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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1997
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 000-21665
SIMULATIONS PLUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 95-4595609
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
40015 SIERRA HIGHWAY, B-110
PALMDALE, CALIFORNIA 93550
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (805) 266-9294
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
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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 90 days. Yes [X] No [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ending August 31, 1997 were
approximately $2,493,000.
As of December 12, 1997, the aggregate market value of the voting stock
held by non-affiliates of the issuer was approximately $6,037,500 based upon
the average closing bid and asked price of such stock on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement relating to the
1998 Annual Meeting of shareholders are incorporated herein by reference into
Part III.
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SIMULATIONS PLUS, INC.
FORM 10-KSB
For the Fiscal Year Ended August 31, 1997
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Table of Contents
Page No.
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PART I.
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . 14
PART II
Item 5. Market for Common Stock and Related Stockholder Matters. . . . . . . . . . . . . . . 15
Item 6. Management's Discussion and Analysis or Plan of Operation. . . . . . . . . . . . . . 15
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . 39
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act . . . . . . . . . . . . . . . . . . . . . . . 39
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Item 11. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . 42
Item 12. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . 42
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 43
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section entitled "Management's Discussion and Analysis or
Plan of Operation." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Simulations Plus, Inc. undertakes no obligation to publicly revise
these forward-looking statements, or to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission.
PART I
Item 1. Description of Business
GENERAL
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Simulations Plus, Inc. (the "Company" or "Simulations Plus") and its
wholly owned subsidiary, Words+, Inc. ("Words+"), produce two types of products:
(1) Simulations Plus, formed in 1996, produces computer simulation software for
education and is developing simulation software for the pharmaceutical industry,
and (2) Words+, founded in 1981, produces computer software and specialized
hardware for use by persons with disabilities, and a new personal productivity
software program for the retail market.
Simulations Plus is producing and developing a series of educational
simulation software products under the trade name of FutureLab(TM) for the
school and home study markets. These interactive educational software programs
simulate science experiments for high school and college level science and
engineering classes. These simulations enable students to conduct experiments on
a personal computer instead of in a traditional laboratory, thereby increasing
safety, decreasing costs, and providing expanded learning opportunities by
allowing simulations of situations not possible in a traditional laboratory
environment. The Company released the first three titles of FutureLab(TM) in May
1997, an additional title in October 1997, and is currently developing
additional new titles as well as converting the titles from Windows only to both
Macintosh and Windows platforms.
The Company has also been developing simulation software for use in
pharmaceutical research and education in pharmacy and medicine. The Company
plans to capitalize on its simulation software development expertise and build
an expanded simulation software development team of highly skilled software
developers, engineers and scientists with broad applications in additional
targeted industries.
The Company's wholly owned subsidiary, Words+, has been in business
since 1981. Words+ is a technology leader in designing and developing
augmentative and alternative communication computer
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software and hardware devices for persons who cannot speak due to physical
disabilities. Words+ also produces computer access products that enable
physically disabled persons to operate a computer. Words+ products enable a
disabled person to operate a computer and to communicate through a voice
synthesizer, through movements as slight as the blink of an eye. Words+
developed and produces the software for the computerized communication system
used by the world-famous theoretical physicist, Professor Stephen Hawking,
Lucasian Professor of Mathematics at the University of Cambridge in England, and
the author of the best-selling book A Brief History of Time. Words+ markets its
products throughout the United States and to other countries through a direct
sales staff and independent dealers. Words+ introduced a fully integrated,
portable, lightweight personal-computer-based communication system that is
meeting favorable market acceptance. Words+ has recently expanded its sales
force by hiring three direct sales personnel and plans to further increase its
field sales force to increase net sales.
Words+ released a new personal productivity software package called
Abbreviate! in November 1997. Abbreviate! is based on part of the Company's core
technology incorporated in the E Z Keys for Windows software used by Stephen
Hawking and thousands of others around the world. The Company extracted this
technology and developed a user interface and additional features appropriate
for the retail market. Abbreviate! was named "Tool of the Week" by PC Week
magazine in their December 1, 1997 issue.
PRODUCTS
SIMULATION SOFTWARE
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The Company is currently developing simulation software: (1) for
science courses for high school, community college, and university markets, and
(2) for pharmaceutical research.
DESCRIPTION OF SIMULATION SOFTWARE
There are a number of types of simulation software, including
software that simulates the flow of parts and finished goods through a factory,
software that simulates battlefield scenarios, and software that simulates the
growth of a city. Other simulations incorporate equations and relationships that
simulate the laws of physics for a particular process, such as the popular
flight simulator software programs now available for home computers. These
programs may also incorporate sophisticated graphics in order to display the
results of the simulations.
The type of simulation software under development by the Company is
based on the equations of physics that describe (or "model") the behavior of
things in the real world. The Company's science experiment simulations
incorporate the equations of physics for each experiment (optics, electrical
circuits, gravity, ideal gases, heat transfer, etc.). For example, a simulation
of a ball in a gravity experiment might include the acceleration and
deceleration of the ball due to gravity, the deceleration of the ball due to
aerodynamic drag, the kinetic energy loss (and resultant slight heat gain by the
ball and ground) each time the ball bounces, the rotation of the ball as it
spins, and other factors.
The development of simulation software involves identifying and
understanding the underlying physics of the processes to be simulated, breaking
those processes down into the lowest practical level of individual sub-processes
at which the behaviors can be well-represented mathematically, developing
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appropriate mathematical relationships/equations, and converting them into
computer subroutines. The software subroutines representing these individual
processes are then assembled into an overall simulation program, with
appropriate coordination between modules and design of user-friendly inputs and
outputs. The predictions of this program are then compared to known results in
order to determine the validity of the model and to calibrate the simulation to
produce a useful tool for predicting new results.
EDUCATIONAL SIMULATION SOFTWARE
The Company is producing and developing a series of interactive
simulation educational software programs for the school and home study markets.
The Company's initial products, which have won awards from educational software
testers, include simulations of laboratory experiments for Physical Science
courses under the name FutureLab(TM). The Company released its first three
FutureLab(TM) titles in May 1997 (Optics for Physical Science, Gravity for
Physical Science, and Circuits for Physical Science), and a new title, IdealGas
for Chemistry in November 1997. Additional topics to be developed include
Titration for Chemistry, Chemical Equilibria, Genetics for Biology, Heat,
Magnetism, Friction, Kinematics and Dynamics, Earth and Space Science,
Properties of Matter, Atoms and Bonding, Chemical Reactions, Forces, Forces in
Fluids, Waves, Sound, Electric Charges and Currents, Simple Machines, and
additional titles for high school Physics, Chemistry and Biology courses.
PHARMACEUTICAL SIMULATION SOFTWARE
The Company's pharmaceutical software will seek to provide
cost-effective solutions to a number of problems in pharmaceutical research and
in the education of pharmacy and medical students. The Company is currently
developing HelixGen(TM) and GastroPlus(TM). HelixGen(TM) is designed to predict
the three-dimensional orientation of a certain class of G-protein coupled
transmembrane receptors of interest in the drug discovery process.
GastroPlus(TM) is designed to predict the quantity and rate of absorption of
candidate new drug compounds in the human gastro-intestinal tract.
The Company recently executed a License Agreement with Therapeutic
Systems Research Laboratories, Inc. ("TSRL") to have exclusive rights to TSRL's
technology for drug compound absorption in animal and human test subjects.
Through the formation of this strategic alliance with TSRL, the development
costs and time for GastroPlus are significantly reduced. Among the Company's
goals in this area are to provide comprehensive, highly accurate simulations
that can save a great deal of time and money in the development of
pharmaceutical products, and to reduce the need for animal testing in the
future.
The Company has not yet completed the development of any of its
pharmaceutical simulations programs, and has not yet offered any for sale;
however, the GastroPlus program began Beta testing in November 1997. The Company
expects to release GastroPlus for use by the pharmaceutical industry by the end
of January 1998.
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DISABILITY PRODUCTS
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E Z KEYS FOR WINDOWS
One of the Company's primary software products is E Z Keys for
Windows ("E Z Keys"), which is a program that operates on a Windows-based
personal computer. When coupled with specially-designed input devices, E Z Keys
enables even severely disabled persons to operate a personal computer to
generate voice messages through a voice synthesizer and to operate most
Windows-based software application programs. Input motion by the user can be as
slight as the blink of an eye, or simple eye movement by persons who cannot
blink. E Z Keys is one of the two Words+ programs used by Professor Stephen
Hawking for computer access and communication. In May 1997, the Company released
E Z Keys for Windows 95.
TALKING SCREEN FOR WINDOWS
Talking Screen for Windows ("Talking Screen") is a software program
that operates on a Windows-based personal computer and is designed for persons,
usually children, who cannot read and write at the level necessary to adequately
operate E Z Keys. Talking Screen provides a system of pages of pictographic and
photographic symbols by which the user can produce speech output messages
through a voice synthesizer, play recorded sounds and video files, and operate
controllers for lights, electrical appliances and other equipment. Like E Z
Keys, Talking Screen can be operated through a wide range of alternative input
devices.
PEGASUSLITE
PegasusLITE is a fully-integrated, portable, microprocessor-based
communication system that weights just four and one-half pounds, which is
significantly smaller and lighter in weight, as well as more powerful, than
comparable competitive devices. PegasusLITE currently incorporates a 486DX-5
microprocessor running at 133 MHz, Windows 95(TM) operating system, 16 MB RAM,
340 MB hard disk drive, 256 color LCD display with build-in touch window, PCMCIA
slot for a floppy disk drive and optional accessories, Windows sound system, and
a software voice synthesizer that can provide male, female or child's voices.
PegasusLITE measures approximately 8.75" x 12.75" x 1.65". PegasusLITE can
operate either E Z Keys for Windows or Talking Screen for Windows, although it
is used primarily with Talking Screen.
MESSAGE MATE
The Company produces a series of products called MessageMate, which
are hand-held, dedicated communication devices that store prerecorded speech or
sound on integrated circuit chips. The user plays these recorded sounds by
touching one of the keys on the membrane keyboard if they are able to use a
keyboard, or by using a switch (such as the IST Switch described below) and
scanning to select a position on the keyboard. MessageMates are small,
lightweight (1 to 1.75 lbs.), easy-to-use communication devices with up to four
minutes of recorded messages. They are known for their extremely rugged design
and long battery life. The MessageMate 20 holds twenty messages, the MessageMate
40 holds forty messages, and Mini-MessageMate holds eight messages. In October
1997, the Company released a new model, the Multi-Level MessageMate 40, which
holds up to 144 messages in four levels, and provides up to ten minutes of total
recording time. Since MessageMates use recorded messages, they can be used in
any language. The Company has significant sales of MessageMate in foreign
markets and sales of these MessageMate in foreign markets are increasing.
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INFRARED/SOUND/TOUCH (IST) SWITCH
Many Words+ customers cannot operate a keyboard or mouse. For some
of these persons, the Company has designed and produces a special device called
the Infrared/Sound/Touch Switch ("IST Switch"), that enables the person to
operate a personal computer or a dedicated communication device with the
slightest movement or pressure, including, for example, eye blink, or just eye
movement. The IST is activated by infrared reflection, touch, or sound, and
transmits a momentary "on" signal to the computer upon detecting these signals.
This switch has been in production since 1983, and thousands of physically
disabled persons around the world have used it.
PERSONAL PRODUCTIVITY SOFTWARE
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ABBREVIATE!
The Company released a new productivity software program called
Abbreviate! in November 1997 at COMDEX. The Company took the abbreviation
technology incorporated into E Z Keys for Windows, and turned it into an
extraordinary program that can be used by anyone with the ability to use a
standard keyboard. While many word processors provide a similar "Quick Correct"
feature, the advantage Abbreviate! has over such features is that it runs in the
background and works with most all Windows applications. Thus, Abbreviate!
allows the user to create a personal library of frequently-used abbreviations,
each with its own special keystroke combination, for use in virtually any
Windows-based program - fax, e-mail, word processing, database, Internet chat
rooms, and spreadsheets. The company is currently pursuing distribution
relationships with a number of major software manufacturers for Abbreviate!, as
well as implementing an aggressive marketing program. Abbreviate! was named PC
Week magazine's "Tool of the Week" in their December 1, 1997 issue.
MISCELLANEOUS
The Company also sells a number of other miscellaneous and peripheral devices,
some of which it designs and produces and others it buys and resells. These
include:
- MicroCommPac - Communication hardware package designed for use with a
notebook computer that provides switch interface and audio
amplification.
- U-Control - Wireless infrared remote control device that allows the user
to control functions and appliances in the home and work environment
such as lights, stereo and television equipment, and other appliances.
- LUCY - Laser-activated keyboard for those who cannot use a normal
keyboard, imported from The Netherlands.
- Simplicity Wheelchair Mount - Company-designed and produced wheelchair
mount for portable computers and other devices.
PRODUCT DEVELOPMENT
SIMULATION SOFTWARE
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EDUCATIONAL SIMULATION SOFTWARE
In the area of educational simulations, the Company's research and
development activities include continuing the development of a wide range of
software for high school and university-lever science courses. At the high
school level, anticipated titles include simulated experiments for courses in
Physical Science, Physics, Chemistry, Biology and Earth Science. At the
university level, anticipated titles include more sophisticated simulations for
Physics, Chemistry, and Biology, as well as titles for studies in Engineering
and Medicine such as Heat Transfer, Fluid Mechanics, Thermodynamics, Gas
Dynamics, Kinematics and Dynamics, Electronic Circuits, and Pharmacokinetics.
In the area of Pharmacokinetics, the Company's first title will come
from its recently acquired educational simulation called Cyber Patient, which
the Company will expand, enhance, and offer to schools of pharmacy and medicine
around the world.
