<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
</TABLE>
SIMULATION SCIENCES INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
SIMULATION SCIENCES INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 22, 1997
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
SIMULATION SCIENCES INC., a Delaware corporation (the "Company"), will be held
on April 22, 1997 at 9:00 a.m., local time, at the Company's principal executive
offices located at 601 Valencia Avenue, Suite 100, Brea, California 92823, for
the following purposes:
1. To elect a Board of Directors to serve until the next Annual
Meeting of Stockholders or until their successors are elected.
2. To ratify the appointment of Deloitte & Touche LLP as independent
public accountants of the Company for the fiscal year ending December 31,
1997.
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on March 17, 1997 as
the record date for the determination of stockholders entitled to notice of and
to vote at this meeting. Only stockholders of record at the close of business on
March 17, 1997 are entitled to notice of and to vote at the meeting.
All stockholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed Proxy as promptly as possible in the postage
prepaid envelope enclosed for that purpose. Any stockholder attending the
meeting may vote in person even if he or she has returned a Proxy.
Sincerely,
JEFFREY D. SAPER
Secretary
YOUR VOTE IS IMPORTANT.
IN ORDER TO ASSURE YOUR REPRESENTATION AT THE MEETING,
YOU ARE REQUESTED TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY
AS PROMPTLY AS POSSIBLE AND RETURN IT IN THE ENCLOSED ENVELOPE.
Brea, California
March 25, 1997
<PAGE> 3
SIMULATION SCIENCES INC.
PROXY STATEMENT FOR 1997
ANNUAL MEETING OF STOCKHOLDERS
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed Proxy is solicited on behalf of the Board of Directors of
SIMULATION SCIENCES INC., a Delaware corporation (the "Company"), for use at the
Annual Meeting of Stockholders to be held April 22, 1997 at 9:00 a.m., local
time, or at any adjournment thereof, for the purposes set forth herein and in
the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting
will be held at the Company's principal executive offices located at 601
Valencia Avenue, Suite 100, Brea, California 92823. The Company's telephone
number at that location is (714) 579-0412.
These proxy solicitation materials and the Annual Report on Form 10-K for
the year ended December 31, 1996, including financial statements, were first
mailed on or about March 27, 1997 to all stockholders entitled to vote at the
meeting.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a written notice of revocation or a duly executed proxy bearing a later
date or by attending the meeting and voting in person.
VOTING AND SOLICITATION
Each holder of Common Stock is entitled to one vote for each share held.
This solicitation of proxies is made by the Company, and all related costs
will be borne by the Company. In addition, the Company may reimburse brokerage
firms and other persons representing beneficial owners of shares for their
expenses in forwarding solicitation material to such beneficial owners. Proxies
may also be solicited by certain of the Company's directors, officers and
regular employees, without additional compensation, personally or by telephone
or telegram.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company that are intended to be presented
by such stockholders at the Company's 1998 Annual Meeting of Stockholders must
be received by the Company no later than November 24, 1997 in order that they
may be considered for inclusion in the proxy statement and form of proxy
relating to that meeting.
<PAGE> 4
RECORD DATE AND PRINCIPAL SHARE OWNERSHIP
Only stockholders of record at the close of business on March 17, 1997 (the
"Record Date") are entitled to notice of and to vote at the meeting. The Company
has one series of Common Shares outstanding, designated Common Stock, $.001 par
value. At the Record Date, 10,280,340 shares of the Company's authorized Common
Stock were issued and outstanding.
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of December 31, 1996 as to (i) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director and each nominee for
director of the Company, (iii) each of the executive officers named in the
Summary Compensation Table in "Executive Compensation and Other Matters" below
and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF SHARES
5% STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS BENEFICIALLY OWNED BENEFICIALLY OWNED (%)
- -------------------------------------------------------- ------------------ ----------------------
<S> <C> <C>
Summit Ventures III, L.P.(1)
499 Hamilton Avenue, Suite 200
Palo Alto, CA 94301................................... 1,258,149 12.2%
Summit Investors II, L.P.(2)
499 Hamilton Avenue, Suite 200
Palo Alto, CA 94301................................... 20,502 *
The Kaufmann Fund, Inc.(3)
140 East 45th Street, 43rd Floor
New York, NY 10017.................................... 650,000 6.5%
Dr. Yui L. Wang(4)...................................... 1,064,974 10.7%
N. Fred Brannock(5)..................................... 797,740 8.0%
Vincent S. Verneuil, Jr.(6)............................. 774,656 7.8%
401(k) Plan(7).......................................... 2,096,377 21.0%
Charles R. Harris(8).................................... 50,000 *
Dirk M. Pfeiffer(9)..................................... 25,000 *
Katherine Sullivan Abrams(10)........................... 8,000 *
Dr. Narendra K. Gupta(11)............................... 9,333 *
Walter G. Kortschak(12)................................. 1,278,651 12.4%
All executive officers and directors as a group (7
persons)(13).......................................... 1,370,984 13.1%
</TABLE>
- ---------------
* Less than one percent of the outstanding Common Stock.
