<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-39025
2,700,000 SHARES
LOGO
COMMON STOCK
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Of the 2,700,000 shares of Common Stock offered hereby, 2,586,818 shares
are being sold by Simulation Sciences Inc. ("SimSci" or the "Company") and
113,182 shares are being sold by certain stockholders of the Company (the
"Selling Stockholders"). The Company will not receive any proceeds from the sale
of shares by the Selling Stockholders. See "Principal and Selling Stockholders."
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "SMCI." On November 19, 1997, the last reported sale price of the Common
Stock on the Nasdaq National Market was $18.50 per share. See "Price Range of
Common Stock."
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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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>
<CAPTION>
=================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................. $18.00 $0.97 $17.03 $17.03
- -------------------------------------------------------------------------------------------------
Total(3)................... $48,600,000 $2,619,000 $44,053,511 $1,927,489
=================================================================================================
</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 $475,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 405,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$55,890,000, $3,011,850 and $50,950,661, 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 BT Alex. Brown Incorporated, Baltimore, Maryland, on or about November 25,
1997.
BT ALEX. BROWN
WESSELS, ARNOLD & HENDERSON
SOUNDVIEW FINANCIAL GROUP, INC.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 20, 1997
<PAGE> 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Securities and Exchange
Commission (the "Commission") by the Company are hereby specifically
incorporated by reference into this Prospectus: (i) Annual Report on Form 10-K
for the fiscal year ended December 31, 1996; (ii) Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997;
(iii) Current Report on Form 8-K dated March 26, 1997; (iv) Current Report on
Form 8-K dated September 15, 1997; (v) Current Report on Form 8-K dated
September 30, 1997, as amended by Form 8-K/A dated October 29, 1997; (vi) the
description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A filed on August 30, 1996, and any amendment
or report filed for the purpose of updating such description and (vii) the
description of the Company's Preferred Shares Purchase Rights contained in the
Company's Form 8-A filed on August 14, 1997, and any amendment or report filed
for the purpose of updating such description.
All reports and other documents subsequently filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
of such reports and other documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference in this
Prospectus will be deemed to be modified or superseded for the purposes of this
Prospectus to the extent that a statement contained herein, or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein, modifies or supersedes that statement. Any statement so
modified or superseded will not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the foregoing documents incorporated by reference herein (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such document). Requests for such documents
should be directed to Investor Relations, 601 Valencia Avenue, Suite 100, Brea,
California 92823; telephone number: (714) 579-0412.
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SIMSCI(R), PRO/II(R), PROVISION(R), HEXTRAN(R), PIPEPHASE(R), THE
SIMULATOR(R), OpenYield(R) AND AIM(R) are registered trademarks of the Company.
AIM Supervisor(TM), AIM/AT Suite(TM), FACs(TM), INPLANT(TM), BATCHSIM(TM),
DATACON(TM), ROM(TM), ROMeo(TM), VISUAL FLARE(TM), VISUAL FLOW SUITE(TM), VISUAL
NETWORK(TM) AND NETOPT(TM) are trademarks of the Company. All other trademarks
referred to in this Prospectus are the property of their respective owners.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH REGULATION M. SEE "UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information contained elsewhere herein or incorporated herein by reference and
the Consolidated Financial Statements and Notes thereto incorporated by
reference 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 application software and related services to the petroleum,
petrochemical, industrial chemical and other process industries, as well as the
engineering and construction firms that support those industries. SimSci's
software products are designed to increase customers' profitability by reducing
their capital investment costs, increasing yields, improving product quality and
enhancing management decision making. SimSci has developed software to model
steady-state and dynamic conditions for both continuous and batch processes. The
Company's core simulation technology includes a substantial collection of
physical property data and modeling algorithms used to calculate physical and
chemical characteristics of materials under a broad set of operating conditions.
Key applications addressed by SimSci's products and services include oil and gas
production optimization, process design, operational analysis, process
information management, on-line modeling and optimization, plant performance
monitoring, data reconciliation, and environmental compliance. SimSci provides
support and service to more than 650 customers in over 65 countries.
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 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 Windows NT and
UNIX, and utilize an easy-to-use graphical user interface. The Company also
offers a number of other products to simulate various aspects of process
industry operations.
The Company's strategy is to expand and extend the use of its simulation
technology and solutions for design, operation 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's strategy includes pursuing acquisitions of
complementary businesses, products and technologies. During the first nine
months of 1997, the Company completed 8 acquisitions of assets, licenses and
technology and the related hiring of approximately 75 new employees.
3
<PAGE> 4
The Company markets its products and services through its direct sales
organization complemented by sales agents and distributors. The Company's global
direct sales force includes sales personnel located in three sales and support
offices in the United States and international sales offices in Brazil, Egypt,
Germany, Japan, Singapore, the United Kingdom 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. Selected customers include Exxon
Oil Corporation, Mobil Oil Corporation, Royal Dutch Shell Oil Company, Allied
Signal Corporation, Hoechst AG, Mitsubishi Chemical Corporation, Bechtel
Corporation, Fluor Daniel, Inc. and Snamprogetti SpA.
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.
------------------------
When used in this Prospectus, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Such statements, which include but are not limited to statements
under the captions "Risk Factors," "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this Prospectus as to the rate of contract renewals, the Company's
ability to integrate acquired assets, licenses and technology, the timing of
availability of products under development, the ability to commercialize
products developed under collaborations and alliances, the acceptance,
performance and utility of the Company's products and services, the adequacy of
capital resources, future fluctuations in various operating expenses, future
capital expenditures, the sufficiency of existing and potential cash resources,
disruptions associated with facilities moves, the use of the proceeds of this
offering, and certain products' future percentage contribution to total revenue
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties include, but are
not limited to, those risks discussed herein and in the documents incorporated
herein by reference. 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 assumes no obligation to update such
forward-looking statements or to update the reasons actual results could differ
materially from those anticipated in such forward-looking statements. See "Risk
Factors."
4
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........................ 2,586,818 shares
Common Stock offered by the Selling Stockholders........... 113,182 shares
Common Stock to be outstanding after the offering.......... 13,631,850 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>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997(2)
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<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total revenue........................ $23,940 $28,144 $28,252 $33,119 $46,903 $33,888 $44,095
Gross profit......................... 19,855 24,014 21,564 26,359 39,975 29,034 39,480
Total operating expenses............. 19,009 21,857 23,965 24,152 35,791 26,541 49,756
Income (loss) from operations........ 846 2,157 (2,401) 2,207 4,184 2,493 (10,276)
Net income (loss).................... 536 1,604 (1,642) 1,355 2,692 1,619 (11,230)
Pro forma and net income (loss) per
share.............................. $ 0.32 $ 0.21 $ (1.02)
======= ======= =======
Pro forma and weighted average common
shares............................. 8,347 7,765 10,961
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
ACTUAL AS ADJUSTED(3)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................................ $ 6,879 $ 50,458
Total assets............................................................... 60,116 103,695
Total liabilities.......................................................... 27,190 27,190
Total stockholders' equity................................................. 32,926 76,505
</TABLE>
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(1) Excludes (i) 1,680,790 shares of Common Stock issuable upon the exercise of
outstanding options at September 30, 1997 under the Company's stock option
plans at a weighted average exercise price of $7.71 per share and (ii)
options to purchase an additional 383,500 shares granted after September 30,
1997 at an exercise price of $22.88 per share. Includes 24,949 shares of
Common Stock issued upon the exercise of options after September 30, 1997.
(2) Includes a total of $17.5 million in charges for the write-off of in-process
research and development and other costs relating to certain acquisitions
for the nine months ended September 30, 1997. See "Risk Factors -- Risks
Associated with Past and Potential Future Acquisitions" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(3) Adjusted to give effect to the sale of the 2,586,818 shares of Common Stock
offered by the Company hereby at a public offering price of $18.00 per share
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company. See "Use of Proceeds" and
"Capitalization."
------------------------
Except as otherwise specified, all information in this Prospectus assumes
no exercise of the Underwriters' over-allotment option. See "Underwriting."
5
<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
which appears in this Prospectus or in the documents incorporated herein by
reference 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 Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include those discussed below as well as those
discussed elsewhere herein. The forward-looking statements contained herein are
made as of the date of this Prospectus, and the Company assumes no obligation to
update such forward-looking statements or to update the reasons actual results
could differ materially from those anticipated in such forward-looking
statements. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations" and "Information Regarding Forward-Looking
Statements."
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, timing of 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; the timing and structure of recent
acquisitions and future acquisitions, if any; level of services and other
activity; 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 or service offerings; market-success of the Company's service
offerings; changes in contract terms (including terms affecting the timing of
recognition of license revenue) and the rate at which such changes are made; the
Company's ability to control costs, including the need for, and degree of use
of, third-party contractors and the hiring of new employees; 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 to a significant degree on orders booked and
license renewals in that quarter and is not predictable with any degree of
certainty. Since the Company's expense levels are based in part on management's
expectations regarding future revenue, if revenue is below expectations in any
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
6
<PAGE> 7
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.
