopted by the Company or in succeeding Offering
Periods which commence after the termination of the Offering Period from which
the participant withdraws.
11. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
12. Stock.
(a) The maximum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be two hundred
thousand (200,000) shares, less the number issued under the Foreign ESPP and
subject to adjustment upon changes in capitalization of the Company as provided
in Section 18 hereof. If, on a given Exercise Date, the number of shares with
respect to which options are to be exercised exceeds the number of shares then
available under the Plan, the Company shall make a pro rata allocation of the
shares remaining available for purchase in as uniform a manner as shall be
practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan
shall be registered in the name of the participant or in the name of the
participant and his or her spouse.
13. Administration.
(a) Administrative Body. The Plan shall be administered by the
Board or a committee of members of the Board appointed by the Board. The Board
or its committee shall have full and exclusive discretionary authority to
construe, interpret and apply the terms of the Plan, to determine eligibility
and to adjudicate all disputed claims filed under the Plan. Every finding,
decision and determination made by the Board or its committee shall, to the full
extent permitted by law, be final and binding upon all parties.
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<PAGE> 7
(b) Rule 16b-3 Limitations. Notwithstanding the provisions of
Subsection (a) of this Section 13, in the event that Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
any successor provision ("Rule 16b-3") provides specific requirements for the
administrators of plans of this type, the Plan shall be administered only by
such a body and in such a manner as shall comply with the applicable
requirements of Rule 16b-3. Unless permitted by Rule 16b- 3, no discretion
concerning decisions regarding the Plan shall be afforded to any committee or
person that is not "disinterested" as that term is used in Rule 16b-3.
14.Designation of Beneficiary.
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under the Plan in the event of such participant's death
subsequent to an Exercise Date on which the option is exercised but prior to
delivery to such participant of such shares and cash. In addition, a participant
may file a written designation of a beneficiary who is to receive any cash from
the participant's account under the Plan in the event of such participant's
death prior to exercise of the option. If a participant is married and the
designated beneficiary is not the spouse, spousal consent shall be required for
such designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
15. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
16. Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
17. Reports. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
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<PAGE> 8
18. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action
by the shareholders of the Company, the Reserves, as well as the price per share
and the number of shares of Common Stock covered by each option under the Plan
which has not yet been exercised, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of shares of Common Stock effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration". Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period shall terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board.
(c) Merger or Asset Sale. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"). The
New Exercise Date shall be before the date of the Company's proposed sale or
merger. The Board shall notify each participant in writing, at least ten (10)
business days prior to the New Exercise Date, that the Exercise Date for the
participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
19.Amendment or Termination.
(a) The Board of Directors of the Company may at any time and
for any reason terminate or amend the Plan. Except as provided in Section 18
hereof, no such termination can affect options previously granted, provided that
an Offering Period may be terminated by the Board of Directors on any Exercise
Date if the Board determines that the termination of the Plan is in the best
interests of the Company and its shareholders. Except as provided in Section 18
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Rule 16b-3 or under Section 423 of the Code (or any successor rule
or provision or any other applicable law or regulation), the Company shall
obtain shareholder approval in such a manner and to such a degree as required.
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<PAGE> 9
(b) Without shareholder consent and without regard to whether
any participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
20. Notices. All notices or other communications by a participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
22. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 19 hereof.
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EXHIBIT A
SIMULATION SCIENCES INC.
EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ____________________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _____________________________________ hereby elects to participate in
the Simulation Sciences Inc. Employee Stock Purchase Plan (the
"Employee Stock Purchase Plan") and subscribes to purchase shares of
the Company's Common Stock in accordance with this Subscription
Agreement and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of ____% of my Compensation on each payday (from 2 to 10%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise
my option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is
in all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is
subject to shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should
be issued in the name(s) of (Employee or Employee and Spouse only): .
6. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares), I will be
treated for federal income tax purposes as having received ordinary
income at the time of such disposition in an amount equal to the excess
of the fair market value of the shares at the time such shares were
purchased by me over the price which I paid for the shares. I hereby
agree to notify the Company in writing within 30 days after the date of
any disposition of shares and I will make adequate provision for
Federal, state or other tax withholding obligations, if any, which
arise upon the disposition of the Common Stock. The Company may, but
will not be
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<PAGE> 11
obligated to, withhold from my compensation the amount necessary to
meet any applicable withholding obligation including any withholding
necessary to make available to the Company any tax deductions or
benefits attributable to sale or early disposition of Common Stock by
me. If I dispose of such shares at any time after the expiration of the
2-year holding period, I understand that I will be treated for federal
income tax purposes as having received income only at the time of such
disposition, and that such income will be taxed as ordinary income only
to the extent of an amount equal to the lesser of (1) the excess of the
fair market value of the shares at the time of such disposition over
the purchase price which I paid for the shares, or (2) 15% of the fair
market value of the shares on the first day of the Offering Period. The
remainder of the gain, if any, recognized on such disposition will be
taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent
upon my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)______________________________________________________
(First) (Middle) (Last)
_________________________ ______________________________
Relationship
______________________________
(Address)
Employee's Social
Security Number: ______________________________
Employee's Address: ______________________________
______________________________
______________________________
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<PAGE> 12
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:________________________ ________________________________________
Signature of Employee
________________________________________
Spouse's Signature
(If beneficiary other than spouse)
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<PAGE> 13
EXHIBIT B
SIMULATION SCIENCES INC.
EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Simulation
Sciences Inc. Employee Stock Purchase Plan which began on ___________ 19____
(the "Enrollment Date") hereby notifies the Company that he or she hereby
withdraws from the Offering Period. He or she hereby directs the Company to pay
to the undersigned as promptly as practicable all the payroll deductions
credited to his or her account with respect to such Offering Period. The
undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
________________________________________
________________________________________
________________________________________
Signature:
________________________________________
Date:___________________________________
<PAGE> 1
Exhibit 10.6
SIMULATION SCIENCES, INC.
EMPLOYEE STOCK PURCHASE PLAN FOR NON-U.S. EMPLOYEES
(AS ADOPTED IN MAY OF 1996)
The following constitute the provisions of the Simulation Sciences,
Inc. Employee Stock Purchase Plan for Non-U.S. Employees.
1. Purpose. The purpose of the Plan is to provide non-U.S. employees of
the Company and its Designated Subsidiaries with an opportunity to purchase
Common Stock of the Company through accumulated payroll deductions.
2. Definitions.
(a) "Applicable Law" shall mean legal requirements relating to
the administration of Stock Option Plans under the applicable laws of any
foreign company or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean Simulation Sciences, Inc. and any
Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
earnings, commissions and overtime, but exclusive of payments for shift premium,
incentive compensation, incentive payments, bonuses, allowances and other
compensation.
(f) "Designated Subsidiaries" shall mean the Subsidiaries
which have been designated by the Board from time to time in its sole discretion
as eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an employee of
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship may, pursuant to
regulations established by the Board and as permitted or required by Applicable
Law, be treated as continuing intact while the individual is on sick leave or
other leave of absence approved by the Company.
(h) "Enrollment Date" shall mean the first day of each
Offering Period.
(i) "Exercise Date" shall mean the last Trading Day of each
Offering Period.
<PAGE> 2
(j) "Fair Market Value" shall mean, as of any date, the value
of Common Stock determined as follows:
(1) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation The
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable, or;
(2) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;
(3) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board.
(4) For purposes of the Enrollment date under the
first Offering Period under the Plan, the Fair Market Value shall be the initial
price to the public as set forth in the final Prospectus included within the
Registration Statement in Form S-1 filed with the U.S. Securities and Exchange
Commission for the initial public offering of the Company's Common Stock.