(1) Includes 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 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) Based solely on the Form 13G dated December 31, 1996 filed by the Kaufmann
Fund, Inc. with the Securities and Exchange Commission.
(4) Represents 994,276 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
2
<PAGE> 5
Chairman of the Board of Directors until May 1996 and served as President
and Chief Executive Officer of the Company from December 1994 until June
1995.
(5) Represents 727,682 shares of Common Stock held of record by various trusts
for the benefit of members of Mr. Brannock's immediate family and 70,058
shares of Common Stock 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.
(6) Represents 704,598 shares held of record by various trusts for the benefit
of Mr. Verneuil's immediate family, and 70,058 shares of Common Stock held
of record by the Company's 401(k) Plan. Mr. Verneuil served as Vice
President and Secretary of the Company until May 1996.
(7) Represents shares of Common Stock held of record by the Company's 401(k)
Plan which are beneficially owned by employees and former employees of the
Company.
(8) Represents 50,000 shares of Common Stock issuable upon exercise of stock
options that became exercisable within 60 days of December 31, 1996.
(9) Represents 25,000 shares of Common Stock issuable upon exercise of stock
options that became exercisable within 60 days of December 31, 1996.
(10) Represents 8,000 shares of Common Stock issuable upon exercise of stock
options that became exercisable within 60 days of December 31, 1996.
(11) Represents 9,333 shares of Common Stock issuable upon exercise of stock
options that became exercisable within 60 days of December 31, 1996.
(12) 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.
(13) Includes 350,878 shares of Common Stock underlying outstanding warrants and
92,333 shares of Common Stock subject to stock options held by directors
and officers that became exercisable within 60 days of December 31, 1996.
3
<PAGE> 6
PROPOSAL ONE
ELECTION OF DIRECTORS
A board of three (3) directors is to be elected at the Annual Meeting of
Stockholders. Unless otherwise instructed, the proxy holders will vote the
proxies received by them for the Company's three (3) nominees named below, all
of whom are presently directors of the Company. In the event that any nominee of
the Company is unable or declines to serve as a director at the time of the
Annual Meeting of Stockholders, the proxies will be voted for any nominee who
shall be designated by the present Board of Directors to fill the vacancy. The
Company is not aware of any nominee who will be unable or will decline to serve
as a director. In the event that additional persons are nominated for election
as directors, the proxy holders intend to vote all proxies received by them in
such a manner as will assure the election of as many of the nominees listed
below as possible, and, in such event, the specific nominees to be voted for
will be determined by the proxy holders. The term of office for each person
elected as a director will continue until the next Annual Meeting of
Stockholders or until a successor has been elected and qualified.
VOTE REQUIRED
If a quorum is present and voting, the three (3) nominees receiving the
highest number of votes will be elected to the Board of Directors. Votes
withheld from any nominee, abstentions and shares held by brokers that are
present but not voted because the brokers were prohibited from exercising
discretionary authority ("broker non-votes") will be counted for purposes of
determining the presence or absence of a quorum.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH OF THE NOMINEES
LISTED BELOW.
NOMINEES
The names of the nominees and certain information about them as of March
31, 1996 are set forth below:
<TABLE>
<CAPTION>
NAME OF NOMINEE AGE POSITION
- --------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Dr. Narendra K. Gupta(1)(2)...... 48 Director
Charles R. Harris................ 47 President, Chief Executive Officer and Director
Walter G. Kortschak(1)(2)........ 36 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
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.
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.
