<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 30, 1997
SIMULATION SCIENCES INC.
(Exact name of registrant as specified in its charter)
Delaware 000-21283 95-2487793
-------- --------- ----------
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)
601 Valencia Avenue, Suite 100
Brea, California 92823
(Address of principal executive offices)
(714) 579-0412
(Registrant's telephone number, including area code)
<PAGE> 2
The undersigned Registrant hereby amends the following items, financial
statements, exhibits, or other portions of its Current Report on Form 8-K,
originally filed with the Securities and Exchange Commission on October 14, 1997
(the "Form 8-K") as set forth in the pages attached hereto.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired.
The following financial statements of W.R. Biles & Associates,
Inc. are attached hereto:
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996
and 1995
Statements of Capital Deficiency for the years ended December
31, 1996 and 1995
Statements of Cash Flows for the years ended December 31, 1996
and 1995
Notes to Financial Statements for the years ended December 31,
1996 and 1995
Statements of Operations for the period from January 1, 1997 to
September 29, 1997 and the nine months ended September 30, 1996
(Unaudited)
Statements of Cash Flows for the period from January 1, 1997 to
September 29, 1997 and the nine months ended September 30, 1996
(Unaudited)
Notes to Unaudited Financial Statements
(b) Pro Forma Financial Information.
Proforma financial data for the year ended December 31, 1996 and
for the nine months ended September 30, 1997 is attached hereto.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SIMULATION SCIENCES INC.
Dated: October 29, 1997 By: /s/ ROBERT E. GRICE, JR.
------------------------------
Robert E. Grice, Jr.
Executive Vice President,
Finance an Chief Financial
Officer
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
W.R. Biles & Associates, Inc.
We have audited the accompanying balance sheets of W.R. Biles & Associates, Inc.
(the Company) as of December 31, 1996 and 1995, and the related statements of
operations, capital deficiency and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of W.R. Biles & Associates, Inc. at December
31, 1996 and 1995 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Costa Mesa, California
October 10, 1997
<PAGE> 5
W.R. BILES & ASSOCIATES, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 68,280 $ 473,893
Accounts receivable, net of allowance for doubtful
accounts of $30,680 at December 31, 1996 and 1995
(Note 1) 2,612,392 2,820,937
Prepaid expenses and other current assets 89,819 79,849
----------- -----------
Total current assets 2,770,491 3,374,679
PROPERTY AND EQUIPMENT (Note 1):
Furniture and fixtures 472,658 468,166
Computer equipment 800,767 672,830
Computer software 218,149 167,028
Leasehold improvements 39,297 39,297
----------- -----------
1,530,871 1,347,321
Less accumulated depreciation and amortization (1,115,572) (923,572)
----------- -----------
Property and equipment, net 415,299 423,749
----------- -----------
$ 3,185,790 $ 3,798,428
=========== ===========
</TABLE>
See accompanying notes to financial statements. 1
<PAGE> 6
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
LIABILITIES AND SHAREHOLDERS' DEFICIT
<S> <C> <C>
CURRENT LIABILITIES:
Bank line of credit payable (Note 2) $ 745,000 $ 745,000
Accounts payable 1,044,023 354,022
Notes payable (Note 3) 46,008 305,248
Current portion of capital
lease obligations (Note 4) 79,808 29,977
Accrued liabilities 934,002 458,951
Deferred revenue (Note 1) 2,442,544 2,782,328
----------- -----------
Total current liabilities 5,291,385 4,675,526
CAPITAL LEASE OBLIGATIONS,
less current portion (Note 4) 244,900
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' DEFICIT (Note 5):
Common stock, $.001 par value; 1,000,000 shares
authorized; 908,000 shares issued and outstanding
at December 31, 1996 and 1995 62,367 62,367
Accumulated deficit (2,364,098) (890,701)
Less treasury stock, at cost (48,764) (48,764)
----------- -----------
Total shareholders' deficit (2,350,495) (877,098)
----------- -----------