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 nine months ended September 30,
1997. 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 highly cyclical petroleum industry. 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. In addition, companies in the
petroleum industry are experiencing growing pressures to consolidate in response
to the increasing need to reduce costs to remain competitive. There can be no
assurance that consolidation in the petroleum industry will not result in a loss
of customers or revenue or will not otherwise have a material adverse effect on
the Company's business, operating results or 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 newly
introduced or more established in such other process industries or that the
Company's products and services will 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. The Company derives a significant portion
of its total revenue from the renewal of license agreements with existing
customers. Since the Company's planned expense levels are based in part on
management's expectations regarding renewal rates and future revenue, if
renewals and revenue are below expectations in any quarter, the adverse effect
may be magnified by the Company's inability to adjust spending in a timely
manner to compensate for the revenue shortfall, which could have a material
adverse effect on the Company's business, operating results and financial
condition. 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
7
<PAGE> 8
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
instability 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. See "Management's
Discussion and Analysis of Results of Operations -- Overview."
Risks Associated With Past and Future Acquisitions. During the first nine
months of 1997, the Company completed eight acquisitions of assets, licenses and
technology and the related hiring of approximately 75 new employees. The
integration of the acquired assets, licenses and technology will involve the
assimilation of operations and products, which could divert the attention of the
Company's management team and may have a material adverse effect on the
Company's operating results in future quarters. In addition, certain of such
acquired assets, licenses or technology may require significant additional
development, such as the completion of product functionality and the reduction
of program errors, before release in commercial products. The Company's strategy
includes consideration of additional acquisitions in the future, although there
can be no assurance that suitable companies, technologies or products will be
available for acquisition. Such acquisitions entail numerous risks, including an
inability to assimilate acquired operations and products successfully, inability
to complete development of acquired in-process research and development,
diversion of management's attention, difficulties and uncertainties in
transitioning the business relationships from the acquired entity to the
Company, difficulty in integrating new employees and loss of key employees of
acquired companies. In addition, future acquisitions by the Company may result
in dilutive issuances of equity securities, the incurrence of debt, large
one-time expenses, and the creation of goodwill or other intangible assets that
could result in significant amortization expense. During the nine months ended
September 30, 1997, the Company incurred a total of approximately $17.5 million
in charges for the write-off of in-process research and development as a result
of the allocation of a portion of the purchase price and other charges related
to certain acquisitions. Any one or more of these factors could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Need to Achieve Greater Market Penetration. 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. In addition to SimSci's traditional
emphasis on petroleum and petrochemical process industries, the Company is
increasing its marketing and product targeting efforts in the industrial
chemical, pharmaceutical, and fine chemical process industries. Increased market
acceptance of the Company's products 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 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."
8
<PAGE> 9
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 existing and 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. ("Aspen"), Hyprotech, Ltd. and Chemstations, Inc., and,
with respect to the Company's technology and consulting services, the Hi-Spec
division of Honeywell, Inc., the Advanced Control and Optimization Division of
Aspen 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, certain of the Company's
current and potential competitors have greater name recognition, larger
installed bases and more diversified product lines that could be leveraged to
increase market share to the Company's detriment. 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."
Dependence Upon Product Development; Need To Develop New and Acquired
Technologies. 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. In addition, an important part of the
Company's product development strategy is to acquire or obtain rights to new
technologies from third parties to enhance the Company's existing products or to
develop into new products. In this regard, during the first nine months of 1997,
the Company completed eight acquisitions of assets, licenses and technology,
including technology that will require significant additional development before
9
<PAGE> 10
release in commercial products. There can be no assurance that the Company will
be successful in acquiring, developing and marketing products or 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 acquisition, development, introduction and sale of
such products or enhancements or that such products or 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 certain of its new products and enhancements to certain of its existing
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."
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 61%, 64%, 67% and 65% of total revenue in 1994, 1995 and 1996 and
the nine months ended September 30, 1997, 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 a portion of its total 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
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 or marketing of its
products. For example, the Company has entered into a number of strategic
alliances with respect to its new products and product enhancements, including a
development arrangement with Mobil Oil Corporation with respect to NETOPT; a
joint development arrangement with Shell Oil Products Company, a subsidiary of
Shell Oil Company (collectively, "Shell") with respect to ROMeo; a development
and marketing agreement with IFP, ELF and TOTAL with respect to
PIPEPHASE-TACITE; a general cooperation agreement with Bayer AG with respect to
Simulation Manager; and a marketing agreement with Japan National Oil
Corporation ("JNOC") with respect to the integration of PIPEPHASE with JNOC's
well simulation program. The Company has also entered into cooperation
agreements with Fluor Daniel, IBM and SAP AG. 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
10
<PAGE> 11
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."
Management of Growth. 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
recent growth is attributable in part to recent acquisitions of businesses,
products and technologies, and the related hiring of officers and employees of
such acquired businesses. The Company's ability to manage future growth, if any,
will depend on the ability of the Company's management to work together
effectively and the Company's ability to continue to implement and improve
operational, financial and management information and controls systems on a
timely basis, together with maintaining effective cost controls, and any failure
to do so could have a material adverse effect on the Company's business,
operating results and financial condition. The Company may also experience
changes in senior management that could affect the Company's operations. For
example, the Company's chief financial officer joined the Company in October
1997. Further, 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 is licensed from third parties. These licenses may 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 a 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
11
<PAGE> 12
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 outside the United States, 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."
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than three years, computer systems and software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. Although the
Company believes that its products and internal systems are Year 2000 compliant,
the Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or patch their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
software products such as those offered by the Company, which could result in a
material adverse effect on the Company's business, operating results and
financial condition.
Volatility of Stock Price. The market price for the Company's Common Stock
has in the past been and in the future could be subject to significant
fluctuations as a result of 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, including SimSci,
have been adversely affected by recent world financial market events, including
significant market volatility in late October 1997. Stock prices for many
companies in the technology and emerging growth sectors have experienced wide
fluctuations that 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. See "Price Range of Common Stock."
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 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
12
<PAGE> 13
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. 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."
Risks Associated With Facilities Moves. The Company has recently entered
into a new lease for an approximately 45,000 square foot facility in the
Houston, Texas area and intends to consolidate its Houston-area operations by
relocating them to this facility in the near future. In addition, the Company is
currently seeking alternate space near its Brea, California headquarters and
could also move its Brea operations in the near future. Each move of Company
facilities involves coordination of complex events in order to avoid or minimize
disruption or delay of the Company's operations, including potential delays in
product development or shipment of products. If any of the anticipated facility
moves were to result in significant delays in product development or other
disruption of operations, the Company's business, operating results and
financial condition could be materially adversely affected. See
"Business -- Facilities."
Anti-takeover 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. The issuance of Preferred
Stock could have the effect of delaying, deferring or preventing a change in
control of the Company. In addition, the Company has a Stockholder Rights
Agreement that could discourage potential acquisition proposals and could delay
or prevent a change in control of the Company. The Company is also afforded the
protections of the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). The protections of the Company's
Stockholder Rights Agreement and Section 203 together with 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."
13
<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 the public offering price of $18.00 per share
will be $43.6 million ($50.5 million, if the Underwriters' over-allotment option
is exercised in full) after deducting the 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. 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 currently in negotiations 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.
PRICE RANGE OF COMMON STOCK
The Company was approved for quotation on the Nasdaq National Market
beginning October 25, 1997 under the symbol "SMCI." The following table sets
forth, for the periods indicated, the high and low per share sale prices of the
Common Stock, as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1996
Fourth Quarter (beginning October 25)...................... $ 15.00 $ 9.25
FISCAL YEAR ENDED DECEMBER 31, 1997
First Quarter.............................................. 18.63 10.00
Second Quarter............................................. 15.38 9.13
Third Quarter.............................................. 19.88 12.50
Fourth Quarter (through November 19)....................... 23.38 15.88
</TABLE>
On November 19, 1997, the last reported sale price for the Common Stock, as
reported by the Nasdaq National Market, was $18.50. As of September 30, 1997,
the Company had approximately 45 holders of record of the Common Stock.
14
<PAGE> 15
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
September 30, 1997 and as adjusted to give effect to the sale of the 2,586,818
shares of Common Stock offered by the Company hereby at the public offering
price of $18.00 per share and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by the Company and the
application of the net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------
ACTUAL AS ADJUSTED(1)
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
Obligation related to acquisitions.......................... $ 600 $ 600
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000,000 shares
authorized, 100,000 shares designated as Series A
Participating Preferred Stock; none issued and
outstanding............................................... -- --
Common Stock, $0.001 par value, 30,000,000 shares
authorized; 11,020,083 and 13,520,083 shares issued and
outstanding actual and as adjusted(2)..................... 11 14
Additional paid-in capital.................................. 37,889 81,465
Retained earnings........................................... (4,974) (4,974)
----------- --------------
Total stockholders' equity.................................. 32,926 76,505
----------- --------------
Total capitalization.............................. $ 33,526 $ 77,105
============ =============
</TABLE>
- ---------------
(1) Adjusted to give effect to the sale of the 2,586,818 shares of Common Stock
offered by the Company hereby at a public offering price of $18.00 per share
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company.