In 1996, the Company received a Phase I Small Business Innovation
Research (SBIR) grant from the National Science Foundation for Approximately
$51,000. In October 1997, the Company was awarded a $300,000 Phase II follow-on
grant, $75,000 of which was funded in October 1997 with the remainder being
funded in three equal payments of $75,000 every six months for an eighteen month
period. The purpose of this grant is to further develop software to allow
physically disabled science students to perform simulated laboratory experiments
on a computer with minimal physical input. The Company is using its expertise
and technology in designing and building computer access products for the
physically-disabled, as well as its expertise in developing scientific
educational simulation software, in developing these programs. These programs
are also designed to be used by able-bodied students but will incorporate the
Company's proprietary technology for physically disabled persons so that the
same programs will be attractive to and used by both physically-disabled and
able-bodied persons.
PHARMACEUTICAL SIMULATIONS
In the area of pharmaceutical simulations for screening new drug
compounds, the Company is currently pursuing the development of simulations for
drug absorption and the receptor structure of certain transmembrane proteins.
The Company executed a definitive License Agreement with Therapeutic
Systems Research Laboratories, Inc. ("TSRL"), under which the Company is granted
an exclusive license to TSRL's proprietary absorption technology, including a
database of measurements of drug permeability from approximately 30 laboratory
experiments in human test subjects as well as numerous experiments in animals.
The Company is also receiving consulting assistance in the development of the
simulation model from TSRL staff, including Dr. Gordon Amdon (incoming President
of the American Association of Pharmaceutical Scientists and world-renowned
expert in drug absorption) and Dr. John Crison. The TSRL database is believed to
be unique in the world, and the Company believes that it is the only such
database containing a broad base of actual human absorption data on drugs with a
wide range of premeabilities. The Company also believes that the strategic
advantage of exclusive access to TSRL's technology in absorption modeling,
combined with the Company's current and expected growing expertise in
pharmacokinetics simulation, will maximize its chances for success in this area.
In November 1997, the Company released the first Beta test version
of GastroPlus(TM) to TSRL for testing. These tests are underway as this is
written, and initial feedback is quite favorable. Beta
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testing outside of the company and its alliance partner is expected to begin in
December 1997, with first product release scheduled for January 1998.
GastroPlus(TM) incorporates an absorption model developed by the Company that
runs under Windows 95 and thaT provides a stochastic simulation of percent
absorbed for a drug under a statistical distribution of input conditions.
DISABILITY PRODUCTS
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The Company believes it has been an industry technology leader in
introducing and improving augmentative and alternative communication and
computer access software and devices for disabled persons and intends to
continue to be at the forefront of the development of new products. The Company
will continue to enhance its major software products, E Z Keys and Talking
Screen, as well as its growing line of hardware products. The Company will also
consider acquisitions of other products, businesses and companies that are
complementary to its existing augmentative and alternative communication and
computer access business lines.
MARKETING AND DISTRIBUTION
SIMULATION SOFTWARE
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EDUCATIONAL SIMULATION SOFTWARE
The Company markets its science experiment simulation software
products through a growing list of software resellers, through exhibits and
presentations at conferences and trade shows, through mass mailings to both
science teachers and special education teachers across the U.S. and Canada,
through its Internet web page, and through advertising in selected publications.
The Company is also investigating forming one or more alliances with major
textbook publishers and with additional educational software distributors. The
Company has established three web pages on the Internet and plans to use them
for such activities as providing product information, Java-based interactive
demonstrations, and a forum for user feedback and information exchange.
PHARMACEUTICAL SIMULATION SOFTWARE
The Company will market its pharmaceutical simulation software, and
research services based on its simulations, to pharmaceutical and bio-tech
companies, and to the research companies that serve them, through attendance and
presentations at scientific meetings, exhibits at trade shows, advertising in
selected publications, and through its web pages on the Internet. The Company is
building an in-house sales and marketing team for its products and services and
will also explore sales and marketing agreements with firms that provide
research services and equipment that are complementary to the Company's proposed
pharmaceutical products and services. As with educational software, the Company
plans to use its web pages on the Internet for such activities as providing
product information, Java-based interactive demonstrations, and a forum for user
feedback and information exchange. The Company will also explore distribution
through university bookstores for educational simulations for students in
pharmacy and medicine.
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DISABILITY PRODUCTS
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The Company markets augmentative and alternative communication
products through a network of employee representatives and independent dealers.
The Company is currently expanding its sales and marketing efforts by adding
additional sales persons and independent dealers.
At the present time the Company has seven independent dealers in the
U.S., four in Australia and one each in England, Norway, The Netherlands, New
Zealand, Japan, Finland and Malaysia. The Company has five salary-commission
sales persons in the U.S.: one each in Southern California, Maine, Texas,
Wisconsin and Maryland. The Company also employs four inside sales/support
persons who answer telephone inquiries on the Company's 800 line and who provide
technical support.
The Company directs its marketing efforts to speech pathologists,
occupational therapists, special education teachers, disabled persons and
parents of disabled persons. The Company maintains a mailing list of over 37,000
persons made up of these professionals, consumers and parents and mails various
marketing materials to this list. These materials include the Company's
newsletter, its catalog of products and announcements regarding new and enhanced
products.
The Company participates in industry conferences held throughout the
U.S. and in other countries that are attended by speech pathologists,
occupational and physical therapists, special education teachers, parents and
consumers. The Company and others in the industry demonstrate their products at
these conferences and present technical papers that describe the application of
their technologies and research studies on the effectiveness of their products.
The Communication Aids Manufacturers Association (CAMA) organizes tours of
representatives of companies in this field that travel throughout the country
providing seminars and workshops for professionals, consumers and parents in the
field. The Company advertises in selected publications of interest to persons in
this market.
The Company estimates that for approximately 50% of its sales of
augmentative and alternative communication software and hardware, some or all of
the purchase price is provided by third parties such as Medicaid, school special
education budgets, private insurance or other governmental or charitable
assistance. The Company's personnel provide advice and assistance to customers
and prospective customers on obtaining third-party financial assistance for
purchasing the Company's products.
PERSONAL PRODUCTIVITY SOFTWARE
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The Company's new Abbreviate! software program was introduced in
November 1997 at COMDEX. The Company is currently selling the program itself
through a variety of Internet channels, including its own web site
(www.abbreviate.com ). The Company is also contacting a large number of software
manufacturers and distributors in an effort to secure distribution agreements
for Abbreviate!. An aggressive advertising campaign has begun, including
placement of space ads in airline magazines, computer publications, additional
Internet web sites, and direct mail for targeted groups such as medical
transcriptionists and legal secretaries.
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TRAINING AND TECHNICAL SUPPORT
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The Company believes customer training and technical support are
important factors in customer satisfaction for its products and the Company
believes it is an industry leader in providing customer training and technical
support. For Disability Products, the Company's salesperson or dealer provides
initial training to the customer -- typically two to four hours on major
products and one to two hours on certain other products. This training is
typically provided not only to the user of the product but also to the person's
speech pathologists, teachers, parents and others who will be helping the user.
This initial training is provided as a part of the price of the product. The
Company and its dealers charge a fee for additional training and service calls.
Technical support for both Simulation Software and Disability
Products is provided by the Company's inside sales and support staff based at
its headquarters facilities in Palmdale, California. The Company provides
no-charge toll telephone support offering unlimited 800 number and E-mail
support for all disability and educational software products.
PRODUCTION AND DISTRIBUTION
SIMULATION SOFTWARE
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The Company's major products are designed and developed by its
development team at its Palmdale, California facility. The Company contracts a
substantial portion of its educational simulation software manufacturing
activity to third parties. The chief materials and components used in simulation
software products include CD-ROMs and instruction books.
DISABILITY PRODUCTS
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Disability software products are either loaded onto hard drives by
the Company or copied to diskettes for sale to customers. Microprocessors that
are part of dedicated devices are purchased by the Company and incorporated into
its products by the Company. Many software customers buy their notebook personal
computers from the Company, which the Company purchases at wholesale prices and
resells at a markup. Cases, printed circuit boards, labels and other components
of products such as PegasusLITE, MessageMate and CommPac are designed by the
Company. The Company outsources the extrusion, machining and manufacturing of
certain components. All final assembly and testing is done by the Company at its
facility.
The Company incorporates a tablet-style computer manufactured by
Epson America in its PegasusLITE product. The Company has no written agreements
with Epson America other than purchase orders that it submits to Epson America
to purchase such computers. The Company and other of Epson America's customers
provide projections to Epson America to purchase such computers in order to
allow Epson America to estimate the number of units of such computer that it
should manufacture in each of its production runs.
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The Company's products are shipped from its Palmdale, California
facility either directly to the customer or to the salesperson or dealer. The
outside salesperson or dealer either delivers the product or visits the customer
after delivery to provide training.
PERSONAL PRODUCTIVITY SOFTWARE
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The Abbreviate! personal productivity software program is currently
manufactured at the Company's Palmdale, California facility. If sales volume
wararnts and higher volume capacity is required, the Company will investigate
outside sources for fulfillment.
COMPETITION
SIMULATION SOFTWARE
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EDUCATIONAL SIMULATION SOFTWARE
The educational software industry in which the Company operates is
competitive. The Company competes somewhat against publishers and suppliers of
textbook educational materials that have been, and will continue to be, the
primary educational resource used in these markets. The Company also competes
against educational software publishers who provide software products that are
interactive but are not true simulation software. Most education software
publishers compete in the grades below 9th grade, addressing primarily reading
and math skills. The Company competes primarily in the middle school, high
school, and college markets addressing primarily science and math subjects. A
smaller number of software publishers are addressing these markets, although
existing competitors may broaden their product lines to these markets, and
additional competitors may enter these markets.
The Company is aware of several companies publishing educational
simulation software including HyperCube, Glencore, Corel, Logal and Knowledge
Revolution. Logal is the only company of which the Company is currently aware
that is producing a range of educational simulation software that competes
directly with the Company's current and planned educational simulation software
products. The Company expects that high school and college science and math text
book publishers and other companies may also be developing simulation software
products and that additional competitors may enter this field. Information
gathered by the Company at conferences for science teachers and school
administrators, primarily during the fall of 1997, indicate that these customers
and potential customers prefer the Company's products over those offered by
Logal almost unanimously, for those titles which have been released by the
Company to date.
PHARMACEUTICAL SIMULATION SOFTWARE
In providing simulation-software-based screening, testing and
research services to the pharmaceutical industry, and in marketing simulation
software for these purposes, the Company competes against a number of
established companies that provide screening, testing and research services and
products to these industries that are not based on simulation software. The
Company's competitors
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in this field include companies with financial, personnel, research and
marketing resources that are greater than those of the Company.
Major pharmaceutical companies conduct these efforts through their
internal development staffs and through outsourcing some of this work. Smaller
companies need to outsource a greater percentage of this research. The Company
is aware of a few other companies that are presently developing simulation
software or simulation-software-based services to the pharmaceutical industries
for the purposes of screening compounds.
The Company is not aware of any significant competition in the area
of gastrointestinal absorption simulation. The Company is aware of one company
in England that produces animation software for education in pharmacy and
medicine, but is not aware of any commercial effort by any company to produce a
gastrointestinal absorption simulation software for pharmaceutical research. The
Company believes the key factors in competing in this field will be its ability
to develop simulation software that can effectively predict the absorption
behavior of a large number of compounds, and the ability to develop and maintain
relationships with research and development departments of pharmaceutical
companies.
11
<PAGE> 14
DISABILITY PRODUCTS
- -------------------------------------------------------------------------------
The augmentative and alternative communication industry in which the
Company operates is highly competitive and some of the Company's competitors
have greater financial and personnel resources than the Company. The industry is
made up of six major competitors and a number of smaller ones. The Company
believes that the six major competitors each have revenues ranging from $3
Million to $12 Million so that there are no large companies in this industry.
Two of these companies produce personal-computer based software systems for
Apple Macintosh and the others produce dedicated communication devices and/or
paper products.
The Company believes that the competition in this industry is based
primarily on the quality of products, quality of customer training and technical
support, and quality and size of sales forces. Price is a competitive factor but
the Company believes price is not as important to the customer as obtaining the
product most suited to the customer. The Company believes that it is a leader in
the industry in developing and producing the most technologically-advanced
products and in providing quality customer training and technical support. The
prices of the Company's products are among the highest in the industry and the
Company has one of the smallest sales forces and dealer networks in the
industry. The Company believes it is positioned to continue to be a leader in
the development and production of the highest quality technology and that it
will be able to develop one of the strongest sales forces in the industry by
increasing the number of sales representatives. The Company believes that the
sales of its products can increase significantly due to these factors and the
expected continuing expansion of the size of this market. However, there are few
barriers to entry in the form of proprietary or patented technology or trade
secrets in this industry. While the Company believes that cost of product
development and the need for specialized knowledge and experience in this
industry would present some deterrence for new competition, other companies may
enter this industry, including companies with substantially greater financial
resources than the Company, the companies already in this industry may increase
their market share through increased technology development and marketing
efforts.
PERSONAL PRODUCTIVITY SOFTWARE
- --------------------------------------------------------------------------------
A few products compete with Abbreviate! in the retail market;
however, the Company is not aware of any other product that works with virtually
any software in Windows 95 without the need to create special links to the
software. The Company has priced Abbreviate! at $99, with an introductory price
of $49.95, significantly less than competitor SmarType ($295) and matching
InstantText ($99). The Company enlisted the help of several medical
transcriptionists as beta testers for the product, and the feedback received
from those testers and additional medical transcriptionists who are familiar
with competitive products has been very favorable.
12
<PAGE> 15
EMPLOYEES
As of August 31, 1997, the Company employed 40 full-time and 5
part-time employees, including 13 in research and development, 12 in marketing
and sales, 9 in administration and accounting, 10 in production and 1 in repair.
