<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 27, 1997
REGISTRATION NO. 333-6680
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SIMULATIONS PLUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 7373 95-4595609
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
40015 SIERRA HIGHWAY, BUILDING B-110, PALMDALE, CALIFORNIA 93550
(805) 266-9294
ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
WALTER S. WOLTOSZ
SIMULATIONS PLUS, INC.
40015 SIERRA HIGHWAY, BUILDING B-110, PALMDALE, CALIFORNIA 93550
(805) 266-9294
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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MICHAEL D. DONAHUE, ESQ. DENNIS J. DOUCETTE, ESQ.
ASHER M. LEIDS, ESQ. JAMES A. MERCER III, ESQ.
DONAHUE, MESEREAU & LEIDS LLP LUCE, FORWARD, HAMILTON & SCRIPPS LLP
1900 AVENUE OF THE STARS, SUITE 2700 600 WEST BROADWAY, SUITE 2600
LOS ANGELES, CALIFORNIA 90067 SAN DIEGO, CALIFORNIA 92101
(310) 277-1441 (619) 232-8311
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
(Cover page continued on following page)
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
CALCULATION OF REGISTRATION FEE
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==========================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SECURITY(2) OFFERING PRICE REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.001 per share(3)........ 1,322,500 $5.00 $6,612,500 $2,003.79
- ----------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.001 per share, offered
by the Selling
Shareholders............... 250,000(5) $5.00 $1,250,000 $378.79
- ----------------------------------------------------------------------------------------------------------
Warrants offered by the
Selling Shareholders....... 250,000(4) $4.00 $1,000,000 $303.03
- ----------------------------------------------------------------------------------------------------------
Total........................ $2,685.61(6)
==========================================================================================================
</TABLE>
(1) Pursuant to Rule 416, there are also being registered such additional shares
of Common Stock and such additional Selling Shareholders' Common Stock
Purchase Warrants as may become issuable as a result of the anti-dilution
provisions applicable to the warrants registered hereunder.
(2) Estimated solely for the purpose of computing the registration fee.
(3) Includes 172,500 Shares which the Underwriters have an option to purchase to
cover over-allotments, if any.
(4) Registered for resale on account of Patricia Ann O'Neil and Fernando
Zamudio. Such warrants were issued to the Selling Shareholders in connection
with a loan to the Company and are exercisable at $4.00 per share. The
registration fee for such warrants is based on the exercise price of such
warrants.
(5) Registered for resale on account of the Selling Shareholders. Pursuant to
Rule 457(g), the registration fee for such securities has been calculated
based upon the offering price per share of the Common Stock included in the
1,322,500 shares offered hereby.
(6) $3,090.90 was previously paid.
<PAGE> 3
SIMULATIONS PLUS, INC.
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF FORM SB-2
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ITEM NUMBER AND HEADING IN
FORM SB-2 REGISTRATION STATEMENT PROSPECTUS CAPTION
------------------------------------------- -------------------------------------------
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1. Front of Registration Statement and Outside
Front Cover Page of Prospectus............. Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information and Risk Factors....... Prospectus Summary; Risk Factors; The
Company
4. Use of Proceeds............................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............ Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution................................... Dilution
7. Selling Security Holders................... Principal and Selling Shareholders and Plan
of Distribution by Selling Shareholders
8. Plan of Distribution....................... Outside Front Cover Page of Prospectus;
Underwriting
9. Legal Proceedings.......................... Business -- Litigation
10. Directors, Executive Officers, Promoters
and Control Persons........................ Management
11. Security Ownership of Certain Beneficial
Owners and Management...................... Principal and Selling Shareholders
12. Description of Securities.................. Description of Securities
13. Interests of Named Experts and Counsel..... Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Management -- Limitations of Liability and
Indemnification
15. Organization Within Last Five Years........ Certain Transactions
16. Description of Business.................... Business
17. Management's Discussion and Analysis or
Plan of Operation.......................... Management's Discussion and Analysis or
Plan of Operation
18. Description of Property.................... Business -- Property
19. Certain Relationships and Related
Transactions............................... Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters........................ Shares Eligible for Future Sale
21. Executive Compensation..................... Management -- Executive Compensation
22. Financial Statements....................... Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................. Not Applicable
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<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED MAY 27, 1997
LOGO
1,150,000 SHARES
SELLING SHAREHOLDERS OFFERING
250,000 WARRANTS AND 250,000 SHARES ISSUABLE UPON EXERCISE OF THE WARRANTS
Simulations Plus, Inc. (the "Company") is offering hereby 1,150,000 shares
(the "Shares") of its Common Stock, par value $0.001 per share (the "Common
Stock"). The offering price for the Common Stock was determined by negotiations
between the Company and Waldron & Co., Inc., the representative (the
"Representative") of the several underwriters named herein (the "Underwriters"),
and such price does not necessarily bear any direct relation to the current
market value, asset value or net book value of the Company. See "Risk Factors"
and "Underwriting."
In addition to the Shares being offered hereby, the registration statement
of which this Prospectus is a part (the "Registration Statement") also registers
for resale on behalf of certain persons (the "Selling Shareholders") warrants to
purchase an aggregate of 250,000 shares of Common Stock and 250,000 shares of
Common Stock which are issuable upon the exercise of such warrants (such 250,000
shares of Common Stock, are herein referred to as the "Resale Shares"). See
"Shares Eligible for Future Sale." The Company will not receive any of the
proceeds from the sale of the Resale Shares by the Selling Shareholders. The
Resale Shares may be offered from time to time by the Selling Shareholders
directly to purchasers or to or through broker-dealers who may act as agents or
principals, at market prices prevailing at the time of sale. See "Principal and
Selling Shareholders" and "Plan of Distribution by Selling Shareholders."
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that any such market will develop.
It is anticipated that the initial public offering price of the Shares offered
hereby will be $5.00 per Share. For information relating to the factors
considered in determining the initial offering price to the public, see
"Underwriting." Application will be made to have the Common Stock approved for
inclusion on the Nasdaq SmallCap Market under the trading symbol "SIMU", upon
effectiveness of this offering.
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. THESE SECURITIES SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED PRIOR TO INVESTMENT IN THE SHARES, SEE "RISK
FACTORS" BEGINNING ON PAGE 7 AND "DILUTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY EITHER THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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======================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------
Per Share........................... $5.00 $0.50 $4.50
- ------------------------------------------------------------------------------------------------------
Total (3)........................... $5,750,000 $575,000 $5,175,000
======================================================================================================
</TABLE>
(1) In addition to the Underwriting Discounts and Commissions, the Company has
agreed (i) to pay a 3% non-accountable expense allowance to the
Representative estimated at $172,500; (ii) to pay additional discounts and
commissions if the over-allotment option is exercised in whole or in part;
(iii) to sell at the closing of this offering to the Representative, at a
nominal price, warrants (the "Representative's Warrant") to purchase 115,000
Shares, at a per Share exercise price equal to 120% of the public offering
price, or $6.00 per Share, which Representative's Warrant shall be
exercisable for a period of four years commencing one year after issuance;
(iv) to appoint the Representative, for a period of two years, as its non-
exclusive advisor for the purpose of identifying and developing future
mergers and acquisitions candidates; and (v) to indemnify the Representative
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company (including the
Representative's non-accountable expense allowance and registration of the
Resale Shares) estimated at $625,000.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
172,500 additional Shares at the Price to Public, less Underwriting
Discounts and Commissions, solely for the purpose of covering
over-allotments, if any (the "Over-Allotment Option"). If the Over-Allotment
Option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be $6,612,500,
$661,250 and $5,951,250, respectively. See "Underwriting."
------------------------
The Shares are offered on a firm commitment basis by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by them and
subject to the right of the Underwriters to reject any order in whole or in
part. It is expected that delivery of the Shares will be made at the offices of
Waldron & Co., Inc., Irvine, California on or about , 1997.
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WALDRON & CO., INC.
</TABLE>
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 5
(CD-ROM)
The CD-ROM contains "demo" Windows versions of the Company's educational
simulation software for Optics, Circuits, and Gravity labs for ninth-grade
Physical Science. The CD-ROM is contained in an envelope bound into the
prospectus, with a clear circular window that allows the top of the CD-ROM to
be seen. The CD-ROM is silkscreened in color with artwork containing
abstractions of molecules, a soccer ball, a protractor, and a laser beam, as
well as wording describing the contents of the CD-ROM as "FutureLab(TM) Demo
Disk for Windows 3.x or higher", the titles of the programs, the name of the
Company, the Company's Internet web site address, and the Company's toll-free
telephone number.
FUTURELAB(TM) WINDOWS 95 INSTALLATION
1. Insert the CD into your drive.
2. From the task bar, select Start, then Run.
3. Type "d:\setup", where "d" is the drive letter of your CD-ROM drive, and
press Enter.
4. Follow the instructions on the screen until the installation is completed.
Then double-click on the new FutureLab icon to start FutureLab.
NOTES
This demonstration runs best when you set your video mode to 640 pixels by 480
pixels, 256 colors, and small font. The program will tell you if it finds any
settings other than these. The controls for these settings are different for
each manufacturer. They are usually found in the Control Panel. To change your
settings: 1) From the task bar, select Settings; 2) select "Control Panel"; 3)
select Display. When the video control panel appears, make the changes to your
settings.
TECHNICAL SUPPORT
For further information on any FutureLab product or for help installing
FutureLab on your computer, call toll-free (888) 266-9294 or fax (805) 266-9394.
Copyright (C) 1997 Simulations Plus, Inc.
FUTURELAB(TM) WINDOWS 3.1 INSTALLATION
1. Insert the CD into your drive.
2. In Program Manager, select File, then Run.
3. Type "d:\setup", where "d" is the drive letter of your
CD-ROM drive, and press Enter.
4. Follow the instructions on the screen until the installation is completed.
Double-click on the new FutureLab Icon to start FutureLab.
NOTES
This demonstration runs best when you set your video mode to 640 pixels by 480
pixels, 256 colors, and small font. The program will tell you if it finds any
settings other than these. The controls for these settings are different for
each manufacturer. They are usually found in the Control Panel. To change your
settings: 1) From Program Manager, select the "Main" program group; 2) select
"Control Panel"; 3) look for an icon that refers to your video equipment and
double-click on it. When the video control panel appears make the changes to
your settings.
TECHNICAL SUPPORT
For further information on any FutureLab product or for help installing
FutureLab on your computer, call-toll (888) 266-9224 or fax (805) 266-9394.
Copyright (C) 1997 Simulations Plus, Inc.
(INSIDE FRONT COVER FLAP - GRAPHICS)
Top: Company name and logo with frog and flask.
Top left: Screen capture of Circuits for Physical Science educational
simulation software.
Right vertical third: Drawing of human body outline showing gastrointestinal
tract from mouth through intestines.
Lower left: Photo of Pegasus LITE communication device with video of Space
Shuttle launch on the LCD screen.
Lower right: Words+ company name and logo.
(INSIDE FRONT COVER - TWO PAGES - GRAPHICS)
Left Page Top: Company name and logo with frog and flask.
Left Page Left Vertical Half: Ray box and light rays striking concave spherical
mirror.
Left Page Right Vertical Half: Three screen captures from the Company's Optics,
Gravity, and Circuits lab educational simulation software.
Left Page Lower Left: Company's Internet web site address with graphic of
CD-ROM lying nearly flat with graphics of frog, earth, soccer ball, flask, and
molecule.
Right Page Top: title "Pharmaceutical Applications"
Right Page Left Side: Human outline showing gastrointestinal tract from mouth
to intestines.
Right Page Bottom: Abstract graphic of intestinal segment with drug molecules
moving from left to right and mixing with secretions from kidney and pancreas.
(INSIDE BACK COVER)
Top: Words+ stylized Company name/logo on left, Internet web site address on
right.
Upper Quarter Below Top: Photo of Pegasus LITE communication device on right
with supporting text on left.
Center Quarter: Screen captures of E Z Keys for Windows(TM) communication
software and supporting text.
Lower Quarter Above Bottom: Radar Mouse-Crosshair Mouse(TM) software logo on
right with supporting text on left.
Bottom Quarter: Photo of Stephen Hawking on left with supporting text on right.
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and Financial Statements and the Notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus (i) gives effect to the issuance of 2,200,000
shares of Common Stock of the Company to Walter S. and Virginia E. Woltosz in
exchange for 2,000 shares of Words+, Inc. which occurred in August 1996 (the
"Share Exchange Transaction"); and (ii) assumes no exercise of (A) the
Over-Allotment Option; (B) the Representative's Warrant; (C) the warrants
granted to Patricia Ann O'Neil and Fernando Zamudio to purchase 250,000 shares
of Common Stock (the "Selling Shareholder Warrants"); (D) the 250,000 shares of
Common Stock reserved for issuance upon exercise of options outstanding or
available for future grant under the Company's 1996 Stock Option Plan (the
"Option Plan"); (E) up to 300,000 shares of Common Stock reserved for issuance
upon the exercise of warrants that may be granted to Walter S. and Virginia E.
Woltosz (the "Performance Warrants"); and (F) up to 280,000 shares of Common
Stock issuable upon the exercise of warrants (the "Lender's Warrants") issued to
certain lenders (the "Bridge Lenders") issued in connection with a loan made to
the Company by such Lenders in the aggregate amount of $1,100,000 (the "Bridge
Loan"). Unless the context otherwise requires, references to the Company include
Simulations Plus, Inc. and its wholly-owned subsidiary Words+, Inc. See
"Description of Securities", "Underwriting," "Principal and Selling
Shareholders" and "Certain Transactions." This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from the results discussed in these
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those set forth in the Section entitled "Risk Factors"
and elsewhere in this Prospectus. A demonstration of certain of the Company's
products and services, which demonstration is part of this Prospectus, is
available on the CD-ROM portion of this Prospectus attached to the inside cover
page hereof.
THE COMPANY
Simulations Plus, Inc. ("Simulations Plus") and Words+, Inc. ("Words+"),
its wholly-owned subsidiary, produce two lines of products: (1) Simulations
Plus, formed in 1996, is developing and producing computer simulation software
for education and the pharmaceutical industry, and (2) Words+, founded in 1981,
produces computer software and specialized hardware for use by persons with
physical disabilities. Throughout this prospectus, unless the context otherwise
requires, the term "the Company" will refer to Simulations Plus and Words+.
The Company is developing and producing a series of educational simulation
software products for high school, university and home-study markets and has
acquired, and is enhancing and developing software simulation programs for
pharmacy and medical school markets and for pharmaceutical research. The Company
plans to capitalize on its simulation software development expertise and build
an expanded simulation software development team of software developers,
engineers and scientists with broad applications in these and other
applications.
The interactive, educational simulation software programs for the school
and home-study markets being developed and produced by the Company simulate
science experiments for high school and college-level science and engineering
classes. They 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's
educational programs also incorporate the Company's technology developed over
the past 16 years by Words+ that enables severely-handicapped persons to operate
a computer with as little movement as the blink of an eye, thereby making these
programs accessible to disabled as well as able-bodied students. The Company's
initial development efforts are being accomplished with educational assistance
and advice provided by Mr. Richard Chapleau, California Teacher of the Year for
1995 and Mr. John Fors, Chemistry Teacher at Palmdale High School. The Company's
initial products include simulations of laboratory experiments for Physical
Science courses under the name FutureLab. The Company has completed the
development of its first three FutureLab titles for Physical Science, which are:
Optics, Gravity, and Circuits. Additional topics to be
3
<PAGE> 7
developed during the first 12 months following this offering are expected to
include 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, and Simple
Machines, and additional titles for high school Physics, Chemistry, and Biology
courses. In addition to simulated science experiments presently conducted in
high school and college courses, these simulations include experiments that are
too expensive or too dangerous for actual physical experiments in typical lab
facilities. The Company released its first educational software titles in May
1997.
