<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 1996
REGISTRATION NO. 333-11017
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
AMENDMENT NO. 3
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 Classification Code Number) Identification Number)
incorporation or
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)
------------------------------------
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)
------------------------------------
With copies to:
<TABLE>
<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>
------------------------------------
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 17, 1996
3,550,000 SHARES
LOGO
COMMON STOCK
------------------
Of the 3,550,000 shares of Common Stock offered hereby, 2,700,000 shares
are being sold by Simulation Sciences Inc. ("SimSci" or the "Company") and
850,000 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 532,500 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.... 850,000 shares
Common Stock to be outstanding after the offering... 9,421,803 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 55,034 shares after June 30, 1996 and (iii)
438,598 shares issuable upon the exercise of outstanding warrants at $2.85
per share. Includes 29,300 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 effected in
October 1996; 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%, 61%, 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 17.5% 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 28.4% of the issued and outstanding shares of Common Stock of the
Company. Accordingly, the Investors and the Founders together will beneficially
own 45.9% 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 ($25.9 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."
Benefits of Offering to Current Stockholders. The current stockholders of
the Company will benefit from this offering in that (i) a public market will be
created for shares of the Company's Common Stock, (ii) a significant portion of
the proceeds to be received by the Selling Stockholders from the sale of their
shares in the offering will constitute gain and (iii) the current stockholders
will have substantial unrealized gain with respect to shares of the Company's
Common Stock owned by them following this offering. Current stockholders of the
Company have effective acquisition costs (after giving effect to all stock
splits and similar events since the Company's formation in 1967) with respect to
shares held by them ranging from less than approximately $0.25 per share in the
case of the Founders who acquired their shares at or near the time of the
Company's formation to approximately $2.85 per share in the case of the
Investors. Accordingly, assuming an initial public offering price of $9.00 per
share, and before taking into account underwriting discounts and commissions,
Selling Stockholders will realize gains per share ranging from more than
approximately $8.75 to approximately $6.15 with respect to shares sold by them
in this offering. In addition, current stockholders of the Company will have
unrealized gains on shares of the Company's Common Stock held by them following
this offering ranging from approximately $0.25 per share (in the case of the
Founders) to approximately $2.85 per share (in the case of the Investors). See
"Principal and Selling Stockholders" for the number of shares of Common Stock to
be sold by the Selling Stockholders in the offering and to be held by such
stockholders following completion of this offering.
11
<PAGE> 13
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 9,421,803 shares of Common
Stock outstanding. Of these outstanding shares, the 3,550,000 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 5,862,803 shares held by existing stockholders, 47,134 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
5,815,669 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, 5,862,803 shares of Common stock will be
eligible for sale 180 days after the effective date of the offering 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 1,456,499 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 ($25.9 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 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 29,300 shares of Common Stock after June
30, 1996 and the cancellation of options for 55,034 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 effected in October 1996, (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 5,842,503 shares, or
62.2% of the total number of shares of Common Stock outstanding, and will
increase the number of shares held by new investors to 3,550,000 shares, or
37.8% 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 29,300 shares of Common Stock and the cancellation of
options for 55,034 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%, 61%, 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 $10.2 million and $14.3 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.
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<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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<PAGE> 29
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%, 61%, 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 $110,000
for Katherine Sullivan Abrams from November 1, 1995.
(4) Represents amounts paid in connection with the reimbursement by the Company
of certain relocation expenses.
(5) Represents amounts received by Dr. Wang in his capacity as Chairman of the
Board. Dr. Wang also served as President and Chief Executive Officer of the
Company through June 1995. Dr. Wang resigned as Chairman of the Board in
May 1996.
(6) In June 1996, Mr. Campbell resigned as Vice President, Finance and
Controller.
(7) Represents compensation for services rendered as a consultant to the
Company.
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<PAGE> 41
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
under the Company's 1994 Stock Option Plan granted to the Named Executive
Officers during fiscal 1995.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM($)(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.
EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS
The Company has entered into separation agreements (the "Separation
Agreements") with certain of its executive officers, including its Chief
Executive Officer. Each Separation Agreement provides for a two year term of
employment, subject to early termination as provided therein, a base salary,
bonus, inclusion in the Company's benefit plans and reimbursement for
out-of-pocket expenses reasonably incurred. The Separation Agreements further
provide that if, prior to a Change of Control (as defined) the executive resigns
from his employment for Good Reason (as defined), or following a Change of
Control, the executive is terminated
40
<PAGE> 42
without Cause (as defined) or resigns for Good Reason, the Company will (i) pay
the executive severance payments of one month's salary for a period of six
months, subject to one-month extensions for up to six months if the executive
has not obtained subsequent employment, (ii) cause the accelerated vesting of
all options exercisable within one year from the date of the resignation, (iii)
continue in effect the executive's benefits through the Severance Period,
including any extensions thereof, and (iv) pay outplacement fees of up to
$10,000 for the purpose of assisting the executive in securing re-employment. If
the executive resigns without Good Reason or is terminated by the Company for
Cause, the executive is entitled only to payment of all amounts earned or owed
to the executive and the vesting of equity compensation through the date of such
resignation.
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.
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
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<PAGE> 43
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 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
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<PAGE> 44
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 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.
43
<PAGE> 45
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.
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. However, the Company's charter does not limit directors'
monetary liability under the federal securities laws. 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 $420,000.
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 23.4% 399,031 1,258,149 12.9%
Summit Investors II, L.P.(2)
499 Hamilton Avenue, Suite 200
Palo Alto, CA 94301.......................... 27,032 * 6,530 20,502 *
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 8.3
401(k) Plan(8)................................. 2,258,090 33.6 161,714 2,096,376 22.3
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 23.8 405,561 1,278,651 13.1
All executive officers and directors as a group
(7 persons)(14).............................. 1,772,546 24.8 -- 1,366,985 13.9
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 88,334 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 6,721,803 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 9,421,803 shares of
Common Stock outstanding. Of these outstanding shares, the 3,550,000 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 5,862,803 shares held by existing
stockholders, 47,134 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 5,815,669 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 47,134 "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 1,456,499 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."
51
<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................................................... 3,550,000
=============
</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 532,500 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 3,550,000 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.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Costa Mesa, California
August 2, 1996 (except for paragraphs 14 and 15 of Note 4,
for which the dates are September 5, 1996 and October 11, 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 $3.0 million revolving line of credit bearing interest
at the Bank's prime rate, collateralized by substantially all of the assets of
the Company. The Agreement expires in October 1996 and has certain financial and
other covenants. At June 30, 1996, there were no borrowings outstanding under
the Agreement and the Company was not in compliance with two of the covenants.
The Company received a letter waiving the breached covenants through June 30,
1996 and intends to renew the agreement under substantially the same terms and
conditions as its present Agreement.
4. STOCKHOLDERS' EQUITY
On December 17, 1993, in a private placement offering, the Company sold
1,666,668 shares of Series A convertible preferred stock ($.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 29,300 shares were
exercised at prices ranging from $2.67 to $2.73 per share, options to purchase
26,667 shares at $7.50 per share were granted and options to purchase 55,034
shares at prices ranging from $2.67 to $2.73 per share 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, which was effected in
October 1996. 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.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
3,550,000 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 3.1 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 1,456,499 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.
10.15 Form of Separation Agreement between the Registrant and each of Katherine S.
Abrams, Charles R. Harris, Ken Meyers, Daniel T. Nichols, Dirk Pfeiffer and
Victor Rice
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
+ 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 15th 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 15th 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.
10.15 Form of Separation Agreement between the Registrant and each of
Katherine S. Abrams, Charles R. Harris, Ken Meyers, Daniel T. Nichols,
Dirk Pfeiffer and Victor Rice
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
+ Confidential treatment requested for portions of this document.
<PAGE> 1
EXHIBIT 3.1
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 a corporation may be organized under the General Corporation
Law of Delaware.
