<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ___________ to
___________________
Commission File Number: 000-21283
SIMULATION SCIENCES INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
601 Valencia Avenue, Suite 100, Brea, California 92823
(Address of principal executive offices) (Zip Code)
95-2487793 (I.R.S. Employer Identification No.)
Registrant's telephone number, including area code:
(714) 579-0412
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days.
Yes [X] No [ ]
The registrant had 14,180,839 shares of common stock outstanding as of
April 30, 1998.
<PAGE> 2
SIMULATION SCIENCES INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
December 31, 1997 and March 31, 1998 (Unaudited) 3
Consolidated Statements of Operations (Unaudited) -
Three Months Ended March 31, 1997 and 1998 4
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 1997 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
SIMULATION SCIENCES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------- -------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 46,294,916 $ 46,739,332
Accounts receivable, less allowance for doubtful accounts of $1,471,078
and $1,760,209 at December 31, 1997 and March 31, 1998, respectively 14,183,499 13,435,976
Unbilled accounts receivable 11,284,477 8,789,537
Deferred income taxes 5,335,568 5,335,568
Prepaid expenses and other current assets 1,382,242 1,604,193
------------- -------------
Total current assets 78,480,702 75,904,606
LONG-TERM INSTALLMENTS RECEIVABLE, net of unamortized discount of
$3,169,923 and $2,323,192 at December 31, 1997 and March 31, 1998,
respective1y 15,299,698 10,194,991
PROPERTY AND EQUIPMENT
Computer equipment and programs 9,408,648 9,707,765
Furniture and fixtures 3,643,063 5,124,143
------------- -------------
13,051,711 14,831,908
Less accumulated depreciation (8,089,775) (8,684,854)
------------- -------------
Property and equipment, net 4,961,936 6,147,054
GOODWILL, net of accumulated amortization of $95,636 and $133,014
at December 31, 1997 and March 31, 1998, respectively 1,234,570 1,486,390
OTHER ASSETS, net 6,629,927 6,407,235
DEFERRED INCOME TAXES 145,796 145,796
------------- -------------
$ 106,752,629 $ 100,286,072
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,900,607 $ 2,004,293
Accrued vacation and bonus payable 1,789,558 1,627,767
Other accrued liabilities 3,049,038 3,944,698
Obligations related to acquisitions 6,200,000 6,200,000
Income taxes payable 1,992,941 1,698,698
Deferred revenue 5,460,525 4,800,119
------------- -------------
Total current liabilities 20,392,669 20,275,575
OBLIGATION RELATED TO ACQUISITION 600,000 600,000
COMMITMENTS AND CONTINGENCIES
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK,
$.001 par value; 5,000,000 shares authorized, 100,000 shares designated
as Series A Participating Preferred Stock, no shares issued and
outstanding at December 31, 1997 and March 31, 1998
STOCKHOLDERS' EQUITY
Common stock - $.001 par value; 30,000,000 shares authorized; 14,136,809 and
14,146,608 shares issued and outstanding at
December 31, 1997 and March 31, 1998, respectively 14,137 14,147
Additional paid-in capital 90,610,354 90,644,568
Accumulated deficit (4,864,531) (11,248,218)
------------- -------------
Total stockholders' equity 85,759,960 79,410,497
------------- -------------
$ 106,752,629 $ 100,286,072
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
SIMULATION SCIENCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1997 1998
------------ ------------
Revenue (unaudited)
<S> <C> <C>
Software license revenue $ 12,697,119 $ 8,632,083
Services and other revenue 938,175 957,948
------------ ------------
Total revenue 13,635,294 9,590,031
Cost of revenue
Cost of software license revenue 904,510 1,118,768
Cost of services and other revenue 846,457 1,143,426
------------ ------------
Total cost of revenue 1,750,967 2,262,194
------------ ------------
Gross profit 11,884,327 7,327,837
Operating expenses
Sales and marketing 4,202,329 5,504,580
Research and development 3,420,206 5,144,033
General and administrative 2,161,454 3,528,379
In-process research and development and other costs 5,200,000
------------ ------------
Total operating expenses 14,983,989 14,176,992
------------ ------------
Loss from operations (3,099,662) (6,849,155)
Interest and other income 444,494 585,468
------------ ------------
Loss before provision for income taxes (2,655,168) (6,263,687)
Provision for income taxes 1,068,830 120,000
------------ ------------
Net loss $ (3,723,998) $ (6,383,687)
============ ============
Basic net loss per share $ (0.37) $ (0.45)