(k) "Offering Period" shall mean a period of approximately six
(6) months, commencing on the first Trading Day on or after January 1 and
terminating on the last Trading Day in the period ending the following June 30,
or commencing on the first Trading Day on or after July 1 and terminating on the
last Trading Day in the period ending the following December 31, during which an
option granted pursuant to the Plan may be exercised; provided, however, that
the first Offering Period shall be the period commencing on the first Trading
Day after the effective date of the Company's initial public offering of its
Common Stock registered with the U.S. Securities and Exchange Commission and
terminating on the last Trading Day on or before June 30, 1997. The duration of
Offering Periods may be changed pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan for
Non-U.S. Employees, as it may be amended from time to time.
(m) "Purchase Price" shall mean an amount equal to 85% of the
Fair Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever price is lower.
(n) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
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<PAGE> 3
(o) "Subsidiary" shall mean a corporation, domestic or
foreign, of which not less than 50% of the voting shares are held by the Company
or any Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
(p) "Trading Day" shall mean a day on which national stock
exchanges and The Nasdaq Stock Market are open for trading.
3. Eligibility.
(a) Any Employee who is not an Employee for U.S. tax purposes
and who has been employed by the Company for thirty (30) days or more on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the Plan (i) to
the extent that, immediately after the grant, such Employee (or any other person
whose stock would be attributed to such Employee) would own capital stock of the
Company and/or hold outstanding options to purchase such stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of the capital stock of the Company or of any Subsidiary, or (ii) to the extent
that his or her rights to purchase stock under all employee stock purchase plans
of the Company and its Subsidiaries accrues at a rate which exceeds Twenty-Five
Thousand Dollars ($25,000) worth of stock (determined at the fair market value
of the shares at the time such option is granted) for each calendar year in
which such option is outstanding at any time.
4. Offering Periods. The Plan shall be implemented by consecutive
Offering Periods with a new Offering Period commencing on the first Trading Day
on or after January 1 and July 1 each year, or on such other date as the Board
shall determine, and continuing thereafter until terminated in accordance with
Section 19 hereof. The first Offering Period shall commence on the effective
date of the Company's initial public offering of its Common Stock registered
with the Securities and Exchange Commission and shall terminate the following
June 30, 1997. The Board shall have the power to change the duration of Offering
Periods (including the commencement dates thereof) with respect to future
offerings without shareholder approval if such change is announced at least
fifteen (15) days prior to the scheduled beginning of the first Offering Period
to be affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan
by completing a participation agreement authorizing payroll deductions in the
form of Exhibit A to this Plan and filing it with the Company's payroll office
ten (10) days prior to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
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<PAGE> 4
(c) Notwithstanding anything to the contrary contained herein,
an Employee's enrollment in the Plan shall also constitute enrollment in the
Company's Employee Stock Purchase Plan for U.S. Employees (the "U.S. ESPP") as
of the Enrollment Date of the current Offering Period under the U.S. ESPP. Such
Employee's payroll deductions with respect to the U.S. ESPP prior to the
effective date of a transfer of the Employee to the Company or a Designated
Subsidiary that results in the Employee becoming an Employee for U.S. tax
purposes shall be zero percent (0%), and such Employee's payroll deductions with
respect to the U.S. ESPP following the effective date of the Employee's transfer
may be at the same rate as the Employee's rate of payroll deductions with
respect to this Plan prior to such transfer, or may be adjusted by the Employee
pursuant to Section 6 of the U.S. ESPP. Such Employee's payroll deductions with
respect to this Plan shall be zero percent (0%) as of the effective date of such
transfer.