<PAGE> 2
IV
The corporation is authorized to issue two classes of shares designated
respectively "Common Stock" and "Preferred Stock". The number of shares of
Common Stock is 90,000,000, $.001 par value, and the number of shares of
Preferred Stock is 5,000,000. The Preferred Stock shall be issued in series. The
first such series shall be designated Series A Preferred Stock and shall consist
of 5,000,000 shares, $.001 par value per share. The Series A Preferred Stock is
referred to hereinafter as the "Preferred Stock."
Immediately upon the filing of this Certificate of Incorporation each
three (3) outstanding shares of the Company's Common Stock will be exchanged and
combined, automatically and without further action, into one (1) share of Common
Stock and each three (3) outstanding shares of the Company's Preferred Stock
will be exchanged and combined, automatically and without further action, into
one (1) share of Preferred Stock. Such combination shall be effected on a holder
basis, and any fractional shares resulting from such combination shall be
rounded up to the nearest whole share.
The following is a statement of the designations powers, privileges,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions relating to the Preferred Stock:
1. Dividends. The holders of the then outstanding shares of the
Preferred Stock shall be entitled to receive when, as and if declared by the
Board of Directors, out of funds legally available therefor, cumulative
dividends, at the rate of $.08 per share per annum, and payable upon (i)
repurchase of such Preferred Stock; (ii) liquidation pursuant to Section 2
hereof; (iii) upon the Closing of the corporation's first underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of Common Stock for the
account of the corporation; or (iv) conversion of the Preferred Stock as
expressly provided in Section 4 (a); provided, however, in no event shall the
holder receive an amount on account of such accrued and unpaid dividends upon
(x) the repurchase of the Preferred Stock or upon a liquidation pursuant to
Section 2 herein, such that the aggregate amount received would exceed $1.00 per
share (such amount to be equitably adjusted whenever there should occur a
stock-split, combination, reclassification or other similar event affecting the
Common Stock), or (y) the offering described in subpart (iii) above, such that
the aggregate offering price of the shares of Common Stock in such offering into
which each share of Preferred Stock would be converted as of that date, plus the
accrued and unpaid dividends, would exceed $1.00 per share (such amount to be
equitably adjusted whenever there should occur a stock-split, combination,
reclassification or other similar event affecting the Common Stock), or (z) the
conversion of the Preferred Stock such that the fair market value of the shares
of Common Stock received by the holder for each share of Preferred Stock, plus
the amount of cash or Common Stock, if any, paid on account of the dividends
would exceed $1.00 per share (such amount to be equitably adjusted whenever
there should occur a stock-split, combination, reclassification or other similar
event affecting the Common Stock). The fair market value of a share of Common
Stock shall mean (i) if the Common Stock is publicly traded, the average over
the preceding twenty (20) trading days of the mean of the closing bid and asked
prices on the
-2-
<PAGE> 3
over-the-counter market as reported by NASDAQ, or, if then traded on a national
securities exchange or the National Market System, the average over the
preceding twenty (20) trading days of the mean of the high and low prices on the
principal national securities exchange or the National Market System on which it
is so traded over the preceding twenty (20) trading days, and (ii) if the Common
Stock is not publicly traded, then as agreed upon by the corporation and a
majority in interest of the holders of the Preferred Stock. If no such agreement
is reached within thirty (30) days, the fair market value shall be determined by
appraisal.
2. Liquidation, Dissolution or Winding Up.
(a) Preference - Series A Preferred Stock. In the event of any
liquidation, dissolution or winding up of the corporation, whether voluntary or
involuntary, holders of each share of Preferred Stock shall be entitled to be
paid first out of the assets of the corporation available for distribution to
holders of the corporation's capital stock of all classes, whether such assets
are capital, surplus, or earnings, before any sums shall be paid or any assets
distributed among the holders of shares of Common Stock, an amount equal to the
greater of (i) $1.00 per share of Preferred Stock, plus all accrued and unpaid
dividends thereon up to and including the date of full payment; or (ii) such
amount per share of Preferred Stock as would have been payable had each such
share, plus all accrued and unpaid dividends thereon, subject to the limitation
on the payment of dividends set out in Section 1 hereof, been converted to
Common Stock immediately prior to such event of liquidation, dissolution or
winding up pursuant to the provisions of Section 4 hereof subject to the same
adjustments as provided in Section 4 herein, up to and including the date of
full payment. If the assets of the corporation shall be insufficient to permit
the payment in full to the holders of the Preferred Stock of the amount thus
distributable, then the entire assets of the corporation available for such
distribution shall be distributed ratably among the holders of the Preferred
Stock. After such payment shall have been made in full to the holder of the
Preferred Stock or funds necessary for such payment shall have been set aside by
the corporation in trust for the account of holders of the Preferred Stock so as
to be available for such payment, holders of the Preferred Stock shall be
entitled to no further participation in the distribution of the assets of the
corporation and shall have no further rights of conversion, and the remaining
assets available for distribution shall then be distributed ratably among the
holders of the Common Stock.
(b) A consolidation or merger (other than consolidation or
merger in which the holders of voting securities of the corporation immediately
before the consolidation or merger own (immediately after the consolidation or
merger) voting securities of the surviving or acquiring corporation, or of a
parent party of such surviving or acquiring corporation, possessing more than
50% of the voting power of such surviving or acquiring corporation or parent
party) of the corporation or a sale of all or substantially all of the assets of
the corporation shall be regarded as a liquidation, dissolution or winding up of
the affairs of the corporation within the meaning of this Section 2; provided,
however, in the event of a consolidation, merger or sale of substantially all
the assets of the corporation in exchange for the equity securities of the
acquirer, the holders of the Preferred Stock shall receive the greater of a
payment under Section 2(a)(i) or 2(a)(ii).
-3-
<PAGE> 4
(c) Each holder of Preferred Stock shall have the right to
elect the benefits of the provisions of Section 4(g) hereof in lieu of receiving
payment in liquidation, dissolution or winding up of the corporation pursuant to
this Section 2. The election procedures shall be as provided in Section 4(g)
hereof.
(d) Whenever the distribution provided for herein shall be
paid in property other than cash, the value of such distribution shall be the
fair market value of such property as determined in good faith by the Board of
Directors of the corporation.
3. Voting Power. Except as otherwise expressly provided in Section 7
hereof, or as required by law, each holder of Preferred Stock shall be entitled
to vote on all matters and shall be entitled to that number of votes equal to
the largest number of whole shares of Common Stock into which such holder's
shares of Preferred Stock could be converted, pursuant to the provisions of
Section 4 hereof at the record date for the determination of shareholders
entitled to vote on such matter or, if no such record date is established, at
the date such vote is taken or any written consent of shareholders is solicited.
Except as otherwise expressly provided herein or as required by law, the holders
of shares of Preferred Stock and Common Stock shall vote together as a class on
all matters.
4. Conversion Rights. The holders of the Preferred Stock shall have the
following conversion rights:
(a) General. Subject to and in compliance with the provisions
of this Section 4, any shares of the Preferred Stock and the accrued and unpaid
dividends upon the election of the holder, may, at the option of the holder, be
converted at any time or from time to time into fully-paid and nonassessable
shares (calculated as to each conversion to the largest whole share) of Common
Stock. The number of shares of Common Stock to which a holder of Preferred Stock
shall be entitled upon conversion shall be the product obtained by multiplying
the Applicable Conversion Rate (determined as provided in Section 4 (b)) by the
number of shares of Preferred Stock being converted, and then payment of accrued
but unpaid dividends to be paid either (i) in cash or (ii) into shares of Common
Stock by converting the accrued and unpaid dividends at the then fair market
value of such Common Stock as determined in Section 1 herein. The method of
payment of the dividends as provided in (i) and (ii) above shall be at the
election of the corporation.