============ ============
Basic weighted average common shares 10,142,374 14,141,414
============ ============
Diluted net loss per share $ (0.37) $ (0.45)
============ ============
Diluted weighted average common shares 10,142,374 14,141,414
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
SIMULATION SCIENCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1997 1998
------------ ------------
Cash flows from operating activities: (unaudited)
<S> <C> <C>
Net loss $ (3,723,998) $ (6,383,687)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 413,889 792,402
Provision for doubtful accounts 109,562 355,314
In-process research and development and other costs 5,200,000
Sale of installments receivable 5,290,998
Change in operating assets and liabilities, net of the effect
of acquisitions:
Accounts receivable 71,085 441,295
Unbilled accounts receivable (2,496,758) 464,694
Prepaid expenses and other current assets (9,338) (209,979)
Other assets (57,428) 299,333
Long-term installments receivable (1,919,741) 1,759,728
Accounts payable (581,086) 155,585
Accrued vacation and bonus payable (353,555) (160,871)
Other accrued liabilities 257,399 853,248
Income taxes payable (198,891) (252,188)
Deferred revenue (706,953) (841,851)
------------ ------------
Net cash provided by (used in) operating activities (3,995,813) 2,564,021
Cash flow from investing activities:
Purchases of property and equipment (343,706) (1,709,774)
Cash paid for acquisitions, net of cash acquired (2,755,500) (186,270)
------------ ------------
Net cash used in investing activities (3,099,206) (1,896,044)
Cash flow from financing activities:
Proceeds from the sale of common stock under stock plans 45,592 34,224
------------ ------------
Net cash provided by financing activities 45,592 34,224
Effect of exchange rate changes on cash and cash equivalents 109,533 (257,785)
------------ ------------
Net increase (decrease) in cash and cash equivalents (6,939,894) 444,416
Cash and cash equivalents at beginning of period 26,320,519 46,294,916
------------ ------------
Cash and cash equivalents at end of period $ 19,380,625 $ 46,739,332
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 969,760 $ 297,193
============ ============
Supplemental disclosures related to acquisitions:
In 1998, the Company acquired all of the outstanding stock
of Biles N.V. as described in Note 4. These acquisitions are
summarized as follows:
In-process research and development 5,200,000
Purchased technology 128,000
Fair value of assets acquired 172,295 168,259
Goodwill 1,165,205 289,199
Common stock issued (3,910,000)
Cash paid for acquisitions (2,755,500) (186,270)
Obligations related to acquisitions
------------ ------------
Liabilities assumed $ -- $ (271,188)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
SIMULATION SCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The consolidated balance sheet as of March 31, 1998, the related
consolidated statements of operations for the three month periods ended March
31, 1997 and 1998, and the consolidated statements of cash flows for the three
month periods ended March 31, 1997 and 1998 are unaudited and in the opinion of
management contain all necessary adjustments, consisting of normal recurring
adjustments, for a fair presentation of such financial information. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in the Company's
1997 Report on Form 10-K filed with the Securities and Exchange Commission.
Interim results are not necessarily indicative of results for a full year.
The consolidated financial statements and notes are presented as permitted
by Form 10-Q and do not contain certain information included in the Company's
audited consolidated financial statements and notes for the year ended December
31, 1997.
2. RECENT ACCOUNTING PRONOUNCEMENTS
SOP 97-2 - Effective January 1, 1998, the Company adopted the American
Institute of Certified Public Accountant's recently issued Statement of Position
No. 97-2, Software Revenue Recognition ("SOP 97-2") which superseded SOP 91-1.
There was no material effect from the adoption of SOP 97-2.
SFAS No. 130 - Effective January 1, 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. For the three months ended March 31, 1997 and
1998, there was no difference between net loss as reported and comprehensive
loss.
SFAS No. 131 - Effective January 1, 1998, the Company adopted SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. This
Statement need not be applied to interim financial statements in the initial
year of application. The Company is reviewing the impact of such statements on
its consolidated financial statements.