(2) Excludes (i) 1,680,790 shares of Common Stock issuable upon the exercise of
outstanding options at September 30, 1997 under the Company's stock option
plans at a weighted average exercise price of $7.71 per share, (ii) options
to purchase an additional 383,500 shares granted after September 30, 1997 at
an exercise price of $22.88 per share, and (iii) the exercise of options to
purchase 24,949 shares of Common Stock after September 30, 1997.
15
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of December 31,
1995 and 1996 and for the years ended December 31, 1994, 1995 and 1996, are
derived from the Company's consolidated financial statements incorporated by
reference in this Prospectus, which were audited by Deloitte and Touche LLP,
independent auditors. The selected financial data presented below as of December
31, 1992, 1993 and 1994 and for the years ended December 31, 1992 and 1993 are
derived from the Company's consolidated financial statements, not included or
incorporated by reference in this Prospectus. The selected consolidated
financial data for the nine months ended September 30, 1996 and 1997 and at
September 30, 1997 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
incorporated by reference 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 June 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue
Software license revenue.......... $22,443 $25,048 $25,609 $29,889 $43,561 $31,281 $ 41,913
Services and other revenue........ 1,497 3,096 2,643 3,230 3,342 2,607 2,182
------- ------- ------- ------- ------- ------- -------
Total revenue............... 23,940 28,144 28,252 33,119 46,903 33,888 44,095
Cost of revenue
Cost of software license
revenue......................... 2,849 2,886 3,990 3,509 4,275 2,932 2,613
Cost of services and other
revenue......................... 1,236 1,244 2,698 3,251 2,653 1,922 2,002
------- ------- ------- ------- ------- ------- -------
Total cost of revenue....... 4,085 4,130 6,688 6,760 6,928 4,854 4,615
------- ------- ------- ------- ------- ------- -------
Gross profit........................ 19,855 24,014 21,564 26,359 39,975 29,034 39,480
Operating expenses
Sales and marketing............... 8,685 9,842 10,473 11,662 16,571 11,905 13,189
Research and development.......... 7,258 8,230 9,634 8,621 12,172 9,627 11,835
General and administrative........ 3,066 3,785 3,858 3,869 7,048 5,009 7,212
In-process research and
development and other costs..... -- -- -- -- -- -- 17,520
------- ------- ------- ------- ------- ------- -------
Total operating expenses.... 19,009 21,857 23,965 24,152 35,791 26,541 49,756
Income (loss) from operations....... 846 2,157 (2,401) 2,207 4,184 2,493 (10,276)
Interest and other income, net...... 271 313 194 100 458 299 1,439
------- ------- ------- ------- ------- ------- -------
Income (loss) before provision
(benefit) for income taxes........ 1,117 2,470 (2,207) 2,307 4,642 2,792 (8,837)
Provision (benefit) for income
taxes............................. 581 866 (565) 952 1,950 1,173 2,393
------- ------- ------- ------- ------- ------- -------
Net income (loss)................... $ 536 $ 1,604 $(1,642) $ 1,355 $ 2,692 $ 1,619 $(11,230)
======= ======= ======= ======= ======= ======= =======
Pro forma and net income (loss) per
share............................. $ 0.32 $ 0.21 $ (1.02)
======= ======= =======
Pro forma and weighted average
common shares..................... 8,347 7,765 10,961
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................... $ 5,943 $ 7,375 $ 5,320 $ 6,415 $27,904 $ 6,879
Total assets....................... 13,914 16,939 16,293 21,554 53,198 60,116
Total liabilities.................. 5,807 6,810 7,806 11,712 14,379 27,190
Total stockholders' equity......... 8,107 10,129 8,487 9,842 38,819 32,926
</TABLE>
16
<PAGE> 17
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 incorporated by reference in this Prospectus. The
discussion in this Prospectus contains 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 or in the documents incorporated by
reference herein. The Company's actual results could differ materially from
those anticipated in such forward-looking statements. Factors that could cause
or contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere herein and in the documents incorporated
herein by reference. The forward-looking statements contained herein are made as
of the date of this Prospectus, and the Company assumes no obligation to update
such forward-looking statements or to update the reasons actual results could
differ materially from those anticipated in such forward-looking statements. See
"Risk Factors" and "Information Regarding Forward-Looking Statements."
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, except its
current chief financial officer, who joined the Company in October 1997.
The Company generally licenses its software pursuant to non-cancelable,
one- to five-year term licenses. The Company receives over 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, the substantial majority 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 and nine
months ended September 30, 1997. The remainder of the Company's revenue is
derived from the license of 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 61%, 64%, 67%, and 65% of total revenue in 1994,
1995, 1996 and the nine months ended September 30, 1997, respectively.
The Company recognizes revenue from product licensing agreements in
accordance with the 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
17
<PAGE> 18
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, in
early 1996 the Company began entering into 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 substantial majority of the Company's new and renewal
contracts now contain terms that result in License Revenue. For this reason, the
Company does not believe that revenue and results of operations for periods
ended on or prior to June 30, 1996 will be directly comparable to results for
future periods. Furthermore, because the Company had only begun to recognize
License Revenue during the quarter ended March 31, 1996, the Company does not
believe that revenue and results of operations for the nine-month period ended
September 30, 1997 are directly comparable to the results for the year earlier
period. Revenue recognition on certain 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.
RECENT ACQUISITIONS
During 1997, the Company has pursued a strategy of acquiring complementary
businesses, products and technologies to broaden the Company's product and
service offerings to facilitate market penetration. During the first nine months
of 1997, the Company completed the following eight acquisitions of assets,
licenses or technologies:
In March 1997, the Company acquired certain assets of Salumunek & Assoc.,
Inc. for $870,000 in cash. The acquired assets include a yield accounting system
that has been integrated with the Company's data reconciliation program, which
together comprise the Company's OpenYield product offering.
In March 1997, the Company acquired certain assets of Visual Solutions,
Inc. for a total of $5.5 million in cash and Common Stock of the Company. The
Company has developed certain of the acquired technology into its Visual Flow
Suite product, which expands the Company's product offerings to include a
solution that enables plant engineers to model pressure relief networks, and the
Company is currently developing a set of tools based on certain of the acquired
technology that will enable the integration of process industry applications
under a single user interface.
In May 1997, the Company entered into a research and development agreement
with, and acquired certain technology for $1.0 million in cash from, Bayer AG.
The acquired technology, Simulation Manager, is currently under development as a
product designed to enable customers to leverage their legacy applications by
allowing the simultaneous application of independent software programs to a
single optimization problem.
In June 1997, the Company acquired certain technology from Raytheon
Engineers & Constructors, Inc. for $1.0 million in cash. The acquired technology
includes the Company's FACS service offering, which provides a soft sensor
solution based on rigorous dynamic models.
In September 1997, the Company concluded three transactions with Shell Oil
Products Company, a subsidiary of Shell Oil Company (collectively, "Shell"), for
the acquisition and license of certain technology of Shell, including the
acquisition of business planning software for $1.5 million in cash and, for a
payment of $1.0 million in cash, obtaining certain exclusive marketing
18
<PAGE> 19
rights and the right to purchase Shell's advanced multivariable process control
tools. The Company also acquired an irrevocable, perpetual, exclusive,
worldwide, fully-paid, royalty-free license to Shell's OPERA solver and MITRE
modeling environment for a total of $6.0 million in cash and Common Stock,
payable as follows: (i) $1.5 million in cash to be paid on the date that the
Company ships the first commercial version of ROMeo, the Company's product under
development that will integrate OPERA and MITRE and certain of the Company's own
software, and (ii) $4.5 million in Common Stock based on the value of the
Company's Common Stock over the ten-day period ending seven days before such
shipment date, which is expected in the first half of 1998.
In September 1997, the Company acquired certain assets of W.R. Biles &
Associates, Inc. for approximately $5.2 million, including a cash payment of
$2.5 million and the assumption of approximately $2.7 million in net
liabilities. The acquired assets included the Company's AIM/AT product under
development, a Windows NT-based process information management programs for
continuous and batch processes.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's Consolidated
Statements of Operations as a percentage of total revenue for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue
Software license revenue.................... 90.6% 90.2% 92.9% 92.3% 95.1%
Services and other revenue.................. 9.4 9.8 7.1 7.7 4.9
----- ----- ----- ----- -----
Total revenue....................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue
Cost of software license revenue............ 14.1 10.6 9.1 8.6 5.9
Cost of services and other revenue.......... 9.6 9.8 5.7 5.7 4.6
----- ----- ----- ----- -----
Total cost of revenue............... 23.7 20.4 14.8 14.3 10.5
----- ----- ----- ----- -----
Gross profit.................................. 76.3 79.6 85.2 85.7 89.5
Operating expenses
Sales and marketing......................... 37.1 35.2 35.3 35.1 29.9
Research and development.................... 34.1 26.0 26.0 28.4 26.8
General and administrative.................. 13.6 11.7 15.0 14.8 16.4
In process research and development and
other costs.............................. -- -- -- -- 39.7
----- ----- ----- ----- -----
Total operating expenses............ 84.8 72.9 76.3 78.3 112.8
----- ----- ----- ----- -----
Income (loss) from operations................. (8.5) 6.7 8.9 7.4 (23.3)
Interest and other income, net................ 0.7 0.3 1.0 0.9 3.3
----- ----- ----- ----- -----
Income (loss) before provision (benefit) for
income taxes................................ (7.8) 7.0 9.9 8.3 (20.0)
Provision (benefit) for income taxes.......... (2.0) 2.9 4.2 3.5 5.5
----- ----- ----- ----- -----
Net income (loss)............................. (5.8)% 4.1% 5.7% 4.8% (25.5)%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Total Revenue. Total revenue increased 30% to $44.1 million for the nine
months ended September 30, 1997 from $33.9 million for the nine months ended
September 30, 1996. Software
19
<PAGE> 20
license revenue, which includes revenue from software licenses, maintenance and
support fees, increased 34% to $41.9 million for the nine months ended September
30, 1997 from $31.3 million for the nine months ended September 30, 1996. The
increase in software license revenue was primarily attributable to the effect of
the change in contract terms, renewals of licenses for higher fees, addition of
new products and services to renewing contracts and licenses to new customers.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" for a discussion of the change in contract terms.