(b) Applicable Conversion Rate. The conversion rate in effect
at any time (the "Applicable Conversion Rate") shall be the quotient obtained by
dividing $1.00 by the Applicable Conversion Value, calculated as provided in
Section 4(c).
(c) Applicable Conversion value. The Applicable Conversion
Value in effect from time to time, except as adjusted in accordance with
Section 4(d) hereof, shall be $1.00.
(d) Adjustments to Applicable Conversion Value.
(i) Upon Sale of Common Stock. If the corporation shall,
while there are any shares of Preferred Stock outstanding, issue or sell shares
of its Common Stock without
-4-
<PAGE> 5
consideration or at a price per share less than the Applicable Conversion Value
in effect immediately prior to such issuance or sale, then in each such case
such Applicable Conversion Value upon each such issuance or sale, except as
hereinafter provided, shall be adjusted to an amount determined by multiplying
the Applicable conversion Value by a fraction:
(A) the numerator of which shall be (a) the number of shares
of Common Stock outstanding and the number of shares of Common Stock subject to
issuance pursuant to any convertible securities, warrants, options, subscription
rights or purchase rights outstanding immediately prior to the issuance of such
additional shares of Common Stock, plus (b) the number of shares of Common Stock
which the net aggregate consideration received by the corporation for the total
number of such additional shares of Common Stock so issued would purchase at the
Applicable Conversion Value, and
(B) the denominator of which shall be (a) the number of shares
of Common Stock outstanding and the number of shares of Common Stock subject to
issuance pursuant to any convertible securities, warrants, options, subscription
rights or purchase rights outstanding immediately prior to the issuance of such
additional shares of Common Stock, plus (b) the number of such additional shares
of Common Stock so issued.
The corporation's issuance of up to an aggregate of 5,000,000 shares of
Common Stock, or options exercisable therefor, pursuant to any stock purchase or
stock option plan or other employee incentive program approved by the Board of
Directors to the corporation's employees, directors or officers, the shares of
Common Stock pursuant to the conversion of the Preferred Stock and accrued and
unpaid dividends thereon, and the exercise of the four-year warrants to purchase
1,315,789 shares of the corporation's Common Stock or any adjustments thereto,
shall not be deemed an issuance of additional shares of Common Stock and shall
have no effect on the calculations contemplated by this Section 4 (d) except as
specifically otherwise set forth herein.
Except as discussed in the preceding paragraph, for the purposes of
this Section 4 (d), the issuance of any warrants, options, subscriptions or
purchase rights with respect to shares of Common Stock and the issuance of any
securities convertible into or exchangeable for shares of Common Stock (or the
issuance of any warrants, options or any rights with respect to such convertible
or exchangeable securities) shall be deemed an issuance at such time of such
Common Stock if the Net Consideration Per Share (as hereinafter determined)
which may be received by the corporation for such Common Stock shall be less
than the Applicable Conversion Value at the time of such issuance. Any
obligation, agreement or undertaking to issue warrants, options, subscriptions
or purchase rights at any time in the future shall be deemed to be an issuance
at the time such obligation, agreement or undertaking is made or arises. No
adjustment of the Applicable Conversion Value shall be made under this Section
4(d) upon the issuance of any shares of Common Stock which are issued pursuant
to the exercise of any warrants, options, subscriptions or purchase rights or
pursuant to the exercise of any conversion or exchange rights in any convertible
securities if any adjustment shall previously have been made upon the issuance
of any such warrants, options or subscriptions or purchase rights or upon the
issuance of any convertible securities (or upon the issuance of any warrants,
options or any rights therefor) as above provided. Any adjustment of the
Applicable Conversion Value with
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<PAGE> 6
respect to this paragraph which relates to warrants, options, subscriptions or
purchase rights with respect to shares of Common Stock shall be disregarded if
and when all of such warrants, options, subscriptions or purchase rights expire
or are canceled without being exercised, so that the Applicable Conversion Value
effective immediately upon such cancellation or expiration shall be equal to the
Applicable Conversion Value in effect at the time of the issuance of the expired
or canceled warrants, options, subscriptions or purchase rights, with such
additional adjustments as would have been made to that Applicable Conversion
Value had the expired or canceled warrants, options, subscriptions or purchase
rights not been issued. For purposes of this paragraph, the "Net Consideration
Per Share" which may be received by the corporation shall be determined as
follows:
(A) The "Net Consideration Per Share" shall mean the amount
equal to the total amount of consideration, if any, received by the corporation
for the issuance of such warrants, options, subscriptions or other purchase
rights or convertible or exchangeable securities, plus the minimum amount of
consideration, if any, payable to the corporation upon exercise or conversion
thereof, divided by the aggregate number of shares of Common Stock that would be
issued if all such warrants, options, subscriptions or other purchase rights or
convertible or exchangeable securities were exercised, exchanged or converted.
(B) The "Net Consideration Per Share" which may be received by
the corporation shall be determined in each instance as of the date of issuance
of warrants, options, subscriptions or other purchase rights or convertible or
exchangeable securities without giving effect to any possible future price
adjustments or rate adjustments which may be applicable with respect to such
warrants, options, subscriptions or other purchase rights or convertible or
exchangeable securities.
For purposes of this Section 4(d), if a part or all of the
consideration received by the corporation in connection with the issuance of
shares of Common Stock or the issuance of any of the securities described in
this Section 4(d) consists of property other than cash, the value of such
contribution shall be the fair market value of such property as determined in
good faith by the Board of Directors of the corporation, whereupon such value
shall be given to such consideration and shall be recorded on the books of the
corporation with respect to receipt of such property.
This Section 4(d) shall not apply under any of the circumstances which
would constitute an Extraordinary Common Stock Event (as hereinafter defined in
Section 4(d)(ii)).
(ii) Upon the happening of an Extraordinary Common Stock Event
(as hereinafter defined), the Applicable Conversion Value (and all other
conversion values set forth in Section (d) (i) above) shall, simultaneously with
the happening of such Extraordinary Common Stock Event, be adjusted by
multiplying the then effective Applicable Conversion Value by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such Extraordinary Common Stock Event and the denominator
of which shall be the number of shares of Common Stock outstanding immediately
after such Extraordinary Common Stock Event, and the product so obtained shall
thereafter be the Applicable Conversion Value. The Applicable Conversion
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<PAGE> 7
Value, as so adjusted, shall be readjusted in the same manner upon the happening
of any successive Extraordinary Common Stock Event or Events.
"Extraordinary Common Stock Event" shall mean (i) the issue of
additional shares of the Common Stock as a dividend or other distribution on
outstanding Common Stock, (ii) subdivision of outstanding shares of Common Stock
into a greater number of shares of the Common Stock, or (iii) combination of
outstanding shares of the Common Stock into a smaller number of shares of the
Common Stock.
(e) Dividends. In the event the corporation shall make or
issue, or fix a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
the corporation other than shares of Common Stock or in assets (excluding cash
dividends or distributions), then and in each such event provision shall be made
so that the holders of the Preferred Stock shall receive upon conversion thereof
in addition to the number of shares of Common Stock receivable thereupon, the
number of securities or such other assets of the corporation which they would
have received had their Preferred Stock been converted into Common Stock on the
date of such event and had they thereafter, during the period from the date of
such event to and including the Conversion Date (as that term is hereafter
defined in Section 4(i)), retained such securities or such other assets
receivable by them as aforesaid during such period, giving application to all
adjustments called for during such period under this Section 4 with respect to
the rights of the holders of the Preferred Stock.