The Company is also developing pharmaceutical simulation software that 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 pharmaceutical industry spends billions of dollars annually in the
development and testing of new drugs, a considerable portion of which are spent
on pre-screening of "candidate compounds" prior to selecting the best candidates
for more extensive development and testing required by the United States Food
and Drug Administration (FDA). Candidate compounds are drug compounds
(molecules) which have been designed by a pharmaceutical company but which have
not yet been proved to be of commercial value. This pre-screening research seeks
to determine various characteristics of these candidate compounds and relies
heavily on testing with animals and animal-derived products which is expensive,
time-consuming and controversial. The Company is developing simulation software
programs to provide predictive information in the pre-screening of candidate
compounds, which it hopes will one day reduce the use of animal-based testing
and the time and expense in this phase of pharmaceutical research. The
pharmaceutical industry is also engaged in substantial efforts to determine the
three-dimensional description of drug receptor sites, thousands of whose linear
amino acid sequences have been mapped through the human genome and other
projects. Current technology for determining this three-dimensional description
of these receptor sites is time-consuming and expensive. The Company's
development program includes development of simulation software that will
provide this information with considerable savings of time and expense. The
Company has also acquired and is enhancing software designed to provide
multimedia pharmacokinetic simulations of drug behavior in the human body for
use in pharmacy and medical schools. The Company expects to release its first
pharmaceutical programs in late 1997 but does not expect significant revenues
from these products prior to the second quarter of 1998.
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 software and hardware devices for persons who
cannot speak due to physical disabilities. The Company also produces computer
access products that enable physically-disabled persons to operate a computer.
The Company's products enable a disabled person to operate a computer and to
communicate through a voice synthesizer with movements as slight as the blink of
an eye. The Company developed and produces the software for the computerized
communication system used by the world-famous theoretical physicist, Professor
Stephen Hawking, Professor of Mathematics at the University of Cambridge in
England and 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 through independent dealers. The Company has recently
introduced a new fully-integrated, portable, lightweight personal-computer-based
communication system that the Company believes is meeting favorable market
acceptance and will contribute to a growth in sales. The Company plans to
substantially increase its Words+ direct sales force using a portion of the
proceeds of the offering and the Company believes this will contribute to a
growth in sales of Words+ products.
The Company is a California corporation incorporated in July 1996. Its
wholly-owned subsidiary, Words+, was incorporated in 1981. The Company's
executive offices are located at 40015 Sierra Hwy., Building B-110, Palmdale,
California 93550 and its telephone number is (805) 266-9294.
RISK FACTORS
The Shares offered hereby involve a high degree of risk. See "Risk Factors"
beginning on page 7.
4
<PAGE> 8
THE OFFERING
Common Stock Offered by the
Company....................... 1,150,000 Shares(1)
Common Stock Outstanding after
the Offering.................. 3,350,000 shares(2)
Use of Proceeds............... For (i) repayment of a $500,000 loan and the
$1,100,000 Bridge Loan, (ii) research and
development for educational simulation
software, (iii) research and development for
pharmaceutical simulation software, (iv)
expansion of the sales force for augmentative
communication devices, (v) marketing and sales,
(vi) equipment purchases and leases, (vii)
payment of accrued but unpaid compensation to
the Company's Chief Executive Officer, and
(viii) working capital, capital expenditures
and other general corporate purposes, including
paying accrued interest to the Bridge Lenders
and on the promissory notes held by Patricia
Ann O'Neil and Fernando Zamudio.
Proposed Nasdaq SmallCap
Market Symbol................. SIMU
Concurrent Registration....... Concurrently with the registration of the
1,150,000 Shares of Common Stock, the Company
is registering warrants to purchase an
aggregate of 250,000 shares of Common Stock and
250,000 shares of Common Stock issuable upon
exercise of such warrants. See "Risk
Factors -- Shares Eligible for Future Sale,"
"Principal and Selling Shareholders," and "Plan
of Distribution by Selling Shareholders."
- ---------------
(1) Does not include 172,500 Shares subject to the Over-Allotment Option.
(2) Based on number of shares outstanding as of May 20, 1997. Does not include
(i) 250,000 shares of Common Stock reserved for issuance upon exercise of
options outstanding or available for future grant under the Company's 1996
Stock Option Plan; (ii) up to 300,000 shares of Common Stock reserved for
issuance upon exercise by Walter S. and Virginia E. Woltosz of the
Performance Warrants; (iii) 250,000 shares of Common Stock reserved for
issuance upon exercise of the warrants granted to the Selling Shareholders
at an exercise price of $4.00 per share and (iv) 280,000 shares of Common
Stock reserved for issuance upon exercise of the Lender's Warrants granted
to the Bridge Lenders at an exercise price of $2.50 per share.
The following names appearing in this Prospectus are non-registered
trademarks of the Company: Simulations Plus, Words+, FutureLab, Cyber Patient, E
Z Keys for Windows, Talking Screen for Windows, Pegasus LITE and MessageMate.
All other trademarks appearing in this Prospectus are the property of their
respective holders.
5
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
AUGUST 31, -----------------------------
---------------------------- FEBRUARY 29, FEBRUARY 28,
1994 1995 1996 1996 1997
------ ------ ------ ------------ ------------
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STATEMENTS OF OPERATIONS DATA:
Net sales............................. $2,589 $2,879 $2,601 $1,361 $1,220
Cost of sales......................... 1,372 1,356 1,289 662 569
------ ------ ------ ------ ------
Gross profit.......................... 1,217 1,523 1,312 699 651
Selling, general and administrative
expenses........................... 994 1,100 1,190 602 938
Research and development.............. 159 102 108 45 56
------ ------ ------ ------ ------
Income (loss) from operations......... 64 321 14 52 (343)
Other income (expenses)............... (12) (13) 24 (2) (347)
------ ------ ------ ------ ------
Income (loss) before provision for
income taxes....................... 52 308 38 50 (690)
Provision (benefit) for income
taxes.............................. 9 115 15 15 (39)
------ ------ ------ ------ ------
Net income (loss)..................... $ 43 $ 193 $ 23 $ 35 $ (651)
====== ====== ====== ====== ======
Net income (loss) per share........... $ 0.02 $ 0.08 $ 0.01 $ 0.01 $(0.27)
====== ====== ====== ====== ======
Weighted average number of shares
outstanding........................ 2,390 2,390 2,390 2,390 2,390
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
--------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)....................................... $(1,362) $3,591
Total assets.................................................... 2,018 4,768
Long-term liabilities........................................... 69 69
Total shareholders' equity (deficit)............................ (179) 4,371
</TABLE>
- ---------------
(1) Adjusted to reflect the sale of 1,150,000 Shares offered by the Company
hereby at an assumed initial public offering price of $5.00 per Share and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Certain Transactions."
6
<PAGE> 10
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the Shares offered hereby. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from the results discussed in these
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those set forth in the following risk factors and
elsewhere in this Prospectus.
EARLY STAGE OF DEVELOPMENT OF PROPOSED NEW BUSINESS LINES. The Company
plans to use a substantial portion of the proceeds of this offering on the
development, sales and marketing of educational, pharmaceutical and other
simulation software products and services. While Walter S. Woltosz, the
Company's founder, president and chief executive officer, has extensive
experience in the development and management of the development of sophisticated
simulation software programs for aerospace applications, the Company's proposed
simulation software business is at a very early stage of development. The
Company has only recently completed the development of its first three
educational simulation software programs. The Company recently acquired a series
of pharmaceutical simulation programs, none of which has previously realized
commercial revenues. The Company's future success in these lines of business
will be dependent upon its ability to successfully develop commercially-viable
educational and pharmaceutical simulation software programs and to successfully
market these programs. In October 1996, the Company printed and mailed a total
of 118,000 brochures to science teachers across the United States whose names
were purchased from an educational mailing list company. The Company expected to
receive a response rate of one to two percent to this mailing. The actual
response rate was approximately 0.1 percent. Based on information obtained since
the time of the mailing, management believes that the failure of the initial
mailing to produce the expected response rate was based on several factors,
including, without limitation, the following: (i) the mailing occurred at a time
of year during which schools make relatively few purchases, (ii) the offering
included only Windows versions of the software, while many schools desire
Macintosh versions, (iii) although a large number of teachers was in the
database, these teachers represented only about one-half the schools in the
U.S., and (iv) the design of the mailer did not incorporate features to ensure
that it would be read by most recipients. The Company has recently hired a new
Vice President, Marketing and Sales, who has extensive experience in direct mail
marketing as well as marketing through other traditional channels. In addition
to direct marketing, the Company is pursuing distribution agreements with
several educational software distributors. Management believes that the revised
marketing plan incorporates sound marketing principles, and that the resources
that will be available from this offering will allow it to pursue an aggressive
and cost-effective marketing campaign for its educational simulation software.
Nonetheless the Company's simulation software has not experienced any
significant sales to date and there can be no assurance that the Company's new
approach to marketing and sales will be successful. In light of the early stage
of development of these programs and the Company's lack of experience in
offering these programs for sale or selling these programs, there can be no
assurance as to (i) the extent of the Company's future success in developing
these programs, (ii) the extent of the market acceptance of the programs that
are developed, and (iii) the extent of revenues and earnings, if any, that may
be realized by the Company in the future with respect to these business lines.
See "Business."
WORKING CAPITAL AND SHAREHOLDERS' EQUITY DEFICITS; RECENT OPERATING LOSS;
ABILITY TO CONTINUE AS A GOING CONCERN. As of February 28, 1997, the Company had
an approximately $1,362,000 working capital deficit, although $1,600,000 of this
deficit represents notes payable that will be repaid upon the closing of this
offering. Further, as of February 28, 1997, the Company had a shareholders'
deficit of approximately $179,000. While the Company has been profitable in each
of its three most recent fiscal years, the Company sustained a net loss of
approximately $651,000 for the six-month period ended February 28, 1997. This
loss was attributable primarily to an increase in selling, general and
administrative expenses, including in particular an increase in administrative
and research and development personnel in anticipation of the initial release of
the educational simulation software and the proceeds of this offering and
financing costs associated with the issuance of warrants and amortization of
loan acquisition fees. The Company will continue to sustain losses unless it can
successfully increase revenues and reduce selling, general and administrative
costs as a percentage of sales in accordance with management's business
strategy. Footnote 1 to the independent public
7
<PAGE> 11
accountant's report on the Company's financial statements contains an
explanatory section to the effect that the Company's financial statements have
been prepared in contemplation of the continuation of the Company as a going
concern which results from the Company's substantial loss from operations for
the six months ended February 28, 1997, negative cash flows from operations and
need for additional capital. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON SUCCESSFUL EXPANSION OF OPERATIONS AND MANAGEMENT OF
GROWTH. The Company anticipates that, upon completion of this offering, it will
substantially increase the scale of its operations. The Company expects that it
will move its operations to a larger facility during 1998. This increase in
scale and expansion of facilities will include the hiring of additional
personnel and the purchase of additional equipment, and will result in
substantially higher operating expenses. It is likely that the Company's
operations will experience some disruptions resulting from the move to its
larger facility. If such disruptions are prolonged or if the Company encounters
difficulties in starting up and/or achieving sustained production in its new
facility, the Company's business, financial condition and results of operations
would be materially and adversely affected. The Company also plans to introduce
a significant number of new products, enhance its product development, increase
its production capacity and development expenditures, expand its sales and
marketing initiatives and increase its work force. Accordingly, the Company
anticipates that its operating expenses will continue to increase substantially.
If the Company's net sales do not correspondingly increase, the Company's
results of operations would be materially and adversely affected. The Company
may experience periods of rapid growth, including increased staffing levels.
Such growth could place a substantial strain on the Company's management,
operational, financial and other resources. The Company's ability to manage its
growth effectively will require it to develop further its management information
systems capabilities and improve its operational and financial systems.
Moreover, the Company will need to train, motivate and manage its employees and
attract middle managers and technical professionals. Any failure to expand these
areas and implement and improve such systems, procedures and controls in an
efficient manner and at a pace consistent with the Company's business could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Use of Proceeds" and "Business -- Facilities."
DEPENDENCE ON EMERGING PHARMACEUTICAL SIMULATION MARKET AND EFFECT OF
TECHNOLOGICAL CHANGE. There is a small and developing market for pharmaceutical
simulations. The Company believes that it will be one of the pioneers in the
development of such a market. The Company's efforts to develop economically
useful simulations for the pharmaceutical industry will initially be based on
existing pharmacokinetic simulation software that the Company recently acquired
from Dr. Michael B. Bolger. The further enhancement of this software to make it
useful to a large number of pharmaceutical customers will require expertise in a
variety of areas, including pharmacology, physiology, chemistry, biology,
thermodynamics, fluid mechanics, and others, as well as expertise in efficient
computer program design and computer programming of the scientific equations and
relationships that represent sophisticated physical processes across these
disciplines. Although the Company believes it will be one of the few
organizations making a business in the pharmaceutical simulation market, and
that it will therefore develop a technological lead in this area, there can be
no assurance that the Company will achieve sufficient economic utility in the
simulation models it develops, or even if it does, that it will be able to
market a sufficient number of such simulations at a profitable price. In
addition, there can be no assurance that the pharmaceutical market will accept
the Company's simulation software as a viable or cost effective alternative for
screening new product developments or that regulation by the FDA or other
regulatory agencies either in the United States or abroad will not adversely
affect the market for pharmaceutical simulations. In the event that a viable
market develops, competition may arise from companies with substantially greater
financial, development and marketing resources than the Company.
DEPENDENCE ON EMERGING EDUCATIONAL SOFTWARE MARKET AND EFFECT OF
TECHNOLOGICAL CHANGE. The market for interactive educational software is
emerging and dependent upon a number of variables, including customer
preferences, shipments of new personal computers to schools and homes, and the
number of publishers creating interactive educational software products. There
can be no assurance that this market will continue to grow or that the Company
will be able to respond effectively to the evolving requirements of this market.
The market for educational software is characterized by rapid change in computer
hardware and
8
<PAGE> 12
software technology and is highly competitive with respect to timely product
innovation. The life cycles of the Company's products will be difficult to
estimate, due in large measure to the recent emergence of the educational
software market, the future effect of product enhancements, the future effect of
developments in hardware technology, and competition. The Company's success will
be dependent on, among other things, its ability to effectively market its
simulation software products and to create products that are competitive. The
failure to effectively market its simulation software products, whether as a
result of competition, technological change or otherwise, could have a material
adverse effect on the Company's business, financial condition or results of
operations.
The Company must continually adapt its products to emerging and changing
personal computer software technology, platforms and operating system
environments. While such rapid change may offer the Company new opportunities
for product enhancement, it also may require significant additional expenditure
of financial and personnel resources to achieve compatibility, and could divert
a significant portion of the Company's resources away from product development.
Although the Company has adapted to such changes in the past, there can be no
assurance that the Company will successfully adapt to such changes in the
future. Should new releases of software delivery technology, hardware platforms
or operating system environments occur, there can be no assurance that the
Company will be able to develop products compatible with such new releases, and
any resulting decline in demand for the Company's products could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Business -- Product Development."
DEPENDENCE ON EDUCATIONAL INSTITUTIONS. The Company anticipates that a
substantial portion of its revenues in the near term will be derived from
software products sold for use in educational institutions. The Company also
hopes to capitalize on such use by educational institutions to generate consumer
sales for in-home use. There can be no assurance that educational institutions
will continue to install the technological infrastructure (including multimedia
technology) which is needed for use of the Company's products, or that
educational institutions will continue to invest in science and math interactive
educational products. Moreover, competition among publishing companies and other
suppliers to the educational industry is intense, with many competitors
possessing substantially greater product lines and financial resources than the
Company. There can be no assurance that the Company will be successful in
prevailing over its competitors for sales to educational institutions. The
inability of the Company to penetrate the school market both in the number of
schools served and in the number of products sold, could have a material adverse
effect on the Company's business, financial condition or results of operations.