Three additional research and development employees have started working since
then. Nine current employees hold Ph.D.'s in their respective science or
engineering disciplines. Four additional employees hold Master's degrees. The
Company believes that its future success will depend, in part, on its ability to
continue to attract, hire and retain qualified personnel. The competition for
such personnel in the augmentative and alternative communication device and
computer software industry is intense. None of the Company's employees is
represented by a labor union, and the Company has never experienced a work
stoppage. The Company believes that its relations with its employees are good.
Item 2. Description of Property
The Company occupies offices in an office building in Palmdale,
California. In September 1996, the Company expanded its office space from
approximately 4,800 square feet to approximately 11,800 square feet. The Company
expects to outgrow its current space within the next fiscal year. Leases on the
office space currently occupied by the Company will expire in October 1998
(about 7,000 square feet) and June 1998 (about 4,800 square feet). Leases on the
newly-acquired 7,000 square feet allow for month-to-month renewal or an
additional 12-month term renewal at the end of the lease term. The original
lease on the 4,800 square foot space allows a 12-month term renewal at the end
of the lease term.
Item 3. Legal Proceedings
The Company is not a party to any litigation and, except as
discussed in the next paragraph, is not aware of any pending or threatened
litigation against the Company.
In January 1997, the Company received notice from a former employee
claiming, among other things, that her employment with the Company had been
wrongfully terminated and alleging potential causes of action based on negligent
misrepresentation, wrongful discharge, breach of contract and sex and race
discrimination. Such former employee threatened to commence litigation against
the Company if the Company did not respond to her notice by a certain date. The
Company responded to such notice at the end of January 1997 and has not received
any further communications from such former employee. The Company believes that
it has complied with all legal requirements in terminating such former employee
and intends to vigorously defend itself against any; and all claims make by such
former employee. Although there can be no assurance that such former employee's
claims or any related governmental action will not have a material adverse
effect on the Company's business, financial condition or results of operation,
the Company does not believe that it will have such affect.
13
<PAGE> 16
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fiscal year ended August 31, 1997.
14
<PAGE> 17
PART II
Item 5. Market for Common Stock and Related Stockholder Matters
The Company's Common Stock began trading on the Nasdaq SmallCap
Market ("NASDAQ") on June 18, 1997 under the symbol "SIMU". According to records
of the Company's transfer agent, the Company had five stockholders of record as
of August 31, 1997. The following table sets forth, for the period indicated,
the low and high sales prices for the Common Stock as reported by NASDAQ.
<TABLE>
<CAPTION>
PERIOD LOW SALES PRICE HIGH SALES PRICE
------ --------------- ----------------
<S> <C> <C>
Fiscal 1998:
First quarter. . . . . . . . . . . . . . . . . . . . . . . 5 5 3/4
Fiscal 1997:
Fourth quarter (from 6/18/97). . . . . . . . . . . . . . . 5 6 1/8
</TABLE>
The Company has never paid any dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis or Plan of Operation
RESULTS OF OPERATIONS
The following sets forth selected items from the Company's
statements of operations (in thousands) and the percentages that such items bear
to net sales for the fiscal years ended August 31, 1997 ("FY97"), August 31,
1996 ("FY96") and August 31, 1995 ("FY 95").
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Year Ended August 31,
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 2,493 100.0% $ 2,601 100.0% $ 2,879 100.0%
- -------------------------------------------------------------------------------------------------------------
Cost of sales 1,252 50.2 1,289 49.6 1,356 47.1
- -------------------------------------------------------------------------------------------------------------
Selling, general, and administrative 2,277 91.3 1,190 45.8 1,100 38.2
- -------------------------------------------------------------------------------------------------------------
Research and development 133 5.4 108 4.1 102 3.5
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 2,410 96.7 1,298 49.9 1,202 41.7
- -------------------------------------------------------------------------------------------------------------
Income (loss) from operations (1,169) (46.9) 14 0.5 321 11.2
- -------------------------------------------------------------------------------------------------------------
Income from grant 17 0.7 34 1.3 -- --
- -------------------------------------------------------------------------------------------------------------
Interest income 26 1.0 -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Interest expense 69 2.8 10 0.4 13 0.5
- -------------------------------------------------------------------------------------------------------------
Financing Costs 280 11.2 -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Provision for income taxes (39) (1.6) 15 0.5 115 4.0
- -------------------------------------------------------------------------------------------------------------
Net income (loss) (1,436) (57.6)% 23 0.9% 193 6.7%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
FY 96 COMPARED WITH FY 95
- --------------------------------------------------------------------------------
Net sales
Net sales for FY 96 decreased by $278,000, or 9.7%, to $2,601,000
compared to $2,879,000 for FY 95. Management attributes this decrease primarily
to three factors: (1) delays in shipping new Windows-based versions of its E Z
Keys for Windows and Talking Screen for Windows software products, (2) changing
from a higher-priced hardware voice synthesizer to a lower-priced voice
synthesizer for a significant percentage of its computer based products (3) lack
of market acceptance of the original Pegasus communication device.
In approximately March 1994, the Company commenced the development
of Windows versions of its two major software products, E Z Keys and Talking
Screen. Management expected completion of these software projects by December
1994. In approximately October 1994, the Company commenced advertising these
products in its product catalog. Due to a variety of technical difficulties
encountered in developing n the Windows environment for the first time, Talking
Screen for Windows was not released until July 1995, and E Z Keys for Windows
was not released until December 1995. In April 1996, the Company began shipping
a new software voice synthesizer with a significant number of its computer-based
communication systems. This software voice synthesizer has a retail price of
$199, whereas the hardware voice synthesizer it replaced had a retail price of
$1,195. This reduced the average revenues per sale for such systems by
approximately $1,000 per system. Also during late 1994, the development of the
original Pegasus communication device was initiated, and the device was released
in June 1995. Sales were well below expectations, primarily due to the size and
weight (12.5 pounds) of the device. Management believes that the delays in
completing the Windows-based software products resulted in delays in orders
during the last part of 1995 and early 1996 as customers waited until such
Windows-based software products were available instead of placing orders for the
Company's already existing comparable DOS-based products, and that the
relatively heavy weight of the Pegasus was a major factor in limiting sales of
that product.
Cost of Sales
Cost of sales for FY 96 decreased by $67,000, or $4.9%, to
$1,289,000 compared to $1,356,000 for FY 95. As a percentage of net sales, cost
of sales was 49.6% for FY 96 compared to 47.1% for FY 95. Management attributes
this decrease of $67,000 in cost of sales primarily to the conversion from the
hardware voice synthesizer to the software voice synthesizer. Management
attributes the increase in the cost of sales as a percentage of total sales
primarily to the Company's lower net sales in software products which has a
higher gross margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for FY 96 increased by
$90,000, or 8.2%, to $1,190,000 compared to $1,100,000 for FY 95. As a
percentage of net sales, selling, general and administrative expenses increased
by 7.6% to 45.8% in FY 96 from 38.2% in FY 95. Management
16
<PAGE> 19
attributes this increase primarily to the following three factors: (1) higher
commission costs due to a higher percentage of sales being make through dealers,
(2) higher salaries and wages due to increase in personnel and general increases
in salaries provided to existing employees, and (3) increased newsletter mailing
costs resulting from an expanded database and increased postal rates.
Research and Development
The Company incurred approximately $215,000 of research and
development costs for FY 96, of which approximately $107,000 was capitalized and
approximately $108,000 was expensed compared to approximately $253,000 for FY
95, of which approximately $151,000 was capitalized and approximately $102,000
was expensed. The 15.0% decrease in research and development expenditure for FY
96 was primarily due to the Company completing development work on its
Windows-based versions of E Z Keys for Windows and Talking Screen for Windows
software products.
Income from Grant
For FY 96, the Company received $34,000 of a $51,000 Phase I SBIR
grant from the National Science Foundation to develop software to allow
physically-disabled students to perform simulated laboratory experiments on a
computer.
Interest Expense
Interest expense for FY 96 decreased by $3,000, or 23.1%, to $10,000
from $13,000 in FY 95. This decrease is attributable primarily to lower
borrowings by the Company on its line of credit. As a percentage of sales,
interest expense decreased to 0.4% in FY 96 from 0.5% in FY 95.
Income Taxes
Income taxed decreased $100,000, or 87% to $15,000 from $115,000 in
FY 95 because of the Company's decreased earnings.
Net Income
Net income for FY 96 declined by $170,000, or 88.1%, to $23,000
compared to $193,000 in FY 95. Management attributes this decline primarily to
the decrease in Net Sales, the increase in Selling, general and administrative
expenses, the amortization of software development cots and the increased
expenses incurred by the Company in its research and development efforts
compared to FY 95.
FY 97 COMPARED WITH FY 96
- --------------------------------------------------------------------------------
Net Sales
17
<PAGE> 20
Net sales decreased by $108,000 or 4.2%, to $2,493,000 compared to
$2,601,000 for FY 96. Management attributes the majority of this reduction to
the changeover from the MultiVoice hardware voice synthesizer to the Eloquence
software voice synthesizer. MultiVoice sales accounted for $120,000 in the 1996
period, but only $14,000 in the 1997 period. Lower Talking Screen software
sales, somewhat offset by higher computer sales, accounted for the majority of
the remainder of $2,000 difference in net sales for the two periods.
Cost of Sales
Cost of sales for FY 97 declined by $37,000 or 2.9% from $1,289,000
in FY 96. As a percentage of sales, cost of sales was 50.2% for the 1997 period,
compared to 49.6% for the 1996 period. Management attributes this slight
percentage change in gross margin primarily to two factors: (1) an approximately
2% decline in cost from the changeover from the MultiVoice to the Eloquence
software voice synthesizer, which somewhat offset by, (2) higher computer sales
which has higher percentage in cost.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for FY 97 increased by
$1,087,000, or 91.3% to $2,277,000 compared to $1,190,000 for FY 96. As a
percentage of net sales, selling, general and administrative expenses increased
by 45.5% to 91.3% in FY 97 from 45.8% in FY 96. Management attributes this
increase primarily to the expansion of the Company's simulation software efforts
as the Company added office space, furniture and equipment, and additional
staff, including recruiting and hiring costs, commencing in September 1996 in
contemplation of receiving funding from the closing of the a public offering
that was scheduled to close in November 1996 but which did not close because the
underwriter of such offering had failed to reach agreement with its clearing
agent regarding the amount of capital that such clearing agent required such
underwriter to maintain in connection with such offering. A portion of the
increase was also due to higher professional fees, increases in salaries and
wages, increased printing and advertising costs.
Research and Development
The Company incurred approximately $765,000 of research and
development costs for FY 97, of which approximately $632,000 was capitalized and
approximately $133,000 was expensed. For FY 96, the Company incurred
approximately $215,000 of research and development costs, of which approximately
$107,000 was capitalized and approximately $108,000 was expensed. The 255.8%
increase in research and development expenditures for FY 97 is due to the
expanded development work on educational and pharmaceutical simulation software
begun in September 1996.
18
<PAGE> 21
Income from Grant
For FY 97, the Company received $17,000, the last one-third of a
$51,000 Phase I SBIR grant from the National Science Foundation to develop
software to allow physically-disabled students to perform simulated laboratory
experiments on a computer. For FY 96, the Company received the first two-thirds
of this grant. (A follow-on $300,000 Phase II SBIR grant was awarded to the
Company in October 1997.)
Interest Expense
Interest expense for FY 97 increased $59,000, or 590.0%, to $69,000
from $10,000 in FY 96. This increase is primarily due to the interest charges
incurred for the $1,600,000 in notes payable issued in August 1996 through
January 1997 to help fund the Company's IPO and expand its simulation software
operations.
Financing Costs
Financing costs for FY 97 were $280,000 compared to $0 for FY 96.
The increase is due to the issuance of 280,000 warrants in connection with notes
payable issued in December 1996 and January 1997. This financing cost was being
amortized over the term of the notes and the unamortized portion at the time of
the completion of the IPO was charged to earnings. The warrants entitled the
holder to purchase one share of the Company's Common Stock for $2.50 per share.
The Company issued these warrants which had an exercise price that the Company
estimated to be $1.00 less than the fair value of the Company's Common Stock at
the date of grant. Accordingly, the Company recognized an additional financing
cost of $280,000.
Income Taxes
Income taxes decreased $54,000, or 360.0% to the tax benefit of
$39,000 from the provision of $15,000 for FY 96 because of the Company's
decreased earnings.
Net Income
Net income for FY 97 declined by $1,459,000, or 6,343.5%, to the net
loss of $1,436,000 compared to the net income of $23,000. Management attributes
this decline primarily to the decrease in Net Sales, the increase in Selling,
General and Administrative expenses incurred by the Company for its research and
development efforts, and the increased financing costs and interest expenses
compared to FY 96.
19
<PAGE> 22
Seasonality
Sales of the Company's disability products exhibit relatively mild
seasonal fluctuations. The following table sets forth net sales information for
each of the Company's last 12 calendar quarters. This unaudited net sales
information has been prepared on the same basis as the annual information
presented elsewhere in this Form 10-KSB and, in the opinion of management,
reflects all adjustments (consisting of normal recurring entries) necessary for
a fair presentation of the information presented. Net sales for any quarter are
not necessarily indicative of sales for any future period.
20
<PAGE> 23
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Net Sales
FY
First Second Third Fourth Total
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
(in thousands)
- -----------------------------------------------------------------------------------------------------------
1995 ................................................... 700 618 710 851 2,879
- -----------------------------------------------------------------------------------------------------------
1996 ................................................... 733 628 621 619 2,601
- -----------------------------------------------------------------------------------------------------------
1997 ................................................... 541 679 560 713 2,493
- -----------------------------------------------------------------------------------------------------------
</TABLE>
In general, management believes sales to schools are seasonal, with
greater sales to schools during the Company's third and fourth fiscal quarter
(March-May and June-August). There is not sufficient historical data at this
time to allow a detailed analysis of the seasonality of educational simulation
software. Sales of pharmaceutical simulations, expected to begin in the first
calendar quarter of 1998, are not expected to show significant seasonal
behavior.