(f) Recapitalization or Reclassification. If the Common Stock
issuable upon the conversion of the Preferred Stock shall be changed into the
same or different number of shares of any class or classes of stock of the
corporation, whether by recapitalization, reclassification or otherwise (other
than a subdivision or combination of shares or stock dividend provided for
elsewhere in this Section 4, or a reorganization, merger, consolidation or sale
of assets provided for elsewhere in this Section 4), then and in each such event
the holder of each share of Preferred Stock shall have the right thereafter to
convert such share into the kind and amount of shares of stock and other
securities and property receivable upon such reorganization, reclassification or
other change by holders of the number of shares of Common Stock into which such
share of Preferred Stock might have been converted (taking into account all
accrued and unpaid dividends and interest with respect to such Preferred Stock)
immediately prior to such reorganization, reclassification or change, all
subject to further adjustment as provided herein.
(g) Capital Reorganization, Merger or Sale of Assets. If at
any time or from time to time there shall be a capital reorganization of the
Common Stock (other than a subdivision, combination, reclassification or
exchange of shares provided for elsewhere in this Section 4) or a merger or
consolidation of the corporation with or into another corporation, or the sale
of all or substantially all of the corporation's properties and assets to any
other person, then, as a part of such reorganization, merger, consolidation or
sale, provision shall be made so that the holders of the Preferred Stock shall
thereafter be entitled to receive upon conversion of the Preferred Stock, the
number of shares of stock or other securities or property of the corporation, or
of the successor corporation resulting from such merger, consolidation or sale,
to which a holder of Common Stock
-7-
<PAGE> 8
issuable upon conversion would have been entitled on such capital
reorganization, merger, consolidation, or sale. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section 4
with respect to the rights of the holders of the Preferred Stock after the
reorganization, merger, consolidation or sale to the end that the provisions of
this Section 4 (including adjustment of the Applicable Conversion Value then in
effect and the number of shares purchasable upon conversion of the Preferred
Stock) shall be applicable after that event in as nearly equivalent a manner as
may be practicable.
Each holder of Preferred Stock upon the occurrence of a capital
reorganization, merger or consolidation of the corporation, or the sale of all
or substantially all its assets and properties as such events are more fully set
forth in the first paragraph of this Section 4 (g), shall have the option of
electing treatment of his shares of Preferred Stock under either this Section
4(g) or Section 2 hereof, notice of which election shall be submitted in writing
to the corporation at its principal offices no later than five (5) days before
the effective date of such event, but, if a holder fails to make any election,
he shall be deemed to have elected the benefits of Section 2 hereof.
(h) Accountant's Certificate as to Adjustments. In each case
of an adjustment or readjustment of the Applicable Conversion Rate, the
corporation will furnish each holder of Preferred Stock with a certificate,
prepared by its chief financial officer showing such adjustment or readjustment,
and stating in detail the facts upon which such adjustment or readjustment is
based. Upon the request of the holders of a majority of either series of the
Preferred Stock, the corporation will cause its independent public accountants
to confirm the accuracy of such adjustment or readjustment.
(i) Exercise of Conversion Privilege. To exercise its
conversion privilege, a holder of Preferred Stock shall surrender the
certificate or certificates representing the shares being converted to the
corporation at its principal office, and shall give written notice to the
corporation at that office that such holder elects to convert such shares and
whether such holder elects to convert the accrued and unpaid dividends or to
take cash in payment of the accrued and unpaid dividends. Such notice shall also
state the name or names (with address or addresses) in which the certificate or
certificates for shares of Common Stock issuable upon such conversion shall be
issued. The certificate or certificates for shares of Preferred Stock
surrendered for conversion shall be accompanied by proper assignment thereof to
the corporation or in blank. The date when such written notice is received by
the corporation, together with the certificate or certificates representing the
shares of Preferred Stock being converted, shall be the "Conversion Date."
Immediately upon receipt of such notice, but in any event within 3 days after
the Conversion Date, the corporation shall deliver notice to the holder who has
elected to convert setting forth its election to pay the accrued but unpaid
dividends in cash or to convert the accrued but unpaid dividends into shares of
Common Stock. As promptly as practicable, in any event within 15 days after the
conversion Date, the corporation shall issue and shall deliver to the holder of
the shares of Preferred Stock being converted, or on its written order, such
certificate or certificates as it may request for the number of whole shares of
Common Stock issuable upon the conversion of such shares of Preferred Stock and,
if so elected, upon the conversion of the accrued and unpaid dividends thereon,
in accordance with the provisions of this Section 4, or, if not electing to
convert such accrued and unpaid dividends, then
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<PAGE> 9
cash in the amount of all accrued and unpaid dividends on such shares of
Preferred Stock, whether or not earned or declared, up to and including the
Conversion Date, and cash, as provided in Section 4 (j), in respect of any
fraction of a share of Common Stock issuable upon such conversion. Such
conversion shall be deemed to have been effected immediately prior to the close
of business on the Conversion Date, and at such time the rights of the holder as
holder of the converted shares of Preferred Stock shall cease and the person or
persons in whose name or names any certificate or certificates for shares of
Common Stock shall be issuable upon such conversion shall be deemed to have
become the holder or holders of record of the shares of Common Stock represented
thereby.
(j) Cash in Lieu of Fractional Shares. No Factional shares of
Common Stock or scrip representing fractional shares shall be issued upon the
conversion of shares of Preferred Stock. Instead of any fractional shares of
Common Stock which would otherwise be issuable upon conversion of Preferred
Stock, the corporation shall pay to the holder of the shares of Preferred Stock
which were converted a cash adjustment in respect of such fractional shares in
an amount equal to the same fraction of the market price per share of the Common
Stock (as determined in a reasonable manner prescribed by the Board of
Directors) at the close of business on the Conversion Date. The determination as
to whether or not any fractional shares are issuable shall be based upon the
total number of shares of Preferred Stock being converted at any one time by any
holder thereof, not upon each share of Preferred Stock being converted.
(k) Partial Conversion. In the event some but not all of the
shares of Preferred Stock represented by a certificate or certificates
surrendered by a holder are converted, the corporation shall execute and deliver
to or on the order of the holder, at the expense of the corporation, a new
certificate representing the number of shares of Preferred Stock which were not
converted.
(l) Reservation of Common Stock. The corporation shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the shares
of the Preferred Stock, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding shares of
the Preferred Stock, and if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of the Preferred Stock, the corporation shall take such
corporate action as may be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
5. Mandatory Conversion.
(a) Mandatory Conversion. The Preferred Stock shall be
converted into fully paid and nonassessable shares (calculated as to each
conversion to the largest whole share) of Common Stock, without election by the
holders thereof, upon the closing of an underwritten public offering pursuant to
an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for the account of the
corporation from which the gross cash proceeds to the corporation are not less
than $10 million, and in which the price per share is at least $2.00 per share
(such amount to be equitably adjusted whenever there should occur a stock-split
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<PAGE> 10
combination, combination, reclassification or other similar event affecting the
Common Stock) ("Qualified Public Offering") or on December 17, 1999, if the
Preferred Stock then remains outstanding. The conversion of the Preferred Stock
pursuant to this Section 5 shall be on the terms and subject to the provisions
of Section 4 herein.
(b) Mandatory Conversion Notice. At least 30 days before any
Qualified Public Offering, written notice (the "Mandatory Conversion Notice")
shall be mailed, postage prepaid, to each holder of record of each share of
Preferred Stock which is to be converted, at its address shown on the records of
the corporation; provided, however, that the giving of such Mandatory Conversion
Notice shall not affect the conversion rights of such holder pursuant to
Section 4; provided, further, that the giving of such Mandatory Conversion
Notice shall not affect the rights of such holder pursuant to any agreement
between the corporation and such holder with respect to such holder's right to
cause the corporation to repurchase such Preferred Stock. The Mandatory
Conversion Notice shall contain the following information:
(i) a statement that it is the intention of the corporation
to effect a Qualified Public Offering, together with a copy of the preliminary
prospectus as filed with the Securities and Exchange Commission therefor,
(ii) the number of shares of Preferred Stock held by the
holder and the number of shares of Common Stock to be received by such holder
upon the conversion of such Preferred Stock,
(iii) the expected date of the closing of the Qualified
Public offering, and
(iv) that the holder is to surrender to the corporation, at
the place designated therein, its certificate or certificates representing the
shares of Preferred Stock to be converted.