$ 3,185,790 $ 3,798,428
=========== ===========
</TABLE>
See accompanying notes to financial statements. 2
<PAGE> 7
W.R. BILES & ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
REVENUE (Note 1):
<S> <C> <C>
Software license revenue $ 3,313,693 $ 2,871,884
Services and other revenue 5,968,109 4,278,383
----------- -----------
Total revenue 9,281,802 7,150,267
----------- -----------
COST OF SALES:
Cost of software license revenue 471,469 428,199
Cost of services and other revenue 3,248,903 1,706,940
----------- -----------
Total cost of sales 3,720,372 2,135,139
----------- -----------
GROSS PROFIT 5,561,430 5,015,128
OPERATING EXPENSES (Note 6):
Sales and marketing 2,678,784 2,426,087
Research and development 1,782,531 1,412,095
General and administrative 2,413,206 2,152,465
----------- -----------
Total operating expenses 6,874,521 5,990,647
----------- -----------
LOSS FROM OPERATIONS (1,313,091) (975,519)
INTEREST EXPENSE AND OTHER INCOME, net (79,268) (95,131)
----------- -----------
NET LOSS $(1,392,359) $(1,070,650)
=========== ===========
</TABLE>
See accompanying notes to financial statements. 3
<PAGE> 8
W.R. BILES & ASSOCIATES, INC.
STATEMENTS OF CAPITAL DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
--------------------- ------------------- ACCUMULATED CAPITAL
SHARES AMOUNT SHARES AMOUNT DEFICIT DEFICIENCY
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
January 1, 1995 858,000 $ 39,867 92,000 $ (48,764) $ 179,949 $ 171,052
Issuance of common
stock (Note 5) 50,000 22,500 22,500
Net loss (1,070,650) (1,070,650)
------- --------- ------ --------- ----------- -----------
BALANCE,
December 31, 1995 908,000 62,367 92,000 (48,764) (890,701) (877,098)
Distributions (Note 5) (81,038) (81,038)
Net loss (1,392,359) (1,392,359)
------- --------- ------ --------- ----------- -----------
BALANCE,
December 31, 1996 908,000 $ 62,367 92,000 $ (48,764) $(2,364,098) $(2,350,495)
======= ========= ====== ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 9
W.R. BILES & ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(1,392,359) $(1,070,650)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Depreciation and amortization 192,000 166,052
Change in operating assets and liabilities:
Accounts receivable 208,545 (133,654)
Prepaid expenses and other assets (9,970) 83,712
Accounts payable 690,001 352,814
Accrued liabilities 475,051 119,948
Deferred revenue (339,784) 643,933
----------- -----------
Net cash (used in) provided
by operating activities (176,516) 162,155
CASH FLOWS USED IN INVESTING ACTIVITIES -
Purchases of property and equipment (183,550) (148,245)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 22,500
Distributions to shareholders (81,038)
Proceeds from notes payable 35,491
Repayment of notes payable (314,973)
----------- -----------
Net cash used in financing activities (45,547) (292,473)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (405,613) (278,563)
CASH AND CASH EQUIVALENTS, beginning of year 473,893 752,456
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 68,280 $ 473,893
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during the year for:
Interest $ 99,874 $ 126,052
=========== ===========
Income taxes $ -- $ --
=========== ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 10
W.R. BILES & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
W.R. Biles & Associates, Inc. (Biles or the Company) provides process
information management solutions to companies in the chemicals,
pharmaceuticals, food and beverage, semiconductor and consumer products
industries. The Company also provides consulting, training and support
services to its customers. On September 30, 1997, certain assets of the
Company were acquired by Simulation Sciences Inc. (Note 9).
Cash and Cash Equivalents - Cash equivalents are defined as short-term,
highly-liquid investments with original maturities of three months or less.
Accounts Receivable - The Company sells its products and services to
various companies across several industries. The Company performs ongoing
credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses and
such losses have been within management's expectations.
Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization are provided using the double declining
balance method over the estimated useful lives ranging from three to seven
years. Repair and maintenance costs are expensed as incurred. Depreciation
expense was $192,000 and $166,052 for the years ended December 31, 1996 and
1995, respectively.
Long-Lived Assets - The Company accounts for the impairment and disposition
of long-lived assets in accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. In accordance with SFAS
No. 121, long-lived assets to be held are reviewed for events or changes in
circumstances which indicate that their carrying value may not be
recoverable. The Company periodically reviews the carrying value of
long-lived assets to determine whether or not an impairment to such value
has occurred and as of December 31, 1996, no such impairment was noted.
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 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, 1996 or 1995.
Revenue Recognition - Revenues from software licenses are recognized upon
shipment of the product, provided that no significant vendor or
post-contract support obligations remain and that collection of the
resulting receivable is deemed probable by management. Service revenue
includes training, consulting, and customer support, including maintenance
6
<PAGE> 11
W.R. BILES & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (CONTINUED)
- --------------------------------------------------------------------------------
agreements. Revenues from training and consulting are recognized at the
time the service is performed. Customer support revenues are recognized
ratably over the term of the related contract, generally one year.
Customer Concentration - Although the Company currently sells its products
to a variety of customers, ten customers account for approximately 49% and
57% of the Company's sales in 1996 and 1995, respectively. Additionally,
the top three customers represented approximately 26% and 28% of sales in
1996 and 1995, respectively. Therefore, the loss of, or a reduction in
sales to, any such customers could materially affect the Company's
business, operating results and financial position.
Income Taxes - The Company has elected to be taxed for federal purposes
under the provisions of Subchapter S of the Internal Revenue Code.
Accordingly, current and future taxable income of the Company is treated
as if it were distributed to the shareholder who is responsible for the
payment of taxes thereon. In accordance with the provisions of the Texas
Franchise Tax Law regarding corporations, the Company pays taxes at a
rate of 4 1/2% of taxable income. As the Company has incurred net losses
for the years ended December 31, 1996 and 1995, no taxes have been paid.
The Company provides for deferred state income taxes based on income
applicable to transactions which affect income for financial reporting and
state franchise tax purposes in different years.
Stock-Based Compensation - The Company accounts for stock-based awards to
employees, using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees.
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.
Recent Accounting Pronouncements - For the years beginning after January 1,
1998, the Company will adopt SFAS No. 130, Reporting Comprehensive Income
and SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. The Company is reviewing the impact of such statements on its
financial statements.
7
<PAGE> 12
W.R. BILES & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (CONTINUED)
- --------------------------------------------------------------------------------
2. LINE OF CREDIT
The Company had a line of credit agreement of up to $750,000 with a
bank which expired April 3, 1997. The line of credit agreement
stipulated borrowings not to exceed specified percentages of eligible
accounts receivable. Interest is payable monthly at the bank's
reference rate, plus .25% (9.75% at December 31, 1996). The line of
credit is collateralized by accounts receivable and guaranteed by the
Company's majority shareholder. The Company is subject to a minimum
net tangible worth covenant which it was not in compliance with at
December 31, 1996. However, during 1997, the Company repaid the bank
all amounts outstanding under the agreement.
3. NOTES PAYABLE
Notes payable consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Note payable to bank, interest payable
monthly at bank's reference rate plus 0.5%,
collateralized by certain property, paid in
full during 1996 $ - $ 259,240
Note payable to shareholder, interest only
payments monthly at 12.0%, principal due
upon demand. 46,008 46,008
-------- ---------
$ 46,008 $ 305,248
======== =========
</TABLE>
4. CAPITAL LEASE OBLIGATIONS
The following is a schedule of future minimum lease payments under capital
leases together with the present value of minimum lease payments as of
December 31, 1996:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 118,754
1998 101,789
1999 101,789
2000 84,823
--------
Total future minimum lease payments $407,155
Less amounts representing interest (82,447)
--------
Obligations under capital leases 324,708
Less current obligation (79,808)
--------
$244,900
=========
</TABLE>
Capital leases included in property and equipment at December 31, 1996, net
of accumulated depreciation, was $314,208.