3. STOCK PLANS
Stock Option Plans - The following table summarizes stock option activity
under the 1994 Plan, 1996 Plan and 1996 Director Plan for the three months ended
March 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF PRICE OPTIONS
SHARES PER SHARE EXERCISABLE
----------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1998 2,087,450 $2.67 - $22.88 192,515
Granted 1,076,842 8.44 - 10.25
Exercised (9,799) 2.67 - 7.50
Canceled (1,061,494) 2.67 - 22.88
------------
Balance, March 31, 1998 2,092,999 2.67 - 22.88 326,225
============
</TABLE>
6
<PAGE> 7
SIMULATION SCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In March 1998, in connection with an Option Exchange Program for the 1996
Plan, 837,342 options were exchanged into the same number of new options
exercisable at $8.44 per share. The Option Exchange Program contained certain
provisions including, but not limited to, the following: the new options were
priced at the fair market value on a predetermined future date, vesting
schedules and expiration dates were deferred by 6 months from those of the
canceled options and a 6 month exercise restriction period ending on September
20, 1998 was imposed. The Company's Directors and Executive Officers did not
participate in the Option Exchange Program.
Employee Stock Purchase Plans - At March 31, 1998, the Company had a
liability of $321,748 recorded in connection with the future purchase of common
stock under the plan.
4. ACQUISITIONS
On March 18, 1998, the Company acquired all of the outstanding stock of
Biles & Associates N.V., for $186,000 in cash (net of cash acquired and
including transaction costs). The purchase price may be increased by $100,000 if
certain future revenue milestones are achieved in 1998. Biles & Associates N.V.
was a privately held Belgium corporation providing sales, marketing and support
services for the Company's AIM software products to customers in Belgium and
certain surrounding countries (The Company acquired the AIM software from Texas
based W.R. Biles & Associates, Inc. in September 1997). The acquisition was
accounted for under the purchase method of accounting and the purchase price was
allocated to goodwill ($289,000), accounts receivable ($118,000), fixed assets
($47,000), deposits ($3,000) and assumed liabilities ($271,000).
5. SALE OF INSTALLMENTS RECEIVABLE
On March 31, 1998, the Company received approximately $5.3 million in
connection with the sale, without recourse, of certain of its installments
receivable to a financial institution.
6. RECENT EVENTS
On April 15, 1998, the Company announced a definitive agreement to be
acquired for $10 per share in cash by Siebe plc, one of the United Kingdom's
largest diversified engineering groups. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview."
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto, included
elsewhere in this Form 10-Q. The discussion in this Form 10-Q contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Form 10-Q should be read as being applicable
to all related forward-looking statements wherever they appear in this Form
10-Q. 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 "Factors That May
Affect Future Results of Operations," as well as those discussed elsewhere
herein. 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 " - Factors That May
Affect Future Results of Operations" and " - Information Regarding
Forward-Looking Statements."
OVERVIEW
Simulation Sciences Inc. ("SimSci") 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 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 "Factors That May Affect Future Results of Operations - Dependence on
Contract Renewals; Need to Achieve Greater Market Penetration."
Revenue from the Company's primary simulation product, PRO/II, accounted for
approximately 70% of total revenue in each of the last three years. The
remainder of the Company's revenue is derived from the license of other products
and services. International revenue, which includes revenue from international
subsidiaries and export sales, accounted for approximately 65% of total revenue
in each of the last three years.
Prior to 1998, the Company recognized 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"). Effective January 1, 1998, the Company adopted the American Institute of
Certified Public Accountant's recently issued Statement of Position No. 97-2,
Software Revenue Recognition ("SOP 97-2") which superseded SOP 91-1. There was
no material effect from the adoption of SOP 97-2.
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.
8
<PAGE> 9
RECENT DEVELOPMENTS
On April 15, 1998, the Company announced a definitive agreement to be
acquired for $10 per share in cash by an indirect wholly owned subsidiary of
Siebe plc ("Siebe"), one of the United Kingdom's largest diversified engineering
groups with fiscal 1997 annual revenue of approximately $4.9 billion. Pursuant
to the agreement, Siebe commenced a cash tender offer on April 21, 1998 for all
of the Company's outstanding shares. The tender offer, which is scheduled to
expire at 12:00 midnight New York City time on Monday, May 18, 1998, but may be
extended by Siebe, is subject to customary conditions, including that at least a
majority of the outstanding fully diluted shares are validly tendered and not
withdrawn. If the tender offer is successful, it will be followed as promptly as
possible by a merger in which any remaining shares of SimSci's stock will be
converted into the right to receive $10.00 per share in cash. The terms and
conditions of the tender offer are more fully described in documents filed by
Siebe and SimSci with the Securities and Exchange Commission, including a
Solicitation/Recommendation Statement on Schedule 14D-9 filed by SimSci on April
21, 1998 as amended to date. If the tender offer and merger are consummated,
SimSci stock will no longer be publicly traded (SimSci stock will be delisted
from the Nasdaq National Market), and SimSci will become an indirect wholly
owned subsidiary of Siebe plc.