6. No Reissuance of the Preferred Stock. No share or shares of the
Preferred Stock acquired by the corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued. The corporation may from time to time
take such appropriate corporate action as may be necessary to reduce the
authorized number of shares of the Preferred Stock accordingly.
7. Restrictions and Limitations.
(a) Except as expressly provided herein or as required by law,
so long as any shares of Preferred Stock remain outstanding, the corporation
shall not, and shall not permit any subsidiary (which shall mean any corporation
or trust of which the corporation directly or indirectly owns at the time more
than 50% of the voting power of such corporation or trust) to, without the vote
or written consent by the holders of at least a majority of the then outstanding
shares of Preferred Stock, each share of Preferred Stock to be entitled to one
vote in each instance:
(i) Redeem, purchase or otherwise acquire for value (or pay
into or set aside for a sinking fund for such purpose), any share or shares of
the corporation (except for those
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<PAGE> 11
shares repurchased from officers, directors or employees under agreements
requiring such persons to sell such shares to the corporation, at cost, on
termination of their relationship with the corporation or its subsidiaries);
(ii) Authorize or pay any cash dividend in respect to the
Common Stock;
(iii) Authorize or issue, or obligate itself to authorize or
issue, any other equity security senior to or on a parity with the Preferred
Stock as to liquidation preferences, conversion rights, voting rights or
otherwise, provided, however, that in no event shall this provision restrict the
issuance of Common Stock; or
(iv) Effect any sale, lease, assignment, transfer or other
conveyance of all or substantially all of the assets of the corporation or any
subsidiary thereof, or any consolidation or merger involving the corporation or
any subsidiary thereof, or any reclassification or other change of shares, or
any recapitalization or any dissolution, liquidation or winding up of the
corporation.
(b) The corporation shall not amend its Articles of
Incorporation without the approval by vote or written consent by the holders of
at least a majority of the then outstanding Preferred Stock, each share of
Preferred Stock to be entitled to one vote in each instance, if such amendment
would change any of the rights, preferences, privileges or limitations provided
for herein for the benefit of any Preferred Stock. Without limiting the
generality of the next preceding sentence, the corporation will not amend its
Articles of Incorporation without the approval by the holders of at least a
majority of the then outstanding Preferred Stock if such amendment would:
(i) Change the relative seniority rights of the holders of
Preferred Stock as to the payment of dividends in relation to the holders of any
other capital shares of the corporation; or
(ii) Reduce the amount payable to the holders of Preferred
Stock upon the voluntary or involuntary, liquidation, dissolution or winding up
of the corporation, or change the relative seniority of the liquidation
preferences of the holders of Preferred Stock to the rights upon liquidation of
the holders of any other capital Shares of the corporation or change the
dividend rights of the holders of Preferred Stock; or
(iii) Cancel or modify the conversion rights of the holders
of Preferred Stock provided for in Section 5 herein.
8. No Dilution or Impairment. The corporation will not, by amendment of
its Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance of performance of any of
the terms of the Preferred Stock set forth herein, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
holders of the Preferred Stock against dilution or other impairment. Without
limiting the generality of the foregoing, the corporation (a) will no, increase
the par value of any shares of stock receivable on the conversion of the
Preferred Stock
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<PAGE> 12
above the amount payable therefor on such conversion, (b) will take all such
action as may be necessary or appropriate in order that the corporation may
validly and legally issue fully paid and nonassessable shares on the conversion
of all Preferred Stock from time to time outstanding, (c) will not issue any
shares of any class which is senior to or on a parity with the Preferred Stock
as to dividends or as to the distribution of assets upon voluntary or
involuntary dissolution, liquidation or winding up of the corporation, and (d)
will not transfer all substantially all of its properties and assets to any
other person (corporate or otherwise), or consolidate with or merge into any
other person or permit any such person to consolidate with or merge into the
corporation (if the corporation is not the surviving person), unless such other
person shall expressly assume in writing and will be bound by all the terms of
the Preferred Stock set forth herein.
9. Notices of Record Date. In the event of (a) any taking by the
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, or
(a) any capital reorganization of the corporation, any
reclassification or recapitalization of the capital stock of the corporation,
any merger or consolidation of the corporation, or any transfer of all or
substantially all of the assets of the corporation to any other corporation, or
any other entity or person, or
(b) any voluntary or involuntary dissolution, liquidation or
winding up of the corporation, then and in each such event the corporation shall
mail or cause to be mailed to each holder of Preferred Stock a notice specifying
(i) the date on which any such record is to be taken for the purpose of such
dividend, distribution or right and a description of such dividend, distribution
or right, (ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding up is expected to become effective, (iii) the time, if any, that is to
be fixed, as to when the holders of record of Common Stock (or other securities)
shall be entitled to exchange their shares of Common Stock (or other securities)
for securities or other property deliverable upon such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding up. Such notice shall be mailed at least 30
days prior to the date specified in such notice on which such action is to be
taken.
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
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<PAGE> 13
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
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.
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<PAGE> 14
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been signed this 11th day of October, 1996.
SIMULATION SCIENCES INC.
By /s/ Charles R. Harris
-------------------------------
Charles R. Harris
President and Chief Executive
Officer
<PAGE> 1
COMMON STOCK COMMON STOCK
[SEAL] SIMULATION SCIENCES INC. [SEAL]
INCORPORATED UNDER SEE REVERSE FOR CERTAIN
THE LAWS OF THE DEFINITIONS AND A
STATE OF DELAWARE STATEMENT AS TO THE
RIGHTS, PREFERENCES,
PRIVILEGES AND
RESTRICTIONS ON SHARES
CUSIP
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE
$.001 PER SHARE, OF
SIMULATION SCIENCES INC.
TRANSFERABLE ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR
BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY
ENDORSED. THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED BY THE TRANSFER
AGENT AND REGISTERED BY THE REGISTRAR.
WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
DATED: [SIMULATION SCIENCES INC. SEAL]
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
HARRIS TRUST COMPANY OF CALIFORNIA
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
A statement of the powers, designations, preferences, and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of designation, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by entireties
JT TEN - as joint tenants
with rights of
survivorship and not
as tenants in common
COM PROP - as community property
UNIF GIFT MIN ACT - ___________________Custodian_____________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act______________________________________________
(State)
UNIF TRF MIN ACT - _________________Custodian (until age___________)
(Cust)
__________________________under Uniform Transfers
(Minor)
to Minors Act____________________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated____________________________________
X _____________________________________________
X _____________________________________________
NOTICE: THE SIGNATURE(S) TO THIS AGREEMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT ON ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By _____________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS) WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM, PURSUANT TO S.E.C. RULE 17Ad-15.
<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:
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* Post September 1996 reverse stock split
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<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
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<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
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<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
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<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
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<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.
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<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.
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<PAGE> 9
SIMULATION SCIENCES INC.
DIRECTOR OPTION AGREEMENT
Simulation Sciences Inc., a Delaware corporation (the "Company"), has
granted to ______________________________________ (the "Optionee"), an option to
purchase a total of [ __________________ (_________)] shares of the Company's
Common Stock (the "Optioned Stock"), at the price determined as provided herein,
and in all respects subject to the terms, definitions and provisions of the
Company's 1996 Director Option Plan (the "Plan") adopted by the Company which is
incorporated herein by reference. The terms defined in the Plan shall have the
same defined meanings herein.
1. Nature of the Option. This Option is a nonstatutory option and is not
intended to qualify for any special tax benefits to the Optionee.
2. Exercise Price. The exercise price is $_______ for each share of Common
Stock.
3. Exercise of Option. This Option shall be exercisable during its term in
accordance with the provisions of Section 8 of the Plan as follows:
(i) Right to Exercise.