DEPENDENCE ON GOVERNMENT AND LOCAL FUNDING AND REIMBURSEMENT FOR
EDUCATIONAL SIMULATION SOFTWARE. The Company's simulation software products will
compete in a specific market segment of the educational software industry. The
budgets for educational institutions to purchase such products are dependent
upon federal, state and local government budgets and funding. As a result, the
Company's sales are directly affected by revisions or reallocations in such
budgets. A substantial decrease in such budgets or specific reductions in
funding for technology, occurring simultaneously in several of the markets that
the Company anticipates will be important to it, could have a material adverse
effect on the Company's business, financial condition or results of operations.
Moreover, the Company's future growth may depend on the application of
government funds, which have previously been reserved for the purchase of
traditional instructional materials such as textbooks, towards software
purchases. For states wherein textbook selection is adopted on a statewide
basis, the process of permitting textbook adoption funds to be used to purchase
computer-based curriculum products is important to the continued expansion of
the educational software industry. The slowdown or reversal of this process
could have a material adverse effect on the Company's business, financial
condition or results of operations.
DEPENDENCE ON GOVERNMENTAL AND THIRD PARTY FUNDING FOR AUGMENTATIVE AND
ASSISTIVE COMMUNICATION AND COMPUTER TECHNOLOGY. The Company estimates that
approximately 50% of its sales of augmentative and assistive communication and
computer products is to public schools that fund these purchases from special
education budgets or to persons who receive funding for such purchases, in whole
or in part, from third-party payors such as Medicaid, Medicare, other
governmental funding sources, private medical insurance or from charitable
organizations. Purchases of these products by public schools from special
education budgets is
9
<PAGE> 13
prompted in large part by Federal legislation mandating that schools acquire
this assistive technology and make it available to disabled students. Medicaid,
Medicare and other governmental funding for such assistive technology has been
driven by Federal legislation and policies and supported by court decisions.
Private insurance providers have increasingly accepted this technology as a
covered benefit. In addition, professional speech-therapy organizations and
governmental initiatives have sponsored public awareness and advocacy programs
with regard to governmental funding for this technology. See
"Business -- Disability Products -- Industry Background" for a discussion of
these developments. At the present time, the Company believes the direction of
professional organizations, Federal government policy, the courts and private
insurance providers is for continued and increased support for access to this
technology for disabled persons. However, there can be no assurance that the
policies of these entities will continue to support continued or increased
governmental and other third-party funding for this technology. Any change in
these policies, or court decisions for reduced support for funding for this
technology or public awareness programs for such funding, could reduce the
ability of individuals to purchase this technology and reduce special education
budgets in public schools for this technology, and this could materially
adversely affect sales of these products by the entire industry and by the
Company. In addition, changes in governmental and private insurance policies in
other countries could adversely affect foreign sales of these products.
ENTRANCE INTO THE HOME STUDY MARKET. Although the Company does not
presently sell in the home study market, it does intend to develop a new line of
educational simulation products targeted for that market. The home study market
generally differs from the institutional market in its distribution channels and
end users, and the Company presently has no distribution network in place for
the home study market. Furthermore, the percentage of product returns typically
is higher in the home market than in the school market. There can be no
assurance that the Company will be able to successfully develop or market a
product line for the home study market, or achieve profitability in this market.
All consumer and other multimedia software products, including products
similar to the Company's products currently under development, have been subject
to significant competition which has resulted in price declines and reductions
in margins. The Company anticipates that such trends may continue in the future
with respect to its existing and new products for the home study market.
DEPENDENCE ON INDEPENDENT DISTRIBUTORS. The Company is substantially
dependent on the efforts of its independent distributors and dealers for sales
of its Words+ disability products and for customer service and support. The
Company's distribution and dealer agreements generally grant exclusive
territorial rights and generally are terminable by either party on 30 days
notice. In the event of a termination of any such distributor or dealer
relationship, there can be no assurance that the Company could quickly find
alternative distributors or dealers. In addition, if a distributor or dealer
terminates its relationship with the Company and begins to distribute
competitive products, the Company's ability to compete in the former distributor
or dealer's territory could be materially adversely affected. Thus, the loss of
one or more of the Company's distributors or dealers could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Disability Products -- Marketing and Distribution."
DEPENDENCE ON REFERRAL BUSINESS. As part of its mix of marketing strategies
for its disability products, the Company and its distributors and dealers
maintain close working relationships with many clinics, service agencies,
rehabilitation organizations, speech-language pathologists, rehabilitation
counselors or similar advisors to people with communication problems. A
significant amount of the Company's business is derived from referrals from such
people, organizations and agencies. Sometimes such relationships are a matter of
contract, but more often they are informal relationships developed over an
extended period of time. The Company's competitors compete with the Company for
such referral sources. The loss of one or more of these referral sources could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Marketing."
POSSIBLE NEED FOR ADDITIONAL CAPITAL; ALLOCATION OF FUNDS. The Company
believes, based on currently-proposed plans and assumptions relating to its
operations, that the net proceeds of this offering, together with existing
capital and anticipated funds from operations, should be sufficient to sustain
current operations and finance planned expansion for at least 13 months after
consummation of this offering. However, in the event
10
<PAGE> 14
that the Company's plans change or its assumptions and estimates change or prove
to be inaccurate, the Company could be required to seek additional financing in
order to sustain operations or achieve planned expansion. There can be no
assurance that such additional funds will be available or that, if available,
such additional funds will be on terms acceptable to the Company. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." The Company is
currently developing three related, yet distinct product lines -- (i)
augmentative communication software and devices, (ii) educational simulation
software and (iii) pharmacological simulation software. As a result, the Company
will face recurring decisions with respect to allocation of resources. These
decisions will become critically important if there is insufficient capital to
fund complete development of all product lines. Moreover, cost overruns in
connection with the development of one product line may impede the Company's
ability to complete development and implementation of the other product lines.
See "Use of Proceeds" and "Business."
LIMITED SOURCE FOR CERTAIN COMPONENTS. The Company does not manufacture
certain of its components. The Company's Pegasus LITE portable communication
system is based upon a computer that is only available from Epson, Inc.
("Epson"), a large multi-national corporation headquartered in Japan. Although
to date the Company has not experienced any significant difficulty in obtaining
such computer, there can be no assurance that shortages will not arise in the
future. There is no other source for this computer component. The failure of
Epson to continue manufacture and sale of the computer that is utilized in the
Company's Pegasus LITE could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, a number
of the pictographic symbols used by the Company in its Talking Screen for
Windows product are purchased from a competitor that produces augmentative
communication systems for Apple computers. Although the Company believes that
its relationship with this supplier is good, no assurance can be given that it
will continue to sell such pictographic symbols to the Company, or, if such
sales continue that such sales will be on terms favorable to the Company. The
termination of sales of pictographic symbols to the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company relies on limited sources for other
components as well. If the Company were unable to obtain sufficient quantities
of components, it could experience delays or reductions in product shipments
which would have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, delays in filling orders may
have a material adverse effect on the Company's relationships with its
customers, which may cause a permanent loss of sales and result in a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Disability Products -- Products and "-- Production
and Distribution Operations."
UNCERTAINTY OF FUTURE ACQUISITIONS. Although the Company has from time to
time considered various acquisition opportunities and has held informal
discussions with certain companies regarding the possible acquisition of such
companies, the Company does not currently have any specific acquisition under
active consideration. However, the Company may make acquisitions in the future.
Such acquisitions may be of technologies, product lines or businesses that are
complementary to the Company's business, such as the pharmaceutical simulation
software that the Company recently acquired. Significant uncertainties accompany
any acquisition and its integration with the Company's existing operations and
products, such that any acquisition could have an adverse effect on the Company.
There can be no assurance that the Company will be able to locate appropriate
acquisition candidates, that any identified candidates will be acquired or that
acquired operations will be effectively integrated or prove profitable. See
"Business -- Simulation Software -- Pharmaceutical Simulation Software."
SEASONALITY AND FLUCTUATIONS IN QUARTERLY PERFORMANCE. The Company
anticipates that a large portion of its business may be seasonal, with operating
results varying from quarter to quarter. The Company believes that this may be
due to budget cycles of the Company's targeted school customers. The Company's
historical revenues and results of operations are not necessarily indicative of
future revenues and results of operations, because, among other things, the
Company is only now entering the simulation software business, the market for
educational multimedia software products is evolving rapidly and the Company's
revenues in any period will be significantly affected by the announcements and
product offerings of the Company and its competitors, as well as school demands,
school budget cycles and the economy in general. Accordingly, the Company
believes that period to period comparisons of its financial results should not
be relied upon as an indication of
11
<PAGE> 15
future performance. Due to all of these factors, it is possible that in some
future quarter the Company's operating results will be below expectations of
public market analysts and investors. In such event, the price of the Company's
securities could be adversely affected.
HIGHLY COMPETITIVE INDUSTRIES. The educational software industry in which
the Company intends to operate is very competitive. The Company will compete in
the school marketplace primarily with other companies offering educational
software products. Most educational software publishers compete in the grade and
middle school markets, addressing primarily reading and math skills. The Company
intends to compete in the high school and college markets, providing software to
address science and math subjects. To date, only a few software publishers have
addressed these markets and offer products covering full curriculums, although
the larger textbook publishers are offering traditional print materials for
science and math courses. Existing competitors may continue to broaden their
product lines, and potential competitors, including large hardware or software
manufacturers and educational materials publishers, may enter or increase their
focus on the school market, resulting in greater competition for the Company.
The Company's potential competitors include many companies which have
substantially greater financial, development and marketing resources than those
of the Company. The key competitive factors in the high school and college
educational software business include the depth and breadth of the product line,
educational approach, ease of use, after-sales service and training, and price.
In the school market, the Company will face competition from other companies
offering educational software products, including those who offer integrated
learning systems, bundled hardware and software systems for entire schools.
While these vendors have traditionally targeted elementary and middle schools,
there can be no assurance that such companies will not enter the high school and
college markets in the future with competitive products. There can be no
assurance that any of the Company's simulation software products will compete
effectively against other interactive multimedia software products. In the home
software marketplace, the Company will face direct competition from other
companies offering educational software products as well as competition for
shelf space from other companies offering entertainment and consumer software
products. A number of factors, including, but not limited to, discounts to
wholesalers and customer service and marketing efforts, affect access to
wholesalers and retailers. There can be no assurance that the Company will be
able to market its products successfully or compete effectively in the school
or, in the future, in the home marketplace. See "Business -- Competition."
The augmentative communication industry in which the Company competes is
also very competitive. The Company believes that the level of sophistication of
the market somewhat precludes successful entry by very small companies, as has
been possible in the past; however, companies with sufficient financial,
development and marketing resources may enter the market. There can be no
assurance that the Company's products will remain at the technological forefront
of the industry, or that the Company will be able to market and sell its
products successfully in the presence of new competition, whether from improved
products offered by existing competitors, or from new competitors who may enter
the market with new technologies.
RISK OF PRODUCT DEFECTS. Software products as complex as those offered by
the Company may contain undetected errors or "bugs" when introduced or when new
versions are released. The Company has in the past discovered software defects
in certain of its products after commercial release. No assurance can be given
that, despite testing by the Company, errors will not be found in new products
or releases after commencement of commercial shipments, resulting in loss of
market share or failure to achieve market acceptance. Any such occurrence could
have a material adverse effect upon the Company's business, financial condition
and results of operations. The Company's warranty costs have not been
significant to date, however the Company has not yet released any of its
educational or pharmaceutical simulation software programs. No assurance can be
given that such costs will not increase in future periods or that any such
increase would not have a material adverse effect on the Company's business,
financial condition and results of operation. See "Business -- Disability
Products -- Products."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS; NO
PATENTS. The Company regards its E Z Keys for Windows, Talking Screen for
Windows, Pegasus LITE and related software and its simulation software products
as proprietary and relies primarily on a combination of copyright, trademark,
trade secret and confidential information laws and employee and third-party
non-disclosure agreements and other methods to protect its proprietary rights.
There can be no assurance that these protections will be adequate to protect the
Company's intellectual property rights or that the Company's competitors will
not
12
<PAGE> 16
independently develop technologies that are substantially equivalent or superior
to the Company's technologies. The Company does not currently hold any patents
or have any patent applications pending for itself or its products and has not
obtained Federal registration for any of its trademarks. The Company enters into
non-disclosure and invention assignment agreements with its employees and enters
into non-disclosure agreements with its consultants, subcontractors and
distributors. However, there can be no assurance that such measures will protect
the Company's proprietary technology, or that its competitors will not develop
products with features based upon, or otherwise similar to, the Company's
products or that the Company will be able to enjoin competitors from selling
similar products.
The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. The Company
has been conducting business on a world-wide basis in the augmentative
communication and computer alternative access industries without receiving
claims from third parties that its products or names infringe on any proprietary
rights of other parties. However, the Company is a recent entrant in the
educational and pharmaceutical simulation software fields. There can be no
assurance that third parties will not assert infringement claims against the
Company in the future with respect to current or future products, trademarks or
other Company works or that such assertion may not require the Company to enter
into royalty arrangements or result in costly litigation. See
"Business -- Disability Products -- Intellectual Property."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent on the continued service of its key technical and management personnel,
particularly Walter S. Woltosz, the Company's co-founder, Chief Executive
Officer, President and Chairman of the Board of Directors. The Company's growth
and future success will depend in large part on its ability to continue to hire,
motivate and retain Mr. Woltosz and other qualified employees. The competition
for such personnel is intense, and the loss of key employees could have an
adverse effect on the business, financial condition or results of operations of
the Company. Although Mr. Woltosz has entered into an employment agreement with
the Company, there can be no assurance that the Company will be able to retain
him or its other key employees in the future. The Company has applied for key
person life insurance in the amount of $1,000,000 for Mr. Woltosz. Although the
Company believes that it can obtain such a life insurance policy, no assurance
can be given that such policy will be issued, or, if issued, that the premium
charged on such policy will be acceptable to the Company. See "Management."
BENEFITS TO MAJORITY SHAREHOLDERS. Out of the proceeds of this offering,
the Company plans to pay Mr. Woltosz $150,000 in satisfaction of accrued but
unpaid compensation. Mr. Woltosz will use a portion of the proceeds to repay a
loan from the Company. See "Use of Proceeds" and "Certain Transactions."
CONCENTRATION OF OWNERSHIP. Following this offering, the current officers
and directors of the Company and their affiliates will beneficially own or have
voting control over approximately 61.11% of the outstanding shares of Common
Stock (assuming exercise of the warrants sold to the Selling Shareholders).
Accordingly, these individuals will have the ability to influence the election
of the Company's directors and effectively to control most corporate actions.
This concentration of ownership may also have the effect of delaying, deterring
or preventing a change in control of the Company. See "Principal and Selling
Shareholders."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. The Company distributes its
products in approximately 12 countries and revenues from sales outside the
United States represented approximately 14%, 11%, and 17% of the Company's
revenues for the fiscal years ended August 31, 1996, 1995 and 1994,
respectively, and approximately 20% and 14% of the Company's revenues for the
six month periods ended February 28, 1997 and February 29, 1996, respectively.
Adaption of the Company's products for distribution in foreign countries
includes translation of text to conform to foreign languages and conventions and
can be time consuming and costly. The Company faces the following additional
risks in distributing its products abroad although to date such risks have not
materially and adversely affected the Company's business: unexpected changes in
regulatory requirements, tariffs and other trade barriers, longer accounts
receivable payment cycles, difficulties in managing international operations,
potentially adverse tax consequences, repatriation of earnings and the burdens
of complying with a wide variety of foreign laws. There can be no assurance that
such factors will not have an adverse effect on the Company's future foreign
sales and, consequently, the Company's future
13
<PAGE> 17
business, financial condition or results of operations. All of the Company's
international sales are currently designated in United States Dollars.