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
4
<PAGE> 7
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.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of fifteen meetings
during fiscal 1996, of which five were by unanimous written consent. No director
attended fewer than 75% of the meetings of the Board of Directors and committees
thereof, if any, upon which such director served. The Board of Directors has a
Compensation Committee and an Audit Committee. The Board of Directors has no
nominating committee or any committee performing such functions.
The Compensation Committee, which consisted of directors Dr. Narendra K.
Gupta and Walter G. Kortschak at the end of fiscal 1996, met four times during
the fiscal year. This Committee is responsible for reviewing and making
recommendations to the Board of Directors regarding all forms of compensation to
be provided to the executive officers and directors of the Company and its
subsidiaries including stock compensation and loans and all bonuses and stock
compensation to all employees.
The Audit Committee, which consisted of directors Dr. Narendra K. Gupta and
Walter G. Kortschak met three times during fiscal 1996. This Committee is
responsible for monitoring the Company's financial reporting and internal and
external audits, reviewing the Company's internal accounting controls and
nominating the Company's independent auditors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1996, the Compensation Committee consisted of Dr. Narendra K.
Gupta and Walter G. Kortschak. The Compensation Committee makes recommendations
to the Board of Directors concerning salaries and incentive compensation for
directors and officers of the Company. Mr. Harris, President and Chief Executive
Officer of the Company, is not a member of the Compensation Committee and cannot
vote on matters decided by the Committee. He does participate in all discussions
and decisions regarding salaries and incentive compensation for all employees of
and consultants to the Company, except that Mr. Harris is excluded from
discussions and decisions regarding his own salary and incentive compensation.
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 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 "Executive
Compensation and Other Matters -- Certain Transactions" for a discussion of
transactions between the Company and Summit Ventures III, L.P. and Summit
Investors II, L.P.
PROPOSAL TWO
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected Deloitte & Touche LLP, independent
public accountants, to audit the financial statements of the Company for the
fiscal year ending December 31, 1997, and recommends that stockholders vote for
ratification of such appointment. In the event of a negative vote on
ratification, the Board of Directors will reconsider its selection.
Deloitte & Touche LLP has audited the Company's financial statements
annually since 1992. Representatives of Deloitte & Touche LLP are expected to be
present at the meeting with the opportunity to make a statement if they desire
to do so and are expected to be available to respond to appropriate questions.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of the
Company's Common Stock voting in person or by proxy on this proposal at the
annual meeting is required to approve the appointment of the independent
auditors.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION
OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS INDEPENDENT PUBLIC ACCOUNTANTS.
5
<PAGE> 8
EXECUTIVE COMPENSATION AND OTHER MATTERS
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of March 31, 1996
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Charles R. Harris................ 47 President, Chief Executive Officer and Director
Vice President, Sales, Marketing and Engineering
Dirk M. Pfeiffer................. 39 Services
Katherine Sullivan Abrams........ 58 Vice President, Research and Development
Daniel T. Nichols................ 48 Vice President, Human Resources and Administration
L. Ronald Trepp.................. 58 Vice President, Finance and Chief Financial Officer
</TABLE>
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.
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 AG, 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 an 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.
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.
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.
6
<PAGE> 9
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the Company's four other executive officers
(collectively, the "Named Executive Officers") for services rendered in all
capacities to the Company during the years ended December 31, 1994, 1995 and
1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------ ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) SARS(#) ($)(2)
- ------------------------------ ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Harris............. 1996 $193,749 $100,000 $ 79,684(4) 91,666 $8,092
President, Chief Executive 1995 86,413(3) 37,500 148,670(4) 250,000 4,583
Officer
Dirk M. Pfeiffer.............. 1996 150,000 75,000 214,714(4) 25,000 7,321
Vice President, Sales, 1995 43,750(3) 37,500 -- 125,000 --
Marketing and Engineering
Services
Katherine Sullivan Abrams..... 1996 135,693 45,000 -- 46,666 3,449
Vice President, Research and 1995 18,667(3) 8,800 22,500(5) 20,000 --
Development
Daniel T. Nichols............. 1996 127,307(3) 45,000 54,186(4) 66,666 7,315
Vice President, Human
Resources and Administration
L. Ronald Trepp............... 1996 86,665(3) 12,000 -- 66,666 2,766
Vice President, Finance and
Chief Financial Officer
</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 through December 31, 1995, $150,000 for Dirk M. Pfeiffer from
September 15, 1995 through December 31, 1995, $110,000 for Katherine
Sullivan Abrams from November 1, 1995 through December 31, 1995, $150,000
for Daniel T. Nichols from February 26, 1996 through December 31, 1996, and
$160,000 for L. Ronald Trepp from June 18, 1996 through December 31, 1996.