9
<PAGE> 10
A. RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and March 31, 1998
The following table sets forth certain items in the Company's unaudited
consolidated statements of operations in thousands of dollars and as a
percentage of total revenue for the three months ended March 31, 1997 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
1997 1998
--------------------- ----------------------
AMOUNT % AMOUNT %
--------------------- ----------------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Revenue:
Software license revenue ........................ $ 12,697 93.1% $ 8,632 90.0%
Services and other revenue ...................... 938 6.9 958 10.0
-------- ----- -------- -----
Total revenue ................................ 13,635 100.0 9,590 100.0
Cost of revenue:
Cost of software license revenue ................ 905 6.6 1,119 11.7
Cost of services and other revenue .............. 846 6.2 1,143 11.9
-------- ----- -------- -----
Total cost of revenue ........................ 1,751 12.8 2,262 23.6
-------- ----- -------- -----
Gross profit ........................................ 11,884 87.2 7,328 76.4
Operating expenses:
Sales and marketing ............................. 4,202 30.8 5,505 57.4
Research and development ........................ 3,420 25.1 5,144 53.6
General and administrative ...................... 2,162 15.9 3,528 36.8
In-process research and development and other
costs .......................................... 5,200 38.1
-------- ----- -------- -----
Total operating expenses ..................... 14,984 109.9 14,177 147.8
-------- ----- -------- -----
Loss from operations ................................ (3,100) (22.7) (6,849) (71.4)
Interest and other income, net ...................... 445 3.2 585 6.1
-------- ----- -------- -----
Loss before provision for income taxes .............. (2,655) (19.5) (6,264) (65.3)
Provision for income taxes .......................... 1,069 7.8 120 1.3
-------- ----- -------- -----
Net loss ............................................ $ (3,724) (27.3)% $ (6,384) (66.6)%
======== ===== ======== =====
</TABLE>
Total Revenue. Total revenue decreased 30% to $9.6 million for the three
months ended March 31, 1998 from $13.6 million for the three months ended March
31, 1997. Software license revenue, which includes revenue from software
licenses, maintenance and support fees, decreased 32% to $8.6 million for the
three months ended March 31, 1998 from $12.7 million for the three months ended
March 31, 1997. The decrease in software license revenue was primarily
attributable to economic conditions in the petroleum and petrochemical
industries and longer sales cycles associated with larger contracts that
resulted in delays and deferrals of plant expansion in those industries.
Services and other revenue, which includes integration, Rigorous On-line
Modeling ("ROM"), consulting and training services, was $1.0 million and $0.9
million for the three months ended March 31, 1998 and 1997, respectively.
Total Cost of Revenue. Total cost of revenue increased 29% to $2.3 million
for the three months ended March 31, 1998 from $1.8 million for the three months
ended March 31, 1997. Cost of software license revenue, which includes costs of
production and distribution, customer support and maintenance and royalties,
increased 24% to $1.1 million from $0.9 million for the three months ended March
31, 1998 and 1997, respectively. The increase in cost of license revenue in
dollars was primarily due to an increase in amortization expense associated with
purchased technology and royalty expense. Cost of software license revenue as a
percentage of software license revenue was 13% and 7% in the three months ended
March 31, 1998
10
<PAGE> 11
and 1997, respectively. The increase as a percentage of software license revenue
was due to the decrease in dollars of software license revenue and the increase
in dollars of cost of software license revenue. 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, increased 35% to $1.1 million from $0.8 million for the
three months ended March 31, 1998 and 1997, respectively. Cost of services and
other revenue as a percentage of services and other revenue increased to 119%
from 90% for the three months ended March 31, 1998 and 1997, respectively. The
increase in cost of services and other revenue in dollars, and as a percentage
of services and other revenue, was due primarily to the addition of personnel
involved in project execution related to the Company's new services offerings.
Sales and Marketing. Sales and marketing expenses increased 31% to $5.5
million for the three months ended March 31, 1998 from $4.2 million for the
three months ended March 31, 1997. Sales and marketing expenses as a percentage
of total revenue were 57% and 31% for the three months ended March 31, 1998 and
1997, respectively. The increase in sales and marketing expenses in dollars was
due primarily to an increase in the number of sales and marketing personnel and
related expenses, including personnel hired in connection with acquisitions.