Strengthening of the United States Dollar in relation to other currencies may
result in the Company's products becoming more expensive in foreign markets,
which may result in decreased demand for the Company's products in such markets.
The Company does not engage in hedging transactions to mitigate against such
risk.
BROAD DISCRETION OF APPLICATION OF PROCEEDS OF OFFERING. A portion of the
proceeds of the offering will be used for general working capital. Management
will have broad discretion as to the use of such proceeds and management
reserves the right to reallocate all proceeds to working capital. See "Use of
Proceeds."
RISK OF PUBLIC OFFERINGS; PRIOR OFFERING. In September 1996, the Company
filed a Registration Statement covering the sale of 500,000 units (the "Units"),
each Unit consisting of two shares of Common Stock and one non-redeemable
warrant exercisable to purchase one share of Common Stock at $6.50 per share for
a period of five years from the date such Registration Statement was to be
declared effective by the Securities and Exchange Commission, at $10.01 per Unit
(the "Prior Offering") through Janda, Phillips and Garrington, The Capital
Markets Division of Financial West Group as the representative (the "Prior
Representative") of certain underwriters. On or about November 26, 1996, the
Prior Representative advised the Company that it had failed to reach agreement
with its clearing agent regarding the amount of capital that such clearing agent
required the Prior Representative to maintain in connection with the Prior
Offering and that since it did not have the ability to close the Prior Offering
at that time, it withdrew from such Prior Offering. The failure to complete the
Prior Offering could adversely affect the market price of the Shares offered
hereby.
GOVERNMENT REGULATION. Devices that produce radio frequency ("RF") energy
are regulated by the Federal Communications Commission (the "FCC") pursuant to
the Communications Act of 1934, as amended. Part 15 of the FCC's Rules establish
technical standards for devices that generate radio energy but that are not
intended to emit RF energy and do not transmit information on radio frequencies.
Such devices are known as "unintentional radiators." The FCC requires that
equipment authorizations be obtained from the FCC in order to market Part 15
unintentional radiators and that applicants for equipment authorizations
demonstrate that their equipment satisfies FCC technical requirements relating
to RF emissions. The Company had not previously sought to obtain FCC equipment
authorizations for any of its products and was recently advised that certain of
its products are subject to Part 15 so that such authorizations are required.
The Company also recently learned that certain of these products did not comply
with the FCC's technical requirements under certain limited circumstances. The
Company has completed modifications to these products to comply with these
technical requirements and has successfully completed testing at an FCC-
certified lab for all of its current products. Certain of the Company's products
are subject to similar regulatory requirements in certain foreign markets and
the Company believes certain of its products have not complied with these
requirements. These regulations may require similar modifications to the
Company's products. Non-compliance with these requirements can result in fines,
halts in sales and recalls. The Company believes that it may incur fines but
that these will not materially adversely affect the Company's operations or
financial position and that the risk of further adverse consequences as a result
of these circumstances is remote. However, there can be no assurance that these
circumstances will not result in further adverse consequences.
Under the Federal Food, Drug and Cosmetic Act, a "[medical] device" is
defined, in part, as an "instrument, apparatus, implement, machine, contrivance,
or other similar or related article . . . which is . . . intended for use in
the . . . mitigation, treatment or prevention of disease in man or other
animals." The FDA regulates such devices with respect to preclinical and
clinical testing, manufacturing, labeling, distribution and promotion. The FDA
issued a letter dated April 28, 1995 to one of the Company's competitors
concerning the applicability of FDA rules to disability products similar to the
Company's. This letter stated that the FDA had determined that communication
systems that were the subject of that letter will be considered as meeting the
definition of a medical device only if they are intended to be used for
communications directly with medical personnel or to alert authorities regarding
a medical condition or medical emergency and that the FDA will not consider
communication systems to be medical devices if they are intended to facilitate
communications for physically impaired persons and make no specific or implied
claims for use during a medical emergency. This letter addressed products of a
competitor of the Company.
14
<PAGE> 18
The Company believes that its disability products are similar in intended use to
the product that was the subject of such letter and that its disability products
have not been promoted or marketed in a way that would suggest that such
products are intended to facilitate communications for physically impaired
persons for use during a medical emergency. Accordingly, the Company believes
that its disability products are not subject to regulation as medical devices in
accordance with the FDA's position expressed in such letter. There can be no
assurance that the FDA will not change its regulatory position in the future and
seek to regulate such products as medical devices or that the Company's
disability products will not otherwise become subject to FDA regulation as
medical devices. In the event the Company's disability products were to become
subject to FDA regulations as medical devices, the Company would incur added
costs and regulatory burdens. See "Business -- Disability Products -- Government
Regulation."
ENVIRONMENTAL COMPLIANCE. In the ordinary course of its manufacturing and
repair processes, the Company uses batteries, glue and similar materials which
are stored on-site. The waste created by use of these materials is transported
off-site on a regular basis. The Company currently ships batteries to a battery
distributor for recycling and disposes of empty glue containers in accordance
with instructions given to it by the disposal company that disposes of the
Company's general refuse. Although the Company is not aware of any claim
involving violation of environmental or occupational safety and health laws and
regulations, there can be no assurance that such a claim may not arise in the
future, which may have a material adverse effect on the business, financial
condition or results of operations of the Company. See "Business -- Disability
Products -- Environmental Compliance."
NO PRIOR PUBLIC MARKET; ARBITRARY OFFERING PRICE; POSSIBLE VOLATILITY OF
STOCK PRICE. Prior to this offering, there has been no public market for the
Common Stock. Although the Company intends to apply for listing of its Common
Stock on the Nasdaq SmallCap Market, there can be no assurance that an active
trading market will develop or, if it develops, that it will be sustained.
Holders of the Common Stock may, therefore, have difficulty in selling their
securities should they desire to do so. The initial public offering price was
determined by negotiations between the Company and the Representative, and may
not be indicative of the market price of the Common Stock after this offering.
The trading price of the Common Stock could also be subject to significant
fluctuation in response to variations in quarterly results of operations,
announcements of technological innovations or new products by the Company or its
competitors, developments or disputes with respect to proprietary rights,
general trends in the industry and overall market conditions and other factors.
The market for securities of early-stage, small-market capitalization companies
has been highly volatile in recent years, often as a result of factors unrelated
to a company's operations. See "Underwriting."
EXERCISE OF WARRANTS; EXERCISE AND GRANT OF OPTIONS. In connection with
this offering, the Company will sell to the Representative, for a nominal price,
a warrant to purchase an aggregate of 115,000 shares of Common Stock (the
"Representative's Warrant"). The Representative's Warrant will be exercisable
commencing 12 months after the date of this Prospectus and ending five years
after the date of this Prospectus, at an exercise price of $6.00 per share. The
holder of the Representative's Warrant has the opportunity to profit from a rise
in the market price of the Company's Common Stock, if any, without assuming the
risk of ownership. The Company may find it more difficult to raise additional
equity capital if it should be needed for the business of the Company while the
Representative's Warrant is outstanding. The holder of the Representative's
Warrant will have certain registration rights which may cause future expense to
the Company. At any time when the holder thereof might be expected to exercise
it, the Company would probably be able to obtain additional equity capital on
terms more favorable than those provided by the Representative's Warrant. The
total number of shares of Common Stock reserved for issuance under the Company's
1996 Stock Option Plan is 250,000. The Company has also issued to Patricia Ann
O'Neil and Fernando Zamudio, the Selling Shareholders, warrants to purchase an
aggregate of 250,000 shares of Common Stock in connection with a bridge loan
that they made to the Company. In addition, the Company has issued to certain of
the Bridge Lenders the Lender's Warrants to purchase an aggregate of 280,000
shares of Common Stock in connection with the Bridge Loan that they made to the
Company. The holders of the Lender's Warrants have the opportunity to profit
from a rise in the market price of the Company's Common Stock, if any, without
assuming the risk of ownership. The Company may find it more difficult to raise
additional equity capital if it should be needed for the business of the Company
while the Lender's Warrants
15
<PAGE> 19
are outstanding. The holders of the Lender's Warrants will have certain
registration rights which may cause future expense to the Company. At any time
when the holders of the Lender's Warrants might be expected to exercise them,
the Company would probably be able to obtain additional equity capital on terms
more favorable than those provided by the Lender's Warrants. The Bridge Lenders
have, however, agreed not to resell or otherwise transfer the Lender's Warrants
or the shares of Common Stock issuable upon exercise thereof until 365 days from
the consummation of this offering. Further, the Company has reserved for
issuance 300,000 shares of Common Stock for issuance upon the exercise of the
Performance Warrants. To the extent that the Representative's Warrant, any
options granted under the Company's stock option plan or any other warrants or
options are exercised, the ownership interests of the Company's shareholders may
be diluted proportionately. See "Underwriting", "Management -- 1996 Stock Option
Plan" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources".
SHARES ELIGIBLE FOR FUTURE SALE. After completion of this offering,
3,350,000 shares of Common Stock will be issued and outstanding, assuming no
exercise of (i) the Over-Allotment Option; (ii) the Representative's Warrant;
(iii) the warrants to purchase 250,000 shares of Common Stock held by the
Selling Shareholders; (iv) the Performance Warrants; (v) the warrants to
purchase 280,000 shares of Common Stock held by certain of the Bridge Lenders;
and (vi) other outstanding rights to acquire Common Stock. Of these shares, the
1,150,000 shares of Common Stock sold in this offering will be freely
transferable without restriction or further registration under the Securities
Act of 1933, as amended (the "Securities Act"), by persons other than
"affiliates" of the Company (as that term is defined in Rule 144 under the
Securities Act). The remaining 2,200,000 shares of Common Stock issued by the
Company prior to this offering will be "restricted securities," as that term is
defined under Rule 144 promulgated under the Securities Act, and may be publicly
sold only if registered under the Securities Act or sold in accordance with an
applicable exemption from registration, such as Rule 144. Each holder of Common
Stock who is an officer, director or key employee of the Company has entered
into a "lock-up" agreement providing that such shareholder will not offer, sell,
contract to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any shares of the Company's Common Stock or any security
or other instrument which by its terms is convertible into, exercisable for, or
exchangeable for shares of the Company's Common Stock for a period of 18 months
after the effective date of the Registration Statement without the prior written
consent of the Representative.
2,200,000 shares of Common Stock will be eligible for sale 18 months after
the effective date of the Registration Statement, subject to satisfaction of the
applicable conditions of Rule 144. Further, the 280,000 shares of Common Stock
issuable upon exercise of the Lender's Warrants will be eligible for sale 365
days after the effective date of the Registration Statement. In addition, the
250,000 shares of Common Stock issuable upon exercise of the warrants granted to
the Selling Shareholders are eligible for resale pursuant to the Registration
Statement of which this Prospectus is a part. Sales of substantial amounts of
shares in the public market following the expiration of the lock-up agreements
or restrictions imposed by Rule 144, or the prospect of such sales, could
adversely affect the market price of Common Stock. See "Description of
Securities," "Certain Transactions" and "Shares Eligible for Future Sale."
ABSENCE OF DIVIDENDS. The Company has never paid cash dividends on the
Common Stock and does not anticipate paying cash dividends on the Common Stock
in the foreseeable future. See "Dividend Policy."
DILUTION. After giving effect to the sale of the 1,150,000 shares of Common
Stock offered by the Company hereby at the initial public offering price of
$5.00 per Share and the receipt of the estimated net proceeds therefrom, the
Company's existing shareholders will experience an immediate increase in net
tangible book value of $1.47 per share and purchasers of Common Stock in this
offering will experience immediate dilution in net tangible book value of $3.85
per share or approximately 77% of their investment. See "Dilution."
LIMITATIONS ON LIABILITY OF DIRECTORS. The Company's Articles of
Incorporation substantially limits the liability of the Company's directors to
the Company and its shareholders for breach of fiduciary and other duties to the
Company. See "Management -- Limitation of Liability and Indemnification
Matters."
POSSIBLE DELISTING OF SHARES OF COMMON STOCK FROM THE NASDAQ MARKET. While
the Company believes that the shares of Common Stock will be included for
quotation on the Nasdaq SmallCap Market
16
<PAGE> 20
("Nasdaq"), there can be no assurance that this will actually occur. The Company
will have to maintain certain minimum financial requirements for continued
inclusion on Nasdaq.
If the Company is unable to satisfy Nasdaq's maintenance requirements, the
Company's securities may be delisted from Nasdaq. In such event, trading if any,
in the shares of Common Stock would thereafter be conducted in the
over-the-counter markets in the so-called "pink sheets" or the NASD's
"Electronic Bulletin Board." Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of the transactions,
reductions in security analysts' and the news media's coverage of the Company,
and lower prices for the Company's securities than might otherwise be attained.
RISK OF PENNY STOCKS. If the Company's securities were to be delisted from
Nasdaq, they could become subject to Rule 15g-9 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), which imposes additional sales
practice requirements on broker-dealers which sell such securities to persons
other than established customers and "accredited investors" (generally,
individuals with net worths in excess of $1,000,000 or annual incomes exceeding
$200,000, or $300,000 together with their spouses). For transactions covered by
this rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently, the rule may adversely affect the ability of
broker-dealers to sell the Company's securities and may adversely affect the
ability of purchasers in the offering to sell any of the securities acquired
hereby in the secondary market.
Securities and Exchange Commission ("Commission") regulations define a
"penny stock" to be any non-Nasdaq equity security that has a market price (as
therein defined) of less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require delivery, prior to any
transaction in a penny stock, of a disclosure schedule prepared by the
Commission relating to the penny stock market. Disclosure is also required to be
made about commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities. Finally, monthly
statements are required to be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or meet
certain minimum net tangible assets or average revenue criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6) of the Exchange
Act, which gives the Commission the authority to prohibit any person that is
engaged in unlawful conduct while participating in a distribution of a penny
stock from associating with a broker-dealer or participating in a distribution
of a penny stock, if the Commission finds that such a restriction would be in
the public interest. If the Company's securities were subject to the rules on
penny stocks, the market liquidity for the Company's securities could be
severely adversely affected.
LACK OF EXPERIENCE OF WALDRON & CO., INC. While Waldron & Co., Inc. has
been in the investment broker's business and registered NASD members since 1939,
it has not previously participated as a managing underwriter in public offerings
of equity securities. Prospective purchasers of Common Stock in this offering
should consider the lack of experience of Waldron & Co., Inc. in evaluating an
investment in the Company. See "Risk Factors -- Prior Offering" and
"Underwriting."
RISKS RELATED TO REPRESENTATIVE'S AGREEMENTS WITH THE COMPANY. The Company
has agreed to appoint Waldron & Co., Inc. as representative (the
"Representative") of the several underwriters in this offering. In connection
with such engagement, the Company has agreed to appoint the Representative, for
a period of two years, as its non-exclusive advisor for the purpose of
identifying and developing future mergers and acquisition candidates. If, during
the term of this appointment, the Company participates in any merger,
acquisition or other transaction which the Representative has brought to the
Company, including acquisition of assets or stock and in which it pays for the
acquisition, in whole or in part, with shares of the Company's Common Stock,
then it will be obligated to pay the Representative a fee for such services
which will vary depending upon the size of the transaction. In addition, the
Representative will have the right for a period of three years
17
<PAGE> 21
following the date of this Prospectus to receive notice of, and to have an
observer present at, meetings of the Board of Directors and shareholders of the
Company and the Company is obligated to reimburse the Representative for the
costs and expenses reasonably incurred by such observer in attending such
meetings. See "Underwriting."