8
<PAGE> 13
W.R. BILES & ASSOCIATES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (CONTINUED)
- --------------------------------------------------------------------------------
5. CAPITAL DEFICIENCY
Total cash distributions charged against accumulated deficit include
payments of $81,038 and $0 in 1996 and 1995, respectively, made to the
Company's shareholders as a form of supplemental dividends, as well as to
pay income taxes related to corporate earnings passed through to
shareholders.
Stock Option Information - At December 31, 1996, the Company had three
stock option plans in effect. The 1985 Stock Option Plan, the 1988 Stock
Option Plan and the 1990 Stock Option Plan (collectively, the Plans), allow
for the issuance of up to 60,000, 50,000 and 82,000 shares, respectively,
of the Company's common stock to executive personnel and key employees. The
options expire ten years after the date of grant, and options generally
vest at 20% per year. During the years ended December 31, 1996 and 1995, no
options were issued under any of the Plans, and no options were outstanding
under the 1985 and 1988 Plans. Under the terms of the 1990 Stock Option
Plan, options to purchase 40,000 shares were outstanding and exercisable at
$1.11 per share at December 31, 1995 and 1996. The weighted average
remaining contractual life for the outstanding options is 2.5 years.
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
interpretations.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income (loss) had the Company adopted the fair
value method as of the beginning of fiscal 1995. Under SFAS No. 123, the
fair value of stock-based awards to employees is calculated through the use
of option-pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise,
which greatly affect the calculated values. The impact of outstanding stock
options granted prior to 1995 is excluded from the pro forma calculation.
As no options have been issued under the terms of the Plans in 1996 and
1995, the impact of applying the fair value method of SFAS No. 123 to the
Company's options has not been calculated.
6. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities and certain equipment under
various operating leases. Total rent expense was $235,865 and $256,277 for
the years ended December 31, 1996 and 1995, respectively.
9
<PAGE> 14
W.R. BILES & ASSOCIATES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (CONTINUED)
- --------------------------------------------------------------------------------
Minimum annual lease commitments under noncancelable operating leases at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $297,420
1998 297,420
1999 297,420
2000 99,140
--------
$991,400
========
</TABLE>
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The litigation process is inherently uncertain
and it is possible that the resolution of such claims and legal actions may
adversely affect the Company. However, it is the opinion of management,
upon the advice of legal counsel, that the ultimate disposition of these
matters will not materially affect the Company's financial position.
7. 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. In
the event the future consequence of differences between the financial
reporting bases and the tax bases of the Company's assets and liabilities
result in a deferred tax asset, SFAS 109 requires an evaluation of the
probability of being able to realize the future benefits indicated by such
asset. A valuation allowance related to a deferred tax asset is recorded
when it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
Deferred state income taxes are primarily attributable to state net
operating losses and to the use of different methods of reporting income
for financial statement and tax reporting purposes. Differences between the
Company's effective tax rate and the state statutory rate are due to the
Company's treatment as an S Corporation.
As of December 31, 1996 and 1995, the Company has a net deferred tax asset
of approximately $54,000 and $34,000, respectively, with a valuation
allowance of $54,000 and $34,000, respectively, comprised of the following:
10
<PAGE> 15
W.R. BILES & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 23,000 $ 28,000
Accrual-to-cash adjustment 11,000 26,000
-------- --------
34,000 54,000
Less valuation allowance (34,000) (54,000)
-------- --------
$ -- $ --
======== ========
</TABLE>
The net operating loss carryforwards begin to expire in 1999.
8. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) and profit sharing plan (the Plan) which
provides for eligible employees (as defined) to make voluntary
contributions to the Plan to be matched by the Company up to a specified
percentage. The Company may also make additional discretionary
contributions under the terms of the Plan. The Company's matching
contributions are fully vested after six years of employment with the
Company. During the years ended December 31, 1996 and 1995, the Company did
not contribute to the Plan.