(a) This Option shall become exercisable in installments
cumulatively with respect to __________ percent (___%) of the Optioned Stock one
year after the date of grant, and as to an additional ______________ percent
(__%) of the Optioned Stock on each anniversary of the date of grant, so that
one hundred percent (100%) of the Optioned Stock shall be exercisable [_______]
years after the date of grant; provided, however, that in no event shall any
Option be exercisable prior to the date the stockholders of the Company approve
the Plan.
(b) This Option may not be exercised for a fraction of a
share.
(c) In the event of Optionee's death, disability or other
termination of service as a Director, the exercisability of the Option is
governed by Section 8 of the Plan.
(ii) Method of Exercise. This Option shall be exercisable by written
notice which shall state the election to exercise the Option and the number of
Shares in respect of which the Option is being exercised. Such written notice,
in the form attached hereto as Exhibit A, shall be signed by the Optionee and
shall be delivered in person or by certified mail to the Secretary of the
Company. The written notice shall be accompanied by payment of the exercise
price.
4. Method of Payment. Payment of the exercise price shall be by any of the
following, or a combination thereof, at the election of the Optionee:
<PAGE> 10
(i) cash;
(ii) check; or
(iii) surrender of 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 exercised; or
(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.
5. Restrictions on Exercise. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulations, or if such issuance
would not comply with the requirements of any stock exchange upon which the
Shares may then be listed. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
6. 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 this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
7. Term of Option. This Option may not be exercised more than ten (10)
years from the date of grant of this Option, and may be exercised during such
period only in accordance with the Plan and the terms of this Option.
8. Taxation Upon Exercise of Option. Optionee understands that, upon
exercise of this Option, he or she will recognize income for tax purposes in an
amount equal to the excess of the then Fair Market Value of the Shares purchased
over the exercise price paid for such Shares. Since the Optionee is subject to
Section 16(b) of the Securities Exchange Act of 1934, as amended, under certain
limited circumstances the measurement and timing of such income (and the
commencement of any capital gain holding period) may be deferred, and the
Optionee is advised to contact a tax advisor concerning the application of
Section 83 in general and the availability a Section 83(b) election in
particular in connection with the exercise of the Option. Upon a resale of such
Shares by the Optionee, any difference between the sale price and the Fair
Market Value of the Shares on the date
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<PAGE> 11
of exercise of the Option, to the extent not included in income as described
above, will be treated as capital gain or loss.
DATE OF GRANT:
-------------------
SIMULATION SCIENCES INC.,
a Delaware corporation
By:
----------------------------
Optionee acknowledges receipt of a copy of the Plan, a copy of which is
attached hereto, and represents that he or she is familiar with the terms and
provisions thereof, and hereby accepts this Option subject to all of the terms
and provisions thereof. Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Board upon any questions
arising under the Plan.
Dated:
-------------------
--------------------------
Optionee
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<PAGE> 12
EXHIBIT A
DIRECTOR OPTION EXERCISE NOTICE
Simulation Sciences Inc.
601 Valencia Avenue, Suite 100
Brea, California 92823
Attention: Corporate Secretary
1. Exercise of Option. The undersigned ("Optionee") hereby elects to
exercise Optionee's option to purchase ______ shares of the Common Stock (the
"Shares") of Simulation Sciences Inc. (the "Company") under and pursuant to the
Company's 1996 Director Option Plan and the Director Option Agreement dated
_______________ (the "Agreement").
2. Representations of Optionee. Optionee acknowledges that Optionee has
received, read and understood the Agreement.
3. Federal Restrictions on Transfer. Optionee understands that the Shares
must be held indefinitely unless they are registered under the Securities Act of
1933, as amended (the "1933 Act"), or unless an exemption from such registration
is available, and that the certificate(s) representing the Shares may bear a
legend to that effect. Optionee understands that the Company is under no
obligation to register the Shares and that an exemption may not be available or
may not permit Optionee to transfer Shares in the amounts or at the times
proposed by Optionee.
4. Tax Consequences. Optionee understands that Optionee may suffer adverse
tax consequences as a result of Optionee's purchase or disposition of the
Shares. Optionee represents that Optionee has consulted with any tax
consultant(s) Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
5. Delivery of Payment. Optionee herewith delivers to the Company the
aggregate purchase price for the Shares that Optionee has elected to purchase
and has made provision for the payment of any federal or state withholding taxes
required to be paid or withheld by the Company.
6. Entire Agreement. The Agreement is incorporated herein by reference.
This Exercise Notice and the Agreement constitute the entire agreement of the
parties and supersede in their entirety all prior undertakings and agreements of
the Company and Optionee with respect to the
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<PAGE> 13
subject matter hereof. This Exercise Notice and the Agreement are governed by
California law except for that body of law pertaining to conflict of laws.
Submitted by: Accepted by:
OPTIONEE: SIMULATION SCIENCES INC.
By:
--------------------- ------------------------------
Its:
------------------------------
Address:
Dated: Dated:
------------------- ------------------------------
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<PAGE> 1
EXHIBIT 10.15
SIMULATION SCIENCES
SEPARATION AGREEMENT
This separation agreement (the "Agreement") is made and entered into by
and between ________________ ("Executive") and Simulation Sciences Inc. (the
"Company"), effective as of ________ __, 1996 (the "Effective Date").
WHEREAS, Executive is and has been employed by the Company and is
currently President and chief executive officer.
WHEREAS, the Board has determined that Executive is a critical
management asset to the Company and desires to assure itself of the continued
services of Executive for the term of employment provided for in this Agreement,
and Executive desires to be employed by the Company for such period, upon the
terms and conditions set forth herein; and
WHEREAS, the Board believes that it is imperative to provide the
Executive with certain severance benefits upon Executive's termination of
employment following a Change of Control which provides the Executive with
enhanced financial security and provides incentive and encouragement to the
Executive to remain with the Company notwithstanding the possibility of a Change
of Control;
NOW, THEREFORE, in consideration of the covenants and agreements set
forth herein, the parties hereto agree as follows:
1. Employment; Duties. During the Employment Term (as defined in
Section 2 of this Agreement), Executive shall serve as President and chief
executive officer. During the Employment Term, Executive shall render such
business and professional services in the performance of his duties, consistent
with Executive's position within the Company, as shall reasonably be assigned to
him by the Board. Executive shall not serve as a director, employee, consultant
or advisor to any other corporation or other business enterprise without the
prior written consent of the Company; provided, however, that Executive may
serve in any capacity with any civic, educational or charitable organization or
any trade association without the approval of the Board, so long as such
activities do not interfere with his duties and obligations under this
Agreement. It is understood and agreed that Executive will be considered an
"employee" of the Company for tax and contractual purposes for the duration of
the Employment Term.
2. Term of Employment. Executive's employment under this Agreement
shall commence on the Effective Date and shall continue for a period of two (2)
years thereafter, unless sooner terminated as provided herein. The period
commencing on the
1
<PAGE> 2
Effective date and ending two years later, or such shorter term as is provided
for herein, is referred to as the " Effective Term."
3. Compensation.
(a) Base Salary. The Company shall pay Executive throughout the --
Effective Term a base salary (the "Base Salary") at a rate of not less than
$200,000 per year, payable in equal installments no less frequently than
monthly. Once increased, such higher salary shall constitute Executive's Base
Salary for purposes of this Agreement.
(b) Bonuses. Executive shall receive bonuses (i) as determined by
the Compensation Committee of the Board of Directors, and (ii) according to the
terms of any Company executive bonus plans; (targeted bonus 50% of base pay).
4. Employee Benefits.
(a) General. Executive shall be included in all employee benefit
plans, programs or arrangements, including, without limitation, any plans,
programs or arrangements providing for retirement benefits, incentive
compensation, profit bonuses, disability benefits, health and life insurance,
vacation and paid holidays, which shall be established by the Company for, or
made available to , its senior executives and shall further be entitled to
fringe and other employee benefits and perquisites comparable to those he
received prior to entering onto this Agreement and to such other benefits and
perquisites as are specifically set forth herein.