FORWARD-LOOKING STATEMENTS. When used in this Prospectus and the documents
incorporated herein by reference, the words "believes," "anticipates,"
"intends," "expects" and similar expressions are intended to identify in certain
circumstances, forward-looking statements. Such statements are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those projected, including the risks described in this "Risk
Factors" section. Given these uncertainties, prospective investors are cautioned
not to place undue reliance on such statements. The Company undertakes no
obligation to update these forward-looking statements.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,150,000 shares of
Common Stock offered by the Company, at an initial public offering price of
$5.00 per Share, are estimated to be approximately $4,550,000 (approximately
$5,300,000 if the Over-Allotment Option is exercised in full), after deducting
estimated offering expenses of approximately $625,000 (approximately $650,000 if
the Over-Allotment Option is exercised in full) and the underwriting discounts
and commissions. The Company expects to use the net proceeds of this offering
for working capital purposes, to repay certain short-term indebtedness and to
pay accrued but unpaid compensation, as described more fully below.
The Company expects to use its working capital to develop educational and
pharmaceutical simulation software, to further enhance its products for the
disability market, and to expand its distribution network and sales and
marketing forces in the United States and internationally. The Company
anticipates using approximately $2,605,000 of the net proceeds of the offering
to add marketing, sales, engineering, and scientific personnel, to purchase
equipment, to expand the size of its Palmdale, California, office and to
continue to expand and enhance its lines of educational and pharmaceutical
simulation software. The Company also expects to use approximately $1,800,000 of
the net proceeds of the offering to (i) repay a short-term bridge loan in the
aggregate principal amount of $500,000, plus accrued interest at the rate of
10.0% per annum and payment of additional fees, maturing five business days
after the closing of this offering (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources), (ii) repay the Bridge Loan in the aggregate principal amount of
$1,100,000, plus accrued interest at the rate of 10% per annum, maturing five
business days after the closing of this offering, (iii) repay a $50,000
promissory note issued to Dr. Michael Bolger that was issued to him in
connection with the Company's acquisition of certain simulation software
programs (See "Business -- Simulation Software -- Pharmaceutical Simulation
Software") and (iv) satisfy accrued but unpaid compensation to the Company's
18
<PAGE> 22
Chief Executive officer of $150,000. The expected uses of the net proceeds of
the offering are summarized below:
<TABLE>
<CAPTION>
ANTICIPATED USES OF NET PROCEEDS APPROXIMATE AMOUNT PERCENT OF NET PROCEEDS
- ------------------------------------------------------ ------------------ -----------------------
<S> <C> <C>
Repayment of principal of bridge loan from Patricia
Ann O'Neil and Fernando Zamudio..................... $ 500,000 10.99%
Repayment of Principal of Bridge Loan................. 1,100,000 24.18
Research and development for educational simulation
software............................................ 645,000 14.18
Research and development for pharmaceutical simulation
software............................................ 300,000 6.59
Expand sales force for Words+, Inc.................... 300,000 6.59
Marketing and sales expenses.......................... 700,000 15.38
Equipment purchases and leases........................ 360,000 7.91
Payment of accrued but unpaid compensation (net)...... 110,000 2.42
Facilities expansion.................................. 300,000 6.59
Repayment of line of credit........................... 100,000 2.20
Repayment of principal of Promissory Note due to Dr.
Michael Bolger...................................... 50,000 1.10
Other uses (as described below)....................... 85,000 1.87
----------
Total............................................... $4,550,000 100.00%
==========
</TABLE>
The use of the balance of the net proceeds from the offering referenced as
"Other Uses" in the above table is dependent on various factors, including the
timing of the introduction and customer acceptance of additional educational and
pharmaceutical simulation software titles, and growth in foreign sales of the
Company's disability products. The remaining proceeds of this offering,
including any proceeds received from the exercise of the Over-Allotment Option
(approximately $85,000, or approximately $835,000 if the Over-Allotment Option
is exercised in full), will be used to fund additional new product development,
potential strategic acquisitions or joint ventures, and other general corporate
purposes including paying accrued interest to the holders of the notes issued in
connection with the Bridge Loan and the promissory notes held by Patricia Ann
O'Neil and Fernando Zamudio, which as of April 30, 1997 was approximately
$70,000. See "Business -- Simulation Software -- Pharmaceutical Simulation
Software." Pending such uses, the net proceeds will be invested in short-term,
investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain its earnings for future growth and, therefore, does
not anticipate paying any cash dividends in the foreseeable future. Any future
determination as to the payment of dividends will be at the discretion of the
Company's Board of Directors and will depend, among other things, on the
Company's financial condition, results of operations, capital requirements and
such other factors as the Board of Directors deems relevant.
19
<PAGE> 23
DILUTION
As of February 28, 1997, the net tangible book value of the Company was
$(712,072) in the aggregate, or $(0.32) per share of Common Stock. "Net tangible
book value per share" represents the amount of the Company's tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of the Shares offered hereby, at an
offering price of $5.00 per Share, net of offering expenses, and assuming (i) no
exercise of the Over-Allotment Option, and (ii) no exercise of outstanding stock
options or warrants to purchase Common Stock, the net pro forma tangible book
value of the Common Stock as of February 28, 1997, would have been $3,837,928 in
the aggregate, or $1.15 per share. This represents an immediate increase in the
net tangible book value of $1.47 per share of Common Stock to existing
shareholders as a result of this offering and an immediate dilution of $3.85 per
share to new shareholders purchasing shares of Common Stock in the offering.
"Dilution per share" represents the difference between the price per share to be
paid by new shareholders for the shares of Common Stock issued in the offering
and the net pro forma tangible book value per share as of February 28, 1997. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share............................. $5.00
Net tangible book value per share before the offering...... (0.32)
Increase per share attributable to the offering............ 1.47
Net tangible book value per share as adjusted to reflect the
offering................................................... 1.15
-----
Dilution per share to new shareholders....................... $3.85
=====
</TABLE>
The following table summarizes, on a pro forma basis at February 28, 1997
the differences between existing shareholders and new investors with respect to
the number of shares purchased from the Company, the total cash consideration
paid to the Company and the average price paid per share by existing
shareholders and by purchasers of the shares offered hereby (at an assumed
initial public offering price of $5.00 per share and before deducing the
underwriting discount and the estimated offering expenses payable by the
Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders............... 2,200,000 65.67% $ 2,200 0.04% $0.00
New Shareholders.................... 1,150,000 34.33 5,750,000 99.96% $5.00
--------- ----- ---------- -----
Total............................. 3,350,000 100.00% $5,752,200 100.00%
========= ====== ========== ======
</TABLE>
The computations in this section assume: (i) no exercise of the
Over-Allotment Option; (ii) no exercise of the Representative's Warrant; (iii)
no exercise of the Selling Shareholder warrants to purchase 250,000 shares of
Common Stock; (iv) no exercise of the Performance Warrants; and (v) no exercise
of stock options issuable under the Company's 1996 Stock Option Plan, none of
which are outstanding as of the date of this Prospectus; and (vi) no exercise of
the Lender's Warrants. See "Management -- 1996 Stock Option Plan," "Description
of Securities," "Underwriting," "Principal and Selling Shareholders" and
"Certain Transactions."
20
<PAGE> 24
CAPITALIZATION
The following table sets forth the Company's capitalization as of February
28, 1997 and as adjusted to reflect the sale by the Company of 1,150,000 Shares
offered hereby at an assumed initial public offering price of $5.00 per Share,
after deducting estimated underwriting discounts and commissions and offering
expenses, and the application of the net proceeds therefrom. See "Use of
Proceeds." This table should be read in conjunction with the Financial
Statements and related Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
----------------------------
ACTUAL AS ADJUSTED
------------ -----------
<S> <C> <C>
Long-term obligations.............................................. $ 68,783 $ 68,783
Shareholders' equity (deficit)(1)
Common Stock, no par value, 20,000,000 shares authorized,
2,200,000 shares issued and outstanding; 3,350,000 shares
issued and outstanding, as adjusted........................... 2,200 3,350
Additional paid-in capital....................................... 280,000 4,828,850
Retained earnings (deficit)...................................... (460,964) (460,964)
Total shareholders' equity (deficit).......................... (178,764) 4,371,236
---------- ----------
Total capitalization..................................... $ (109,981) $ 4,440,019
========== ==========
</TABLE>
- ---------------
(1) Does not include (i) the Over-Allotment Option; (ii) the Representative's
Warrant; (iii) 250,000 shares of Common Stock reserved for issuance upon the
exercise of options outstanding or available for future grant under the
Company's 1996 Stock Option Plan; (iv) 300,000 shares reserved for issuance
upon exercise of the Performance Warrants granted to Walter and Virginia
Woltosz; (v) 250,000 shares reserved for issuance upon exercise of the
Selling Shareholder Warrants and (vi) 280,000 shares reserved for issuance
upon exercise of the Lender's Warrants. See "Principal and Selling
Shareholders" and "Certain Transactions."
21
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below is qualified by reference to, and should be read
in conjunction with, the consolidated financial statements of the Company and
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus. The
following selected financial data of the Company for the fiscal years ended
August 31, 1996, 1995 and 1994 are derived from the financial statements of the
Company audited by Singer Lewak Greenbaum & Goldstein LLP, independent
accountants. The consolidated balance sheets at August 31, 1996 and 1995 and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the fiscal years ended August 31, 1996, 1995 and 1994,
respectively, and notes thereto are included elsewhere in this Prospectus. The
selected financial data as of February 28, 1997, and for the six-month periods
ended February 28, 1997 and February 29, 1996 have been derived from the
Company's unaudited financial statements which, in the opinion of management,
reflect all adjustments, which are of a normal recurring nature, necessary for a
fair presentation of the results of operations for such periods. The results of
the interim periods are not necessarily indicative of the results of a full
year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
FISCAL YEARS ENDED
AUGUST 31, FEBRUARY 29, FEBRUARY 28,
---------------------------- ------------ ------------
1994 1995 1996 1996 1997
------ ------ ------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales............................. $2,589 $2,879 $2,601 $1,361 $1,220
Cost of sales......................... 1,372 1,356 1,289 662 569
------ ------- ------ ------ ------
Gross profit.......................... 1,217 1,523 1,312 699 651
Selling, general and administrative
expenses........................... 994 1,100 1,190 602 938
Research and development.............. 159 102 108 45 56
------ ------- ------ ------ ------
Income (loss) from operations......... 64 321 14 52 (343)
Other income (expenses)............... (12) (13) 24 (2) (347)
------ ------- ------ ------ ------
Income (loss) before provision for
income taxes....................... 52 308 38 50 (690)
Provision (benefit) for income
taxes.............................. 9 115 15 15 (39)
------ ------- ------ ------ ------
Net income (loss)..................... $ 43 $ 193 $ 23 $ 35 $ (651)
====== ======= ====== ====== ======
Net income (loss) per share........... $ 0.02 $ 0.09 $ 0.01 $ 0.01 $(0.27)
====== ======= ====== ====== ======
Weighted average number of shares
outstanding........................ 2,390 2,390 2,390 2,390 2,390
====== ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
--------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)....................................... $(1,362) $3,591
Total assets.................................................... 2,018 4,768
Long-term liabilities........................................... 69 69
Total shareholders' equity (deficit)............................ (179) 4,371
</TABLE>
- ---------------
(1) Adjusted to reflect the sale of 1,150,000 Shares offered by the Company
hereby at an assumed initial public offering price of $5.00 per Share and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Certain Transactions."
22
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to provide an analysis of the
Company's financial condition and results of operations and should be read in
conjunction with, and is qualified in its entirety by, the Company's
Consolidated Financial Statements and the Notes thereto contained elsewhere in
this Prospectus. Historical results and percentage relationships among any
amounts included in the Company's Consolidated Financial Statements are not
necessarily indicative of trends in operating results for any future period.
OVERVIEW
From 1981 to 1996, the Company's operations consisted of the development,
production, marketing, sales, and support of software and hardware for use by
persons with severe physical disabilities. In 1996, the Company began the
development of educational and pharmaceutical simulation software for the school
and home study markets and the pharmaceutical industry, respectively. The
educational simulation software simulates laboratory experiments for high school
and college science classes and can also be operated by severely-disabled
students with as little motion as the blink of an eye. Able-bodied students can
operate the software through standard keyboard and mouse inputs. The
pharmaceutical simulation software simulates the process of amino acids that
comprise certain transmembrane proteins settling into their equilibrium
positions. The Company has identified simulation software for education and for
the pharmaceutical industry as major new business areas.
As of February 28, 1997, the Company's sales have been generated almost
exclusively from the marketing, sale and support of its software and hardware
products for the disability market, as well as repairs. While the Company
expects increased revenue from the sale of products in the disability market,
the Company also anticipates that future revenues from the sale of educational
and pharmaceutical simulation software will be greater than those from the sale
of products in the disability market. The Company's simulation software
businesses are at an early stage of development and as of February 28, 1997, no
sales from such products have been generated by the Company although the Company
recently commenced advertising the projected availability of three educational
simulation software programs for March 1997. Such programs became available in
May 1997. Accordingly, there can be no assurance as to the volume of sales and
earnings, if any, that can be generated by the Company from the simulation
software businesses.
Growth in disability product sales is expected by the Company as a result
of an expanded sales force, continued product improvements, and the recent
introduction of the Pegasus LITE communication device. Management believes,
based on feedback from customers, dealers, and sales representatives, that the
release of the new Pegasus LITE (4.5 pounds) in April 1996, and the availability
of mature versions of both E Z Keys for Windows and Talking Screen for Windows
software will result in improved sales of these products for the fiscal year
ending August 31, 1997. The Company released the first Beta test version of its
E Z keys for Windows 95 software in the early part of March 1997 and expects
additional sales as a result of this new product, although no assurance in this
regard can be given. In addition, the Company has completed the development of
foreign language versions of its disability software, and has begun to realize
additional net sales in overseas markets from the sale of such foreign language
versions.
The Company's historic business of sales to the disability market involves
products that are a combination of software and specially-developed or modified
hardware products. The Company's new line of educational and pharmaceutical
simulation software will be comprised almost exclusively of software products.
However, development of this software is not complete. Accordingly, the Company
expects that cost of sales will decline as a percentage of new sales as the
Company sells more high margin software products and derives a lesser percentage
of revenues from sales of lower margin hardware products. The Company also
expects selling, general and administrative expenses and research and
development expenses to increase as a percentage of sales in the near term, as
the Company hires additional staff to complete development of new product lines.
The Company is currently implementing a strategy to capitalize on the rapid
growth of computer technology in education in general and on the interest in
promoting student interest in science and math education in particular. The
Company's immediate plan is to develop simulated laboratory experiments for the
standard range of high school and college science courses, including Physical
Science, Physics, Chemistry, and
23
<PAGE> 27
Biology. Each software title will incorporate the Company's proprietary
technology that will allow not only able-bodied students, but also even severely
physically-disabled students, to operate the simulations with as little motion
as the blink of an eye with an optional hardware interface and appropriate input
switch. The Company has developed methods to cost-effectively include high
quality photorealistic graphics as part of the simulations, so that the
on-screen presentation appears as much like real laboratory equipment as
possible. See "Business -- Simulation Software."
The Company's strategy in the area of pharmaceutical simulations is
initially to build a team of simulation experts in each of the component areas
needed to model a variety of phenomena for new drug compounds. These component
areas include pharmacology, chemistry, fluid mechanics, molecular dynamics,
thermochemistry, and other related disciplines that determine the solubility,
permeability, transport characteristics, and other pertinent factors that
affect, for example, how a compound is absorbed through various membranes in the
body or how it degrades on the shelf. The Company intends to enhance the
software that it recently acquired from Dr. Michael Bolger to develop
simulations, with the goal of providing pharmaceutical companies with a
cost-effective substitute for some portion of the expensive laboratory and
animal testing currently carried out in the pre-screening of drug compounds
prior to subjecting these drugs to the more extensive testing required in the
development of new drugs by the Food and Drug Administration. The Company has
also signed a letter of intent to form a strategic alliance with Therapeutic
Systems Research Laboratories ("TSRL") the purpose of which is to build and sell
a simulation software package for drug absorption in the human gastrointestinal
tract. See "Business -- Simulation Software."