9. SUBSEQUENT EVENT
On September 30, 1997, certain net assets of the Company were acquired by
Simulation Sciences Inc. pursuant to the terms of an Asset Purchase
Agreement (the Agreement). Under the terms of the Agreement, the purchase
price for the net assets was approximately $5,600,000 including acquisition
costs. The purchase price consisted of $2,500,000 in cash and the
assumption of approximately $2,700,000 in net liabilities. Of the cash
portion of the purchase price, $625,000 will be held in escrow for up to
one year to cover any post acquisition contingencies. Simulation Sciences
Inc. intends to integrate and assimilate the operations of the Company,
which it purchased, into its on-going operations over the next twelve
months. In conjunction with the Agreement, the Company has terminated its
401(k) profit sharing plan.
11
<PAGE> 16
W.R. BILES & ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1997 TO SEPTEMBER 29, 1997
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
(UNAUDITED)
<S> <C> <C>
REVENUE (Note 1):
Software license revenue $ 1,255,882 $2,491,388
Services and other revenue 3,472,506 4,450,471
----------- ----------
Total revenue 4,728,388 6,941,859
----------- ----------
COST OF SALES:
Cost of software license revenue 257,425 307,759
Cost of services and other revenue 1,308,691 2,437,825
----------- ----------
Total cost of sales 1,566,116 2,745,584
----------- ----------
GROSS PROFIT 3,162,272 4,196,275
OPERATING EXPENSES:
Sales and marketing 1,808,063 1,956,835
Research and development 1,410,626 1,339,054
General and administrative 1,319,897 1,738 499
----------- ----------
Total operating expenses 4,538,586 5,034,388
----------- ----------
LOSS FROM OPERATIONS (1,376,314) (838,113)
INTEREST EXPENSE AND OTHER INCOME, net 182,573 57,196
----------- ----------
NET LOSS $(1,558,887) $ (895,309)
=========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 17
W.R. BILES & ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 TO SEPTEMBER 29, 1997
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,558,887) $ (895,309)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 144,000 144,000
Change in operating assets and liabilities:
Accounts receivable 2,026,990 1,301,787
Prepaid expenses and other assets 65,015 36,299
Accounts payable 230,884 421,830
Accrued liabilities (327,004) 15,072
Deferred revenue (739,767) (1,172,720)
----------- -----------
Net cash used in operating activities (158,769) (149,041)
CASH FLOWS USED IN INVESTING ACTIVITIES --
Purchases of property and equipment (56,287) (167,112)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (62,463)
Proceeds from notes payable 186,076 78,105
----------- -----------
Net cash provided by
financing activities 186,076 15,642
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (28,980) (300,511)
CASH AND CASH EQUIVALENTS, beginning of period 68,280 473,893
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 39,300 $ 173,382
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -- Cash paid during the year for:
Interest $ 199,838 $ 69,455
=========== ===========
Income taxes $ -- $ --
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 18
W.R. BILES & ASSOCIATES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1997 TO SEPTEMBER 29, 1997
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The interim condensed financial statements included herein have been
prepared by W.R. Biles and Associates (Biles or the Company) without audit.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted; nevertheless, the
management of the Company believes that the disclosures herein are adequate
to make the information presented not misleading. These condensed financial
statements should be read in conjunction with the audited financial
statements and notes thereto for the Company for the years ended December
31, 1996 and 1995, included in this Form 8K-A. In the opinion of
management, the condensed financial statements included herein reflect all
adjustments consisting only of normal recurring adjustments, necessary to
present fairly the results of its operations and its cash flows for the
period from January 1, 1997 to September 29, 1997 and the nine-month period
ended September 30, 1996. The results of operations for the interim periods
are not necessarily indicative of the results of operations for the full
year.