Services and other revenue, which includes integration, ROM, consulting and
training services, decreased 16% to $2.2 million from $2.6 million for the nine
months ended September 30, 1997 and 1996, respectively. The decrease in services
and other revenue primarily relates to a decrease in ROM projects.
Total Cost of Revenue. Total cost of revenue decreased 5% to $4.6 million
for the nine months ended September 30, 1997 from $4.9 million for the nine
months ended September 30, 1996. Cost of software license revenue, which
includes costs of product and distribution, customer support and maintenance,
and royalties, was $2.6 and $2.9 million for the nine months ended September 30,
1997 and 1996, respectively. Cost of software license revenue as a percentage of
software license revenue was 6% and 9% in the nine months ended September 30,
1997 and 1996, respectively. The decrease as a percentage of software license
revenues was due primarily to the increase in software license revenues. The
decrease in dollars in cost of software license revenue was due primarily to
lower support costs. Cost of services and other revenue, which includes costs of
personnel involved in project execution and training, as well as travel,
third-party professional fees and related administrative costs, was $2.0 million
and $1.9 million for the nine months ended September 30, 1997 and 1996,
respectively. Cost of services and other revenue as a percentage of services and
other revenue increased to 92% from 74% for the nine months ended September 30,
1997 and 1996, respectively, primarily due to the decrease in services and other
revenue during the period and underutilization of services personnel and other
resources.
Sales and Marketing. Sales and marketing expenses increased 11% to $13.2
million for the nine months ended September 30, 1997 from $11.9 million for the
nine months ended September 30, 1996. Sales and marketing expenses as a
percentage of total revenue were 30% and 35% for the nine months ended September
30, 1997 and 1996, respectively. The increase in sales and marketing expenses in
dollars was due primarily to an increase in the number of sales and marketing
professionals and related expenses. The Company anticipates that sales and
marketing expenses will increase in dollars and may fluctuate as a percentage of
total revenue in the future.
Research and Development. Research and development expenses increased 23%
to $11.8 million for the nine months ended September 30, 1997 from $9.6 million
for the nine months ended September 30, 1996. Research and development expenses
as a percentage of total revenue were 27% and 28% for the nine months ended
September 30, 1997 and 1996, respectively. The dollar increase in research and
development expenses was primarily due to an increase in the number of technical
professionals, including support staff, as well as personnel hired in connection
with acquisitions. 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 increased
44% to $7.2 million for the nine months ended September 30, 1997 from $5.0
million for the nine months ended September 30, 1996. General and administrative
expenses as a percentage of total revenue were 16% and 15% in the nine months
ended September 30, 1997 and 1996, respectively. The increase in general and
administrative expenses in dollars was primarily due to the costs associated
with being a publicly held company, personnel-related costs, costs associated
with the Company's tax planning program, and consulting and legal expenses. The
Company anticipates that its general and administrative expenses will increase
in dollars and may fluctuate as a percentage of total revenue in the future.
20
<PAGE> 21
In-process Research and Development and Other Costs. In-process research
and development expense of $16.2 million for the nine months ended September 30,
1997 was due to the allocation of a portion of the purchase price of technology
acquired. The amounts allocated to in-process research and development were
based on management's assumptions. Other costs of $1.3 million was due to the
write off of amounts paid in previous periods in connection with certain
technology acquired from Shell.
Interest and Other Income. Interest and other income increased $1.1
million to $1.4 million for the nine months ended September 30, 1997 from $0.3
million for the nine months ended September 30, 1996. The increase was primarily
attributable to interest income associated with the proceeds received in the
Company's initial public offering in the fourth quarter of 1996 and an increase
in interest income from the effect of the change in contract terms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
Provision for Incomes Taxes. The Company's effective tax rate, excluding
the in-process research and development and other costs, decreased to 40% from
42% for the nine months ended September 30, 1997 and 1996, respectively, due to
the Company's implementation of a tax planning program.
Net Income (Loss). Net loss was $11.2 million for the nine months ended
September 30, 1997 compared to net income of $1.6 million for the nine months
ended September 30, 1996. Excluding the $17.5 million in charges for in-process
research and development and other costs, net income for the nine months ended
September 30, 1997 would have been approximately $5.2 million.
COMPARISON OF 1996 TO 1995
Total Revenue. Total revenue increased 42% to $46.9 million for the year
ended December 31, 1996 from $33.1 million for the year ended December 31, 1995.
Software license revenue, which includes revenue from software licenses,
maintenance and support fees, increased 46% to $43.6 million for the year ended
December 31, 1996 from $29.9 million for the year ended December 31, 1995. The
increase in software license revenue was primarily attributable to the effect of
the change in contract terms, renewals of licenses for higher fees, addition of
new products and services to renewing contracts and licenses to new customers.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" for discussion of change in contract terms. Services and
other revenue, which includes integration, ROM, consulting and training
services, was $3.3 million and $3.2 million for the years ended December 31,
1996 and 1995, respectively.
Total Cost of Revenue. Total cost of revenue increased 2% to $6.9 million
for the year ended December 31, 1996 from $6.8 million for the year ended
December 31, 1995. Cost of software license revenue, which includes costs of
production and distribution, customer support and maintenance, and royalties,
increased 22% to $4.3 million from $3.5 million for the years ended December 31,
1996 and 1995, respectively. Cost of software license revenue as a percentage of
software license revenue was 10% and 12% in the years ended December 31, 1996
and 1995, respectively. Such decrease primarily relates to the increase in
software license revenue. Cost of services and other revenue, which includes
costs of personnel involved in training and project execution, as well as
travel, third-party professional fees and related administrative costs,
decreased 18% to $2.7 million from $3.3 million for the years ended December 31,
1996 and 1995, respectively. Cost of services and other revenue as a percentage
of services and other revenue decreased to 79% from 101% for the years ended
December 31, 1996 and 1995, respectively as the Company improved employee
productivity on ROM projects.
Sales and Marketing. Sales and marketing expenses increased 42% to $16.6
million for the year ended December 31, 1996 from $11.7 million for the year
ended December 31, 1995. Sales and marketing expenses as a percentage of total
revenue were 35% for each of the years ended December 31, 1996 and 1995. The
increase in sales and marketing expenses in dollars was due
21
<PAGE> 22
primarily to an increase in the number of sales and marketing professionals and
related hiring expenses. 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 increased 41%
to $12.2 million for the year ended December 31, 1996 from $8.6 million for the
year ended December 31, 1995. These increases were due to an increase in the
number of engineers and related hiring expenses and third-party contractors
involved in the development of a number of planned upgrades and new products.
Research and development expenses as a percentage of total revenue were 26% for
each of the years ended December 31, 1996 and 1995. 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 increased
82% to $7.0 million for the year ended December 31, 1996 from $3.9 million for
the year ended December 31, 1995. General and administrative expenses as a
percentage of total revenue were 15% and 12% in the years ended December 31,
1996 and 1995, respectively. The increase in general and administrative expenses
in dollars and as a percentage of total revenue was primarily due to the
addition of senior management personnel, as well as the increase in expense
recorded for bad debts. 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 increased $358,000 to
$458,000 for the year ended December 31, 1996 from $100,000 for the year ended
December 31, 1995. The increase was primarily attributable to interest income
associated with the proceeds received in the Company's initial public offering
in the fourth quarter of 1996 and an increase in interest income from the effect
of the change in contract terms. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."
Provision for Income Taxes. The Company's effective tax rate was 42% and
41% for the years ended December 31, 1996 and 1995, respectively.
COMPARISON OF 1995 TO 1994
Total Revenue. Total revenue increased 17% to $33.1 million for the year
ended December 31, 1995 from $28.3 million for the year ended December 31, 1994.
Software license revenue, which includes revenue from software licenses,
maintenance and support fees, increased 17% to $29.9 million for the year ended
December 31, 1995 from $25.6 million for the year ended December 31, 1994. The
increase in software license revenue was primarily attributable 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, which includes integration, ROM, consulting
and training services, was $3.2 million and $2.6 million for the years ended
December 31, 1995 and 1994, respectively. The increase in services and other
revenue 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.
Total Cost of Revenue. Total cost of revenue was $6.8 million for the year
ended December 31, 1995 and $6.7 million for the year ended December 31, 1994.