The Company's success will to a large extent depend on its ability to
continue to increase sales in the disability market, its success in completing
development of and marketing its new line of educational simulation software,
and in continuously improving and marketing simulation software for the
pharmaceutical industry. Due to a variety of factors, including, without
limitation, the inherent uncertainties of software development, the
unpredictability of the continued acceptance of the Company's disability
products, the Company's ability to continue to develop new products at
commercially acceptable prices for the disability market, the unpredictability
of the acceptance of the Company's new educational simulation software products
in the marketplace, the technical challenges associated with modeling various
processes for new drug compounds, and the Company's ability to avoid product
obsolescence in its disability products and in both educational and
pharmaceutical simulations, there can be no assurance that the Company will be
able to implement successfully its business plan or that the Company will be
profitable in the future. See "Business -- Strategy Overview" and "Risk
Factors."
RESULTS OF OPERATIONS
The following table sets forth statements of operations items (in
thousands) and the percentages that such items bear to net sales for the fiscal
years ended August 31, 1996 ("FY 96"), August 31, 1995 ("FY 95") and August 31,
1994 ("FY 94").
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net sales....................................... $2,589 100.0% $2,879 100.0% $2,601 100.0%
Cost of sales................................... 1,372 53.0 1,356 47.1 1,289 49.6
Selling, general, and administrative............ 994 38.4 1,100 38.2 1,190 45.8
Research and development........................ 159 6.1 102 3.5 108 4.1
------ ----- ------ ----- ------ -----
Total operating expenses........................ 1,153 44.5 1,202 41.7 1,298 49.9
------ ----- ------ ----- ------ -----
Income from operations.......................... 64 2.5 321 11.2 14 0.5
Income from grant............................... -- -- -- -- 34 1.3
Interest expense................................ 12 0.5 13 0.5 10 0.4
Provision for income taxes...................... 9 0.3 115 4.0 15 0.5
------ ----- ------ ----- ------ -----
Net income...................................... $ 43 1.7% $ 193 6.7% $ 23 0.9%
====== ===== ====== ===== ====== =====
</TABLE>
24
<PAGE> 28
FY 1995 COMPARED WITH FY 1994
Net Sales
Net sales for FY 95 increased by $290,000, or 11.2%, to $2,879,000 compared
to $2,589,000 for FY 94. Management attributes this growth to an overall growth
in the industry, and to the acceptance in the field of the "dynamic display"
(computer screen) concept pioneered by the Company and incorporated in its high
end devices, which concept has advantages over "static display" (fixed symbols)
devices based on earlier technology. Increased public awareness, improved third
party funding, and recent legislation have all contributed to a growth in the
industry overall.
Cost of Sales
Cost of sales for FY 95 decreased $16,000, or 1.2%, to $1,356,000, or 47.1%
of net sales, from $1,372,000, or 53% of net sales. A major factor affecting
cost of sales is that some software customers also purchase computers from the
Company. The gross margin on computers is less than on software and dedicated
hardware devices, such as the MessageMate communication devices made by the
Company. The Company's gross profit is higher on software than on computers, and
the mix of products ordered during any reporting period can have a significant
effect on the Company's gross margin for that period. The decrease in cost of
goods sold and the corresponding increase in gross margin was due primarily to a
shift in the product sales mix to a higher proportion of sales of software
products. Computer sales for FY 95 decreased to $367,000 from $454,000 for FY
94.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for FY 95 increased by
$106,000, or 10.7%, to $1,100,000 compared to $994,000 for FY 94. Sales and
marketing costs include salaries, commissions, travel, trade shows, advertising,
educational workshops, public relations, and other costs related directly to
sales and marketing. The sales cycle for most of the Company's products in its
disability market ranges from a few weeks to as much as one year, with typical
sales lead times of 3-6 months. Management attributes this increase primarily to
higher trade show, educational workshop and related travel expenses. As a
percentage of sales, selling, general and administrative expenses decreased by
0.2% to 38.2% in FY 95 from 38.4% in FY 94.
Research and Development
The Company incurred $253,000 of research and development costs during FY
95, of which $151,000 was capitalized and $102,000 was expensed compared to
$191,000 for FY 94, of which $32,000 was capitalized and $159,000 was expensed.
The 32.5% increase in research and development expenditures for FY 95 was due
primarily to development of Windows versions of the E Z keys and Talking Screen
software for the disability market.
Interest Expense
Interest expense for FY 95 increased $1,000, or 8.3%, to $13,000 in FY 95
from $12,000 in FY 94. This increase is attributable primarily to higher
borrowings by the Company on its line of credit. As a percentage of sales,
interest expense remained constant at 0.5%.
Income Taxes
Income taxes increased $106,000, or 1,178%, to $115,000 in FY 95 from
$9,000 in FY 94 because of the Company's improved earnings.
Net Income
Net income for FY 95 increased by $150,000, or 349%, to $193,000 compared
to $43,000 for FY 94. Management attributes this growth primarily to a shift in
the product sales mix to a higher proportion of sales
25
<PAGE> 29
of higher margin software products and to the capitalization of a much greater
proportion of the Company's research and development expenses.
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 and (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 in 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.
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 attributes this
increase primarily to the following three factors: (1) higher commission costs
due to a higher percentage of sales being made 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% decline in research and development expenditures 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.
26
<PAGE> 30
Income from Grant
For FY 96, the Company received $34,000 of a $51,000 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 $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 net sales, interest
expense decreased to 0.4% in FY 96 from 0.5% in FY 95.
Income Taxes
Income taxes 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 costs and the increased expenses incurred
by the Company in its research and development efforts compared to FY 95. In
addition, the Company incurred a net loss in the fourth quarter of the year
ended FY 96 as compared to the fourth quarter ended FY 95 which was primarily
due to the changeover from the MultiVoice hardware voice synthesizer to the
Eloquence software voice synthesizer. In addition, the Company allowed several
owners of the original Pegasus communication system to return their devices.
Additional factors were somewhat lower sales of MessageMates and software, which
management attributes to normal business cycles.
SIX MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO SIX MONTHS ENDED FEBRUARY 29,
1996
The following table sets forth statements of operations items (in
thousands) and the percentages that such items bear to net sales for the
six-month periods ended February 28, 1997 and February 29, 1996:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------
FEBRUARY 28, 1997 FEBRUARY 29, 1996
----------------- -----------------
<S> <C> <C> <C> <C>
Net sales............................................. $1,220 100.0% $1,361 100.0%
Cost of sales......................................... 569 46.6 662 48.7
Selling, general and administrative................... 938 76.9 602 44.2
Research and development.............................. 56 4.6 45 3.3
------ ------ ------ ------
Total operating expenses.............................. 994 81.5 647 47.5
------ ------ ------ ------
Increase (loss) from operations....................... (343) (28.1) 52 3.8
Income from grant..................................... 17 1.4 0 0.0
Interest income....................................... 1 0.1 0 0.0
Financing costs....................................... (315) (25.8)
Interest expense...................................... (50) (4.1) (2) (0.1)
Provision (benefit) for taxes......................... (39) (3.2) 15 1.1
------ ------ ------ ------
Net income (loss)..................................... $ (651) (53.3)% $ 35 2.6%
====== ====== ====== ======
</TABLE>
NET SALES
Net sales for the six months ended February 28, 1997 were $1,220,000,
compared to $1,361,000 for the six months ended February 29, 1996. Management
attributes the majority of this 10.4% reduction to the changeover from the
MultiVoice hardware voice synthesizer to the Eloquence software voice
synthesizer.
27
<PAGE> 31
MultiVoice sales accounted for $120,000 in the 1996 period, but only $14,000 in
the 1997 period. Lower software sales, somewhat offset by higher computer sales,
accounted for the majority of the remainder of the difference in net sales for
the two periods. The decline in sales of existing products will be addressed
through a significant expansion in marketing and sales activities, including
expansion of the field sales force to be more in line with the size of major
competitors' sales forces. In addition, new products and product improvements
have either recently been completed (such as the Windows 95 version of the
Company's E Z Keys for Windows software) or are currently in progress.
COST OF SALES
Cost of sales of $569,000 for the six months ended February 28, 1997
declined by $93,000, or 14.0%, from $662,000 in the six month period ended
February 29, 1996. As a percentage of sales, cost of sales was 46.6% for the
1997 period, compared to 48.7% for the 1996 period. Management attributes this
decrease in cost of sales primarily to the changeover from the MultiVoice
hardware voice synthesizer which has a lower gross margin to the Eloquence
software voice synthesizer which has a higher gross margin. This decrease in
cost of sales is partially offset by an increase in amortization of capitalized
software development costs in the 1997 period for the Company's Windows versions
of its E Z Keys and Talking Screen software programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six months ended
February 28, 1997 were $938,000, compared to $602,000 for the six month period
ended February 29, 1996. Management attributes this increase of $336,000, or
55.8%, primarily to the expansion of the Company's simulation software efforts
as the Company added office space, furniture and equipment, and additional staff
commencing in September 1996 in contemplation of receiving funding from the
closing of the Prior Offering which was, at that time, expected to occur in
November 1996. A portion of the increase was also due to recruiting and hiring
costs, higher professional fees, additions to the Words+ sales force, increases
in salaries and wages, increased printing and advertising costs, and increased
telephone costs.
RESEARCH AND DEVELOPMENT
Research and development costs for the six months ended February 28, 1997
were $404,000, compared to $85,000 for the six month period ended February 29,
1996. During the 1997 period, $348,000 of this amount was capitalized, and
$56,000 expensed, while during the 1996 period, $40,000 was capitalized and
$45,000 was expensed. The increase in research and development for the latter
period is due to the expanded development of educational and pharmaceutical
simulation software begun in September 1996.
INCOME FROM GRANT
For the six months ended February 28, 1997, the Company received the final
$17,000 payment of a $51,000 grant from the National Science Foundation to
develop software to allow physically-disabled students to perform simulated
laboratory experiments on a computer.
FINANCING COSTS
Financing costs for the six months ended February 28, 1997 was $315,000
compared to $0 for the six months ended February 29, 1996. The increase is due
to the amortization of loan origination fees of $35,000 and the value attributed
to the 280,000 warrants issued in December 1996 and January 1997 of $280,000.
INTEREST EXPENSE
Interest expense for the six months ended February 28, 1997 was $50,000,
compared to $2,000 for the six month period ended February 29, 1996. This
increase of $48,000, or 2400% is attributable primarily to accrued interest on
the aggregate of $1,600,000 of promissory notes issued by the Company. As a
percentage of net sales, interest expense, increased to 4.1% for the 1997 period
compared to 0.1% for the 1996 period.
28
<PAGE> 32
INCOME TAXES
Provision (benefit) for income taxes for the six months ended February 28,
1997 was ($39,000), compared to $15,000 for the six month period ended February
29, 1996. This reduction is due to the reduced earnings for the latter period,
produced primarily by the increase in operating expenses for Simulations Plus
and the decrease in sales for Words+.
NET INCOME (LOSS)
Net income (loss) for the six months ended February 28, 1997 was ($651,000)
compared to $35,000 for the six month period ended February 29, 1996. Management
attributes this decline to increased marketing costs for the introduction of the
Company's educational simulation software, a decline in sales, the financing
costs associated with the notes payable, the addition of three new sales
representatives to the outside sales force for Words+, the increase in selling,
general and administrative expenses from the expansion of Simulations Plus, and
the decrease in sales for Words+.
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 Prospectus 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.
<TABLE>
<CAPTION>
NET SALES
-----------------------------------------------------
FIRST SECOND THIRD FOURTH
FY QUARTER QUARTER QUARTER QUARTER TOTAL
------------------------ ------- ------- ------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1994.................... 507 503 703 876 2,589
1995.................... 700 618 710 851 2,879
1996.................... 733 628 621 619 2,601
1997.................... 541 679
</TABLE>
In general, sales to schools is mildly seasonal, with slightly greater
sales to schools during the Company's third and fourth fiscal quarter (March-May
and June-August). Sales of educational simulations are also expected to exhibit
seasonal behavior, with stronger sales in the spring and early fall months. Home
study software sales are expected to be somewhat stronger in the fall.
Pharmaceutical simulations 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, the private placement of promissory notes and
the Bridge Loan, a government grant, and cash loans from the officers on an
as-needed basis. All indebtedness to the officers was repaid during 1996.
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 February 28, 1997 was 11.25% and 11.25%,
respectively. At August 31, 1996, the outstanding balance under the revolving
line of credit was approximately $94,000, with approximately $1,000 available on
that date and at February 28, 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. All amounts due and owing on
the line of credit were repaid in September 1996 with a portion of the proceeds
that the Company received from the loans made to the Company by Patricia Ann
O'Neil and Fernando Zamudio, two of the Selling Shareholders. In December 1996,
the Company drew down $95,000 on the revolving line of credit and all amounts
due and owing on the line of credit were repaid in January 1997
29
<PAGE> 33
with a portion of the proceeds that the Company received from loans made to the
Company pursuant to a private placement (the "Private Placement") to accredited
investors of $1,100,000 of promissory notes in connection with the Bridge Loan.
In April and May 1997, the Company drew down $100,000 of the line of credit. See
"Certain Transactions."
During the fiscal year ended August 31, 1995, the Company, from time to
time, borrowed money from Mr. Woltosz to purchase equipment and supplies used by
the Company. At August 31, 1995, $34,148 was owed to Mr. Woltosz by the Company.
Such amounts were due at the discretion of Mr. Woltosz and bear interest at the
rate of 6% per annum. All such amounts were repaid by the Company to Mr. Woltosz
in April 1996. See "Certain Transactions."
In 1996, the Company was awarded a $51,000 Phase I Small Business
Innovation Research ("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. The Company applied
for a Phase II SBIR grant in the amount of $300,000 in February 1997. No
assurance can be given that the Company will receive the Phase II SBIR grant, or
any portion thereof.
Fernando Zamudio, one of the Selling Shareholders, advanced to the Company
$200,000 in August 1996 and Patricia Ann O'Neil, another Selling Shareholder,
advanced to the Company $300,000 in September 1996 pursuant to promissory notes
bearing interest at 10% per annum originally and due and payable upon the
earlier of May 31, 1997 or five business days following the completion of the
Company's initial public offering. Such loans are secured by the inventory and
accounts receivable of the Company and Words+. On May 23, 1997, the Selling
Shareholders agreed, for a payment of an additional $300 per day that the
promissory notes remain outstanding, to extend the maturity date of the
promissory notes to June 30, 1997. The purpose of these loans was to help
finance the costs of this offering and the ongoing operations of the Company. In
connection with the loans, the Company granted Dr. Zamudio and Ms. O'Neil
five-year warrants, with registration rights, to purchase an aggregate of
100,000 and 150,000 shares, respectively, exercisable at $4.00 per share. See
"Use of Proceeds" and "Principal and Selling Shareholders." Dr. Zamudio and Ms.
O'Neil have no relationship with the Company, its directors, officers or
affiliates.
After the Company was informed by the Prior Representative that it was
withdrawing from the Prior Offering, the Company, in December 1996 and January
1997, raised an aggregate of $1,100,000 in gross proceeds from the Private
Placement of the Bridge Loan. The notes evidencing the Bridge Loan bear interest
at 10% per annum and are due and payable upon the earlier of December 31, 1997
or five business days following the completion of the Company's initial public
offering. The proceeds from the Bridge Loan were used to help finance the costs
of this offering and the ongoing operations of the Company and to repay the line
of credit. See "Use of Proceeds" and "Principal and Selling Shareholders."