Liquidity and Capital Resources:
The Company's principal sources of capital have been cash flows from
its operations, a bank line of credit, a government grant, cash loans from the
officers on an as-needed basis, and proceeds from the Company's initial public
offering.
The Company has available a $100,000 revolving line of credit from a
bank. Interest is payable on a monthly basis at the bank's prime rate plus 3.0%.
The interest rate at August 31, 1996 and 1997 was 11.25% and 11.50%,
respectively. At August 31, 1996, the outstanding balance under the revolving
line of credit was approximately $94,000, and at August 31, 1997, the
outstanding balance under the revolving line of credit was $0, with $100,000
available on that date. The revolving line of credit is not secured by any of
the assets of the Company but is personally guaranteed by Mr. Walter S. Woltosz,
the Company's Chief Executive Officer, President and Chairman of the Board of
Directors
In 1996, the Company was awarded a $51,000 Phase I SBIR grant from
the National Science Foundation, the purpose of which was to help fund the
Company's development of educational simulation software for the school and home
study markets. In October 1997, the Company was also awarded a follow-on
$300,000 Phase II SBIR grant for the same purpose, which will be paid in four
equal payments of $75,000 semi-annually. The first payment on such grant was
received in October 1997.
The Company believes that the net proceeds from the sale of the
shares of Common Stock offered in the IPO, together with existing capital and
anticipated funds from operations, will be sufficient to meet its anticipated
cash needs for working capital and capital expenditures for at least the next 13
months. Thereafter, if cash generated from operations is insufficient to satisfy
the Company's capital requirements, the Company may have to sell additional
equity or debt securities or obtain expanded
21
<PAGE> 24
credit facilities. In the event such financing is needed in the future, there
can be no assurance that such financing will be available to the Company, or, if
available, that it will be in amounts and on terms acceptable to the Company.
22
<PAGE> 25
Item 7. Financial Statements
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Simulations Plus, Inc.
We have audited the accompanying consolidated balance sheet of Simulations Plus,
Inc. and subsidiary as of August 31, 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended August 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Simulations Plus,
Inc. and subsidiary as of August 31, 1997, and the consolidated results of their
operations and their consolidated cash flows for each of the two years in the
period ended August 31, 1997 in conformity with generally accepted accounting
principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
October 31, 1997
23
<PAGE> 26
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF AUGUST 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 2) $ 2,156,761
Accounts receivable, net of allowance for doubtful
accounts of $15,000 375,051
Income tax receivable 57,426
Inventory 222,798
-----------
Total current assets 2,812,036
CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS, net
of accumulated amortization of $175,414 746,720
FURNITURE AND EQUIPMENT, net (Note 3) 183,973
OTHER ASSETS 34,996
-----------
TOTAL ASSETS $ 3,777,725
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 140,542
Accrued payroll and other expenses 150,709
Accrued warranty and service costs 51,859
Current portion of capitalized lease obligations (Note 4) 25,857
-----------
Total current liabilities 368,967
CAPITALIZED LEASE OBLIGATIONS, net of current portion (Note 4) 55,727
-----------
Total liabilities 424,694
COMMITMENTS (Note 4)
SHAREHOLDERS' EQUITY (Notes 5, 7, and 8)
Common stock, $.001 par value
20,000,000 shares authorized
3,350,000 shares issued and outstanding 3,350
Additional paid-in capital 4,595,771
Accumulated deficit (1,246,090)
-----------
Total shareholders' equity 3,353,031
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,777,725
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 27
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
NET SALES (Note 1) $ 2,493,101 $ 2,600,792
COST OF SALES 1,252,343 1,289,059
----------- -----------
GROSS PROFIT 1,240,758 1,311,733
----------- -----------
OPERATING EXPENSES
Selling, general, and administrative 2,277,022 1,189,737
Research and development 133,023 107,767
----------- -----------
Total operating expenses 2,410,045 1,297,504
----------- -----------
INCOME (LOSS) FROM OPERATIONS (1,169,287) 14,229
----------- -----------
OTHER INCOME (EXPENSE)
Interest income 25,709 --
Income from grant 17,159 34,318
Interest expense (68,858) (10,037)
Financing costs (Note 5) (280,000) --
----------- -----------
Total other income (expense) (305,990) 24,281
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT FROM)
INCOME TAXES (1,475,277) 38,510
PROVISION FOR (BENEFIT FROM) INCOME TAXES (Note 6) (38,800) 15,593
----------- -----------
NET INCOME (LOSS) $(1,436,477) $ 22,917
=========== ===========
NET INCOME (LOSS) PER SHARE $ (0.57) $ 0.01
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,527,370 2,390,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 28
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
----------------------------- Paid-in (Accumulated
Shares Amount Capital Deficit) Total
---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31,
1995 2,200,000 $ 2,200 $ - $ 167,470 $ 169,670
NET INCOME 22,917 22,917
---------- ----------- ---------- ----------- ----------
BALANCE, AUGUST 31,
1996 2,200,000 2,200 -- 190,387 192,587
SALE OF COMMON STOCK
IN INITIAL PUBLIC
OFFERING (Note 7) 1,150,000 1,150 5,748,850 5,750,000
OFFERING COSTS (1,433,079) (1,433,079)
ISSUANCE OF WARRANTS
FOR FINANCING COSTS
(Note 5) 280,000 280,000
NET LOSS (1,436,477) (1,436,477)
---------- ----------- ---------- ----------- ----------
BALANCE, AUGUST 31,
1997 3,350,000 $ 3,350 $4,595,771 $(1,246,090) $3,353,031
========== =========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 29
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,436,477) $ 22,917
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization of furniture and equipment 31,777 20,545
Amortization of capitalized software development costs 108,087 63,793
Deferred taxes 380 30,870
Issuance of warrants for financing activities 280,000 --
(Increase) decrease in
Accounts receivable (125,637) 59,683
Income tax receivable (22,149) --
Inventory (130,736) (21,976)
Other assets (9,057) (21,390)
Increase (decrease) in
Accounts payable (36,946) 33,733
Accrued compensation due to officer (150,000) --
Accrued payroll and other expenses 77,245 13,967
Accrued warranty and service costs 13,418 (2,178)
Income tax payable -- (58,618)
----------- ---------
Net cash provided by (used in) operating activities (1,400,095) 141,346
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment (80,409) (14,797)
Capitalized computer software development cost (631,865) (106,623)
----------- ---------
Net cash used in investing activities (712,274) (121,420)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit 201,603 95,022
Payments on line of credit (295,142) (20,425)
Payments on capitalized lease obligations (22,482) (16,322)
Due to officer, net -- (34,148)
Increase in deferred offering costs (1,338,949) (94,130)
Proceeds from notes payable 1,400,000 200,000
Payments on notes payable (1,600,000) --
Payments to officer (40,000) --
Proceeds from officer 40,000 --
Proceeds from the sale of common stock 5,750,000 --
----------- ---------
Net cash provided by financing activities 4,095,030 129,997
----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 30
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Net increase in cash during year $1,982,661 $149,923
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 174,100 24,177
---------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $2,156,761 $174,100
========== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended August 31, 1997 and 1996, the Company paid $10,354 and
$42,851, respectively, in income taxes and $137,608 and $10,037, respectively,
in interest. During the year ended August 31, 1997, the Company received $28,985
in income tax refunds.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company entered into capital lease obligations of $85,952 during the year
ended August 31, 1997 and transferred $7,420 and $17,753 of computer hardware
from inventory to furniture and equipment during the years ended August 31, 1997
and 1996, respectively.
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 31
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Simulations Plus, Inc. was incorporated on July 17, 1996. On August
29, 1996, the shareholders of Words+, Inc. exchanged their 2,000
shares of Words+, Inc. common stock for 2,200,000 shares of
Simulations Plus, Inc. common stock, and Words+, Inc. became a
wholly-owned subsidiary of Simulations Plus, Inc. (collectively the
"Company"). The effect of the stock-for-stock exchange is presented
retroactively in the accompanying consolidated financial statements.
All intercompany accounts and transactions have been eliminated.
Line of Business
The Company designs and develops computer software and manufactures
augmentative communication devices and computer access products that
provide a voice for those who cannot speak and allow
physically-disabled persons to operate a standard computer. The
Company also designs interactive, educational software programs that
simulate science experiments conducted in high school science
classes. In addition, the Company is developing pharmaceutical
simulation software to promote cost-effective solutions to a number
of problems in pharmaceutical research and in the education of
pharmacy and medical students.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities
at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers
all highly-liquid investments purchased with original maturities of
three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost (first-in, first-out basis)
or market and consists primarily of computers and peripheral
computer equipment.
Furniture and Equipment
Furniture and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are
provided using accelerated methods over the estimated useful lives
as follows:
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 32
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Furniture and Equipment (Continued)
Equipment 5 years
Computer equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Leasehold improvements 5 years
Maintenance and minor replacements are charged to expense as
incurred. Gains and losses on disposals are included in the results
of operations.
Advertising
The Company expenses advertising costs as incurred. Advertising
costs for the years ended August 31, 1997 and 1996 were $88,422 and
$44,564, respectively.
Research and Development Costs
Research and development costs are charged to expense as incurred
until technological feasibility has been established. These costs
consist primarily of salaries and direct payroll related costs.
Software Development Costs
Software development costs are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Cost of Computer Software to be Sold, Leased, or
Otherwise Marketed." Capitalization of software development costs
begins upon the establishment of technological feasibility and is
discontinued when the product is available for sale. The
establishment of technological feasibility and the ongoing
assessment for recoverability of capitalized software development
costs require considerable judgment by management with respect to
certain external factors including, but not limited to,
technological feasibility, anticipated future gross revenues,
estimated economic life, and changes in software and hardware
technologies. Capitalized software development costs are comprised
primarily of salaries and direct payroll related costs and the
purchase of existing software to be used in the Company's software
products.
Amortization of capitalized software development costs is provided
on a product-by-product basis on the straight-line method over the
estimated economic life of the products (not to exceed three years).
Management periodically compares estimated net realizable value by
product with the amount of software development costs capitalized
for that product to ensure the amount capitalized is not in excess
of the amount to be recovered through revenues. Any such excess of
capitalized software development costs to expected net realizable
value is expensed at that time.
30
<PAGE> 33
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company recognizes revenues related to software licenses and
software maintenance in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statements of Position No.
91-1, "Software Revenue Recognition." Product revenue is recorded at
the time of shipment, net of estimated allowances and returns.
Post-contract customer support ("PCS") obligations are
insignificant; therefore, revenue for PCS is recognized at the time
of shipment, and the costs of providing such support services are
accrued and amortized over the obligation period. The Company
provides, for a fee, additional training and service calls to its
customers and recognizes revenue at the time the training or service
call is provided.
Income Taxes
The Company accounts for income taxes under the liability method
required by SFAS No. 109, "Accounting for Income Taxes." Deferred
tax assets and liabilities reflect the expected future tax
consequences of events that have been included in the financial
statements and tax returns. Deferred tax assets and liabilities are
determined based upon the difference between the financial statement
and tax bases of assets and liabilities, using the enacted tax rates
in effect for the year in which the differences are expected to
reverse.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in
accordance with generally accepted accounting principles. For
certain of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable, accrued
payroll and other expenses, and accrued warranty and service costs,
the carrying amounts approximate fair value due to their short
maturities. The amounts shown for capitalized lease obligations also
approximate fair value because current interest rates offered to the
Company for leases of similar maturities are substantially the same.
Stock Options
The Company has adopted only the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." It applies
Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in
accounting for its plan and does not recognize compensation expense
for its stock-based compensation plan other than for restricted
stock and options/warrants issued to outside third parties.
31
<PAGE> 34
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average number
of common and common equivalent shares outstanding during each year.
In connection with the Company's initial public offering ("IPO"),
stock options and warrants issued for consideration below the IPO
per share price during the twelve months before the filing of the
registration statement have been included in the calculation of
common stock equivalent shares using the treasury stock method as if
they had been outstanding throughout the interim period (February
28, 1997) included in the IPO prospectus. The determination of
common stock and equivalents outstanding for the remainder of fiscal
year 1997 has been determined on a basis consistent with APB 15.
That is, outstanding options and warrants are included in the
earnings per share computation using the treasury stock method only
if they have a dilutive effect.
Concentrations and Uncertainties
International sales accounted for 17% and 14% of net sales for the
years ended August 31, 1997 and 1996, respectively. Amounts due from
Medicaid represented 20% of the net accounts receivable balance at
August 31, 1997.
The Company operates in the computer software industry which is
highly competitive and changes rapidly. The Company's operating
results could be significantly affected by its ability to develop
new products and find new distribution channels for new and existing
products.
The Company does not manufacture certain of its components including
the computer that is used in one of the Company's products. Such
computer is sourced by the Company from a single vendor. The Company
also uses a number of pictographic symbols that are used in its
software products which are licensed from a third party. The
inability of the Company to obtain computers used in its products or
to renew its licensing agreement to use pictographic symbols could
negatively impact the Company's financial position, results of
operations, and cash flows.
Recently Issued Accounting Pronouncement
The Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings Per Share," which is effective for financial
statements issued for periods ending after December 15, 1997,
including interim periods. SFAS No. 128 requires public companies to
present basic earnings per share and, if applicable, diluted
earnings per share instead of primary and fully-diluted earnings per
share. The Company does not believe that diluted earnings per share
in accordance with SFAS No. 128 will be materially different from
the earnings per share previously reported.
32
<PAGE> 35
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncement (Continued)
SFAS No. 129, "Disclosure of Information about Capital Structures,"
issued by FASB is effective for financial statements ending after
December 15, 1997. The new standard reinstates various securities
disclosure requirements previously in effect under APB 15,
"Computing Earnings per Share," which has been superseded by SFAS
No. 128. The Company does not expect adoption of SFAS No. 129 to
have a material effect, if any, on its financial position or results
of operations.