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not less than two percent (2%) nor more
than ten percent (2 - 10%) of the Compensation which he or she receives on each
pay day during the Offering Period.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may not change the rate of his or her
payroll deductions during the Offering Period but may discontinue his or her
participation in the Plan as provided in Section 10 hereof. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, a participant's payroll
deductions shall be decreased to zero percent (0%) at such time during any
Offering Period that the aggregate of all payroll deductions accumulated with
respect to such Offering Period equals $10,000. Payroll deductions shall
recommence at the rate provided in such participant's subscription agreement at
the beginning of the following Offering Period, unless terminated by the
participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part,
or at the time some or all of the Company's Common Stock issued under the Plan
is disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
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<PAGE> 5
7. Grant of Option. On the Enrollment Date of each Offering Period,
each eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Offering Period more than one
thousand shares (1,000) of the Company's Common Stock, and provided further that
such purchase shall be subject to the limitations set forth in Sections 3(b),
6(d), and 12 hereof. Exercise of the option shall occur as provided in Section 8
hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The
Option shall expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Offering Period. Any other monies left over in a participant's account after the
Exercise Date shall be returned to the participant. During a participant's
lifetime, a participant's option to purchase shares hereunder is exercisable
only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company at its discretion shall either
arrange for the delivery to each participant, as appropriate, of a certificate
representing the shares purchased upon exercise of his or her option or credit
the shares purchased to an account in the participant's name with a brokerage
firm selected by the Board to hold the shares in street name.
10. Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
deductions credited to his or her account shall be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) Upon a participant's ceasing to be an Employee for any
reason, he or she shall be deemed to have elected to withdraw from the Plan and
the payroll deductions credited to such participant's account during the
Offering Period but not yet used to exercise the option shall be returned to
such participant or, in the case of his or her death, to the person or persons
entitled thereto under Section 14 hereof, and such participant's option shall be
automatically terminated. The preceding
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<PAGE> 6
sentence notwithstanding, a participant who receives payment in lieu of notice
of termination of employment shall be treated as continuing to be an Employee
for the participant's customary number of hours per week of employment during
the period in which the participant is subject to such payment in lieu of
notice.
(c) A participant's withdrawal from an Offering Period shall
not have any effect upon his or her eligibility to participate in any similar
plan which may hereafter be adopted by the Company or in succeeding Offering
Periods which commence after the termination of the Offering Period from which
the participant withdraws.
11. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
12. Stock.
(a) The maximum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be three hundred
thousand (300,000) shares, less the number issued under the U.S. ESPP and
subject to adjustment upon changes in capitalization of the Company as provided
in Section 18 hereof. If, on a given Exercise Date, the number of shares with
respect to which options are to be exercised exceeds the number of shares then
available under the Plan, the Company shall make a pro rata allocation of the
shares remaining available for purchase in as uniform a manner as shall be
practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan
shall be registered in the name of the participant or in the name of the
participant and his or her spouse.
13. Administration.
(a) Administrative Body. The Plan shall be administered by the
Board or a committee of members of the Board appointed by the Board. The Board
or its committee shall have full and exclusive discretionary authority to
construe, interpret and apply the terms of the Plan, to determine eligibility,
to adjudicate all disputed claims filed under the Plan and to prescribe, amend
and rescind rules and regulations relating to the Plan, in the form of addendums
hereto or otherwise, including rules and regulations necessary to conform the
Plan to Applicable Law. Every finding, decision and determination made by the
Board or its committee shall, to the full extent permitted by law, be final and
binding upon all parties.
(b) Rule 16b-3 Limitations. Notwithstanding the provisions of
Subsection (a) of this Section 13, in the event that Rule 16b-3 ("Rule 16b-3")
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), provides specific requirements for the administrators of plans of this
type, the Plan shall be administered only by such a body and in such a manner as
shall comply with the applicable requirements of Rule 16b-3. Unless permitted by
Rule 16b-3, no discretion concerning
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<PAGE> 7
decisions regarding the Plan shall be afforded to any committee or person that
is not "disinterested" as that term is used in Rule 16b-3.
14. Designation of Beneficiary.
(a) Subject to applicable law, a participant may file a
written designation of a beneficiary who is to receive any shares and cash, if
any, from the participant's account under the Plan in the event of such
participant's death subsequent to an Exercise Date on which the option is
exercised but prior to delivery to such participant of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to exercise of the option. If a participant is
married and the designated beneficiary is not the spouse, spousal consent shall
be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
15. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
16. Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
17. Reports. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
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<PAGE> 8
18. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action
by the shareholders of the Company, the Reserves as well as the price per share
and the number of shares of Common Stock covered by each option under the Plan
which has not yet been exercised shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of shares of Common Stock effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration". Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period shall terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board.