2. SUBSEQUENT EVENT
On September 30, 1997, certain net assets of the Company were acquired by
Simulation Sciences Inc. pursuant to the terms of an Asset Purchase
Agreement (the Agreement). Under the terms of the Agreement, the purchase
price for the net assets was approximately $5,600,000, including
acquisition costs. The purchase price consisted of $2,500,000 in cash and
the assumption of approximately $2,700,000 in net liabilities. Of the cash
portion of the purchase price, $625,000 will be held in escrow for up to
one year to cover any post acquisition contingencies. Simulation Sciences
Inc. intends to integrate and assimilate the operations of the Company,
which it purchased, into its on-going operations over the next twelve
months. In conjunction with the Agreement, the Company has terminated its
401(k) profit sharing plan.
<PAGE> 19
PRO FORMA FINANCIAL DATA
INTRODUCTION
The following unaudited pro forma financial data is based upon the
historical financial statements of Simulation Sciences Inc. ("the Company") for
the nine months ended September 30, 1997 and the year ended December 31, 1996
and W.R. Biles & Associates, Inc. ("Biles") for the period from January 1, 1997
to September 29, 1997 and the year ended December 31, 1996, and has been
prepared to present, on a pro forma basis, the unaudited combined results of
operations of the companies. The balance sheet of the Company includes the
effects of the purchase of Biles which was consummated on September 30, 1997.
Therefore, a pro forma balance sheet is not considered necessary. The unaudited
pro forma statement of operations for the year ended December 31, 1996 and for
the nine months ended September 30, 1997 gives effect to the acquisition as if
it had been completed as of January 1, 1996 using the purchase method of
accounting for business combinations.
The net purchase price of approximately $5,581,000 (which includes
transaction costs of approximately $350,000) was allocated to tangible
assets acquired of $796,000, intangible assets of $1,581,000, liabilities
assumed of $3,744,000 and in-process research and development of $4,000,000.
The pro forma financial data is provided for comparative purposes only and
does not purport to represent the actual financial position or results of
operations of the Company that actually would have been obtained if the
acquisition had been consummated on the date specified, nor is it necessarily
indicative of the results of operations that may be achieved in the future.
Adjustments to the pro forma operating results for the acquisition include
changes in depreciation and amortization to reflect the basis of assets
acquired; changes to cost of sales to reflect the amortization of developed
technology; changes in interest expense to reflect debt repaid at the time of
the Acquisition; a change to reflect the write-off of in-process research and
development at the time of acquisition; and changes to the provision for income
taxes to reflect reductions resulting from the pro forma income adjustments.
The pro forma financial data is based on certain assumptions and adjustments
described in the notes thereto and should be read in conjunction therewith.
<PAGE> 20
Simulation Sciences Inc. and W.R. Biles & Associates Inc.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDING DECEMBER 31, 1996
-----------------------------------------------------
SIMULATION BILES ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
Software license
revenue $43,561,069 $ 3,313,693 $46,874,762
Services and other
revenue 3,342,314 5,968,109 9,310,423
----------- ----------- -----------
Total revenue 46,903,383 9,281,802 56,185,185
----------- ----------- -----------
Cost of revenue:
Cost of software
license revenue 4,275,169 471,469 $ 527,090(1) 5,273,728
Cost of services and
other revenue 2,653,021 3,248,903 5,901,924
----------- ----------- ----------- -----------
Total cost of revenue: 6,928,190 3,720,372 527,090 11,175,652
----------- ----------- ----------- -----------
Gross profit 39,975,193 5,561,430 (527,090) 45,009,533
Operating Expenses:
Sales and marketing 16,571,770 2,678,784 19,250,554
Research and
development 12,171,729 1,782,531 13,954,260
General and
administrative 7,048,089 2,413,206 (158,667)(2) 9,302,628
In-process research
and development 4,000,000 (3) 4,000,000
----------- ----------- ----------- -----------
Total operating
expenses 35,791,588 6,874,521 3,841,333 46,507,442
----------- ----------- ----------- -----------
Income (loss) from
operations 4,183,605 (1,313,091) (4,368,423) (1,497,909)
Interest and other
income, net 458,058 (79,268) 72,638 (4) 451,428
----------- ----------- ----------- -----------
Income (loss) before
provision for
income tax 4,641,663 (1,392,359) (4,295,785) (1,046,481)
Provision for
income taxes 1,949,500 0 (709,022)(5) 1,240,478
----------- ----------- ----------- -----------
Net income (loss) $ 2,692,163 $(1,392,359) $(3,586,763) $(2,286,959)
=========== =========== =========== ===========
Net loss per share $ 0.32 $ (0.30)
=========== ===========
Weighted average
common shares 8,347,054 7,596,852(6)
=========== ==========
</TABLE>
- --------------
(1) Reflects the amortization of purchased technology on a straight line basis
over three years resulting from the allocation of a portion of the purchase
price to developed technology in the acquisition.