SFAS No. 130, "Reporting Comprehensive Income," issued by FASB is
effective for financial statements with fiscal years beginning after
December 15, 1997. Earlier application is permitted; SFAS No. 130
establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. The Company does not expect adoption of SFAS No. 130 to
have a material effect, if any, on its financial position or results
of operations.
NOTE 2 - CASH AND CASH EQUIVALENTS
The Company maintains cash deposits at banks located in California.
Deposits at each bank are insured by the Federal Deposit Insurance
Corporation up to $100,000. As of August 31, 1997, uninsured
portions of balances held at banks aggregated to $91,206. In
addition, the Company also had on deposit with a high-quality
financial institution cash and cash equivalents in the amount of
$2,006,251 that are uninsured. The Company has not experienced any
losses in such accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
NOTE 3 - FURNITURE AND EQUIPMENT
Furniture and equipment at August 31, 1997 consisted of the
following:
<TABLE>
<S> <C>
Equipment $ 40,556
Computer equipment 294,465
Furniture and fixtures 43,921
Leasehold improvements 5,900
--------
384,842
Less accumulated depreciation and amortization 200,869
TOTAL $183,973
========
</TABLE>
33
<PAGE> 36
NOTE 4 - COMMITMENTS
Leases
The Company leases certain facilities for its corporate and
operations offices under a non-cancelable operating lease agreement
that expires in 1999. The Company also leases certain office and
computer equipment under non-cancelable capital lease arrangements.
Future minimum lease payments under non-cancelable capital and
operating leases with initial or remaining terms of one year or more
are as follows:
<TABLE>
<CAPTION>
Year Ending Operating Capital
August 31, Leases Leases
---------- ------ ------
<S> <C> <C>
1998 $104,335 $36,438
1999 5,449 34,602
2000 29,588
2001 704
-------- -------
109,748 101,332
=======
Less amount representing interest 81,584
Less current portion 25,857
-------
LONG-TERM PORTION $55,727
=======
</TABLE>
Included in furniture and equipment is capitalized leased equipment
of $156,907 with accumulated amortization of $80,178 at August 31,
1997.
Rent expense was $142,195 and $55,939 for the years ended August 31,
1997 and 1996, respectively.
Employee Agreement
The Company entered into an employment agreement with its president
that extends until August 31, 1999. The employment agreement
provides for an annual salary of $150,000 and an annual bonus based
on the Company's performance not to exceed $150,000.
License Agreement
The Company entered into an agreement with Therapeutic Systems
Research Laboratory ("TSRL") to jointly develop simulation of the
absorption of drug compounds in the gastrointestinal tract. Upon
execution of a definitive License Agreement, TSRL received a
one-time payment of $75,000, plus a royalty of 20% of net sales of
the absorption simulation.
34
<PAGE> 37
Litigation
The Company is involved in various legal proceedings and claims
which arise in the ordinary course of its business. Management does
not believe that the outcome of these matters will have a material
adverse effect on the Company's consolidated financial position or
results of operations.
NOTE 5 - PROMISSORY NOTES PAYABLE
In August and September 1996, the Company entered into two
Subscription Agreements whereby the Company issued two notes in the
amount of $200,000 and $300,000, respectively, and issued 100,000
and 150,000 warrants, respectively, to purchase shares of common
stock. The warrants are exercisable at $4.00 per share and expire
five years from the date of grant. The notes were repaid upon the
completion of the Company's IPO.
In January 1997, the Company entered into Subscription Agreements
whereby the Company issued notes in the amount of $1,100,000 and
issued 280,000 warrants to purchase common stock. The warrants are
exercisable at $2.50 per share, are subject to a 12-month lock-up
period, and expire five years from the grant date. The notes were
repaid upon the completion of the Company's IPO. The Company
determined that the fair value of these warrants at the date of
grant was $3.50 per warrant due to the time between grant date and
the expected completion of the IPO based on the condition of the
Company on the grant date and the 12-month lock-up period (from the
date of the IPO) associated with these warrants. Accordingly, the
Company has recognized additional financing costs associated with
the $1,100,000 notes of $280,000 which was being amortized over the
term of the notes. The unamortized portion of this additional
financing cost upon the completion of the IPO was charged to
earnings.
NOTE 6 - INCOME TAXES
A reconciliation of the expected income tax computed using the
federal statutory income tax rate to the Company's effective income
tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Income tax computed at federal statutory tax rate (34.0)% 34.0%
State taxes, net of federal benefit 0.1 6.2
Surtax exemption -- (1.2)
Change in valuation allowance 31.1 --
Other 0.2 1.5
------- -------
TOTAL (2.6)% 40.5%
======= =======
</TABLE>
35
<PAGE> 38
Significant components of the Company's deferred tax assets and
liabilities for income taxes at August 31, 1997 consisted of the
following:
<TABLE>
<S> <C>
Deferred tax assets
Accrued payroll and other expenses $ 32,715
Accrued warranty and service costs 20,744
Net operating loss carryforward 625,498
Other 6,000
---------
684,957
Valuation allowance 378,756
---------
306,201
Deferred tax liabilities
Fixed assets (7,513)
Capitalized computer software development costs (298,688)
---------
NET DEFERRED TAX ASSET $ -
=========
</TABLE>
The Company's valuation allowance increased $378,756 during the year
ended August 31, 1997. At August 31, 1997, the Company had net
operating loss carryforwards of approximately $1,800,000 that expire
in 2012.
The components of the income tax provision for the years ended
August 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current
Federal $(40,780) $(12,097)
State 1,600 (3,180)
-------- --------
(39,180) (15,277)
-------- --------
Deferred
Federal 293 23,770
State 87 7,100
-------- --------
380 30,870
-------- --------
TOTAL $(38,800) $ 15,593
======== ========
</TABLE>
NOTE 7 - SHAREHOLDERS' EQUITY
Issuance of Common Stock
In June 1997, the Company completed an IPO where it sold 1,150,000
shares of common stock at $5.00 per share. Gross proceeds from the
sale were $5,750,000.
36
<PAGE> 39
Stock Option Plan
In September 1996, the board of directors adopted and the
shareholders approved the 1996 Stock Option Plan (the "Option Plan")
under which a total of 250,000 shares of common stock has been
reserved for issuance. As of August 31, 1997, no options have been
granted. The Option Plan terminates in 2006, subject to earlier
termination by the board of directors.
NOTE 8 - RELATED PARTY TRANSACTIONS
As of August 31, 1996, accrued compensation due to officer was
$150,000 which represents accrued salary due to the Company's
president. The amount due does not accrue interest and was repaid
from proceeds received in connection with the Company's IPO.
37
<PAGE> 40
NOTE 8 - RELATED PARTY TRANSACTIONS (CONTINUED)
In connection with the Company's IPO, the Company agreed to grant to
its president warrants to purchase up to 300,000 shares of the
Company's common stock. The number of warrants to be granted will be
based on net income for the year ended August 31, 1998, but cannot
exceed 300,000 shares. All such warrants granted will be exercisable
for a period of five years at an exercise price of $5.00 per share.
Any difference between the price of the Company common stock and the
exercise price of $5.00 per share on the measurement date will be
recorded as an expense in accordance with APB 25.
In January 1997, the Company's president borrowed $40,000 from the
Company. The amount bears interest at 10% per annum and was repaid
upon the completion of the Company's IPO.
NOTE 9 - LINE OF CREDIT
The Company has available an unsecured $100,000 revolving line of
credit from a bank with interest payable on a monthly basis at prime
(8.5% at August 31, 1997) plus 3%. The line is personally guaranteed
by the Company's president. As of August 31, 1997, no amounts were
drawn against the line of credit.
38
<PAGE> 41
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and key employees of the Company
and their ages and positions held with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICES:
Walter S. Woltosz 52 Chairman of the Board, Chief Executive Officer and
President of the Company and Words+.
Virginia E. Woltosz 46 Vice President, Secretary and Director of the Company
and Words+.
Dr. David Z. D'Argenio 47 Director and Consultant to the Company
Dr. Richard Weiss 62 Director
Ron F. Creeley 46 Vice President, Marketing and Sales of the Company
Philip R. Lawrence 47 Vice President, Operations of Words+
Momoko A. Beran 45 Chief Financial Officer of the Company and Words+
CERTAIN KEY EMPLOYEES AND CONSULTANTS:
Dr. Michael Bolger 46 Director of Life Sciences
Dr. Gregory Moore 38 Director of Engineering and Physical Sciences of the
Company
</TABLE>
39
<PAGE> 42
Walter S. Woltosz is a co-founder of the Company and has served as
its Chief Executive Officer and President and as Chairman of the Board of
Directors since its incorporation in July 1996. Mr. Woltosz is also a co-founder
of Words+ and has served as its Chief Executive Officer and President since its
incorporation in 1981.
Virginia E. Woltosz is a co-founder of the Company and has served as
its Vice President and Secretary since its incorporation in July 1996. Mrs.
Woltosz is also a co-founder of Words+ and has served as its Vice President,
Secretary and Treasurer since its incorporation in 1981. Virginia E. Woltosz is
the wife of Walter S. Woltosz.
Ronald F. Creeley joined the Company in February 1997 as its Vice
President, Marketing and Sales. Prior to joining the Company, Mr. Creeley had
been Marketing Director at Union Pen Company, Time Resources, and New England
Business Services, Inc., with experience in marketing and research.
Philip R. Lawrence joined Words+ in January 1993 as a sales
representative. He was promoted to Director of Marketing and Sales of Words+ in
1995, and was Promoted to Vice President, Operation of Words+.
Dr. David Z. D'Argenio started to serve as a Director of the Company
in June 1997. He is currently Professor and Chairman of Biomedical Engineering
at the University of Southern California ("USC"), and has been on the faculty at
USC since 1979. He also serves as the Co-Director of the Biomedical Simulations
Resource Project at USC, a project funded by the National Institutes of Health
since 1985.
Dr. Richard R. Weiss started to serve as a Director of the Company
in June 1997. From October 1994 to the present, Dr. Weiss has acted as a
consultant to a number of aerospace companies and to the U.S. Department of
Defense through his own consulting entity, Richard R. Weiss Consulting Services.
From June 1993 through July 1994, Dr. Weiss was employed by the U.S. Department
of Defense as its Deputy Director, Space Launch & Technology.
Momoko A. Beran joined Words+ in June 1993 as Director of Accounting
and was named the Company's Chief Financial Officer in July 1996.
Certain Key Employees and Consultants:
Dr. Michael B. Bolger is the Director, Life Sciences for the
Company, having joined the Company in October 1996. Dr. Bolger is Associate
Professor of Pharmacy at the USC, a co-founder and former director of CoCensys,
Inc., a pharmaceutical firm in Irvine, California. He is the author of 16
computer programs related to molecular chemistry, pharmacokinetics, cellular
growth, and data reduction in pharmacology and related areas, including the
Cyber Patient, drug shelf life, and receptor structure simulation programs the
Company acquired.
Dr. Gregory Moore joined the Company in October 1997 as the
Company's Director of Engineering and Physical Science. Dr. Moore holds a Ph.D.
from the University of California, Santa Barbara, in Mechanical Engineering.
Previously, Dr. Moore was employed at the MacNeal-Schwendler
40
<PAGE> 43
Corporation, specializing in the development and marketing of large-scale
structural optimization software tools. His expertise focuses on the development
and application of computer-based numerical simulation and optimization
techniques.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT:
Section 16(a) of the Securities Exchange Act of 1934 as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than ten percent of its Common Stock to file reports of ownership and
changes of ownership with the Securities and Exchange Commission and NASDAQ.
Such persons are also required to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on the Company's review of the copies of those forms
received by the Company, or written representations from such persons that no
Forms 5 were required to be filed, it appears that all reports due were timely
filed.
Item 10. Executive Compensation
The following table sets forth certain information concerning
compensation paid or accrued for the fiscal year ended August 31, 1997, 1996 and
1995 by the Company to or for the benefit of the Company's President. No other
executive officers of the Company received total annual compensation for the
fiscal year ended August 31, 1997, 1996 and 1995 that exceeded $100,000. As
permitted under the rules of the Securities and Exchange Commission, no amounts
are shown in the table below with respect to any perquisites paid to named
officer because the aggregate amount of such perquisites (e.g., auto allowance)
did not exceed the lessor of (i) $50,000 or (ii) 10% of the total annual salary
and bonus of a named officer.
<TABLE>
<CAPTION>
NAME AND FISCAL
PRINCIPAL POSITION SALARY YEAR
------------------ ------ ----
<S> <C> <C>
Walter S. Woltosz . . . . . . . . . . . . . . . . . . $ 70,000 1995
President and Chief Executive Officer $ 82,500 1996
$300,000 * 1997
</TABLE>
* Includes $150,000 accrued but unpaid compensation paid from
proceeds of the Company's Initial Public Offering.
EMPLOYMENT AND OTHER COMPENSATION AGREEMENTS
The Company has an employment agreement with Walter Woltosz
commencing September 1, 1996 that extends until August 31, 1999. The agreement
provides for an annual salary of $150,000. Pursuant to such agreement, Mr.
Woltosz is entitled to such health insurance and other benefits that are not
inconsistent with that which the Company customarily provides to its other
management employees and to reimbursement of customary, ordinary and necessary
business expenses incurred in connection
41
<PAGE> 44
with the rendering of services to the Company. The agreement also provides that
the Company may terminate the agreement upon 30 days' written notice if
termination is without cause and that the Company's only obligation to Mr.