(4) Represents amounts paid in connection with the reimbursement by the Company
of certain relocation expenses.
(5) Represents compensation for services rendered as a consultant to the
Company.
7
<PAGE> 10
OPTION GRANTS DURING FISCAL 1996
The following table provides information with respect to stock option
grants in fiscal 1996 to the Named Executive Officers.
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
---------------------------------------------------------- ASSUMED ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE OF FOR OPTION TERM($)(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SHARE) DATE 5% 10%
- --------------------------- ----------- -------------- ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Harris.......... 91,666 12.66 $6.30 3/20/06 $363,184 $920,380
Dirk M. Pfeifer............ 25,000 3.45 6.30 3/20/06 99,051 251,014
Katherine Sullivan
Abrams................... 20,000 2.76 5.37 1/19/06 67,543 171,168
26,666 3.68 6.30 3/20/06 105,652 267,742
Daniel T. Nichols.......... 66,666 9.20 6.30 3/20/06 264,133 669,365
L. Ronald Trepp............ 66,666 9.20 7.50 6/27/06 314,444 796,863
</TABLE>
- ---------------
(1) Based on options to purchase 724,333 shares of Common Stock granted during
fiscal 1996.
(2) Potential realizable value is based on the assumption that the price of the
Common Stock appreciates at the annual rate shown, compounded annually, from
the date of grant until the end of the 10-year option term. The 5% and 10%
assumed annual compound rates of stock price appreciation are mandated by
rules promulgated by the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future Common Stock
prices.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the number of
options and the aggregate value of in-the-money options held by each Named
Executive Officer at December 31, 1996.
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND FISCAL 1996 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FY-END IN-THE-MONEY OPTIONS
SHARES VALUE ---------------------- --------------------
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE($)/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE($)(1)
- -------------------------------- ----------- -------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Charles R. Harris............... -- $-- 50,000/291,666 $ 610,250/3,227,035
Dirk M. Pfeifer................. -- -- 25,000/125,000 305,125/1,434,875
Katherine Sullivan Abrams....... -- -- 4,000/62,666 48,820/614,041
Daniel T. Nichols............... -- -- --/66,666 --/571,661
L. Ronald Trepp................. -- -- --/66,666 --/491,662
</TABLE>
- ---------------
(1) Calculated by determining the difference between the fair market value of
the securities on December 31, 1996 of $14.875 (as reported on the Nasdaq
National Market), less the exercise price of the option.
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 in Control (as defined) the executive resigns
from his employment for Good Reason (as defined), or following a Change of
Control, the executive is terminated without Cause (as defined) or resigns for
Good Reason, the Company will (i) pay the executive monthly severance payments
equal to one month's salary for a period of six months, subject to one-month
extensions
8
<PAGE> 11
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 to 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.
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 of officer.
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
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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.
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 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.
In February 1997, Summit Ventures III, L.P. and Summit Investors II, L.P.
(the "Summit Entities") exercised warrants for the purchase of an aggregate of
350,878 shares of the Company's Common Stock pursuant to a net exercise
provision contained in such warrant agreements, as amended. Upon the net
exercise of such warrants, the Company issued an aggregate of 284,434 shares of
Common Stock to the Summit Entities.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
During the fiscal year ended December 31, 1996, the Compensation Committee
of the Board of Directors was comprised of two non-employee directors. The
Compensation Committee is responsible for reviewing and making recommendations
to the Board of Directors regarding all forms of compensation to be provided to
the Company's executive officers and directors and for administering the
Company's stock option plans. All decisions by the Compensation Committee are
reviewed by the entire Board of Directors.
In making compensation decisions, it has been the practice of the
Compensation Committee to meet with the Company's chief executive officer, as
appropriate. For fiscal 1996, the Compensation Committee consulted with an
outside compensation firm and reviewed published surveys and special studies.
Such surveys and studies were utilized to establish compensation packages that
are within the range of those persons holding comparably responsible positions
at companies similar to the Company in age, number of employees, revenues and
overall growth rate.