(c) Merger or Asset Sale. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"). The
New Exercise Date shall be before the date of the Company's proposed sale or
merger. The Board shall notify each participant in writing, at least ten (10)
business days prior to the New Exercise Date, that the Exercise Date for the
participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
19. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and
for any reason terminate or amend the Plan. Except as provided in Section 18
hereof, no such termination can affect options previously granted, provided that
an Offering Period may be terminated by the Board of Directors on any Exercise
Date if the Board determines that the termination of the Plan is in the best
interests of the Company and its shareholders. Except as provided in Section 18
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Rule 16b-3 (or any successor rule or provision or any other
applicable law or regulation), the Company shall obtain shareholder approval in
such a manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether
any participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during
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<PAGE> 9
an Offering Period, establish the exchange ratio applicable to amounts withheld
in a currency other than U.S. dollars, permit payroll withholding in excess of
the amount designated by a participant in order to adjust for delays or mistakes
in the Company's processing of properly completed withholding elections,
establish reasonable waiting and adjustment periods and/or accounting and
crediting procedures to ensure that amounts applied toward the purchase of
Common Stock for each participant properly correspond with amounts withheld from
the participant's Compensation, and establish such other limitations or
procedures as the Board (or its committee) determines in its sole discretion
advisable which are consistent with the Plan.
20. Notices. All notices or other communications by a participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the U.S.
Securities Act of 1933, as amended, the U.S. Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
22. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 19 hereof.
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<PAGE> 10
EXHIBIT A
SIMULATION SCIENCES, INC.
EMPLOYEE STOCK PURCHASE PLAN FOR NON-U.S. EMPLOYEES
PARTICIPATION AGREEMENT
_____ Original Application Enrollment Date: __________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. I, _____________________________________, hereby elect to participate
in the Simulation Sciences, Inc. Employee Stock Purchase Plan for
Non-U.S. Employees (the "Plan") and subscribe to purchase shares of the
Company's Common Stock in accordance with this Participation Agreement
and the Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of ____% of my Compensation on each payday (from 2 to 10%) during the
Offering Period in accordance with the Plan. (Please note that no
fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Plan. I understand that if I do not
withdraw from an Offering Period, any accumulated payroll deductions
shall be used to automatically exercise my option.
4. I have received a copy of the complete "Employee Stock Purchase Plan
for Non-U.S. Employees." I understand that my participation in the Plan
is in all respects subject to the terms of the Plan. I understand that
the grant of the option by the Company under this Participation
Agreement is subject to obtaining shareholder approval of the Plan.
5. Shares purchased for me under the Plan should be issued in the name(s)
of (Employee or Employee and Spouse Only):
6. I understand and acknowledge that my participation in the Plan and any
benefits thereunder shall not form part of any contract of employment
with the Company or any subsidiary and said benefits are not part of my
remuneration and do not count as such for any purpose. I acknowledge
further that in the event of the termination of my employment and my
resulting ineligibility to participate in the Plan I shall have no
claim for compensation for any loss of any
<PAGE> 11
right or benefit or prospective right or benefit under the Plan which I
might otherwise have enjoyed.
7. I understand that I may be subject to taxation upon grant or exercise
of any option granted under the Plan or the subsequent disposition of
any shares so purchased.
8. I hereby agree to be bound by the terms of the Plan. The effectiveness
of this Participation Agreement is dependent upon my eligibility to
participate in the Plan.
Employee's Address: __________________________________
__________________________________
__________________________________
I UNDERSTAND THAT THIS PARTICIPATION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated: ___________________ __________________________________
Signature of Employee
__________________________________
Spouse's Signature (If beneficiary
other than spouse)
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<PAGE> 12
EXHIBIT B
SIMULATION SCIENCES, INC.