Cost of software license revenue, which includes costs of production and
distribution, customer support and maintenance, and royalties, decreased 12% to
$3.5 million from $4.0 million for the years ended December 31, 1995 and 1994,
respectively. Cost of software license revenue as a percentage of software
license revenue was 12% and 16% in the years ended December 31, 1995 and 1994,
respectively. The decrease in
22
<PAGE> 23
cost of software license revenue in dollars and as a percentage of software
license revenue was primarily due to increased customer support and distribution
costs associated with the introduction of PRO/II with PROVISION in 1994. Cost of
services and other revenue, which includes costs of personnel involved in
training and project execution, as well as travel, third-party professional fees
and related administrative costs, increased 20% to $3.3 million from $2.7
million for the years ended December 31, 1995 and 1994, respectively, due to an
increase in the volume of ROM projects. Cost of services and other revenue as a
percentage of services and other revenue decreased to 101% from 102% for the
years ended December 31, 1995 and 1994, respectively.
Sales and Marketing. Sales and marketing expenses increased 11% to $11.7
million for the year ended December 31, 1995 from $10.5 million for the year
ended December 31, 1994. Sales and marketing expenses as a percentage of total
revenue was 35% for the year ended December 31, 1995 and 37% for the year ended
December 31, 1994. The dollar increase in sales and marketing expenses were
generally attributable to the expansion and restructuring of the Company's sales
force in 1995.
Research and Development. Research and development expenses decreased 11%
to $8.6 million for the year ended December 31, 1995 from $9.6 million for the
year ended December 31, 1994. Research and development expenses as a percentage
of total revenue was 26% for the year ended December 31, 1995 and 34% for the
year ended December 31, 1994. The decrease in 1995 was primarily due to contract
development costs associated with the completion of PRO/II with PROVISION in
1994.
General and Administration. General and administrative expenses were $3.9
million for each of the years ended December 31, 1995 and 1994. General and
administrative expenses as a percentage of total revenue were 12% and 14% in the
years ended December 31, 1995 and 1994, respectively.
Interest and Other Income. Interest and other income decreased $94,000 to
$100,000 for the year ended December 31, 1995 from $194,000 for the year ended
December 31, 1994.
Provision (Benefit) for Income Taxes. The Company's effective tax rate was
41% for the year ended December 31, 1995, which was primarily attributable to
the effect of income tax rates and the related tax rate differential effect of
the Company's foreign subsidiaries' operations. The Company's tax benefit was
26% for the year ended December 31, 1994, which 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.
23
<PAGE> 24
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited statements of operations
data for each of the quarters in the seven-quarter period ended September 30,
1997, 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. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
-------- -------- --------- -------- -------- -------- ---------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Software license revenue.......... $ 8,942 $10,695 $11,645 $ 12,279 $ 12,697 $14,229 $14,987
Service and other revenue......... 1,086 1,068 452 736 938 479 765
------ ------ ------ ------ ------ ------ ------
Total revenue.............. 10,028 11,763 12,097 13,015 13,635 14,708 15,752
Cost of software license
revenue......................... 1,017 761 1,154 1,343 905 890 819
Cost of services and other
revenue......................... 873 680 369 731 846 459 696
------ ------ ------ ------ ------ ------ ------
Total cost of revenue...... 1,890 1,441 1,523 2,074 1,751 1,349 1,515
------ ------ ------ ------ ------ ------ ------
Gross profit........................ 8,138 10,322 10,574 10,941 11,884 13,359 14,237
Operating expenses
Sales and marketing............... 3,548 3,791 4,566 4,666 4,202 4,544 4,443
Research and development.......... 2,699 4,146 2,782 2,545 3,420 4,081 4,334
General and administrative........ 1,467 1,599 1,943 2,039 2,162 2,314 2,736
In-process research and
development and other costs..... -- -- -- -- 5,200 1,070 11,250
------ ------ ------ ------ ------ ------ ------
Total operating expenses... 7,714 9,536 9,291 9,250 14,984 12,009 22,763
------ ------ ------ ------ ------ ------ ------
Income (loss) from operations....... 424 786 1,283 1,691 (3,100) 1,350 (8,526)
Interest and other income, net...... 28 135 135 160 445 514 480
------ ------ ------ ------ ------ ------ ------
Income (loss) before provision for
income taxes...................... 452 921 1,418 1,851 (2,655) 1,864 (8,046)
Provision for income taxes.......... 185 378 609 778 1,069 1,144 180
------ ------ ------ ------ ------ ------ ------
Net income (loss)................... $ 267 $ 543 $ 809 $ 1,073 $ (3,724) $ 720 $(8,226)
====== ====== ====== ====== ====== ====== ======
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
-------- -------- --------- -------- -------- -------- ---------
(AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Software license revenue..................... 89.2% 90.9% 96.3% 94.3% 93.1% 96.7% 95.1%
Service and other revenue.................... 10.8 9.1 3.7 5.7 6.9 3.3 4.9
----- ----- ----- ----- ----- ----- -----
Total revenue.......................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of software license revenue........... 10.1 6.5 9.5 10.3 6.6 6.1 5.2
Cost of services and other revenue........... 8.7 5.8 3.1 5.6 6.2 3.1 4.4
----- ----- ----- ----- ----- ----- -----
Total cost of revenue.................. 18.8 12.3 12.6 15.9 12.8 9.2 9.6
----- ----- ----- ----- ----- ----- -----
Gross profit................................. 81.2 87.7 87.4 84.1 87.2 90.8 90.4
Operating expenses
Sales and marketing.......................... 35.4 32.2 37.7 35.9 30.8 30.9 28.2
Research and development..................... 26.9 35.2 23.0 19.5 25.1 27.7 27.5
General and administrative................... 14.7 13.6 16.1 15.7 15.9 15.7 17.4
In-process research and development and other
costs...................................... -- -- -- -- 38.1 7.3 71.4
----- ----- ----- ----- ----- ----- -----
Total operating expenses............... 77.0 81.0 76.8 71.1 109.9 81.6 144.5
----- ----- ----- ----- ----- ----- -----
Income (loss) from operations.................. 4.2 6.7 10.6 13.0 (22.7) 9.2 (54.1)
Interest and other income, net................. 0.3 1.1 1.1 1.2 3.2 3.5 3.0
----- ----- ----- ----- ----- ----- -----
Income (loss) before provision for income
taxes........................................ 4.5 7.8 11.7 14.2 (19.5) 12.7 (51.1)
Provision for income taxes..................... 1.8 3.2 5.0 6.0 7.8 7.8 1.1
----- ----- ----- ----- ----- ----- -----
Net income (loss)...................... 2.7% 4.6% 6.7% 8.2% (27.3)% 4.9% (52.2)%
===== ===== ===== ===== ===== ===== =====
</TABLE>
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, timing of
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; the timing and structure of recent acquisitions and future acquisitions,
if any; level of services and other activity; 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 or service
offerings; market-success of the Company's service offerings; changes in
contract terms (including terms affecting the timing of recognition of license
revenue) and the rate at which such changes are made; the Company's ability to
control costs, including the need for, and degree of use of, third-party
contractors and the hiring of new employees; 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.
LIQUIDITY AND CAPITAL RESOURCES
During the past three years, the Company has satisfied its cash needs
principally through cash generated from operations, if any, existing cash
resources and net proceeds from the Company's initial public offering in October
1996. Cash used in operating activities for the nine months ended September 30,
1997 was $10.6 million, which was primarily attributable to increases in
long-term installments receivable, unbilled accounts receivable and deferred
revenue, partially offset by income excluding the $17.5 million of in-process
research and development and other costs.
Cash used in investing activities during the nine months ended September
30, 1997 was $8.6 million, which was primarily attributable to the acquisition
of certain assets and the purchase of property and equipment.
25
<PAGE> 26
Cash provided by financing activities of $1.4 million for the nine months
ended September 30, 1997 was due to the purchase of shares of the Company's
Common Stock in connection with stock plans.
Available sources of funds at September 30, 1997 consisted of $8.6 million
in cash and cash equivalents and a $2.7 million revolving line of credit, net of
$0.3 million in outstanding letters of credit, with a commercial bank. The
revolving line of credit provides for an unsecured line of credit up to $3.0
million at the bank's prime rate, contains certain financial and other
covenants, and expires March 31, 1999. At September 30, 1997, there were no
outstanding borrowings under the line of credit; however, the Company currently
has $500,000 outstanding under the line of credit. At September 30, 1997, the
Company was not in compliance with certain financial covenants contained in the
line of credit. The Company is currently exploring various alternatives to
increase its cash reserves, which include, but are not limited to, its current
discussions with its bank to increase the existing credit facility and to obtain
waivers for the Company's noncompliance as of September 30, 1997.
The Company currently does not anticipate that capital expenditures in the
foreseeable future will vary materially from amounts incurred in the prior year
except that the Company may relocate one or more of its offices in 1998.
The Company believes that existing cash resources, the existing line of
credit, cash flow from operations, if any, together with the Company's borrowing
capacity will be sufficient to fund the Company's operations during the next 12
months.