The Compensation Committee believes that executive officer compensation
should be closely aligned with the performance of the Company on both a
short-term and long-term basis and that such compensation should assist the
Company in attracting and retaining key executives critical to its long-term
success. To that end, the Compensation Committee's policy is that the
compensation package for executive officers should consist of the following
components: (i) annual base salary; (ii) the potential to earn incentive bonuses
each fiscal year, the amount of which is dependent on the Company's overall
performance and (iii) stock option awards designed to align stockholder
interests with those of management by providing long-term incentives for the
Company's key employees.
Base salary is based upon the responsibilities of the particular executive
officers targeted at the median of comparable companies and is reviewed on an
annual basis. Incentive bonuses represent an opportunity for each executive
officer to earn additional annual cash compensation in an amount tied to a
percentage of each officer's base salary. Such incentive bonuses are based upon
Company, organizational and individual performance objectives and are
established and reviewed by the Compensation Committee.
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The long-term performance based compensation of executive officers takes
the form of option awards under the Company's 1994 Stock Option Plan, 1996 Stock
Plan and 1996 Employee Stock Purchase Plans (the "Stock Plans"). The
Compensation Committee believes that equity-based compensation ensures that the
Company's executive officers have a continuing stake in the long-term success of
the Company. All options granted by the Company have been granted with an
exercise price equal to the market price of the Company's Common Stock on the
date of grant and, accordingly, have value only if the Company's stock price
increases after such date. In granting options under the Stock Plans, the
Committee takes into account each executive's responsibilities, relative
position in the Company, and past grants.
The compensation of Mr. Charles R. Harris, the Company's Chief Executive
Officer, for fiscal 1996 was approved by the Board of Directors. The
Compensation Committee made its recommendation and the Board determined the
Chief Executive Officer's compensation after considering the same factors used
to determine the compensation of other executive officers.
COMPENSATION COMMITTEE
Dr. Narendra K. Gupta
Walter G. Kortschak
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PERFORMANCE GRAPH
Set forth below is a line graph comparing the annual percentage change in
the cumulative return to the stockholders of the Company's Common Stock with the
cumulative return of (i) the Nasdaq U.S. Index and (ii) the Nasdaq Computer &
Data Processing Index for the period commencing October 25, 1996 (the date of
the Company's initial public offering of its Common Stock at a per share price
of $9.00) and ending on December 31, 1996. The information contained in the
performance graph shall not be deemed to be "soliciting material" or to be
"filed" with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act or
Exchange Act, except to the extent that the Company specifically incorporates it
by reference into such filing.
COMPARISON OF 2 MONTH CUMULATIVE TOTAL RETURN*
AMONG SIMULATION SCIENCES INC., THE NASDAQ STOCK MARKET-US INDEX
AND THE NASDAQ COMPUTER & DATA PROCESSING INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Cumulative Total Return
--------------------------------
10/25/96 10/96 11/96 12/96
-------- ----- ----- -----
SIMULATION SCIENCES INC 100 122 138 165
NASDAQ STOCK MARKET-US 100 99 105 105
NASDAQ COMPUTER & DATA PROCESSING 100 98 105 104
* $100 invested on 10/25/96 in stock or on 9/30/96 in index - including
reinvestment of dividends. Fiscal year ending December 31.
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SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and directors, and persons who own
more than ten percent of a registered class of the Company's equity securities
to file reports of ownership on Form 3 and changes in ownership on Form 4 and
Form 5 with the Securities and Exchange Commission ("SEC") and the National
Association of Securities Dealers, Inc. Executive officers, directors and
greater than ten percent stockholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file. Based solely in
its review of the copies of such forms received by it, or written
representations from certain reporting persons, the Company believes that,
during fiscal 1996, all filing requirements applicable to its executive officers
and directors were complied with, except that a Form 4 was not timely filed on
behalf of Daniel T. Nichols, the Company's Vice President, Human Resources and
Administration, with respect to a single purchase by Mr. Nichols of 430 shares
of the Company's Common Stock in October 1996.
OTHER MATTERS
The Company knows of no other matters to be submitted at the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of Proxy to vote the shares they represent as
the Board of Directors may recommend.
THE BOARD OF DIRECTORS
Dated: March 25, 1997
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