(2) Reflects a reduction in depreciation expense resulting from the acquisition
of only certain property and equipment in the acquisition.
(3) Reflects $4,000,000 allocated to in-process research and development and
expensed as a result of the acquisition.
(4) Reflects interest savings resulting from the repayment of the 9.75% line
of credit in the principal amount of $745,000 at the time of acquisition.
(5) Reflects an adjustment to the Company's effective tax rate for the year.
(6) Adjusted to exclude common stock equivalents due to the loss.
<PAGE> 21
Simulation Sciences Inc. and W.R. Biles & Associates, Inc.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the nine months ended September 30, 1997
---------------------------------------------------------
Simulation
Sciences Biles Adjustments Combined
------------ ----------- ----------- -----------
<S> <C>
Revenue:
Software license revenue $ 41,913,110 $ 1,255,882 $43,168,992
Services and other revenue 2,182,302 3,472,506 5,654,808
------------ ----------- -----------
Total revenue 44,095,412 4,728,388 48,823,800
------------ ----------- -----------
Cost of revenue:
Cost of software license revenue 2,613,706 257,425 $ 395,318 (1) 3,266,449
Cost of services and other revenue 2,001,932 1,308,691 3,310,623
------------ ----------- ----------- -----------
Total cost of revenue: 4,615,638 1,566,116 395,318 6,577,072
------------ ----------- ----------- -----------
Gross profit 39,479,774 3,162,272 (395,318) 42,246,728
------------ ----------- ----------- -----------
Operating Expenses:
Sales and marketing 13,188,986 1,808,063 14,997,049
Research and development 11,835,223 1,410,626 13,245,849
General and administrative 7,211,969 1,319,897 (119,000)(2) 8,412,866
In-process research and development
and other costs 17,520,000 (4,000,000)(3) 13,520,000
------------ ----------- ----------- -----------
Total operating expenses 49,756,178 4,538,586 (4,119,000) 50,175,764
------------ ----------- ----------- -----------
Loss from operations (10,276,404) (1,376,314) 3,723,682 (7,929,036)
Interest and other income, net 1,439,435 (182,573) 54,478 (4) 1,311,340
------------ ----------- ----------- -----------
Loss before provision for income taxes (8,836,969) (1,558,887) 3,778,160 (6,617,696)
Provision for income taxes 2,392,984 0 (460,339)(5) 1,932,645
------------ ----------- ----------- -----------
Net loss $(11,229,953) $(1,558,887) $ 4,238,499 $(8,550,341)
============ =========== =========== ===========
Net loss per share $ (1.02) $ (0.78)
============ ===========
Weighted average common shares outstanding 10,961,360 10,961,360
============ ===========
</TABLE>
- ----------------
(1) Reflects the amortization of purchased technology on a straight line basis
over three years resulting from an allocation of a portion of the purchase
price to developed technology in the acquisition.
(2) Reflects a reduction in depreciation expense resulting from the
acquisition of only certain property and equipment in the acquisition.
(3) Reflects $4,000,000 allocated to in-process research and development and
expensed as a result of the acquisition.
(4) Reflects interest savings resulting from the repayment of the 9.75% line
of credit in the principal amount of $745,000 of the time of acquisition.
(5) Reflects an adjustment to the Company's effective tax rate for the period.