Research and Development. Research and development expenses increased 50% to
$5.1 million for the three months ended March 31, 1998 from $3.4 million for the
three months ended March 31, 1997. Research and development expenses as a
percentage of total revenue were 54% and 25% for the three months ended March
31, 1998 and 1997, respectively. The increase in research and development
expenses in dollars was primarily due to an increase in the number of technical
professionals, including support staff, as well as research and development
personnel hired in connection with acquisitions of products and in-process
technologies.
General and Administrative. General and administrative expenses increased
63% to $3.5 million for the three months ended March 31, 1998 from $2.2 million
for the three months ended March 31, 1997. General and administrative expenses
as a percentage of total revenue were 37% and 16% in the three months ended
March 31, 1998 and 1997, respectively. The increase in general and
administrative expenses in dollars was primarily due to an increase in the
number of personnel, including personnel hired in connection with acquisitions,
increases in expense recorded for bad debts, outside professional services and
legal expense and relocation costs associated with the consolidation of the
Company's Houston operations.
In-process Research and Development and Other Costs. There were no
in-process research and development and other costs in the three months ended
March 31, 1998. In-process research and development expense of $5.2 million for
the three months ended March 31, 1997 was due to the allocation of a portion of
the purchase price of technology acquired from Visual Solutions, Inc. The
amounts allocated to in-process research and development were based upon
management's assumptions.
Interest and Other Income, Net. Interest and other income, net increased
$140,000 to $585,000 for the three months ended March 31, 1998 from $445,000 for
the three months ended March 31, 1997. The increase was primarily attributable
to interest income associated with the proceeds received in the Company's public
offering in the fourth quarter of 1997.
Provision for Income Taxes. The Company recorded a tax provision for
estimated foreign taxable income for the three months ended March 31, 1998;
however, the Company did not record a benefit for domestic losses.
Net Loss. Net loss was $(6.2) million for the three months ended March 31,
1998 and $(3.7) million for the three months ended March 31, 1997.
11
<PAGE> 12
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 and secondary public offering in November 1997. Cash provided by operating
activities for the three months ended March 31, 1998 was $2.6 million, which was
primarily attributable to the Company's sale of certain installments receivable
to a financial institution and a decrease in long-term installments receivable,
partially offset by the net loss.
Cash used in investing activities during the three months ended March 31,
1998 was $1.9 million, which was primarily attributable to the purchase of
property and equipment related to the Company's relocation and consolidation of
its Houston, Texas operations into one facility and the acquisition of Biles &
Associates N.V.
Cash provided by financing activities of $34,000 for the three months ended
March 31, 1998 was due to the purchase of shares of the Company's Common Stock
in connection with stock plans.
Available sources of funds at March 31, 1998 consisted of $46.7 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 restrictive financial and
other covenants (including but not limited to, profitability, tangible net
worth, liquidity and capital expenditures), and expires March 31, 1999. At March
31, 1998, there were no borrowings outstanding under the agreement and the
Company was in compliance with all covenants.
The Company currently does not anticipate that capital expenditures in the
foreseeable future will vary materially from amounts incurred in previous years,
except that the Company is currently relocating its Houston-area operations
which the Company anticipates will result in capital expenditures in 1998 in
excess of amounts incurred in previous years.
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.
12
<PAGE> 13
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, or be modified in some fashion, to
distinguish 21st century dates from 20th century dates. This problem could force
computers to either shut down or provide incorrect data. As a result, in less
than two years, computer systems and software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements. The Company has
examined its products and internal computer systems and contacted its software
providers to determine whether the Company's software applications are compliant
with the Year 2000. While the Company believes that its products and internal
systems are fully Year 2000 compliant, the Company intends to continue to review
its products and internal systems for any problems as well as monitor its key
customers and suppliers for any impact that the Year 2000 may have on their
information systems which in turn could impact the Company. While it is
difficult to quantify the total cost to the Company of the Year 2000 Compliance
activities, the Company's best estimate of expenditures is between $50,000 and
$250,000. However, there can be no guarantee that the Year 2000 issue will not
have a material impact on the Company's business, operating results and
financial condition. In addition, the Company believes that the purchasing
patterns of customers and potential customers may be affected by the 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.