Woltosz would be for a payment equal to the greater of (i) 12 months of salary
or (ii) the remainder of the term of the employment agreement from the date of
notice of termination. Further, the agreement provides that the Company may
terminate the agreement for cause (as defined) and that the Company's only
obligation to Mr. Woltosz would be limited to the payment of Mr. Woltosz' salary
and benefits through and until the effective date of any such termination.
Commencing with the Company's fiscal year ending 1997 and for each
fiscal year thereafter, Walter and Virginia Woltosz are entitled to receive
bonuses not to exceed $150,000 and $60,000, respectively, equal to 5% of the
Company's net annual income before taxes. In addition, if the closing price of
the Company's Common Stock averages in excess of $10 per share for a period of
20 consecutive trading days during any fiscal year, then the Company will grant
to each of Mr. And Mrs. Woltosz options under the 1996 Stock Option Plan,
exercisable for five years, to purchase 50 shares of Common Stock for each
$1,000 of net income before taxed that the Company earns with respect to such
fiscal year (up to a Maximum of 60,000 options each until August 31, 1999) at an
exercise price equal to the market value per share as of the date of grant.
If the Company's after tax net income for the fiscal year ending
August 31, 1998 as reflected in the Company's audited financial statements is
$3,000,000 or more, Walter and Virginia Woltosz will be granted warrants to
purchase 300,000 shares of the Company's Common Stock. If such after tax net
income is $2,000,000 to $3,000,000, then the Woltosz' shall be granted warrants
to acquire 200,000 shares of the Company's Common Stock, and for each additional
$100,000 of after tax net income above $2,000,000 for such fiscal year, the
Woltosz' shall be entitled to receive warrants to acquire 10,000 shares of
Common Stock. All such warrants shall be exercisable for a period of five years
from June 18, 1997 at an exercise price of $5.00 per share,
subject to adjustment in certain circumstances.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 11 will be contained in the
Company's definitive proxy statement (the "Proxy Statement") for its 1998 annual
shareholders' meeting, which is hereby incorporated by reference.
Item 12. Certain Relationships and Related Transactions
The information required by Item 12 will be contained in the Proxy
Statement, which is incorporated by reference.
42
<PAGE> 45
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report as required
by Item 601 of Regulation S-B:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.1 Articles of Incorporation of the Registrant(1)
3.2 Amended and Restated Bylaws of the Registrant(1)
4.1 Articles of Incorporation of the Registrant (incorporated by reference to
Exhibit 3.1 hereof and Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 hereof)
4.2 Form of Common Stock Certificate(1)
4.3 Share Exchange Agreement(1)
10.1 Simulations Plus, Inc. 1996 Stock Option Plan (the "Option Plan") and terms of
agreements relating thereto(1)+
10.2 Subscription Agreement with Patricia Ann O'Neil(1)
10.3 Security Agreement with Patricia Ann O'Neil(1)
10.4 Promissory Note made by the Registrant in favor of Patricia Ann O'Neil(1)
10.5 Warrants to purchase 150,000 shares of Common Stock of the Registrant issued to
Patricia Ann O'Neil(1)
10.6 First Amendment to Agreement with Patricia Ann O'Neil(1)
10.7 Subscription Agreement with Fernando Zamudio(1)
10.8 Security Agreement with Fernando Zamudio(1)
10.9 Promissory Note made by the Registrant in favor of Fernando Zamudio(1)
10.10 Warrant to purchase 100,000 shares of Common Stock of the Registrant issued to
Fernando Zamudio(1)
10.11 Employment Agreement by and between the Registrant and Walter S. Woltosz(1)+
10.12 Performance Warrant Agreement by and between the Registrant and Walter S. and
Virginia E. Woltosz(2)+
10.13 Software Acquisition Agreement by and between the Registrant and Michael B.
Bolger(1)
10.14 Sublease Agreement dated May 7, 1993 by and between the Registrant and
Westholme Partners (along with Consent to Sublease and master lease
agreement)(1)
10.15 Lease Agreements dated August 22, 1996 by and between Words+, Inc. and
Abbey-Sierra LLC(1)
10.16 Form of 10% Amended and Restated Promissory Note issued in connection with
the Registrant's Private Placement(2)
10.17 Form of Subscription Agreement relative to the Registrant's Private
Placement(1)
10.18 Form of Lock-up Agreement with Bridge Lenders(2)
10.19 Form of Indemnification Agreement(1)
10.20 Form of Lock-Up Agreement with the Woltosz'(2)
10.21 Letter of Intent by and between the Registrant and Therapeutic Systems
Research Laboratories(1)
10.22 Form of Representative's Warrant to be issued by the Registrant in favor
of the Representative(2)
10.23 Form of Warrant issued to Bridge Lenders(2)
10.24 License Agreement by and between the Registered Therapeutic Systems Research
Laboratories(3)
27.1 Financial Data Schedule(3)
</TABLE>
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (Registration No. 333-6680) filed on March 25, 1997 (the "Registration
Statement").
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement filed on May 27, 1997.
(3) Filed herewith.
+ Management Contract or Compensatory Plan.
(b) Reports on Form 8-K
None.
43
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the
City of Palmdale, State of California, On December 15, 1997.
SIMULATIONS PLUS, INC.
By /s/ Momoko A. Beran
-------------------------------
Momoko A. Beran
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Registrant and in the capacities indicated on December 15, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ Walter S. Woltosz
- ----------------------------------------- Chairman of the Board of Directors, President
Walter S. Woltosz and Chief Executive Officer
/s/ Virginia E. Woltosz
- -----------------------------------------
Virginia Woltosz Senior Vice President, Secretary and Director of
the Company
- -----------------------------------------
Dr. David Z. D'Argenio Director and Consultant to the Company
/s/ Dr. Richard Weiss
- -----------------------------------------
Dr. Richard Weiss Director
</TABLE>
44
<PAGE> 47
<TABLE>
<S> <C>
/s/ Momoko A. Beran
- -----------------------------------------
Momoko A. Beran Chief Financial Officer (Principal Financial and Accounting Officer)
of the Company
</TABLE>
45
<PAGE> 1
EXHIBIT 10.24
EXCLUSIVE SOFTWARE LICENSING AGREEMENT
This Exclusive Software Licensing Agreement (the "Agreement") made as of
the 30th day of June, 1997 is by and between Therapeutic Systems Research
Laboratories "("TSRL"), a Michigan corporation, (the "Licensor") with its
principal place of business at 540 Avis Drive, Suite A, Ann Arbor, Michigan
48108, and Simulations Plus, Inc., a California Corporation, with its principal
place of business at 40015 Sierra Highway, Suite B110, Palmdale, California
93550, (the "Licensee").
WITNESSETH
WHEREAS, subject only to those exceptions disclosed in this Agreement,
Licensor owns all right, title, and interest in and to certain computer software
based technologies (the "Software Technology"), and certain biological databases
(the "Databases") the functional specifications for which are set forth in
Exhibit A attached hereto;
WHEREAS, Licensor desires to license the Software Technology and
Databases exclusively to Licensee, and Licensee desires to acquire a license to
the Software Technology and Databases, in accordance with the terms and
conditions of this Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Licensor and Licensee, intended to
be legally bound, hereby agree as follows:
SECTION 1.
DEFINITIONS
SOFTWARE TECHNOLOGY. "Software Technology" means the computer
program for gastrointestinal tract absorption prediction referred to as "Gastro"
(as defined in Exhibit A) licensed by Simulations Plus, Inc. and includes: (i)
source code form of the computer Software "Gastro" in all forms, including
machine-readable, visually-perceptible or otherwise; (ii) all associated
documentation, manuals and other printed or visually-perceptible materials
describing the use or design of the Software Technology; (iii) any revisions or
updates provided by Licensor to Licensee pursuant to the terms of this
Agreement; and (iv) any additional computer programs as the parties may from
time to time designate in writing. Modifications, enhancements and/or any
software, technology or other programs derived from the Software Technology for
the purpose of gastrointestinal tract absorption prediction shall be jointly
owned by the Licensee and Licensor following termination as discussed in
Sections 6 and 19 herein.
DATABASES. "Databases" means the experimentally derived
Effective Permeabilities (Peff), determined for a set of proprietary and
non-proprietary drugs (as defined in Exhibit A) by performing plug flow and
mixing tank drug absorption experiments on the following species: human, rat,
dog, and rabbit.
1
<PAGE> 2
ACCEPTANCE DATE. "Acceptance Date" means the date upon which the
Licensor receives from the Licensee the Acceptance Notice pursuant to Section 16
and the License Fee pursuant to Section 10.1.
SECTION 2.
CONVEYANCE OF RIGHTS
2.1 Subject to the following terms and conditions, Licensor,
effective as of the Acceptance Date, grants to Licensee a nontransferable,
exclusive license to use the Software Technology and Databases on any and all of
Licensee's computer systems, whether owned, leased, rented or otherwise under
the control of Licensee. The term "use" shall mean the right to copy or utilize
all or any portion of the Software Technology and Databases.
2.2 Licensee shall have the right to adapt the Software
Technology and Databases, in machine-readable form, for its own use and merge it
into other program material to form a composite work. Licensee shall have the
right to modify the Software Technology after the Acceptance Date and subject to
the terms and conditions set forth in Section 6, infra. Upon termination or
discontinuance of the license as discussed in Section 19, infra, Licensee shall
completely remove the Software Technology and Databases from its computer
systems and shall discontinue use of the Software Technology and Databases. Upon
any termination of the license grant under this Agreement, Licensee shall return
to Licensor (or, at Licensor's option, destroy and certify in writing to
Licensor that it has destroyed) the original and all copies of the Software
Technology and Databases. Following the Acceptance Date and thereafter for so
long as this Agreement remains in effect, Licensor shall work exclusively with
Licensee to develop absorption prediction software.
2.3 Licensee shall have the right, after the Acceptance
Date, to copy, in whole or in part, the Software Technology and Databases and
shall be permitted to make as many copies of the Software Technology and
Databases as it deems necessary. The original and any copies of the Software
Technology and Databases, in whole or in part, shall at all times be the joint
property of the Licensee and Licensor together. Each copy of the Software
Technology shall so state in the following language:
This copy of the Gastro program is
the property of Simulations Plus
Inc. and TSRL and is protected
under the copyright, trade secret
and confidentiality laws of the
United States and Canada.
Licensee shall keep a record of each copy made, where such copy
is located and in whose custody it is.
SECTION 3.
DELIVERY OF PHYSICAL OBJECTS
2
<PAGE> 3
Licensor, on or before July 31, 1997, shall deliver to Licensee
(1) a master copy of the Software Technology in source code and executable form
and Databases in machine readable form (spreadsheet or database), which shall be
in a form suitable for copying; and (2) all system and user documentation
pertaining to the Software Technology and Databases, including design or
development specifications, technical papers, presentations, error reports, and
related correspondence and memoranda.
SECTION 4.
REPRESENTATIONS AND WARRANTIES OF LICENSOR
4.1 Licensor represents and warrants to Licensee that it is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Michigan, and it has the corporate power and is authorized
under its Articles of Incorporation and its Bylaws to carry on its business as
now conducted;
4.2 Licensor represents and warrants to Licensee that it has
performed all corporate actions and received all corporate authorizations
necessary to execute and deliver this Agreement and to perform its obligations
hereunder;
4.3 Licensor represents and warrants to Licensee that the
execution of this Agreement will not result in any violation or default of or
conflict with: (i) Licensor's Articles of Incorporation or Bylaws; (ii) the
provisions of any other agreement to which it is a party or to which it is
bound; or (iii) any law, judgment, or regulation of any governmental authority;
4.4 Licensor represents and warrants to Licensee that there
are no persons who are entitled to any notice of the transaction contemplated
hereunder or whose consent is required for the consummation of the transaction
contemplated hereunder;
4.5 Licensor represents and warrants to the Licensee that
Licensee shall receive, pursuant to this Agreement, as of the effective date of
this Agreement, an exclusive license in the Software Technology and Databases;
4.6 Licensor represents and warrants to Licensee that, to
Licensor's knowledge (i) the Software Technology and Databases do not infringe
any patent, copyright, or trade secret of any third party; (ii) the Software
Technology and Databases are fully eligible for protection under applicable
copyright law and have not been forfeited to the public domain (except for the
databases of effective permeability that were developed by government funding
mechanisms and are considered to be public information); and (iii) the source
code and system specifications for the Software Technology have been maintained
in confidence;
4.7 Licensor represents and warrants to Licensee that there
are no agreements or arrangements in effect with respect to the marketing,
distribution, licensing or promotion of the Software Technology and Databases by
any independent salesperson, distributor or other remarketer or sales
organization which would interfere with the execution of this Agreement;
3
<PAGE> 4
4.8 Licensor represents and warrants to Licensee that it has
not granted any rights in the Software Technology and Databases to third parties
which rights would interfere with Licensee's exclusive license to the Software
Technology and Databases pursuant to this Agreement.
SECTION 5.
REPRESENTATIONS AND WARRANTIES OF LICENSEE
5.1 Licensee represents and warrants to Licensor that it is
a corporation duly organized, validly existing and in good standing under the
laws of the State of California, and it has the corporate power and is
authorized under its Articles of Incorporation and its Bylaws to carry on its
business as now conducted;
5.2 Licensee represents and warrants to Licensor that it has
performed all corporate actions and received all corporate authorizations
necessary to execute and deliver this Agreement and to perform its obligations
hereunder;
5.3 Licensee represents and warrants to Licensor that the
execution of this Agreement will not result in any violation or default of or
conflict with: (i) Licensee's Articles of Incorporation or Bylaws; (ii) the
provisions of any other agreement to which it is a party or to which it is
bound; or (iii) any law, judgment, or regulation of any governmental authority;
and
5.4 Licensee represents and warrants to Licensor that there
are no persons who are entitled to any notice of the transaction contemplated
hereunder or whose consent is required for the consummation of the transaction
contemplated hereunder.
SECTION 6.