Edward Harris, who loaned an aggregate of $400,000 of the Bridge Loan is an
affiliate of the Representative. In connection with the Bridge Loan, the Company
granted the Lenders (except for Edward Harris) five year warrants, with
registration rights, to purchase an aggregate of 280,000 shares of Common Stock,
exercisable at $2.50 per share. The Bridge Lenders have agreed not to resell or
otherwise transfer such warrants or the shares of Common Stock issuable upon
exercise thereof until 365 days from the consummation of this offering.
The Company believes that the net proceeds from the sale of the shares of
Common Stock offered in this offering, 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 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.
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BUSINESS
GENERAL
Simulations Plus and Words+ produce two lines of products: (1) Simulations
Plus, formed in 1996, is developing computer simulation software for education
and the pharmaceutical industry, and (2) Words+, founded in 1981, produces
computer software and specialized hardware for use by persons with physical
disabilities.
Simulations Plus is developing and producing a series of educational
simulation software products 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 also has
recently acquired and intends to develop simulation software for use in
pharmaceutical research and education in pharmacy and medicine. In the future,
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 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 software and hardware devices for persons who
cannot speak due to physical disabilities. The Company also produces computer
access products that enable physically-disabled persons to operate a computer.
The Company's products enable a disabled person to operate a computer and to
communicate through a voice synthesizer with movements as slight as the blink of
an eye. The Company developed and produces the computerized communication system
used by the world-famous theoretical physicist, Professor Stephen Hawking,
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. The Company has recently introduced a new
fully-integrated, portable, lightweight personal-computer-based communication
system that the Company believes is meeting favorable market acceptance and will
contribute to growth in net sales. The Company plans to substantially increase
its Words+ direct sales force using a portion of the proceeds of this offering
and the Company believes this will contribute to growth in net sales of Words+
products.
Words+ was recently advised that it has achieved finalist status for the
Computerworld Smithsonian Innovation Collection for its Pegasus LITE product. As
such, the Company is one of six finalists in the Education and Academic
category. Approximately 1,000 companies were nominated for the award in a total
of ten categories. As a finalist, the company's materials will be included in
the Smithsonian's permanent collection. The announcement of the winning
innovation in each category will be made at a formal dinner in Washington, D.C.,
on June 9, with a garden presentation at the Smithsonian on June 10.
Words+ was awarded the Southern California Technology Alliance's "Fast 50"
award in 1996 for being one of the 50 fastest-growing technology companies in
Southern California over the previous five-year period.
The Company's expansion from exclusively focusing on hardware and software
for persons with disabilities to include development of software for educational
use and the pharmaceutical industry follows the evolutionary path depicted
below:
<TABLE>
<S> <C> <C> <C> <C>
Software & Educational Simulation Educational Simulation Educational Simulation Simulation Software
Hardware for -> Software for Persons -> Software for All -> Software for Pharmacy -> for the Pharmaceutical
Persons With With Disabilities Students and Medical Students Industry
Disabilities
</TABLE>
In its entrance to each new market, the Company has and will continue to
build upon the expertise developed in earlier activities. The Company expects to
continue expanding its activities in all areas reflected in the evolutionary
path depicted above.
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STRATEGY OVERVIEW
Continue Technological Leadership and Increase Sales and Market Share for
Disability Products. The Company plans to maintain its technological leadership
in the development of augmentative and alternative communication and computer
access products for the physically disabled and to significantly increase its
sales and market share for these products by enlarging its Words+ sales force,
completing foreign language conversions of products to increase foreign sales
and evaluating potential acquisitions complementary to its business.
In the area of simulation software, the Company plans to develop software
for a broad range of applications in education, research, home study,
pharmaceuticals, and other industries. The Company's overall strategy with
respect to simulation software is to:
Leverage the Company's Software-Development Expertise into Creation of a
High Growth/High Margin Product Line. The Company has successfully developed and
marketed DOS- and Windows-based software for the disability market for many
years. The Company plans to leverage its expertise in developing Windows-based
software and user interfaces by continuing to develop educational simulations
for use by both able-bodied and disabled students, which the Company believes is
a market with higher growth and higher profit margin potential than its
traditional disability markets. The Company's educational simulation software
will incorporate the Company's proprietary technology that enables
physically-disabled persons to operate computers. Accordingly, schools will be
able purchase software from the Company for use by its able-bodied students that
can also be used by its disabled students.
Broaden Scientific Expertise of Development Staff. The Company has already
recruited a development staff with broad scientific and software programming
expertise, including Computer Science, Physical Chemistry, Physics, Chemical
Engineering, Mechanical Engineering, Pharmacology, Electronics, Aerodynamics,
Propulsion, and Fluid Mechanics. The Company plans to continue to expand its
scientific and programming staff to include a wider range of disciplines in
order to develop educational simulations for a wider range of courses, and to
build expertise for application in more sophisticated simulations for
pharmaceuticals and other industries.
Acquire and Enhance Educational Software for Students in Pharmacy and
Medicine. The Company recently acquired existing educational software for
pharmacy and medicine and will expand and enhance it and offer it to schools of
pharmacy and medicine. In addition, the Company will develop other simulation
software titles for schools of pharmacy and medicine.
Acquire and Enhance Pharmaceutical Simulation Software. The Company
recently acquired existing software for prediction of receptor structure, which
it intends to expand and enhance, and to offer to the pharmaceutical industry.
In addition, the Company will develop other simulation software programs for the
pharmaceutical industry.
Leverage Educational Simulation Expertise by Developing Industry-Specific
Simulations. The simulation of processes of interest to industry can demand
substantial cross-discipline scientific expertise. The Company plans to maintain
a significant competitive advantage by recruiting and maintaining this
expertise. The Company plans to use educational software development activities
as a basis for generating revenues and earnings while expanding its technical
team and technology base for more sophisticated simulations in the area of
pharmaceuticals and other industries.
Identify New Industries that Can Benefit from Simulations. The Company,
through its contacts with researchers who are in and/or consult to the
pharmaceutical industry and based upon numerous industry publications which
reference the potential benefit of pharmaceutical simulations, believes that it
has identified a need in such industry for simulations for the screening of new
drug compounds. This industry has the economic wherewithal to pay for the
Company's products and can realize substantial benefits by using simulations to
predict certain characteristics of new compounds which now are determined by
experiments. The Company will seek to identify additional industries in which
high-quality simulations can provide an economic benefit, and which are logical
extensions of the Company's simulation expertise.
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Develop Proprietary Database and Simulations for the Pharmaceutical
Industry. The Company plans to develop proprietary databases of information for
a wide range of proteins, amino acids, drug compounds, and other molecules with
which to calibrate its simulations. These databases will continually grow as new
compounds are examined, so that their value as resources will grow as well. The
Company considers the specific technical methods it plans to use to generate
these databases, as well as specific technical details regarding its
pharmaceutical simulations, to be proprietary trade secrets. The steps taken to
protect such technical methods and details include: purchasing all rights and
title to the software from Dr. Bolger, execution of confidentiality agreements
and limiting access to the source code and proprietary database information to
those with a need for such access.
The Company has signed a letter of intent with Therapeutic Systems Research
Laboratories ("TSRL") of Ann Arbor, Michigan, to jointly develop a simulation of
the absorption of drug compounds in the gastrointestinal tract. Under the terms
of the letter of intent, upon execution of a definitive License Agreement, the
Company will be granted an exclusive license to TSRL's proprietary database of
absorption measurements from approximately 30 laboratory experiments in human
test subjects, and will receive consulting assistance in the development of the
simulation model from TSRL staff, including Dr. Gordon Amidon 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 actual human absorption
data. The importance of such data is that such data are the means by which the
absorption simulation will be calibrated. Although there can be no assurance
that a successful absorption simulation can be developed even with the
information in the database, or that if a successful simulation is developed,
that it can be marketed profitably, the Company believes that the strategic
advantage of exclusive access to the database, as well as the expertise of TSRL
in absorption modeling, combined with the Company's current and expected growing
expertise in pharmacokinetic simulation, will maximize its chances for success
in this area. Under the terms of the letter of intent, upon execution of a
definitive License Agreement, TSRL will receive a one-time payment of $75,000
(payable 90 days after execution of the License Agreement), plus a royalty of
20% of net sales of the absorption simulation, as well as a non-exclusive right
to use the simulation in its own in-house research and in work performed for its
clients. TSRL will not be allowed to transfer the simulation to any third party.
The letter of intent is nonbinding and although the parties have agreed to
negotiate a License Agreement in good faith on terms consistent with those
specified in the letter of intent, if a definitive License Agreement is not
executed by June 15, 1997 the letter of intent will be terminated. There can be
no assurance that the Company and TSRL will be able to successfully complete
negotiation of a License Agreement within the time frame specified in the letter
of intent, if at all. If the Company and TSRL are not able to successfully
complete negotiations of a License Agreement, then the Company expects that it
would either incur increased costs and longer development time to complete an
absorption simulation or that it would discontinue the development of the
absorption simulation.
The following discussion is divided into two areas: simulation software,
which is the business of Simulations Plus, and disability products, which is the
business of its wholly-owned subsidiary Words+.
SIMULATION SOFTWARE
The Company is currently developing simulation software for: (1) science
courses for high school, university, and home study markets, (2)
pharmacokinetics simulations for pharmacy and medical school markets, and (3)
pharmaceutical research. The Company plans to use the majority of the proceeds
of this offering to expand its simulation development team and its technology
base for these markets and to develop and produce simulation software products
and services for these markets. In the future, the Company plans to further
expand its development team and technology base to have broad application
potential in a variety of additional industries, including construction,
transportation, and medicine.
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 the flight of an airplane, software that simulates battlefield
scenarios, and software that simulates the growth of a city. Some of these
simulations are based on
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logical relationships between elements in the simulations, such as the flow of
goods through a factory, battlefield scenario simulations, and the popular
SimCity program produced by Maxis. 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, heat transfer, etc.). For example, a
simulation of a bouncing 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 the 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 subprocesses
at which the behaviors can be well-represented mathematically, developing
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 and
to produce a useful tool for predicting new results.
BACKGROUND OF SIMULATION SOFTWARE INDUSTRY
Simulation software has been used for over 25 years on large aerospace and
government-sponsored projects. The aerospace industry has developed and used
simulation software for such activities as designing and testing rocket engines,
designing aircraft frames and researching optimal trajectories for the Space
Shuttle. An example is the launch of the Space Shuttle into orbit, which
requires the description of a complex series of processes including the
moment-by-moment performance of both the liquid and solid propellant rocket
motors, the aerodynamic characteristics of the vehicle in its various
configurations (with and without boosters, and with and without the external
fuel tank) and at various speeds, the rotation of the earth, the variation of
gravity with altitude and latitude, the variation of the atmosphere with
altitude, the effects of varying wind speeds at different altitudes, and others.
This latter simulation was first developed in the early 1970's at an aerospace
company by a three-man team that included the Company's Chief Executive Officer.
The Department of Energy has sponsored large scale simulation software for the
design and development of nuclear weapons. The National Oceanic and Atmospheric
Organization has sponsored the development of large scale simulations of weather
patterns in the atmosphere. Simulation software has been used in large-scale
industrial applications such as the design and testing of power plants and other
industrial facilities.
Until recently, simulation software has not been used extensively outside
of these large government-funded, aerospace and industrial programs because
these programs previously required high-powered mainframe computers. The Company
believes that the use of simulation software is now feasible in a wider variety
of uses in business, industry, research, schools and for home use because
personal computers now generally available to persons in these markets have
sufficient speed, memory and other resources to operate simulation software for
a number of applications.
EDUCATIONAL SIMULATION SOFTWARE
BACKGROUND -- EDUCATIONAL SIMULATION SOFTWARE
There are approximately 30,000 middle and high schools and 4,200 colleges
in the United States teaching science and math. The Company believes that these
schools are increasingly using computer technology in their educational
processes. According to reports furnished to and recently published by the
Software Publisher's Association (the "SPA"), the installed base of computers in
kindergartens, grade schools and high schools is expected to grow from 6.46
million units in 1995 to 14.24 million units by the year 2000. The
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Company believes that the trends are for increased presence of computers at home
and at school, increased school funding for technology purchases and stronger
curriculum in science, math and active learning. In addition, there is a greater
emphasis in the educational system on providing access to educational
opportunities for physically-disabled students and recent Federal legislation
requires schools to provide available technology to enable physically-disabled
students to participate in educational functions which would include science
experiments.
While a large number of educational and "edutainment" software programs
with interactive and animation features are being marketed to the educational
and home study markets, a small number of true simulation products are presently
available. The Company believes that its software products simulating science
experiments, and other simulation software products for schools and home study
will be attractive because they can reduce costs for laboratories and equipment,
increase safety, reduce liabilities, and provide access to laboratory
experiments for disabled students. In addition, these simulations expand
educational opportunities by enabling students to carry out more experiments in
less time and by simulating experiments that are not possible in the facilities
available to high schools, colleges and for home study purposes.
The minimum computer requirement for the Company's educational software is
an 80486/66 MHz computer with 16 MB of RAM and a CD-ROM drive running under
windows 3.1, 3.11 or 95, or an equivalent Macintosh when the Macintosh versions
of the software are released in 1997. According to the SPA, in the 1994-95
school year, 46% of school districts owned a total of over 620,000 windows-based
computers, and 52% of districts owned a total of over 826,000 Macintosh
computers. As previously stated, the SPA also expects that the total number of
computers in K-12 schools will increase from 6.46 million in 1994-1995 to 9.07
million in 1996-1997 and to 14.24 million in 1999-2000. Purchase plans for 1995
were 42% Macintosh and 58% IBM or IBM-compatible. Future hardware purchase
projections were $2.0 billion for 1996, increasing to $3.7 billion by the year
2000. The Company believes that the vast majority of all new computers purchased
by schools will be capable of running its educational simulation software.
FUTURE PRODUCTS -- EDUCATIONAL SIMULATION SOFTWARE
The Company is developing a series of interactive simulation educational
software programs for the school and home study markets. The Company's initial
products include simulations of laboratory experiments for Physical Science
courses under the name FutureLab. The Company's initial development efforts are
being accomplished with educational assistance and advice provided by Mr.
Richard Chapleau, Chemistry teacher at Lancaster High School and California
Teacher of the Year for 1995 and Mr. John Fors, Chemistry and Physical Science
teacher at Palmdale High School. The Company has completed the development of
and is now shipping its first three FutureLab titles for Physical Science, which
are: Optics, Gravity, and Circuits. Additional topics to be developed during the
first 12 months following this offering are expected to include 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, and Simple Machines, as well as additional
titles for high school Physics, Chemistry, and Biology courses. In addition to
the simulated science experiments presently conducted in high school and college
courses, these simulations include additional experiments that are too expensive
or too dangerous for actual physical experiments in typical lab facilities.
Unlike most educational and "edutainment" software, the Company's
simulations for science experiments offer students the freedom to design their
own experiments and to "play" with the concepts to create a greater number of
situations than is possible in the laboratory. The programs then simulate what
would happen if such situations had actually been set up in a real lab. This
freedom provides a free-form learning environment without the costs and possible
dangers in a real lab. The programs also include certain predefined problems
with appropriate questions, allowing the teacher to evaluate whether students
have learned the underlying concepts. These simulations are distinguished from
competitive products currently on the market by their photorealistic graphics,
ability to be run by severely physically-disabled students, high degree of
simulation flexibility, and toll-free technical support (an important factor in
schools where teachers are not allowed to make long-distance telephone calls).
The first educational simulations were released in May 1997.