NEW ACCOUNTING PRONOUNCEMENTS
SOP 97-2 - Effective January 1, 1998, the Company adopted the American
Institute of Certified Public Accountant's recently issued Statement of Position
No. 97-2, Software Revenue Recognition ("SOP 97-2") which superseded SOP 91-1.
There was no material effect from the adoption of SOP 97-2.
SFAS No. 130 - Effective January 1, 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. For the three months ended March 31, 1997 and
1998, there was no difference between net loss as reported and comprehensive
loss.
SFAS No. 131 - Effective January 1, 1998, the Company adopted SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. This
Statement need not be applied to interim financial statements in the initial
year of application. The Company is reviewing the impact of such statements on
its consolidated financial statements.
13
<PAGE> 14
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q, the words "expects," "anticipates,"
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements 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 below under
" - Factors That May Affect Future Results of Operations." The cautionary
statements made in this Form 10-Q should be read as being applicable to all
related forward-looking statements wherever they appear in this Form 10-Q. 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 " - Factors That May Affect Future
Results of Operations."
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Recent Developments - On April 15, 1998, the Company announced a definitive
agreement to be acquired for $10 per share in cash by an indirect wholly owned
subsidiary of Siebe plc, one of the United Kingdom's largest diversified
engineering groups with fiscal 1997 annual revenue of approximately $4.9
billion. Pursuant to the agreement, Siebe commenced a cash tender offer on April
21, 1998 for all of the Company's outstanding shares. The tender offer, which is
scheduled to expire at 12:00 midnight New York City time on Monday, May 18,
1998, but may be extended by Siebe, is subject to customary conditions,
including that at least a majority of the outstanding fully diluted shares are
validly tendered and not withdrawn. If the tender offer is successful, it will
be followed as promptly as possible by a merger in which any remaining shares of
SimSci's stock will be converted into the right to receive $10.00 per share in
cash. The terms and conditions of the tender offer are more fully described in
documents filed by Siebe and SimSci with the Securities and Exchange Commission,
including a Solicitation/Recommendation Statement on Schedule 14D-9 filed by
SimSci on April 21, 1998 as amended to date. If the tender offer and merger are
consummated, SimSci stock will no longer be publicly traded (SimSci stock will
be delisted from the Nasdaq National Market), and SimSci will become an indirect
wholly owned subsidiary of Siebe plc. Therefore, the risk factors described
below should be read in light of the pending tender offer by Siebe plc and the
fact that, if the offer and the merger are completed, the Company will become an
indirect wholly owned subsidiary of Siebe plc.
Recent Operating Losses and Expected Operating Losses in Fiscal 1998. The
Company experienced significant losses in the quarter ended March 31, 1998 and
expects that, if the transaction with Siebe plc is not completed, revenue
levels will be lower than historic levels at least through the quarter ended
December 31, 1998 and it will experience operating losses at least through the
quarter ended September 30, 1998. Accordingly, in the event that the
transaction with Siebe plc is not completed, the Company expects that its
business will be materially adversely affected by future revenue levels and
operating losses and that its stock price will be at prices significantly lower
than historic levels.
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 future
acquisitions, if any; difficulties in assimilating acquired technologies and
related personnel; 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 or service offerings; market acceptance of the Company's products
and products under development; 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. In addition, during the fourth quarter of 1997, a dispute arose over
invoices received by the Company in connection with a development project. The
Company's management believes that such billings, which approximate $750,000,
were outside the scope of the development project and has advised the service
provider of the Company's position. The Company and the service provider are
presently discussing this issue; however, it is not presently determinable what
amounts, if any, will be due related to this matter, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
14
<PAGE> 15
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 has become substantially
dependent as the Company has increased 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. 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 adverse effect on the
Company's business, operating results and financial condition. For example, the
Company's operating results for the quarter ended December 31, 1997 and the
quarter ended March 31, 1998 were materially adversely affected by delays and
deferrals in reaching definitive agreements with customers with potential large
order sizes.
Product Concentration. The Company derives a substantial portion of its
total revenue from sales of its PRO/II simulation product. 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 or the demand for simulation
software in general, could have a material adverse effect on the Company's
business, operating results and financial condition.
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 is
dependent upon the continued demand for process engineering software by
companies in the petroleum industry. For example, the Company believes that its
operating results for the quarter ended March 31, 1998 was adversely affected,
and that its operating results for the remainder of 1998 will be adversely
affected, by economic conditions in the petroleum and petrochemical industries.
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. 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.