(b) Reimbursement of Expenses. The Company shall reimburse
Executive for all out-of-pocket expenses reasonably incurred and paid by him in
the performance of his duties pursuant to this Agreement, in accordance with
Company policies.
5. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Cause. "Cause" shall mean (i) any act of personal dishonesty
taken by the Executive in connection with his responsibilities as an employee
and intended to result in substantial personal enrichment of the Executive, (ii)
the conviction of a felony, (iii) a willful act by the Executive which
constitutes gross misconduct and which is injurious to the Company, and (iv)
following delivery to the Executive of a written demand for performance from the
Company which describes the basis for the Company's belief that the Executive
has not substantially performed his duties, continued violations by the
Executive of the Executive's obligations to the Company which are demonstrably
willful and deliberate on the Executive's part.
2
<PAGE> 3
(b) Change of Control. "Change of Control" means the occurrence
of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing 50% or more of the total
voting power represented by the Company's then outstanding voting securities; or
(ii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
the Company's assets.
(c) Disability. "Disability" shall mean that the Executive has
been unable to perform his Company duties as the result of his incapacity due to
physical or mental illness, and such inability, at least 26 weeks after its
commencement, is determined to be total and permanent by a physician selected by
the Executive or the Executive's legal representative and acceptable to the
Company (such agreement as to acceptability not to be unreasonably withheld).
Termination resulting from Disability may only be effected after at least 30
days' written notice by the Company of its intention to terminate the
Executive's employment. In the event that the Executive resumes the performance
of substantially all of his duties hereunder before the termination of his
employment becomes effective, the notice of intent to terminate shall
automatically be deemed to have been revoked.
(d) Good Reason. "Good Reason" shall mean (i) without the
Executive's express written consent, the significant reduction of the
Executive's duties, authority or responsibilities, relative to the Executive's
duties, authority or responsibilities as in effect immediately prior to such
reduction, or the assignment to Executive of such reduced duties, authority or
responsibilities, (ii) a reduction by the Company in the Base Salary of the
Executive; (iii) a material reduction by the Company in the kind or level of
employee benefits, including bonuses, to which the Executive was entitled
immediately prior to such reduction with the result that the Executive's overall
benefits package is reduced; (iv) the relocation of the Executive to a facility
or a location more than thirty
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(30) miles from the Executive's then present location, without the Executive's
express written consent; (v) any purported termination of the Executive by the
Company which is not effected for Disability or for Cause, or any purported
termination for which the grounds relied upon are not valid; (vi) the failure of
the Company to obtain the assumption of this agreement by any successors
contemplated in Section 18 below; or (vii) any act or set of facts or
circumstances which would, under California case law or statute constitute a
constructive termination of the Executive.
6. Termination of Employment Prior to a Change of Control. The
following provisions shall govern termination of Executive's employment prior to
a Change of Control:
(a) Termination without Cause: Resignation for Good Reason.
(i) General. If, prior to two years following the Effective
Time and prior to a Change of Control Executive resigns from his employment
hereunder for Good Reason, then the Company shall:
(A) Cash Severance Payments. Pay to Executive
severance payments of one month's base salary for a period of six (6) months
following the date of termination (the "Severance Period"). If, at the end of
such six-month period, Executive has not obtained employment with a subsequent
employer after a good faith effort, then the Severance Period shall be extended
on a month by month basis until (i) six months after the expiration of the
initial six-month period, or (ii) Executive obtains employment with a subsequent
employer, whichever occurs first. Such severance payments shall be paid at
regular payroll intervals, and shall be calculated based on the highest level of
monthly salary received by Executive from the Company within the prior three
years.
(B) Accelerated Vesting. Cause the vesting of all
restricted stock, stock options and other equity-based compensation held, on the
date of termination, by Executive, to accelerate, as of the date of termination,
to the same extent as it would have had Executive remained employed by the
Company for twelve (12) months following the date of termination.
(C) Continued Group Health and Insurance Benefits.
Continue to make available to the Executive and Executive's spouse and
dependents covered under any group health plans or life insurance plans of the
Company on the date of such termination (the "Covered Dependents"), and pay for,
to the same extent as paid prior to termination of employment, all group health
plan, life and other similar insurance plans in which Executive or such Covered
Dependents participate on the date of the Executive's termination, through the
Severance Period (including any extension thereof, as applicable).
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(D) Outplacement Services. Pay on behalf of the
Executive, outplacement fees from a qualified outplacement agency, fees not to
exceed ten thousand dollars ($10,000) for the purpose of assisting Executive
securing re-employment in the profession the Executive has been employed by the
Company. Payments of fees will not extend beyond the severance period or the
Executive's re-employment whichever comes first.
(ii) Death During Severance Period. In the event of
Executive's death while he is receiving benefits pursuant to Section 6(a)(i)(C)
hereof, the Company shall continue providing and paying for group health plan,
life and similar insurance plan coverage for the Covered Dependents through the
Severance Period.
(b) Termination for Cause: Resignation Without Good Reason. If,
prior to the expiration of the Effective Term, Executive's employment is
terminated by the Company for Cause, or if the Executive resigns from his
employment hereunder other than for Good Reason, then Executive shall be
entitled only to payment of all amounts earned or owed to Executive and all
vesting of equity compensation through and including the date of such
termination or resignation.
7. Termination of Employment On or Following a Change of Control.
The following provisions shall govern termination of Executive's employment on
or following a Change of Control:
(a) Termination without Cause: Resignation for Good Reason.
(i) General. If, following a Change of Control and prior to
two years following the Effective Time (A) Executive's employment is terminated
by the Company without Cause, or (B) Executive resigns from his employment
hereunder for Good Reason, then the Company shall:
(A) Cash Severance Payments Pay to Executive severance
payments of one month's base salary for a period of six (6) months following the
date of termination (the "Severance Period"). If, at the end of such six-month
period, Executive has not obtained employment with a subsequent employer after a
good faith effort, then the Severance Period shall be extended on a month by
month basis until (i) six months after the expiration of the initial six-month
period, or (ii) Executive obtains employment with a subsequent employer,
whichever occurs first. Such severance payments shall be paid at regular payroll
intervals, and shall be calculated based on the highest level of monthly salary
received by Executive from the Company within the prior three years.
(B) Accelerated Vesting. Cause the vesting of all
restricted stock, stock options and other equity-based compensation held, on the
date of
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termination, by Executive, to fully accelerate, as of the date of termination,
so that they become 100% vested.
(C) Continued Group Health and Insurance Benefits.
Continue to make available to the Executive and the Covered Dependents, and pay
for, to the same extent as paid prior to termination of employment, all group
health plan, life and other similar insurance plans in which Executive or such
Covered Dependents participate on the date of the Executive's termination,
through the Change of Control Severance Period (including any extension thereof,
as applicable).
(D) Outplacement Services. Pay on behalf of the
Executive, outplacement fees from a qualified outplacement agency, fees not to
exceed ten thousand dollars ($10,000) for the purpose of assisting Executive
securing re-employment in the profession the Executive has been employed by the
Company. Payments of fees will not extend beyond the severance period or the
Executive's re-employment whichever comes first.
(ii) Death During Severance Period. In the event of
Executive's death while he is receiving benefits pursuant to Section 7(a)(i)(C)
hereof, the Company shall continue providing and paying for group health plan,
life and similar insurance plan coverage to the Covered Dependents through the
Change of Control Severance Period.
(b) Termination for Cause, Resignation Without Good Reason. If,
prior to the expiration of the Employment Term, Executive's employment is
terminated by the Company for Cause, or if Executive resigns from his employment
hereunder other than for Good Reason, then Executive shall be entitled only to
payment of all amounts earned or owed to Executive and all vesting of equity
compensation through and including the date of such termination or resignation.