26
<PAGE> 27
BUSINESS
THE COMPANY
Simulation Sciences Inc. ("SimSci" or the "Company") is a leading provider
of commercial application software and related services to the petroleum,
petrochemical, industrial chemical and other process industries, as well as the
engineering and construction firms that support those industries. SimSci's
software products are designed to increase customers' profitability by reducing
their capital investment costs, increasing yields, improving product quality and
enhancing management decision making. SimSci has developed software to model
steady-state and dynamic conditions for both continuous and batch processes. The
Company's core simulation technology includes a substantial collection of
physical property data and modeling algorithms used to calculate physical and
chemical characteristics of materials under a broad set of operating conditions.
Key applications addressed by SimSci's products and services include oil and gas
production optimization, process design, operational analysis, process
information management, on-line modeling and optimization, plant performance
monitoring, data reconciliation, and environmental compliance. SimSci provides
support and service to more than 650 customers in over 65 countries.
INDUSTRY BACKGROUND
SimSci provides commercial simulation software and related services to the
process industries worldwide. According to industry sources, the aggregate
number of processing facilities in the process industries is approximately
14,000 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 sixteen-cent per barrel reduction in
oil processing costs would yield an $8.8 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 companies in the process
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 and
required substantial company resources to maintain and support. 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
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skills to operate. Furthermore, these software models were not designed for
sharing of data over networked computers.
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 and the use of better decision-support tools to improve
plant operations. The Company's principal product has an easy-to-use Graphical
User Interface ("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 applicable in 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
manufacturer's 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, for example, through its yield
accounting ("OpenYield") and Rigorous On-line Modeling ("ROM") service
offerings. OpenYield uses reconciled plant data to measure plant
performance and ROM uses 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.
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STRATEGY
The Company's objective is to expand and extend the use of its simulation
technology and solutions for design, operations 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
by developing an interactive GUI as well as the Open Software Application
Framework ("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 Software Application Framework. The
Company's integration tools 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.
Expand Operations Improvement Capabilities. The Company intends to
continue developing turn-key solutions to enable engineers and managers to
better operate and manage plant processes. SimSci's yield accounting solution
combines current database technology with SimSci's data reconciliation
technology to deliver an accurate and reliable plant performance monitoring
system. On-line models of specific operating plants may be created by utilizing
the Company's ROM services 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, is
developing a new product to enable the use of common models for both offline 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 acquired process information management software to
facilitate increased penetration of the Company's products and services in the
petrochemical and chemical industries.
Acquire Complementary Businesses, Products and Technologies. The Company
continually monitors developments in the process industries and seeks to acquire
complementary businesses, products or technologies. During the first nine months
of 1997, the Company completed eight acquisitions of assets, licenses and
technology and the related hiring of approximately 75 new employees.
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 alliances
include Bayer, Fluor Daniel, IBM, Mobil, SAP AG and Shell.
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,
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thermodynamics, fluid flow and solution algorithms related to the delivery of
these competencies to the customer.
Open Software Application Framework. SimSci's Open Software Application
Framework is an architecture for integrating a GUI with application software
components, proprietary simulation programs, engineering databases and other
software applications used in the process industry. OSAF is implemented through
SimSci GUI and integration technology which includes the PROVISION and Simply
Visual Software.
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. 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.
PRODUCTS AND SERVICES
SimSci's strategy is to develop, market and sell products and services that
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 Windows NT 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.
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<TABLE>
<CAPTION>
PRODUCT
DEVELOPMENT
APPLICATIONS AND PRODUCTS PRODUCT DESCRIPTION STATUS
- ---------------------------------------- ---------------------------------------- -----------------
<S> <C> <C>
Process Engineering:
PRO/II................................ General-purpose simulation software with Currently
graphical flowcharting environment for available
processes in steady-state
HEXTRAN............................... Heat transfer simulation software Currently
available
DATACON............................... Data reconciliation software for process Currently
data available
Production Management:
AIM-Supervisor System............... Open VMS-based process information Currently
management software for continuous and available
batch processes
OpenYield........................... Integrated data reconciliation and yield Currently
accounting software available
AIM/AT.............................. Windows NT based process information Under development
management software for continuous and
batch processes
PLANit.............................. Software for planning and scheduling Under development
applications which involve single and
multiple plant sites
Oil & Gas Production:
PIPEPHASE............................. Simulation software for oil and gas Currently
gathering networks available
NETOPT................................ Software for optimizing the production Currently
of oil and gas fields available
PIPEPHASE-TACITE...................... Software to address the simulation of Under development
transient conditions in pipeline
networks
Plant Safety and Regulatory Compliance:
INPLANT............................... Simulation software for plant piping Currently
systems available
Visual Flow Suite..................... Simulation program that enables the Currently
design and modeling of safety systems available
and pressure relief networks
Model-based Control & Optimization:
ROM................................... Rigorous on-line modeling (ROM) and Currently
optimization service utilizing several available
of the Company's products
FACS.................................. Implementation services and technology Currently
for online soft sensors based on available
rigorous dynamic models
ROMeo................................. Integrated system for performing Under development
off-line and on-line process simulation
and optimization
QDMC-PCTP............................. Multi-variable process control software Under development
with enhanced model development,
implementation and maintenance utilities
Application Integration:
Simply Visual......................... Single software interface for process Under development
industry applications based on Windows
technology
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT
DEVELOPMENT
APPLICATIONS AND PRODUCTS PRODUCT DESCRIPTION STATUS
- ---------------------------------------- ---------------------------------------- -----------------
<S> <C> <C>
Simulation Manager.................... Integration and execution control Under development
software for the simultaneous
application of separate software to
problems spanning multiple process
units. Programs may run on different
platforms in a networked environment
</TABLE>
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 nine months ended September 30, 1997. 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."
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.
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 an 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.
AIM Supervisor System. AIM-Supervisor System provides a full complement of
process analysis tools for effectively troubleshooting process problems,
uncovering cause-and-effect relationships and improving product quality.
OpenYield. OpenYield is an integrated data reconciliation and yield
accounting system designed to improve plant performance. 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 Company's data reconciliation technology 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 include links to enterprise
management software, such as that offered by SAP AG, to provide an integrated
plant performance and yield accounting system.
PIPEPHASE. PIPEPHASE is a steady-state simulation program that enables
engineers to simulate multiphase 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.
NETOPT. NETOPT is a program designed to optimize the design, production
and planning of oil and gas networks and enhanced oil recovery. NETOPT has been
developed in conjunction with Mobil Oil Corporation.
INPLANT. INPLANT is a steady-state simulation program for designing,
rating and analyzing plant piping systems. Utilizing INPLANT, 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.
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Visual Flow Suite. Visual Flow Suite is a simulation program that enables
process safety engineers to design and model safety systems and pressure relief
networks in oil and gas processing facilities.
ROM. ROM involves the development of on-line software models of existing
process units. SimSci's core products, such as PRO/II and DATACON, 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 combines real-time plant data 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.
FACS. Facs is a complete information, control and optimization system for
refinery fractionators based on a dynamic fractionator model using the dynamic
emulator system.
Products Under Development
AIM/AT Suite. The AIM/AT Suite creates a secure, scalable system for
manufacturing enterprise, proving open connectivity from control systems to
business management systems.
PLANit. PLANit is a proven planning system currently in use at multiple
Shell refineries. It provides business managers with information designed to
increase operating profits throughout a refinery and across multiple refineries.
PLANit provides simulation-based decision support to operating managers by
selecting optimal product manufacturing plans, including product selection,
intermediates staging and feedstock procurement.
PIPEPHASE-TACITE. This product expands the benefits of PIPEPHASE to
address the simulation of transient conditions in pipeline networks.
PIPEPHASE-TACITE is the result of a joint development and marketing agreement
with Institut Francais Petrole ("IFP"), ELF Aquitaine Production ("ELF") and
TOTAL.
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.
QDMC/PCTP. QDMC is a multivariable controller that is used on-line to
overcome process disturbances, predict future performance and determine the
adjustments required to keep the process controlled within certain limits.
Shell's PCTP tools include advanced algorithms to improve the accuracy,
implementation and maintenance of multivariable controllers.
Simply Visual. Simply Visual is a tool designed to upgrade legacy code to
modern architectural standards to view and analyze historical and live process
data, and to integrate critical applications through a single window interface.
Simply Visual combines drawing and graphical capabilities with binary data
transfer to form an effective interface between integrated applications.
Simulation Manager. Simulation Manager orchestrates the application of
multiple independent programs to large optimization problems, uniting both
commercial and legacy software into a cross platform solution tool. Simulation
Manager is used to solve extensive, plant-wide simulation problems, running
applications in parallel across heterogeneous networked computing environments.
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CUSTOMERS
SimSci currently has over 650 customers across the major process
industries, including the petroleum, petrochemical and chemical industries, and
the engineering and construction industry that supports them. In 1995, 1996 and
the nine months ended September 30, 1997, 64%, 67% and 65%, respectively, of
SimSci's total revenue was generated from customers outside of the United
States.
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:
PETROLEUM INDUSTRY
Agip SpA
Amerada Hess Corporation
Amoco Corporation
Arco
BP Oil Company
Chevron U.S.A. Inc.
Citgo Petroleum Company
Den Norske Stats
Oljeselskap a.s.
Exxon Oil Corporation
Hindustan Petroleum
Corp. Ltd.
Kuwait Oil Co.