OWNERSHIP OF MODIFICATIONS TO THE SOFTWARE TECHNOLOGY
After the Acceptance Date, Licensee may modify, enhance and
otherwise change the Software Technology without the prior written consent of
Licensor. Licensee agrees that a modification or enhancement of the Software
Technology developed by Licensee, with or without the advice or support of
Licensor, whether or not developed in conjunction with Licensor shall jointly be
the property of Licensee and Licensor who, subject to the provisions of Sections
16 and 19, shall thereafter own all right, title and interest to any patents,
inventions, discoveries, applications or processes, software and computer
programs devised, planned, applied, created, discovered or invented for the
purposes of gastrointestinal tract absorption prediction, relating in any way to
the Software Technology. This Section shall survive termination of this
Agreement.
SECTION 7.
WARRANTY
7.1 Licensor represents and warrants to Licensee that the
Software Technology
4
<PAGE> 5
and Databases provided by Licensor to Licensee conform in all material respects
to the functional specifications set forth in Exhibit A.
7.2 Among the remedies available to Licensee at law or in
equity for breach of the foregoing warranties, Licensee can require Licensor to
correct any material nonconformance to such specifications within ten (10) days
of Licensor receiving notice from Licensee. Licensor shall not be liable to
Licensee for any direct, incidental, consequential or other damages and expenses
suffered by Licensee as a result of any breach of this Warranty by Licensor.
7.3 Except as expressly provided in Section 13 of this
Agreement, Licensor shall not be responsible to Licensee for, or have any duty
to conduct or perform, any training or instruction; pre-sale or post-sale
marketing support; any licensing, sublicensing, leasing, or distribution; or any
modification, correction, updating, enhancement or technical support of the
Software Technology and Databases.
7.4 Licensor shall have no obligation to make repairs or
replacements to the Software Technology or Databases except as provided in
Section 7.2., and Section 13.2
SECTION 8.
CONFIDENTIALITY
8.1 Each of Licensor and Licensee shall hold in confidence
and not at any time disclose (except on a confidential basis to their employees
who need to know and who have signed a confidentiality agreement) all
Proprietary Information received from the other party in the same manner and to
the same extent as it holds in confidence its own Proprietary Information, and
shall not use any such Proprietary Information except for the purposes
contemplated by this Agreement. As used in this Agreement, "Proprietary
Information" shall mean all confidential and proprietary information, including
but without limitation, components, drawings, data, plans, programs,
specifications, techniques, processes, algorithms, inventions or other
information or material owned, possessed or used by either Licensor or Licensee
which is at any time so designated by such party in writing, whether by letter
or by the use of a proprietary stamp or legend, prior to the time any such
Proprietary Information is disclosed to the other party. In addition,
information which is orally disclosed to the other party shall constitute
Proprietary Information if identified as such at such time and if within ten
(10) days after such disclosure the disclosing party delivers to the receiving
party a written document describing such Proprietary Information and referencing
the place and date of such oral disclosure and the name of the employees of the
party to whom such disclosure was made.
8.2 Licensee shall take all reasonable steps to safeguard
the Software Technology and Databases so as to insure that no unauthorized
person shall have access to them, and that no persons authorized to have access
shall make any unauthorized copy. Licensee shall promptly report to Licensor any
unauthorized disclosure or any use of the Software Technology and Databases of
which it becomes aware and shall take such further steps as reasonably may be
requested by Licensor to prevent unauthorized use thereof.
5
<PAGE> 6
8.3 Notwithstanding the obligations herein, the obligations
herein shall not be applicable to information which: (i) was in the possession
of the receiving party free of any obligation of confidence or was in the public
domain at the time the furnishing party communicated it to the receiving party,
through no fault of the receiving party; (ii) was rightfully communicated to the
receiving party free of any obligation of confidence or entered the public
domain subsequent to the time the furnishing party communicated it to the
receiving party, through no fault of the receiving party; (iii) was developed by
employees or agents of the receiving party independently and without knowledge
of, or access to, any information which the furnishing party has disclosed in
confidence to the receiving party or to any third party, provided that the
receiving party shall have the burden of so establishing; (iv) is released from
confidential treatment by written consent of the disclosing party; (v) is
disclosed to the receiving party by a third party with the legal right to do so;
or (vi) is required to be disclosed pursuant to any legal proceeding.
SECTION 9.
ASSIGNMENT
Neither this Agreement nor any rights or licenses granted
hereunder may be assigned or delegated without the written consent of Licensor
and Licensee. This Agreement further provides that any assignee or transferee of
rights or obligations under this Agreement must agree in writing to be bound by
all of the terms of this Agreement and any incidental agreements entered into by
the parties in furtherance of this Agreement. The Agreement shall inure to the
benefit of and be binding upon any permitted successors or assigned of the
parties.
SECTION 10.
PAYMENT
10.1 In consideration of the transfer of complete rights to
the Software Technology and Databases granted pursuant to this Agreement,
Licensee shall pay to Licensor a license fee (the "License Fee") of $75,000.00,
payable in full on or before September 30, 1997. (The failure of Licensee to pay
the License Fee in full on or before that date shall, for all purposes, be
deemed a rejection by the Licensee of the Software Technology and Databases
under Section 16 and a termination of this Agreement under Section 19.
10.2 Additionally, Licensee shall pay to Licensor a royalty
(the "Royalty"), equal to twenty percent (20%) of the net revenues received by
the Licensee (e.g., gross revenues less returns, discounts and allowances,
determined in accordance with generally accepted accounting principles), from
the licensing, sale or other distribution of the Software Technology or the
Databases. For the period beginning on the date of this Agreement and ending on
August 31, 1999, the Royalty will be payable on the basis of actual net revenues
and will not be subject to any minimum payment. If this Agreement continues in
effect as of September 1, 1999 or as of any September 1st thereafter, then, for
the 12-month period beginning on each such September 1st, the Royalty will be
equal to 20% of the actual net revenues received by the Licensee during such
12-month period but in no event less than $50,000 per year. The Royalty will be
computed on a quarterly basis, with the Royalty for each quarter payable in full
not later than 45 days following the
6
<PAGE> 7
close of that quarter. If, as of the last quarter of any 12-month period to
which the $50,000 minimum applies, the cumulative Royalties paid with respect to
that 12-month period are less than $50,000, then the payment for the last
quarter of that 12-month period shall include the amount required in order to
satisfy the minimum Royalty for such 12-month period. The Licensee shall include
with each payment of the Royalty a detailed accounting of the licenses, sales
and other distributors of the Software Technology and Databases during the
calendar quarter for which that payment is being made, identifying the
licensee/purchasers of the Software Technology and Databases and the amounts
paid by such licensees/purchasers. Any installment of the Royalty not paid on or
before its due date will bear interest at the prevailing prime rate (as reported
in the Wall Street Journal) from the due date to the date of payment.
SECTION 11.
PAYMENT: TAXES
All license fee and royalty amounts payable pursuant to this
Agreement are exclusive of all federal, state, local and municipal or other
excise, sales, use, property or similar taxes and fees (but not any tax measured
by income of the Licensor), now in force or enacted in the future, and all such
taxes and fees shall be paid by Licensee. Licensee shall obtain and provide
Licensor with any certificate of exemption or similar document required to
exempt any transaction under this Agreement from sales tax, use tax or other tax
liability.
SECTION 12.
RECORDS AND AUDIT
Licensee shall maintain complete and accurate records relating
to the net revenues received by Licensee for the Software Technology and
Databases. Such records shall include information sufficient to determine the
royalties due to Licensor. Licensee agrees to allow Licensor's licensed
certified accountants to audit Licensee's records pertaining to the Software
Technology and Databases and verify the accuracy of the royalties due to
Licensor. Any such audit shall be permitted by Licensee within twenty (20) days
of Licensee's receipt of Licensor's written request to audit. Such audit shall
be conducted during normal business hours at a time mutually agreed upon by
Licensee and Licensor. Licensee's accounting information shall be kept
confidential by the auditors, and Licensee may require that Licensor's
accountants enter into a written confidentiality agreement reasonably acceptable
to Licensee. Such audits will not exceed one (1) per twelve (12) month period.
In the event that Licensee does not agree with the results of the audit
performed by Licensor's licensed certified accountant, then Licensor and
Licensee will mutually choose an independent third party licensed certified
accountant who will audit Licensee's records relating to the net revenues
received by Licensee. The determination of that third party certified accountant
shall be conclusive and binding upon the Licensor and the Licensee. If it is
determined that there was no underpayment by the Licensee of the Royalty for the
period subject to the audit, the Licensor shall bear the entire expense of its
certified accountant and, if applicable, the Licensee's certified accountant and
the third party certified accountant. If it is determined that there was an
underpayment of the Royalty for the period subject to the audit but that the
underpayment was equal to or less than five percent (5%) of the total Royalty
which should have
7
<PAGE> 8
been paid for such period, then each party shall be responsible for the cost of
its own certified accountant and the cost of the third party certified
accountant shall be borne in equal shares by the Licensor and the Licensee. If
it is determined that there was an underpayment of the Royalty for the period
subject to the audit and if such underpayment was more than five percent (5%) of
the total Royalty which should have been paid for such period, then the Licensee
shall be responsible for the cost of its certified accountant, the Licensor's
certified accountant, and, if applicable, the third party certified accountant.
SECTION 13.
DELIVERY, INSTALLATION AND SUPPORT
13.1 TECHNICAL SUPPORT. Licensor will deliver and provide
installation instructions for the Software Technology and Databases with the
program documentation at a time mutually agreed upon by the parties. Licensor
will provide technical support to Licensee relating to the development of the
Software Technology and Databases on the following basis: Licensor will provide
a maximum of fifteen (15) hours of non-compensated technical (non-programming)
support per month, including support in developing representative customer
databases, for as long as this Agreement is in effect. Additional technical
support provided by Licensor to Licensee will be mutually agreed upon by the
parties and Licensee will compensate Licensor for any technical support provided
to Licensee in excess of fifteen hours per month. Licensee may carry over unused
technical support time to another month upon mutual agreement with Licensor. The
amount of compensation to be paid by Licensee to Licensor for technical support
will be at the normal rate charged to Licensor's other clients during the
previous twelve months.
13.2 LICENSOR MAINTENANCE SUPPORT. Licensor agrees to provide
maintenance support for the Software Technology and Databases. All revisions,
updates, maintenance and support of the Software Technology and Databases shall
be provided to Licensee when such products or services are available.
13.3 LICENSEE MAINTENANCE SUPPORT. Licensee agrees to provide
maintenance support for the Software Technology. Licensee agrees to provide
programming, project management, debugging, and other related services to
Licensor when such products or services are available.
13.4 MARKETING AND CONSULTING SERVICES. (a) Licensor will
provide reasonable assistance at mutually agreeable times and places in creating
worldwide visibility at national and international symposia and one on one
visibility with leaders within major pharmaceutical companies. Licensor will
provide scientific after-market support, consulting and other related services
to Licensee at mutually agreeable times.
(b) Licensee agrees to provide advertising and distribution
for the Software Technology. Licensee agrees to perform field research to assess
customer acceptance and future demand.
8
<PAGE> 9
13.5 EXPENSE REIMBURSEMENT. Licensee will reimburse Licensor
for all out-of-pocket expenses reasonably incurred by the Licensor and its
personnel, and approved in advance by Licensee, in providing the technical
support, maintenance support and marketing support and consulting services
described in Section 13.1, 13.2, and 13.4. Such reimbursement shall be in
addition to the specified compensation in those sections for services rendered.
SECTION 14.
RIGHTS TO ABSORPTION DATABASES
14.1 Following the Acceptance Date and thereafter for so long
as this Agreement remains in effect, Licensee shall have unlimited access to the
Databases developed by Licensor and Dr. Amidon. Licensee and Licensor will have
the right to further develop the Databases, with Licensee compensating Licensor
at a rate to be mutually agreed upon by the parties for any further development
by Licensor.
14.2 Licensee shall have unlimited access to data and
information from the Databases which is in the public domain or otherwise
discoverable under the Freedom of Information Act or any similar provision of
any Federal or state law, statute or regulation. This Section shall survive
termination of this Agreement.
14.3 Following the Acceptance Date and thereafter for so long
as this Agreement remains in effect, Licensee shall have unlimited access to
information from the Databases which is proprietary to Licensor and Licensor's
right to the Databases is limited to use for internal purposes only, including
in conjunction with Licensor's client-related projects, and shall not be
licensed, transferred, or otherwise conveyed to any other party.
SECTION 15.
RISK OF LOSS
If the Software Technology and Databases or any documentation
relating to the Software Technology and Databases is lost or damaged during
shipment, Licensor shall replace that which is lost or damaged, together with
necessary program storage media at no additional charge, to Licensee. If the
Software Technology and Databases is lost or damaged while in possession of
Licensee, Licensor will replace it and the Licensee will reimburse the Licensor
for all costs incurred by Licensor in providing that replacement.
SECTION 16.
INSTALLATION AND ACCEPTANCE
Licensor, on or before July 31, 1997, shall deliver to the
Licensee the Software Technology, Databases and all related documentation and
shall oversee the installation of the same onto the Licensee's computer system
for purposes of testing. The Licensee shall thereupon
9
<PAGE> 10
have the right to test the Software Technology and the Databases from the period
of that installation through September 30, 1997 to determine, in the discretion
of the Licensee, if the Software Technology and the Databases will satisfy the
Licensee's intended uses and expectations. The Licensor, at no cost to the
Licensee, will provide timely responses to questions raised by the Licensee
during this period and, if mutually agreed by the Licensor and Licensee, the
Licensor will make modifications to the Software Technology and the Databases to
conform to the Licensee's uses and expectations. If, during such period, the
Licensee determines that the Software Technology and the Databases are
satisfactory for its intended uses and expectations, then the Licensee shall
deliver a written notice to the Licensor ("the Acceptance Notice") on or before
September 30, 1997 and include with that Acceptance Notice a check for the
License Fee as required in Section 10.1. If the Licensee delivers the Acceptance
Notice and the check for the License Fee on or before such date, then this
Agreement shall remain in effect, the Licensee may retain the copies of the
Software Technology and the Databases delivered by the Licensor and the Licensor
and the Licensee shall proceed with this Agreement in accordance with its terms.