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 continue to account for a
significant portion of the Company's total revenue in the future. 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 could have a
material adverse effect on the Company's business, operating results and
15
<PAGE> 16
financial condition.
Risks Associated with Past and Future Acquisitions. In recent periods, the
Company completed several acquisitions of assets, licenses or technology and the
related hiring of numerous 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, the Company's inability to assimilate acquired licenses
or technologies could result in the potential for one-time charges related to
the write off of amounts capitalized. 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, 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 issuance of
equity securities, the incurrence of debt, large one-time expenses, royalty
obligations and the creation of goodwill or other intangible assets that could
result in significant amortization expense. Any one or more of these factors
could have a material adverse effect on the Company's business, operating
results and financial condition.
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 recent periods, the Company has
increased sales and marketing expenditures in an effort to achieve greater
market penetration 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 industries. If the Company
fails to increase market acceptance of its products, or if the Company's sales
and marketing efforts do not result in a corresponding increase in total revenue
through greater market penetration, the Company's operating margins and
opportunity for future growth would be substantially restricted and therefore
could 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 is
characterized by rapidly changing technology, evolving industry standards,
frequent new product introductions and rapidly changing customer requirements.
There can be no assurance that the Company will be successful in developing and
marketing enhancements that respond to technological change, evolving industry
standards or customer requirements, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and sale of such enhancements or that such enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance.
The Company experiences its primary competition from potential customers'
decisions to develop their own software internally rather than purchasing
commercial software products such as those offered by the Company. As a result,
the Company must continuously educate existing and prospective customers about
the advantages of purchasing the Company's products and services. There can be
no assurance that these customers or other potential customers will perceive
sufficient value in the Company's products and services to justify purchasing
them. 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, 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. 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.
16
<PAGE> 17
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. 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.
Certain of the Company's international sales are denominated in local
currencies, and the Company does not currently engage in hedging transactions.
The Company's operating results and financial condition have in the past, and
may be in the future, adversely affected by foreign currency exchange rate
fluctuations which cannot be accurately predicted. The Company may engage in
hedging in the future; however, there can be no assurance that any currency
hedging policies implemented by the Company would be successful.
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, with respect to ROMeo; a development and marketing agreement
with IFP 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 also has entered into
cooperation agreements with Fluor Daniel, IBM and SAP AG. 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.
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 which can render existing
products obsolete and unmarketable. 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 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
acquiring, developing and marketing products or enhancements to existing
products or new products 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 enhancements or new products, or that
such enhancements or new products will adequately meet the requirements of the
marketplace and achieve market acceptance, and the failure to do so would have a
material adverse effect on the Company's business, operating results and
financial condition.
Management of Growth. The Company's business has experienced 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 its 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
17
<PAGE> 18
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 and two
executive officers of the Company resigned in the quarter ended March 31, 1998.
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.
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 material adverse
effect on the Company's business, operating results and financial condition by
delaying the Company's ability to ship products.
From time to time third parties may assert patent, trademark, copyright and
other intellectual property rights to technologies that are important to the
Company. In such an event, the Company may be required to incur significant
costs in litigating a resolution to the asserted claims. There can be no
assurance that such a resolution would not require that the Company pay damages
or obtain a license of a third party's proprietary rights.
Dependence on Contract Developers. The Company currently subcontracts
certain aspects of its research and development to outside contractors. There
can be no assurance that the Company will be able to manage its contract
developers effectively, that these developers will meet the Company's future
requirements for timely delivery of high-quality products or that the retention
of such developers will not result in increased expense levels for development
projects.
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, or be modified in
some fashion, to distinguish 21st century dates from 20th century dates. This
problem could force computers to either shut down or provide incorrect data. As
a result, in less than two years, computer systems and software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
The Company has examined its products and internal computer systems and
contacted its software providers to determine whether the Company's software
applications are compliant with the Year 2000. While the Company believes that
its products and internal systems are fully Year 2000 compliant, the Company
intends to continue to review its products and internal systems for any problems
as well as monitor its key customers and suppliers for any impact that the Year
2000 may have on their information systems which in turn could impact the
Company. While it is difficult to quantify the total cost to the Company of the
Year 2000 Compliance activities, the Company's best estimate of expenditures is
between $50,000 and $250,000. However, there can be no guarantee that the Year
2000 issue will not have a material impact on the Company's business, operating
results and financial condition. In addition, the Company believes that the
purchasing patterns of customers and potential customers may be affected by the
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
18
<PAGE> 19
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.