Mobil Oil Corporation
Pemex
Pertamina
Petroleo Brasileiro-Petrobras
Petrolios de Venezuela
Royal Dutch Shell
Saudi Arabian Oil Co.
Scientific Computing
Consulting Ltd. -- Vniigas
Sun Refining and
Marketing Co.
Texaco Group, Inc.
Unocal Corporation
CHEMICAL AND OTHER
INDUSTRIES
Abbott Laboratories
Allied Signal Corporation
Bayer Corporation
Cabot Corporation
Eastman Chemical Company
Eastman Kodak Company
Eli Lilly & Company
Enichem SpA
General Electric Plastics
Company
Henkel KGaA
Hoechst AG
Imperial Chemical
Industries PLC
Kimberley Clark Corporation
Mitsubishi Chemical
Corporation
Monsanto Company
Nippon Sanso Corporation
Nova Chemical Ltd.
Saudi Basic Industries Corp
Tokuyama Corp
ACADEMIC INSTITUTIONS
Carnegie-Mellon
Fachhochschule Ostfriesland
Indian Institute of Technology
Louisiana State University
University of Oklahoma
Pennsylvania State University
University of Southern
California
University of Wisconsin
ENGINEERING &
CONSTRUCTION INDUSTRY
ABB Lummus Global, Inc.
Bechtel Corporation
Brown & Root, Inc.
Chisso Corporation
Edeleanu GmbH
Fluor Daniel, Inc.
Foster Wheeler U.S.A.
Corporation
IBB GmbH
Idem Isu Engineering
Company, Ltd.
Ishikawajima-Harima Heavy
Industries Co. Ltd.
Jacobs Engineering Group, Inc.
JGC Corporation
John Brown Engineers
and Constructors B.V.
KTI BV
Kvaerner Engineering AS
M.W. Kellogg Company Ltd.
Niigata Construction Co. Ltd.
Nippon Oil Engineering
and Construction
Raytheon Engineers &
Constructors
Snamprogetti SpA
Stone & Webster
Engineering Limited
Toyo Engineering Corporation
Customers typically license SimSci's software for terms of one to five
years. During the past five years, the substantial majority of all licenses have
been renewed. Currently, the approximate annualized cost for the typical license
by a single U.S. corporate user of one of SimSci's core products ranges from
$10,000 to $50,000, depending on the product and options selected. 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
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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."
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 contract renewals in that quarter and are not predictable with
any degree of certainty. See "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
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 61%, 64%, 67% and 65% of
total revenue in 1994, 1995, 1996 and the nine months ended September 30, 1997,
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."
SALES AND MARKETING
SimSci markets its products and services through its direct sales
organization complemented by sales agents and distributors. As of September 30,
1997, the Company's global direct sales force included personnel located in
three sales and support offices in the United States and international sales
offices in Brazil, Egypt, Germany, Japan, Singapore, the United Kingdom 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.
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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 Mobil with respect to NETOPT a joint development arrangement
with Shell with respect to ROMeo, a general cooperation agreement with Bayer AG
with respect to Simulation Manager; a development and marketing agreement with
IFP, ELF and TOTAL with respect to PIPEPHASE-TACITE; and a marketing agreement
with Japan National Oil Corporation ("JNOC") with respect to the integration of
PIPEPHASE with JNOC's well simulation program. The Company also has entered into
cooperation agreements with Fluor Daniel, IBM and SAP AG.
CUSTOMER SUPPORT
Substantially all of the Company's term license contracts to customers
include maintenance and support contracts, which typically range from 12 to 60
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. 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
Software Application Framework. The Company has made substantial investments in
product development, and SimSci currently has several products under
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 and acquired technologies into commercial products that achieve
market acceptance, maintain technological competitiveness and meet an expanding
range of customer requirements. The Company's research and development
expenditures in 1995, 1996 and the nine months ended September 30, 1997 were
$8.6 million, $12.2 million and $11.8 million, respectively, and represented
26%, 26% and 27%, respectively, of total revenue in such periods. The Company
expects that it will continue to commit substantial resources to product
development in the future. See "-- Products -- Products Under Development."
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. In addition, an important part of the
Company's product development strategy is to acquire or obtain rights to new
technologies from third parties to enhance the Company's existing products or to
develop into new products. In this regard, during the first nine months of 1997,
the Company completed eight acquisitions of assets, licenses and technology,
including technology that will require significant additional development before
release in commercial products. There can be no assurance that the Company will
be successful in
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acquiring, developing and marketing products or 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 acquisition, development, introduction and sale of such products or
enhancements or that such products or 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 certain of its new
products and enhancements to certain of its existing 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.
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
competition from current and future competitors, some of whom have significantly
greater financial, technical, marketing and other resources than the Company.
The Company's current direct competitors include Aspen, Hyprotech, Ltd. and
Chemstations, Inc., and, with respect to the Company's technology and consulting
services, the Hi-Spec division of Honeywell, Inc., the Advanced Control and
Optimization Division of Aspen 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,
certain of the Company's current and potential competitors have greater name
recognition, larger installed bases and more diversified product lines that
could be leveraged to increase market share to the Company's detriment. 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 effect 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.
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<PAGE> 38
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 to entry.
PROPRIETARY RIGHTS
To date, the Company has relied upon a combination of copyright, trade
secret and trademark laws to protect its proprietary technology. SIMSCI, PRO/II,
PROVISION, HEXTRAN, PIPEPHASE, THE SIMULATOR, OpenYield, AIM, AIM Supervisor,
AIM/AT Suite, FACs, INPLANT, BATCHSIM, DATACON, ROM, ROMeo, VISUAL FLARE, VISUAL
FLOW SUITE, VISUAL NETWORK and NETOPT 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 is licensed from third
parties. These licenses may 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 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 September 30, 1997, the Company had a total of 302 employees,
including 138 in research and development, 111 in sales and marketing and
related customer support services and 53 in general and administrative. Of these
employees, 245 were located in the United States, 28 in Europe, 9 in South
America and 20 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.
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<PAGE> 39
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 outside the United States,
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 that expires in April 2008. The Company also
occupies an approximately 45,000 square foot facility for its sales and support
office in Houston, Texas pursuant to a lease that expires in March 2006. In
addition, the Company also leases sales and support offices in Newtown,
Pennsylvania. The Company also maintains international offices in Brazil, Egypt,
Germany, Japan, Singapore, the United Kingdom 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.
The Company has recently entered into a new lease for an approximately
45,000 square foot facility in the Houston, Texas area and intends to
consolidate its Houston-area operations by relocating them to this facility in
the near future. In addition, the Company is currently seeking alternate space
near its Brea, California headquarters and could also move its Brea operations
in the near future. Each move of Company facilities involves coordination of
complex events in order to avoid or minimize disruption or delay of the
Company's operations, including potential delays in product development or
shipment of products. If any of the anticipated facility moves were to result in
significant delays in product development or other disruption of operations, the
Company's business, operating results and financial condition could be
materially adversely affected.
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<PAGE> 40
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........................ 48 President and Chief Executive Officer and
Director
Robert E. Grice, Jr...................... 38 Executive Vice President, Finance and
Chief Financial Officer
Daniel T. Nichols........................ 49 Executive Vice President, Human Resources
and Administration
Dirk M. Pfeiffer......................... 40 Executive Vice President, Sales,
Marketing and Engineering Services
Katherine Sullivan Abrams................ 58 Executive Vice President, Research and
Development
Dr. Narendra K. Gupta(1)(2).............. 49 Director
Walter G. Kortschak(1)(2)................ 38 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.
Robert E. Grice, Jr. has served as Executive Vice President, Finance and
Chief Financial Officer since October 1997. Prior to joining the Company, Mr.
Grice served as Vice President, Finance and Chief Financial Officer of Smith
Micro Software, Inc., a software company, from March 1996 to October 1997. From
July 1993 to August 1994, Mr. Grice served as Chief Financial Officer of Newport
Systems Solutions, Inc., a privately owned networking company, until its
acquisition by Cisco Systems, after which Mr. Grice served as a director of
finance at Cisco Systems, Inc. from August 1994 to March 1996. Mr. Grice is a
certified public accountant and holds a B.S. degree from California Polytechnic
University.
Daniel T. Nichols has served as Vice President and then Executive 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 and then Executive 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
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<PAGE> 41
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 and then Executive 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 an B.S. degree
from Cornell University.
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 an M.S. degree from California Institute of Technology and a
Ph.D. from Stanford University.
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. He is also a director of Diamond Multimedia
Systems, Inc., HMT Technology Corporation, Mecon, Inc. and SteriGenics
International, Inc. He formerly served as a director of McAfee Associates, Inc.
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.