EMPLOYEE STOCK PURCHASE PLAN FOR U.S. EMPLOYEES
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Simulation
Sciences, Inc. Employee Stock Purchase Plan for U.S. Employees which began on
___________ 19____ (the "Enrollment Date") hereby notifies the Company that he
or she hereby withdraws from the Offering Period. He or she hereby directs the
Company to pay to the undersigned as promptly as practicable all the payroll
deductions credited to his or her account with respect to such Offering Period.
The undersigned understands and agrees that his or her option for such Offering
Period shall be automatically terminated. The undersigned understands further
that no further payroll deductions shall be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Participation Agreement.
Name and Address of Participant:
_______________________________
_______________________________
_______________________________
Signature:
_______________________________
Date: _________________________
<PAGE> 13
BENEFICIARY DESIGNATION
In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the Plan:
PRIMARY
NAME: (Please print)
__________________________________________________
(First) (Middle) (Last)
__________________________________________________
Relationship
__________________________________________________
(Street Address)
__________________________________________________
__________________________________________________
SECONDARY
NAME: (Please print)
__________________________________________________
(First) (Middle) (Last)
__________________________________________________
Relationship
__________________________________________________
(Street Address)
__________________________________________________
__________________________________________________
<PAGE> 14
Date:_________________________________ __________________________
Signature of Employee
__________________________
Spouse's Signature
(If primary beneficiary
other than spouse)
PLEASE RETURN THIS FORM TO _______________________________
BY ___________________________.
-2-
<PAGE> 1
Exhibit 10.7
SIMULATION SCIENCES INC.
1996 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this 1996 Director Option Plan
are to attract and retain the best available personnel for service as Outside
Directors (as defined herein) of the Company, to provide additional incentive to
the Outside Directors of the Company to serve as Directors, and to encourage
their continued service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" means the Common Stock of the Company.
(d) "Company" means Simulation Sciences Inc., a California
corporation.
(e) "Director" means a member of the Board.
(f) "Employee" means any person, including officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a Director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
(g) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(h) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the date of determination, as
reported in The Wall Street Journal or such other source as the Board deems
reliable, or;
<PAGE> 2
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board.
(i) "Inside Director" means a Director who is an Employee.
(j) "Option" means a stock option granted pursuant to the
Plan.
(k) "Optioned Stock" means the Common Stock subject to an
Option.
(l) "Optionee" means a Director who holds an Option.
(m) "Outside Director" means a Director who is not an
Employee.
(n) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(o) "Plan" means this 1996 Director Option Plan.
(p) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 10 of the Plan.
(q) "Subsidiary" means a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code
of 1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 125,000 Shares* of Common Stock (the "Pool"). The Shares
may be authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
4. Administration and Grants of Options under the Plan.
(a) Procedure for Grants. All grants of Options to Outside
Directors under this Plan shall be automatic and nondiscretionary and shall be
made strictly in accordance with the following provisions:
- --------
* Post September 1996 reverse stock split
-2-
<PAGE> 3
(i) No person shall have any discretion to select
which Outside Directors shall be granted Options or to determine the number of
Shares to be covered by Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically
granted an Option to purchase 20,000 Shares* (the "First Option") on the date on
which the later of the following events occurs: (A) the effective date of this
Plan, as determined in accordance with Section 6 hereof, or (B) the date on
which such person first becomes an Outside Director, whether through election by
the shareholders of the Company or appointment by the Board to fill a vacancy;
provided, however, that an Inside Director who ceases to be an Inside Director
but who remains a Director shall not receive a First Option.
(iii) Each Outside Director shall be automatically
granted an Option to purchase 5,000 Shares* (a "Subsequent Option") on the date
of the Annual Shareholder Meeting of the Company at which such director is
re-elected as an outside director of the Company, provided he or she is then an
Outside Director and if as of such date, he or she shall have served on the
Board for at least the preceding six (6) months.