Product Liability. 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. 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.
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.
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 any 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 Stockholders 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.
19
<PAGE> 20
PART II - OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds
(a) In connection with the merger agreement with Siebe plc, the Company
agreed to effect an amendment to the Preferred Shares Rights Agreement
dated as of August 13, 1997 (the "Rights Agreement") entered into
between the Company and Harris Trust Company of California, as Rights
Agent (the "Rights Agent"), to exclude Siebe and its Affiliates and
Associates (as such terms are defined in the Rights Agreement) from the
definition of "Acquiring Person" therein, with respect to the beneficial
ownership of the Shares which Siebe or its acquisition subsidiaries or
any of their respective Affiliates and Associates have obtained the
right to acquire, or will acquire, as a result of the transactions
contemplated by the Merger Agreement and the related Stock Option
Agreement. Such amendment has been effected by the execution of a formal
amendment to the Rights Agreement on April 17, 1998 (the "Rights
Amendment") by the Company and the Rights Agent, and the filing with the
Securities and Exchange Commission, (and the effectiveness) of an
amendment to the Company's Registration Statement on Form 8-A on April
21, 1998 with respect to such Rights Amendment. The Rights Amendment
ensures that neither Siebe or its acquisition subsidiaries nor any of
their respective Affiliates and Associates will be considered an
"Acquiring Person" under the Rights Agreement, and prevents the
occurrence of a "Distribution Date", a "Shares Acquisition Date" or a
"Triggering Event" (each defined therein) as a result of their
acquisition of Shares upon consummation of the Offer, or their
acquisition of Shares, or rights to acquire same, in connection with the
Merger or otherwise pursuant to the Merger Agreement or Stock Option
Agreement or any of the transactions contemplated thereby.
Item 5. Other Information
On April 15, 1998, the Company announced a definitive agreement to be
acquired for $10 per share in cash by an indirect wholly owned
subsidiary of Siebe plc, one of the United Kingdom's largest diversified
engineering groups with fiscal 1997 annual revenue of approximately $4.9
billion. Pursuant to the agreement, Siebe commenced a cash tender offer
on April 21, 1998 for all of the Company's outstanding shares. The
tender offer, which is scheduled to expire at 12:00 midnight New York
City time on Monday, May 18, 1998, but may be extended by Siebe, is
subject to customary conditions, including that at least a majority of
the outstanding fully diluted shares are validly tendered and not
withdrawn. If the tender offer is successful, it will be followed as
promptly as possible by a merger in which any remaining shares of
SimSci's stock will be converted into the right to receive $10.00 per
share in cash. The terms and conditions of the tender offer are more
fully described in documents filed by Siebe and SimSci with the
Securities and Exchange Commission, including a Solicitation/
Recommendation Statement on Schedule 14D-9 filed by SimSci on April 21,
1998 as amended to date. If the tender offer and merger are consummated,
SimSci stock will no longer be publicly traded (SimSci stock will be
delisted from the Nasdaq National Market), and SimSci will become an
indirect wholly owned subsidiary of Siebe plc.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended March 31,
1998.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Simulation Sciences Inc.
(Registrant)
Date: May 14, 1998 /s/ CHARLES R. HARRIS
-------------------------------------
Charles R. Harris
President and Chief Executive Officer
Date: May 14, 1998 /s/ ROBERT E. GRICE
-------------------------------------
Robert E. Grice
Executive Vice President of Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 46,739,332
<SECURITIES> 0
<RECEIVABLES> 23,985,722
<ALLOWANCES> 1,760,209
<INVENTORY> 0
<CURRENT-ASSETS> 75,904,606
<PP&E> 14,831,908
<DEPRECIATION> 8,684,854
<TOTAL-ASSETS> 100,286,072
<CURRENT-LIABILITIES> 20,275,575
<BONDS> 0
0
0
<COMMON> 14,147
<OTHER-SE> 79,396,350
<TOTAL-LIABILITY-AND-EQUITY> 100,286,072
<SALES> 0
<TOTAL-REVENUES> 9,590,031
<CGS> 0
<TOTAL-COSTS> 2,262,194
<OTHER-EXPENSES> 13,821,678
<LOSS-PROVISION> 355,314
<INTEREST-EXPENSE> (585,468)
<INCOME-PRETAX> (6,263,687)
<INCOME-TAX> 120,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,383,687)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