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<PAGE> 42
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 based solely on
publicly-available filings with the Securities and Exchange Commission received
by the Company, (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 -------------------- SOLD IN THE --------------------
AND EXECUTIVE OFFICERS NUMBER PERCENT OFFERING NUMBER PERCENT
- --------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Van Wagoner Capital Management, Inc.(1)
345 California Street, Suite 2450
San Francisco, CA 94104.............. 952,100 8.62% -- 952,100 6.98%
N. Fred Brannock(2).................... 552,740 5.00% -- 552,740 4.05%
Vincent S. Verneuil, Jr.(3)............ 604,597 5.47% -- 604,597 4.44%
401(k) Plan(4)......................... 1,142,715 10.35% 1,799 1,140,916 8.37%
Charles R. Harris(5)................... 69,204 * 25,000 44,204 *
Dirk M. Pfeiffer(6).................... 45,000 * 25,000 20,000 *
Katherine Sullivan Abrams(7)........... 8,000 * 4,000 4,000 *
Daniel T. Nichols(8)................... 6,763 * -- 6,763 *
Dr. Narendra K. Gupta(9)............... 15,843 * -- 15,843 *
Walter G. Kortschak.................... 4,166 * -- 4,166 *
Other Selling Stockholders:
Bryce Betteridge(10)................. 7,733 * 5,733 2,000 *
John L. Dial II...................... 51,650 * 51,650 -- *
All executive officers and directors as
a group (7 persons)(11).............. 148,976 1.33% 54,000 94,976 *
</TABLE>
- ---------------
* Less than one percent of the outstanding Common Stock.
(1) Information for Van Wagoner Capital Management, Inc. is based solely on
information provided in a Form 13F filed with the Commission by such entity
for the period ended June 30, 1997.
(2) Includes shares held of record by various trusts for the benefit of members
of Mr. Brannock's immediate family. Mr. Brannock served as Director of the
Company until May 1996 and served as Vice President of the Company until
November 1994.
(3) Includes shares held of record by various trusts for the benefit of Mr.
Verneuil's immediate family. Mr. Verneuil served as Vice President and
Secretary of the Company until May 1996.
(4) Represents shares held of record by the Company's 401(k) Plan which are
beneficially owned by employees and former employees of the Company, each
of whom exercises sole voting and investment control over the shares
beneficially owned by each such employee or former employee through the
plan. The 401(k) Plan disclaims beneficial ownership of such shares.
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<PAGE> 43
(5) Includes 68,333 shares of Common Stock issuable upon exercise of stock
options that become exercisable within 60 days of the date of this
Prospectus.
(6) Represents 45,000 shares of Common Stock issuable upon exercise of stock
options that become exercisable within 60 days of the date of this
Prospectus.
(7) Represents 8,000 shares of Common Stock issuable upon exercise of stock
options that become exercisable within 60 days of the date of this
Prospectus.
(8) Includes 5,333 shares of Common Stock issuable upon exercise of stock
options that become exercisable within 60 days of this Prospectus.
(9) Includes 15,499 shares of Common Stock issuable upon exercise of stock
options that become exercisable within 60 days of the date of this
Prospectus.
(10) Includes 5,733 shares of Common Stock issuable upon exercise of stock
options that become exercisable within 60 days of the date of this
Prospectus.
(11) Includes 136,832 shares subject to stock options held by directors and
officers that are exercisable within 60 days of the date of this
Prospectus.
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<PAGE> 44
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.
STOCKHOLDER RIGHTS AGREEMENT
In August 1997, the Company adopted a Stockholder Rights Agreement pursuant
to which one Preferred Share Purchase Right (a "Right") was distributed for each
outstanding share of Common Stock. Each Right entitles stockholders to buy one
one-hundredth of a share of Series A Participating Preferred Stock at an
exercise price of $85.00 upon certain events. The Rights expire on August 13,
2007, unless earlier redeemed by the Company. The Rights become exercisable if a
person acquires 15% or more of the Company's Common Stock or announces a tender
offer that would result in such person owning 15% or more of the Company's
Common Stock. If the Rights become exercisable, the holder of each Right (other
than the person whose acquisition triggered the exercisability of the Rights)
will be entitled to purchase, at the Right's then-current exercise price, a
number of shares of the Company's Common Stock having a market value of twice
the exercise price. In addition, if the Company were to be acquired in a merger
or business combination after the Rights became exercisable, each Right would
entitle its holder to purchase, at the Right's then-current exercise price,
Common Stock of the acquiring company having a market value of twice the
exercise price. The Rights are redeemable by the Company at a price of $0.001
per Right at any time within ten days after a person has acquired 15% or more of
the Company's Common Stock. The Stockholder Rights Agreement is designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal
and to discourage certain unfair or coercive tactics that may be used in
takeovers. The Stockholder Rights Agreement could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. The Stockholder Rights Agreement 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.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S CHARTER, BYLAWS AND
STOCKHOLDER RIGHTS AGREEMENT
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 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 and the Stockholder Rights Agreement 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
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<PAGE> 45
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 -- Anti-takeover effects of the Company's Charter, Bylaws and
Section 203 of the Delaware General Corporation Law."
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<PAGE> 46
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, BT Alex.
Brown Incorporated, Wessels, Arnold & Henderson, L.L.C., and SoundView Financial
Group, Inc. (the "Underwriters") have severally agreed to purchase from the
Company and the Selling Stockholders the following respective number of shares
of Common Stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
--------------------------------------------------------- ---------
<S> <C>
BT Alex. Brown Incorporated.............................. 1,215,000
Wessels, Arnold & Henderson, L.L.C. ..................... 1,080,000
SoundView Financial Group, Inc. ......................... 405,000
----------
Total.................................................... 2,700,000
==========
</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 the Underwriters that they 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 $0.55 per share. The Underwriters may
allow and such dealers may reallow a concession not in excess of $0.10 per share
to certain other dealers. After the public offering of the shares, the offering
price and other selling terms may be changed by the Underwriters.
The Company has 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 405,000 additional shares of Common Stock at the 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 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 2,700,000 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.
All officers and directors of the Company and certain stockholders have
agreed with the Underwriters that, until 90 days after the effective date of
this offering (first sale February 17, 1998), 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 Commission 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 also
agreed not to sell, offer to sell, contract to sell, grant any option to
purchase or
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<PAGE> 47
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 90 days after the effective date of this offering
(until February 17, 1998) without the prior written consent of BT Alex. Brown
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 BT Alex. Brown Incorporated.
The Underwriters have advised the Company that, pursuant to Regulation M
under the Securities Act of 1933, as amended (the "Securities Act"), certain
persons participating in the offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, which may have the effect of stabilizing or maintaining the market price
of the Common Stock at a level above that which might otherwise prevail in the
open market. A "stabilizing bid" is a bid for the purchase of Common Stock on
behalf of the Underwriters for the purpose of fixing or maintaining the price of
the Common Stock. A "syndicate covering transaction" is the bid for or the
purchase of the Common Stock on behalf of the Underwriters to reduce a short
position incurred by the Underwriters in connection with the offering. A
"penalty bid" is an arrangement permitting BT Alex. Brown Incorporated, as
managing underwriter, to reclaim the selling concession otherwise accruing to a
syndicate member in connection with the offering if the Common Stock originally
sold by such syndicate member is purchased in a syndicate covering transaction
and has therefore not been effectively placed by such syndicate member. The
Underwriters have advised the Company that such transactions may be effected on
the Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
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 related financial statement
schedule incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report which is incorporated by
reference in this Prospectus, are incorporated herein by reference and have been
so incorporated in reliance upon the report of such firm, given upon their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at Seven World Trade Center, Suite 1300, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can be obtained by mail from the
Public Reference section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, reports, proxy
statements and other information that the Company files with the Commission
electronically are contained in the Internet Web site maintained by the
Commission. The Commission's Web site address is
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<PAGE> 48
http://www.sec.gov. The Common Stock is quoted on the Nasdaq National Market.
Reports, proxy statements and other information concerning the Company may be
inspected at the offices of the National Association of Securities Dealers, Inc.
at 1735 K Street, Washington, D.C. 20006.
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-3 under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto, to which reference is hereby made.
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 to
be qualified in its entirety by such reference.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
When used in this Prospectus, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Such statements, which include but are not limited to statements
under the captions "Risk Factors," "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this Prospectus as to the rate of contract renewals, the Company's
ability to integrate acquired assets, licenses and technology, the timing of
availability of products under development, the ability to commercialize
products developed under collaborations and alliances, the acceptance,
performance and utility of the Company's products and services, the adequacy of
capital resources, future fluctuations in various operating expenses, future
capital expenditures, the sufficiency of existing and potential cash resources,
disruptions associated with facilities moves, the use of the proceeds of this
offering, and certain products' future percentage contribution to total revenue
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties include, but are
not limited to, those risks discussed herein and in the documents incorporated
herein by reference. 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 assumes no obligation to update such
forward-looking statements or to update the reasons actual results could differ
materially from those anticipated in such forward-looking statements. See "Risk
Factors."
48
<PAGE> 49
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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, ANY SELLING STOCKHOLDER 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>
Incorporation of Certain Documents by
Reference........................... 2
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 14
Dividend Policy....................... 14
Price Range of Common Stock........... 14
Capitalization........................ 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 27
Management............................ 40
Principal and Selling Stockholders.... 42
Description of Capital Stock.......... 44
Underwriting.......................... 46
Legal Matters......................... 47
Experts............................... 47
Available Information................. 47
Information Regarding Forward-Looking
Statements.......................... 48
</TABLE>
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2,700,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
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BT ALEX. BROWN
WESSELS, ARNOLD & HENDERSON
SOUNDVIEW FINANCIAL GROUP, INC.
November 20, 1997
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