(iv) Notwithstanding the provisions of subsections
(ii) and (iii) hereof, any exercise of an Option granted before the Company has
obtained shareholder approval of the Plan in accordance with Section 16 hereof
shall be conditioned upon obtaining such shareholder approval of the Plan in
accordance with Section 16 hereof.
(v) The terms of a First Option granted hereunder
shall be as follows:
(A) the term of the First Option shall be
ten (10) years.
(B) the First Option shall be exercisable
only while the Outside Director remains a Director of the Company, except as set
forth in Sections 8 and 10 hereof.
(C) the exercise price per Share shall be
100% of the Fair Market Value per Share on the date of grant of the First
Option. In the event that the date of grant of the First Option is not a trading
day, the exercise price per Share shall be the Fair Market Value on the next
trading day immediately following the date of grant of the First Option.
(D) subject to Section 10 hereof, the First
Option shall become exercisable as to 25% of the Shares subject to the First
Option on the first anniversary of its date of grant, and as to 1/48 of the
Shares subject thereto each month thereafter; provided that the Optionee
continues to serve as a Director on such dates.
* Post September 1996 stock split
-3-
<PAGE> 4
(vi) The terms of a Subsequent Option granted
hereunder shall be as follows:
(A) the term of the Subsequent Option shall
be ten (10) years.
(B) the Subsequent Option shall be
exercisable only while the Outside Director remains a Director of the Company,
except as set forth in Sections 8 and 10 hereof.
(C) the exercise price per Share shall be
100% of the Fair Market Value per Share on the date of grant of the Subsequent
Option. In the event that the date of grant of the Subsequent Option is not a
trading day, the exercise price per Share shall be the Fair Market Value on the
next trading day immediately following the date of grant of the Subsequent
Option.
(D) subject to Section 10 hereof, the
Subsequent Option shall become exercisable as to 25% of the Shares subject to
the Subsequent Option on the first anniversary of its date of grant, and as to
1/48 of the Shares subject thereto each month thereafter; provided that the
Optionee continues to serve as a Director on such dates.
(vii) In the event that any Option granted under the
Plan would cause the number of Shares subject to outstanding Options plus the
number of Shares previously purchased under Options to exceed the Pool, then the
remaining Shares available for Option grant shall be granted under Options to
the Outside Directors on a pro rata basis. No further grants shall be made until
such time, if any, as additional Shares become available for grant under the
Plan through action of the Board or the shareholders to increase the number of
Shares which may be issued under the Plan or through cancellation or expiration
of Options previously granted hereunder.
5. Eligibility. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4 hereof.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate the Director's relationship with the Company at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by the shareholders of the
Company as described in Section 16 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 11 of the Plan.
7. Form of Consideration. The consideration to be paid for the Shares
to be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be
-4-
<PAGE> 5
exercised, (iv) delivery of a properly executed exercise notice together with
such other documentation as the Company and the broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the exercise price, or (v) any combination
of the foregoing methods of payment.
8. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any
Option granted hereunder shall be exercisable at such times as are set forth in
Section 4 hereof; provided, however, that no Options shall be exercisable until
shareholder approval of the Plan in accordance with Section 16 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received by
the Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Continuous Status as a Director. Subject to
Section 10 hereof, in the event an Optionee's status as a Director terminates
(other than upon the Optionee's death or total and permanent disability (as
defined in Section 22(e)(3) of the Code)), the Optionee may exercise his or her
Option, but only within three (3) months following the date of such termination,
and only to the extent that the Optionee was entitled to exercise it on the date
of such termination (but in no event later than the expiration of its ten (10)
year term). To the extent that the Optionee was not entitled to exercise an
Option on the date of such termination, and to the extent that the Optionee does
not exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. In the event Optionee's status as
a Director terminates as a result of total and permanent disability (as defined
in Section 22(e)(3) of the Code), the Optionee may exercise his or her Option,
but only within twelve (12) months following the date of such termination, and
only to the extent that the Optionee was entitled to exercise it on the date of
such termination (but
-5-
<PAGE> 6
in no event later than the expiration of its ten (10) year term). To the extent
that the Optionee was not entitled to exercise an Option on the date of
termination, or if he or she does not exercise such Option (to the extent
otherwise so entitled) within the time specified herein, the Option shall
terminate.