If the Licensee does not deliver such Acceptance Notice and such check for the
License Fee by such date, then this Agreement shall automatically terminate, the
Licensee shall immediately at its expense return to the Licensor the Software
Technology and the Databases (including all copies or extracts thereof made by
Licensee during the period of possession) and upon such return, except for the
obligations of confidentiality contained in Section 8, all rights and
obligations of the Licensor and the Licensee under this Agreement shall be null,
void, and of no further effect. The Licensee expressly acknowledges that its
rights to use, copy, adapt, modify, enhance or otherwise exploit the Software
Technology and the Databases shall not arise and become effective unless and
until the Licensee delivers the Acceptance Notice and the check for the License
Fee on or before the date specified above.
SECTION 17.
INJUNCTIVE RELIEF
Because unauthorized use of the Software Technology and
Databases or dissemination of information regarding the Software Technology and
Databases may substantially diminish the value of such materials and irreparably
harm the parties, if either party is threatened with disclosure of the
information covered by this Agreement or if either party breaches this
Agreement, the potentially harmed or actually harmed party shall be entitled to
equitable relief (including, but not limited to, injunctive relief without the
need to post a bond therefor), in addition to other remedies afforded by the
law.
SECTION 18.
ASSIGNMENT
Except as hereinafter provided, neither Licensor nor Licensee
shall have the right to assign this Agreement without the prior written consent
of the other party hereto, which consent shall not be unreasonably withheld.
Each party acknowledges that consent to an assignment may be withheld and shall
be considered reasonable if, as a result of such assignment, a third party who
or which is a competitor of the non-assigning party will be the assignee or an
affiliate of the
10
<PAGE> 11
assignee. Each party acknowledges that the prohibition against assignments in
this Section will apply not only to direct sales or assignments but also to
indirect sales or assignments by reason of a merger of Licensor or Licensee into
or with any other entity or a sale of substantially all of the assets or
purchases a majority interest in the voting stock or otherwise assumes the
business of the Licensor or Licensee. Any purported assignment not in accordance
with this Section 18 shall be void and not merely voidable. When assigned as
permitted herein, the terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective permitted successors and assigns
of the parties hereto.
SECTION 19.
TERMINATION
19.1 This Agreement shall terminate as follows:
19.1.1 This Agreement shall automatically terminate as of September 30,
1997 unless, on or prior to that date, the Licensee delivers to the Licensor the
Acceptance Notice and the check for the License Fee as required in Section 16.1.
19.1.2 The Licensee reserves the right to terminate this Agreement at
any time upon written notice delivered to the Licensor, with such termination to
be effective on the fifth business day following the date of delivery of such
notice (or such later date as may be specified by the Licensee in such notice).
19.1.3 If the Licensee breaches its obligation to pay any Royalty or
other amount due to the Licensor under this Agreement on or before its due date
and fails to remedy such breach within ten (10) days after written demand by the
Licensor for payment, then the Licensor shall have the right, by delivery of
written notice to the Licensee following the expiration of that 10-day period,
to terminate this Agreement, effective immediately upon the date of delivery of
such notice of termination. Acceptance of payment of such amount by Licensor
prior to delivery of such notice shall constitute remedy of such breach.
19.1.4 If either party breaches any material obligation under this
Agreement (other than an obligation which is addressed in Section 19.1.3) and
fails to remedy such breach within thirty (30) days after their written notice
by the non-breaching party demanding such remedial action, then the
non-breaching party shall have the right, by delivery of written notice at any
time on or after the expiration of such 30-day period, to terminate this
Agreement effective immediately upon the date of such notice of termination.
19.1.5 If either party files a petition under chapter of the Bankruptcy
Code, as amended, or for the appointment of a receiver, or if any involuntary
petition in bankruptcy is filed against such party and said petition is not
discharged with thirty (30) days, or if either party shall become insolvent or
make a general assignment for the benefit of its creditors, or if the business
or property of either party shall come into possession of its creditors or of a
governmental agency or of a receiver, or if any proceedings supplementary to
judgment shall be commenced against wither
11
<PAGE> 12
party, or if any judgment against either party, not fully bonded shall remain
unpaid in whole or in part for at least five (5) days after entry thereof, then,
in any case, the other party may at its option terminate this Agreement.
19.2 Upon termination of this Agreement, the following shall
apply:
19.2.1 Upon termination of this Agreement, except for termination as a
result of breach by Licensor, Licensee shall promptly return to Licensor, at
Licensee's sole cost and expense, in good repair, condition and working order,
ordinary wear and tear resulting from proper use thereof alone excepted, all
elements which comprise the Software Technology, including, without limitation,
all documentation and other information delivered by Licensor to Licensee
pursuant hereto, and all other documents, notes, and other materials specific to
gastrointestinal absorption prediction, related to the Software Technology and
Databases in Licensee's possession, together with written certification by an
authorized officer of Licensee that the original and all copies of the Software
Technology and Databases, including any unauthorized copies, and other related
materials in Licensee's possession, are no longer in use and have been returned
to Licensor or destroyed.
19.2.2 Licensee shall return to Licensor, at Licensee's sole cost and
expense, in good repair, condition and working order, ordinary wear and tear
resulting from proper use thereof alone excepted, all elements which comprise
the Databases, including, without limitation, all documentation and other
information delivered by Licensor to Licensee pursuant hereto, and all other
documents, notes, and other materials specific to gastrointestinal tract
absorption prediction and related to the Software Technology and Databases in
Licensee's possession, together with written certification by an authorized
officer of Licensee that the original and all copies of the Software Technology
and Databases, including any unauthorized copies, and other related materials in
Licensee's possession, are no longer in use and have been returned to Licensor
or destroyed. Licensee shall not be responsible for returning those portions of
the Databases that are in the public domain, or otherwise discoverable as
described in Section 14.2, supra, or which the parties have mutually agreed will
remain with the Licensee pursuant to a separate written agreement.
19.2.3 Licensee shall immediately discontinue all development,
marketing, licensing, sale or other distribution of the Software Technology or
the Databases.
19.2.4 Licensee shall immediately pay to the Licensor all Royalties and
other amounts due to the Licensor under this Agreement for "net revenues"
received by the Licensee prior to the effective date of termination. Licensee
shall thereafter pay when and as due under the terms of this Agreement all
Royalties payable to the Licensor for "net revenues" received by the Licensee
from and after the termination of this Agreement. The Licensee shall pay to the
Licensor when and as due under the terms of this Agreement any deficiency
required to fund the minimum Royalty due under this Agreement for the 12-month
period during which the termination of this Agreement occurred. For the 12-month
period in which the term of the license terminates, the $50,000 minimum Royalty
payable according to Section 10.2 will be proportionately adjusted, based upon
the portion of the 12-month period during which the term of the license was in
effect, based upon a 365-day year.
12
<PAGE> 13
19.2.5 If either party files petition under any chapter of the
Bankruptcy Code, as amended, or for the appointment of a receiver, or if any
involuntary petition in bankruptcy is filed against such party and said petition
is not discharged within thirty (30) days, or if either party shall become
insolvent or make a general assignment for the benefit of its creditors, or if
the business or property of either party shall come into the possession of its
creditors or of a governmental agency or of a receiver, or if any proceedings
supplementary to judgment shall be commenced against either party, or if any
judgment against either party, not fully bonded shall-remain unpaid in whole or
in part for at least five (5) days after entry thereof, then, in any case, the
other party may at its option terminate this Agreement.
SECTION 20.
REFORMATION, SEVERABILITY AND SURVIVAL
The provisions of this Agreement have been negotiated by
sophisticated parties with equal bargaining power and the parties agree that
such provisions are fair, reasonable and necessary under the circumstances. The
provisions set forth herein are intended as separate covenants and if any of
these provisions should ever be adjudicated to exceed the limitations permitted
by applicable law in any jurisdiction, then such provisions shall be deemed
reformed in such jurisdiction to the maximum limitations permitted by applicable
law. If any one of such provisions is declared invalid for any reason
whatsoever, and if any one of such provisions cannot be reformed as aforesaid,
such ruling shall not affect the validity of the remainder of the provisions.
The other provisions shall remain in effect as if the provisions had been
executed without the invalid provisions. The parties hereby declare that they
intend that the remaining provisions continue to be effective without any that
have been declared invalid and not reformed as aforesaid.
SECTION 21.
GOVERNING LAW AND VENUE
This Agreement shall be governed by, and construed in accordance
with, the internal substantive laws of the State of California, without regard
to choice of law or conflicts of law principles. Each of the parties hereto
recognizes and hereby irrevocably consents to the exclusive jurisdiction over it
or him, as the case may be, of the Federal District Court for the Central
District of California or the Superior Court of California, County of Los
Angeles, in connection with any action or proceeding (whether it be for contract
or tort, at law or in equity, or otherwise) arising out of or relating in any
way to this Agreement, or any other document relating hereto or delivered in
connection with the transactions contemplated hereby.
13
<PAGE> 14
SECTION 22.
REPRESENTATION BY COUNSEL
Each party hereto represents and agrees with the others that it
has been represented by, or had the opportunity to be represented by,
independent counsel of its own choosing, and that it has had the full right and
opportunity to consult with its respective attorneys, that to the extent, if
any, that it desired, it availed itself of this right and opportunity, that each
party is fully aware of the contents thereof and its meaning, intent and legal
effect, and that its authorized officer is competent to execute this Agreement
and has executed this Agreement free from coercion, duress or undue influence.
SECTION 23.
NOTICES
All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed to have been delivered
three business days after having been mailed in a general or branch U.S. post
office and enclosed in a registered or certified post-paid envelope; one
business day after having been sent by overnight courier; when telecopied on a
business day, or otherwise on the next succeeding business day thereafter; and,
in each case, addressed to the respective parties at the addresses stated below
or to such other changed addresses the parties may have fixed by notice as
provided herein:
To the Licensor: TSRL, Inc.
540 Avis Drive - Suite A
Ann Arbor, MI 48108
With a copy to (not in lieu of notice to Licensor)
James R. Beuche
Hooper, Hathaway, Price, Beuche, & Wallace
126 South Main Street
Ann Arbor, MI 48104
To the Licensee:
Simulations Plus, Inc.
40015 Sierra Highway, Suite B110
Palmdale, CA 93550
Attention: Walter S. Woltosz
President
Telephone 805-266-9294
Facsimile 805-266-9394
With a copy to (not in lieu of notice to Licensee)
Asher M. Leids, Esq.
Susan H. Tregub, Esq.
14
<PAGE> 15
Donahue, Mesereau & Leids LLP
1900 Avenue of the Stars, Suite 2700
Los Angeles, CA 90067
Telephone (310) 277-1441
Facsimile (310) 277-2888
SECTION 24.
FEES AND COSTS
Except as otherwise provided herein, in the event of any claim
or controversy relating to this Agreement or the breach of this Agreement and
any action or proceeding brought by Licensor or Licensee against the other
(whether it be for contract or tort, at law or in equity, or otherwise) the
substantially prevailing party in such action or proceeding will be entitled to
recover from the other its costs and expenses incurred in taking or defending
such action or proceeding, including the appeal of such action, and including
reasonable fees of attorneys and other technical advisors.
SECTION 25.
CAPTIONS
The captions used in this Agreement are solely for the
convenience of the parties hereto and such captions do not constitute a part of
this Agreement.
SECTION 26.
COUNTERPARTS
This Agreement may be executed by the parties in two or more
counterparts, each of which together shall constitute one and the same
instrument.
SECTION 27.
ENTIRE AGREEMENT
27.1 This Agreement sets forth the entire agreement of the
parties hereto with respect to the transactions contemplated hereby. This
Agreement may not be amended except by an instrument in writing signed by the
parties hereto, and no claimed amendment, modification, termination or waiver
shall be binding unless in writing and signed by the party against whom or which
such claimed amendment, modification, termination or waiver is sought to be
enforced.
27.2 This Agreement merges and supersedes all prior and
contemporaneous agreements, assurances, representations, and communications
between the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
15
<PAGE> 16
effective as of the date shown above.
Licensor Licensee
By: /s/ Gordon L. Amidon By: /s/ Walter S. Woltosz
--------------------------- ----------------------------------
Title: Chairman, TSRL Inc. Title: President, Simulations Plus, Inc.
--------------------------- ----------------------------------
Date: July 7, 1997 Date: July 9, 1997
16
<PAGE> 17
EXHIBIT A
Functional Specifications of the Software Technology and Databases
The Software Technology and Databases are more particularly described and
identified as "Gastro" which can be identified according to the following
models:
1.
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 2,156,761
<SECURITIES> 0
<RECEIVABLES> 390,051
<ALLOWANCES> 15,000
<INVENTORY> 222,798
<CURRENT-ASSETS> 2,812,036
<PP&E> 384,842
<DEPRECIATION> 200,869
<TOTAL-ASSETS> 3,777,725
<CURRENT-LIABILITIES> 368,967
<BONDS> 0
0
0
<COMMON> 3,350
<OTHER-SE> 3,349,681
<TOTAL-LIABILITY-AND-EQUITY> 3,777,725
<SALES> 2,493,101
<TOTAL-REVENUES> 2,493,101
<CGS> 1,252,343
<TOTAL-COSTS> 2,410,045
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 348,858
<INCOME-PRETAX> (1,475,277)
<INCOME-TAX> (38,800)
<INCOME-CONTINUING> (1,436,477)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,436,477)
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.57
</TABLE>