8. Death or Permanent Disability. In the event Executive's
employment terminates due to Executive's death or Disability, whether or not
there has been a Change of Control, the Company shall:
(a) Cash-Lump-Sum Payment. Pay to Executive, his estate, or his
personal representative (as appropriate) a lump-sum cash payment equal to twelve
(12) months' Base Salary, to be paid within thirty (30) days after the date the
Company receives notice of Executive's death, or within thirty (30) days after
the date it has been conclusively determined that Executive has incurred a
Disability.
(b) Accelerated Vesting. Cause the vesting of all restricted
stock, stock options and other equity-based compensation held, on the date of
termination, by
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Executive, to accelerate, as of the date of termination, to the same extent as
it would have had Executive remained employed by the Company for twelve (12)
months following the date of termination.
(c) Continued Group Health and Insurance Benefits. Continue to
make available to the Executive (if alive) and the Covered Dependents (whether
or not Executive is alive) and pay for, to the same extent as paid prior to
termination of employment, all group health plans, life and other similar
insurance plans in which Executive or such Covered Dependents participate on the
date of the Executive's termination, for a period of twelve (12) months
following the date of Executive's termination of employment.
(d) Other Benefits. Pay to Executive, his estate, or his personal
representative (as appropriate) all other benefits normally paid to employees
who have died or incurred a disability.
9. Golden Parachute Excise Tax Gross-Up. In the event that the
severance and other benefits provided for in this Agreement or otherwise payable
to the Executive constitute "parachute payments" within the meaning of Section
280G of the Internal Revenue Code of 1986, as amended (the "Code") and will be
subject to the excise tax imposed by Section 4999 of the Code, then the
Executive shall receive (i) a payment from the Company sufficient to pay such
excise tax, and (ii) an additional payment from the Company sufficient to pay
the excise tax and federal and state income taxes arising from the payments made
by the Company to Executive pursuant to this sentence. Unless the Company and
the Executive otherwise agree in writing, the determination of Executive's
excise tax liability and the amount required to be paid under this Section 9
shall be made in writing by the Accountants. In the event that the excise tax
incurred by Executive is determined by the Internal Revenue Service to be
greater or lesser than the amount so determined by the Accountants, the Company
and Executive agree to promptly make such additional payment, including interest
and any tax penalties, to the other party as the Accountants reasonably
determine is appropriate to ensure that the net economic effect to Executive
under this Section 9, on an after-tax basis, is as if the Code Section 4999
excise tax did not apply to Executive. For purposes of making the calculations
required by this Section 9, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on interpretations of
the Code for which there is a "substantial authority" tax reporting position.
The Company and the Executive shall furnish to the Accountants such information
and documents as the Accountants may reasonably request in order to make a
determination under this Section. the Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 9.
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The gross-up payment to which Executive is entitled hereunder shall be
paid by the Company to the Executive, in cash and in full, not later than thirty
(30) calendar days following the date of termination.
10. Date of Termination. The date of termination of employment by the
Company shall be the date specified in a written notice of termination to
Executive. The date of resignation shall be the date specified in the written
notice of resignation from Executive to the Company. Termination of Executive's
employment for Cause shall be communicated by delivery to Executive of a copy of
a resolution duly adopted by the affirmative vote of not less than a majority of
the entire membership of the Board (excluding Executive) at a meeting of the
Board called and held for such purpose (a "Notice of Termination"). For purposes
of this Agreement, no purported termination of Executive's employment for Cause
shall be effective without delivery of such Notice of Termination.
11. Assignment. Executive's rights and obligations under this
Agreement shall not be assignable by Executive. The Company's rights and
obligations under this Agreement shall not be assignable by the Company except
as incident to the transfer, by merger, liquidation, or otherwise, of all or
substantially all of the business of the Company.
12. Notices. Any notice required or permitted under this Agreement
shall be given in writing and shall be deemed to have been effectively made or
given if personally delivered, or if sent by facsimile, or mailed to the other
party at its address set forth below in this Section 12, or at such other
address as such party may designate by written notice to the other party hereto.
Any effective notice hereunder shall be deemed given on the date personally
delivered or on the date sent by facsimile or deposited in the United States
mail (sent by certified mail, return receipt requested), as the case may be, at
the following address:
i) If to the Company:
SIMULATION SCIENCES INC.
601 Valencia Ave., #100
Brea, California 92823
ii) If to Executive:
CHARLES R. HARRIS
9 Coronado Pointe
Laguna Niguel, CA 92677
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13. Disputes. Any disputes under this Agreement between the parties
hereto shall be settled by arbitration in Irvine, California under the auspices
of, and in accordance with the rules of, the American Arbitration Association,
by an arbitrator who is mutually agreeable to the parties hereto, or, if the
Company and Executive cannot agree on the selection of the arbitrator, then
before three arbitrators, one of which shall be appointed by Executive, one of
which shall be appointed by the Company, and the third of which shall be chosen
by the American Arbitration Association (such arbitrator or arbitrators
hereinafter referred to as the "Arbitrator"). The decision in such arbitration
shall be final and conclusive on the parties and judgment upon such decision may
be entered in any court having jurisdiction thereof. The parties hereby agree
that the Arbitrator shall be empowered to enter an equitable decree mandating
specific enforcement of the terms of this Agreement. The Company and Executive
shall share equally all expenses of the Arbitrator incurred in any arbitration
hereunder, provided, however, that the Company or Executive, as the case may be,
shall bear all expenses of the Arbitrator and all of the legal fees and
out-of-pocket expenses of the other party if the Arbitrator determines that the
claim or position of such party was without reasonable foundation.
14. Severability. If an arbitrator determines that any term or
provision hereof is invalid or unenforceable, (a) the remaining terms and
provisions hereof shall be unimpaired and (b) such arbitrator shall have the
authority to replace such invalid or unenforceable term or provision with a term
or provision that is valid and enforceable and that comes closest to expressing
the intention of the invalid or unenforceable term or provision.
15. Entire Agreement. This Agreement and the Simulation Sciences Inc.
Confidentiality Agreement represents the entire agreement of the parties with
respect to the matters set forth herein, and to the extent inconsistent with
other prior contracts, arrangements or understandings between the parties,
supersedes all such previous contracts, arrangements or understandings between
the Company and Executive. The Agreement may be amended only by mutual written
agreement of the parties hereto.
16. Withholding. Company shall be entitled to withhold, or cause to
be withheld, from payment any amount of withholding taxes required by law with
respect to payments made to Executive in connection with his employment
hereunder.
17. Governing Law. This Agreement shall be construed, interpreted,
and governed in accordance with the laws of California without reference to
rules relating to conflict of law.
18. Successors. This Agreement shall be binding upon and inure to the
benefit of, and shall be enforceable by Executive and the Company, their
respective heirs, executors, administrators and assigns. In the event the
Company is merged, consolidated,
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liquidated by a parent corporation, or otherwise combined into one or more
corporations, the provisions of this Agreement shall be binding upon and inure
to the benefit of the parent corporation or the corporation resulting from such
merger or to which the asset shall be sold or transferred, which corporation
from and after the date of such merger, consolidation, sale or transfer shall be
deemed to be the Company for purposes of this Agreement. In the event of any
other assignment of this Agreement by the Company, by operation of law or
otherwise, the Company shall remain primarily liable for its obligations
hereunder. This Agreement shall not be assignable by Executive.
19. Headings. The headings of sections herein are included solely for
convenience of reference and shall not control the meaning of interpretation of
any of the provisions of this Agreement.
20. Counterparts. This Agreement may be executed by either of the
parties hereto in counterparts, each of which shall be deemed to be an original,
but all such counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
COMPANY
EXECUTIVE
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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. 3 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 dates are
September 5, 1996 and October 11, 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 17, 1996