(d) Death of Optionee. In the event of an Optionee's death,
the Optionee's estate or a person who acquired the right to exercise the Option
by bequest or inheritance may exercise the Option, but only within twelve (12)
months following the date of death, and only to the extent that the Optionee was
entitled to exercise it on the date of death (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to exercise such Option
does not exercise such Option (to the extent otherwise so entitled) within the
time specified herein, the Option shall terminate.
9. Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action
by the shareholders of the Company, the number of Shares covered by each
outstanding Option, the number of Shares which have been authorized for issuance
under the Plan but as to which no Options have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option, as well
as the price per Share covered by each such outstanding Option, and the number
of Shares issuable pursuant to the automatic grant provisions of Section 4
hereof shall be proportionately adjusted for any increase or decrease in the
number of issued Shares resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of Shares
subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the
Company with or into another corporation or the sale of substantially all of the
assets of the Company, outstanding Options may be assumed or equivalent options
may be substituted by the successor corporation or a Parent or Subsidiary
thereof (the "Successor Corporation"). If an Option is assumed or substituted
for, the Option or equivalent option shall continue to be exercisable as
provided in Section 4 hereof for so long as the
-6-
<PAGE> 7
Optionee serves as a Director or a director of the Successor Corporation.
Following such assumption or substitution, if the Optionee's status as a
Director or director of the Successor Corporation, as applicable, is terminated
other than upon a voluntary resignation by the Optionee, the Option or option
shall become fully exercisable, including as to Shares for which it would not
otherwise be exercisable. Thereafter, the Option or option shall remain
exercisable in accordance with Sections 8(c) through (e) above.
If the Successor Corporation does not assume an outstanding Option or
substitute for it an equivalent option, the Option shall become fully vested and
exercisable, including as to Shares for which it would not otherwise be
exercisable. In such event the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and upon the expiration of such period the Option shall terminate.
For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the right
to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares).
11. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time
amend, alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with any other
applicable law or regulation, the Company shall obtain shareholder approval of
any Plan amendment in such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
-7-
<PAGE> 8
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
14. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
16. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company at or prior to the first annual
meeting of shareholders held subsequent to the granting of an Option hereunder.
Such shareholder approval shall be obtained in the degree and manner required
under applicable state and federal law.
-8-
<PAGE> 1
EXHIBIT 11.1
SIMULATION SCIENCES, INC.
EXHIBIT 11.1 COMPUTATION OF PROFORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
12/31/95 6/30/96
---------- ----------
<S> <C> <C>
Net income........................................... $1,354,684 $ 810,039
Calculation of shares outstanding for computing
proforma earnings per share........................
Weighted average common shares outstanding during 5,025,835 5,025,835
period.............................................
Common stock equivalents used related to options and 1,096,328 1,096,328
warrants calculated using treasury stock method....
Conversion of preferred stock to common stock........ 1,666,668 1,666,668
---------- ----------
Weighted average shares used in computing proforma 7,788,831 7,788,831
earnings per share.................................
========== ==========
Proforma earnings per share.......................... $ .17 $ .10
========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
Simulation Sciences Inc.
We consent to the use in this Amendment No. 2 to Registration Statement of
Simulation Sciences Inc. on Form S-1 (No. 333-11017) of our report dated August
2, 1996 (except for paragraphs 14 and 15 of Note 4, for which the date is
October , 1996), appearing in the Prospectus, which is a part of this
Registration Statement, and to the references to us under the heading "Selected
Consolidated Financial Data" and "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of Simulation Sciences, Inc.,
listed in Item 16. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Costa Mesa, California
October 4, 1996