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In mid-October 1996 the Company commenced advertising the projected
availability of its educational simulation software by mailing literature
describing its software to over 118,000 high school teachers, from which the
Company has already begun to receive orders. The Company intends to engage in
additional mailings every two to three months as new titles are released. The
Company currently anticipates that it will release approximately three new
titles every two months beginning in August 1997 which will be supported by
direct mailings to a targeted audience. See "Risk Factors -- Early Stage of
Development of Proposed New Business Lines."
TECHNOLOGY -- EDUCATIONAL SIMULATION SOFTWARE
The technologies included in the Company's educational simulation software
include: (1) accurate modeling of the physical phenomena for each experiment,
(2) photorealistic graphics, (3) accessibility by disabled students, and (4) an
easy-to-use user interface.
The Company's educational simulation programs contain the equations that
describe the behaviors of the laboratory equipment that the actual lab
assignment would contain. For example, for optics, the simulation includes light
sources and a variety of lenses, prisms, and plane and spherical mirrors. For
electrical circuits, the simulation includes power sources, light bulbs,
resistors, diodes, and switches. The Company's software design approach is to
provide as much freedom as possible to the student in selecting laboratory
apparatus, arranging it, and then simulating what would happen if it were
arranged that way. The Company is purchasing high-quality laboratory equipment
matching the objects available in its simulations and is running experiments
with this equipment to calibrate the simulations and provide a high degree of
accuracy in their predicted results.
The Company has developed efficient methods by which the graphics presented
to the user of its educational simulations are photorealistic - they appear,
within the limits imposed by the resolution of computer screens, to be the
actual laboratory equipment, as opposed to drawn images that symbolically
represent such equipment. The student running a simulation appears to be
manipulating real objects rather than drawings of objects. The Company believes
that this realism gives its educational software a competitive advantage.
The Company is incorporating its proprietary hardware and software
technology for providing access to disabled persons into its educational
simulations. This technology includes a hardware device which plugs into the
parallel (printer) port of a Windows-based computer, and accompanying software
to address it, as well as the expertise in the design of the user interface in a
way that provides efficient operation with as little input as a single switch
closure.
The user interface incorporated into the Company's science experiment
software is based on the Company's expertise in designing software for persons
with extremely limited physical motion, which requires a high degree of
efficiency and "user friendliness" to minimize the time required for persons
with limited physical abilities to run a software program. As a result, the user
interface for the simulation software is also easy for able-bodied students to
use. Field testing of preliminary versions of the software has demonstrated that
students learn the interface within minutes and are quickly setting up and
running their own experiments.
PHARMACEUTICAL SIMULATION SOFTWARE
BACKGROUND -- PHARMACEUTICAL SIMULATION SOFTWARE
The Company's pharmaceutical simulation 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 American Association of Pharmaceutical Scientists (AAPS) claims that
the average cost of research and development of a new drug is $350 Million
(another recent estimate is as high as $670 Million) and that the discovery and
development process in bringing a new drug to market requires an average of 12
years. A major factor in this cost is that approximately 5,000 failures occur
for each new drug that is approved and reaches the market. The pharmaceutical
industry spends billions of dollars each year attempting to identify new drugs
with which to treat a variety of conditions. In the 1993 Annual Reports in
Medicinal
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Chemistry, reference is made to the "millions upon millions" of compounds
evaluated during the previous decade. Pharmaceutical and bio-tech companies are
using automated combinatorial chemistry methods to synthesize families of
related compounds, thus rapidly expanding the number of compounds to be
subjected to initial screening.
A significant component of the time and expense of developing a new drug is
the initial screening of candidate compounds. This initial screening occurs
prior to selecting candidates for the more extensive development and testing
required by the FDA prior to marketing a new pharmaceutical product. The
industry primarily utilizes testing on animals and animal-derived products prior
to final testing on humans to determine various characteristics of new
compounds, including absorption, metabolic, and toxicological properties.
Additional laboratory testing is required to determine other characteristics.
This means of research is time-consuming and expensive and, in the case of
animal tests, has recently become controversial.
Alternative methods of testing are being developed to screen candidate
compounds without the use of animal testing. Most of these alternatives do not
directly produce data on human absorption, toxicology or metabolic
characteristics but, rather, produce more fundamental data, such as drug
solubility and permeability, from which researchers attempt to predict these
higher-level characteristics. One unique effort by TSRL has resulted in the
development of a proprietary database of drug compound absorptions in human test
subjects. The Company has signed a letter of intent to form a strategic alliance
with TSRL for the development and sales of a human absorption simulation. Under
the terms of the letter of intent, upon the signing of a License Agreement with
TSRL, the Company will have exclusive rights to the TSRL database and will share
revenues from sales of the simulation with TSRL. There can be no assurance that
the Company and TSRL will be able to successfully complete negotiation of a
License Agreement within the time frame specified in the letter of intent. If
the Company and TSRL are not able to successfully complete negotiation of a
License Agreement, then the Company expects that it would either incur increased
costs and longer development time to complete an absorption simulation or that
it would discontinue the development of the absorption simulation. The area of
absorption has been identified by the Company as a promising area for the
development of useful simulation software.
The pharmaceutical industry uses automated methods to synthesize millions
of new molecules each year. In order to identify one or more potentially
successful new drugs from these millions of candidates, the industry needs to
identify receptor sites which match the molecular geometries of the drug
compounds. Most receptor sites are arrangements of molecules that form parts of
proteins. If a receptor has the right geometry, it will allow a molecule of the
drug compound to "dock" or "bind" with it.
As a result of the human genome project and other public and private DNA
sequencing projects (which are mapping the chromosomes on the human DNA
molecule), a very large number of linear amino acid sequences which can serve as
drug receptor sites is being identified. However, in order to evaluate a
receptor site, knowledge of the linear amino acid sequence is not sufficient for
initial drug receptor screening; rather, a three-dimensional (3-D) description
of the receptor is required. Current methods for discovering these 3-D
geometries involve crystallizing the protein of interest and examining it under
an electron microscope. This process can take several months for a single
protein, and many important proteins are not amenable to this process. Thus, the
rate at which 3-D information can be generated cannot keep pace with the rate at
which the new linear amino acid sequences are being generated. The industry
needs a faster way to generate 3-D receptor structure information in order to
evaluate its new compounds against potential receptor sites, and to keep pace
with the rate of generation of linear amino acid sequences. The area of receptor
structure simulation has also been identified by the Company as a promising area
for the development of useful simulation software. To this end, the Company has
purchased, and is currently enhancing software developed by Dr. Michael Bolger
which is designed to predict the receptor geometry of certain transmembrane
proteins.
In the education of pharmacy and medical students, the beginning student is
presented with an array of equations, terms, and graphs in classroom lectures,
followed by a laboratory session in which students must evaluate pharmacokinetic
parameters such as elimination rate constants and volume of distribution of a
drug in the body. The analysis of drug concentration versus time data is
well-recognized to be one of the most
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important aspects of a Pharmacy curriculum. The Company believes that
properly-designed pharmacokinetic simulation software can provide a
significantly better learning environment for such students.
FUTURE PRODUCTS -- PHARMACEUTICAL SIMULATION SOFTWARE
The Company recently acquired the complete rights and source code to three
computer programs: one that models the geometry of receptor sites on certain
transmembrane proteins, one that simulates drug shelf life, and one called Cyber
Patient, which is a pharmacokinetics simulation designed for use in education in
schools of pharmacy and medicine. The Company will enhance and expand these
programs prior to offering them to their respective markets.
The receptor structure simulation program is a bioinformatics simulation
program for very fast structure predictions for integral membrane proteins
(proteins embedded in cell walls) on a mass scale. In combination with
combinatorial libraries of drug molecules and automated docking software,
successful development of this software will enable the pharmaceutical industry
to pre-screen thousands of compounds for their interaction with therapeutic
receptors and their subtypes as well as interaction with other receptors that
are responsible for producing side effects. The Company recently acquired the
complete rights and source code for this program, will expand and enhance it,
and will offer it to the pharmaceutical industry.
The drug shelf life simulation is a computer program that calculates a rate
constant for the degradation of a drug at 25 degreesC at a specific pH.
Accordingly, the student will compute a pH profile, by calculation of individual
rate constants for pH values between 1 and 13, inclusive. When using this
program, the student is essentially performing a laboratory experiment, on the
computer, in which the student is measuring drug concentration as a function of
time as the drug degradation reaction progresses. Hence, for each pH the data
the student will obtain from this program is a series of time vs. concentration
values. The student will need to take this 'raw' data and extract a rate
constant from it. A laboratory measurement always has a certain error associated
with it, and this is also true in this drug life simulation program as it will
simulate realistic data with random error at each pH value. The Company recently
acquired the complete rights and source code for this program, will expand and
enhance it, and will offer it for sale to schools and students of pharmacy and
medicine.
Cyber Patient is a Windows-based multimedia pharmacokinetics simulation
(what happens to a drug when it enters the body). This program incorporates a
two-compartment model of drug behavior in the body that can be used for
development and presentation of problem-solving case studies in schools of
pharmacy and medicine. The program places the user in the role of a health care
professional with primary care responsibility for a virtual patient who is
taking medication. In addition to the simulation of drug concentration vs. time
data, Cyber Patient includes a "hypertext/graphical" introduction to basic
pharmacokinetics. The current executable version of Cyber Patient is available
at no charge on the Internet (the source code is not available). The Company
recently acquired the complete rights and source code for Cyber Patient, will
expand and enhance it, and will offer it for sale to schools and students of
pharmacy and medicine.
The Company intends to use the technology in Cyber Patient as the basis for
beginning the development of a model of drug absorption in the gastrointestinal
tract in order to provide a candidate drug screening tool for the pharmaceutical
industry. The Company plans to extend the model to include the simulation of
phenomena in the gastrointestinal tract that affect the absorption of drug
compounds into the blood, to conduct laboratory experiments to build a
proprietary database of information regarding the solubility and permeability of
a wide variety of compounds, and to use the experimental data from these tests
to calibrate the absorption simulation.
All rights and source code for the programs were purchased from Dr. Michael
Bolger, who became the Company's Director, Life Sciences, effective October 1,
1996. The Company paid Dr. Bolger an aggregate of $100,000 for the complete
rights and source code to Cyber Patient, the drug life simulation software and
the receptor geometry simulation program. The Company's rights to the software
acquired from Dr. Bolger are exclusive and are perpetual in duration. The
Company paid $50,000 upon execution of the agreement pursuant to which such
programs were acquired and the remaining $50,000 is evidenced by a promissory
note bearing interest at the rate of eight percent (8%) per annum and due at the
earlier of: (i) one year from the date of
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such note or (ii) seven days after the closing of this offering. See "Risk
Factors -- Uncertainty of Future Acquisitions."
In addition to these acquired programs, the Company intends to develop
additional simulation products for education in pharmacy and medicine, as well
as, in the future, to model drug solubility and permeability for applications in
pharmaceutical research.
The Company plans to offer to license the use of its software to
pharmaceutical companies on a non-exclusive basis and to consult with these
companies and provide training on the use of these simulations. The Company will
also offer research services to pharmaceutical companies in which the Company
will conduct research on the client's candidate compounds using its simulation
software, and to provide reports based on these simulations.
At the present time, the Company's development program with respect to
pharmaceutical simulation software is at an early stage. The Company has not yet
completed the development of any of its pharmaceutical simulations programs, and
has not yet offered any for sale. The software programs recently acquired by the
Company have not produced revenues and will require additional development
before an evaluation can be made of their effectiveness and potential commercial
value. The Company expects to first release pharmaceutical simulation software
for use by the pharmaceutical industry prior to the end of 1997. It is not
possible to provide reliable predictions of the time and expense that will be
incurred by the Company prior to successfully completing pharmaceutical
simulation software programs that will produce revenues for the company, and
there can be no assurance that the Company will be successful in developing
commercially-successful pharmaceutical simulation software programs. See "Risk
Factors."
TECHNOLOGY -- PHARMACEUTICAL SIMULATION SOFTWARE
The Company's current technology in pharmaceutical simulation software lies
in the software it recently acquired, and in the expertise of its current and
future expanded technical staff in developing sophisticated simulations that
model molecular and other behaviors. Further, the Company expects to obtain
additional technologies in pharmaceutical simulation software from its proposed
alliance with TSRL for absorption modeling.
The receptor structure simulation program combines existing published
technologies for determination of membrane-spanning regions of a receptor
sequence, and determination of the helical hydrophobic moment, with proprietary
simulation technology that at the present time can produce a two-dimensional
representation of the novel receptor in as little as three minutes (running on a
486/66 MHz PC). The Company plans to validate the two-dimensional results by
comparing the predictions with the known structure for bacteriorhodopsin, and
expects to complete the development of the three-dimensional transformation from
the two-dimensional solution within 12 months after the completion of this
offering. Unlike previous methods, this technique is capable of being automated
to run on a library of receptor sequences to produce many receptor models in a
short period of time. Specific technical details on the receptor structure
simulation program are considered proprietary trade secrets.
The drug life simulation program's simulations of drug degradation kinetics
are based on a numerical simulation of the acid catalyzed, base catalyzed and
spontaneous hydrolysis of pharmaceutical esters. The rate constants for these
simulations depend on the pKa of the drug being studied and those pKa values can
be predicted from methods known to those skilled in the arts of
biopharmaceutics.
Cyber Patient incorporates a set of differential equations with which it
simulates the level of drug compound in the blood after administering a dose by
oral or intravenous means. The program incorporates multimedia sound and video
files to enhance the realism of the pharmacokinetic simulations. A numerically-
accurate animation provides an indication of the drug quantity in theoretical
compartments of the body. Each drug model includes information on the drug's
acid/base properties and this information is incorporated to more accurately
reflect the elimination rate of the drug from a compartment.
The absorption simulation to be developed with TSRL, in the event that a
definitive License Agreement is executed, will incorporate both proprietary
technology in the GASTRO computer program which is in
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development at TSRL and the primary human intestinal database developed and
currently being expanded by TSRL. Under the terms of the letter of intent, upon
execution of a definitive License Agreement, it is contemplated that the Company
will have exclusive rights to both the GASTRO technology and the database, with
TSRL retaining the right to use both for its internal research and contracted
studies. There can be no assurance that the Company and TSRL will be able to
successfully complete negotiation of a License Agreement within the time frame
specified in the letter of intent, if at all. If the Company and TSRL are not
able to successfully complete negotiations of a License Agreement, then the
Company expects that it would either incur increased costs and longer
development time to update an absorption simulation or that it would discontinue
the development of the absorption simulation.
The Company expects to make significant improvements to these programs
within the 12 months following this offering, which will result in an increase
in the Company's technology base and in the expertise of its scientific and
engineering staff in the area of pharmaceutical simulations.
MARKETING
EDUCATIONAL SIMULATION SOFTWARE
The Company will market its science experiment simulation software products
through mass mailings to both science teachers and special education teachers
across the U.S. and Canada, through its Internet web page, through advertising
in selected publications, and through exhibits and presentations at conferences
and trade shows. In addition, the Company is a registered Business Partner in
the IBM School Vista program, under which IBM distributes third-party software
in connection with its other offerings to schools. The Company is also
investigating forming one or more alliances with major textbook publishers and
with other educational software distributors. The Company has established two
web pages on the Internet (www.words-plus.com and www.simulations-plus.com) 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. The Company also will explore distribution agreements with
mass market software distributors for its home study products. The Company
recently hired a new Vice President, Marketing and Sales, who has extensive
experience in direct mail marketing as well as marketing through other
traditional channels. In October 1996, the Company printed and mailed 118,000
brochures to science teachers across the United States whose names were
purchased from an educational mailing list company. The Company expected a
response rate of one to two percent to this mailing. The actual response rate
was approximately 0.1 percent. In response to this poor response rate, the
Company has revised its marketing plan and believes that the resources available
from this offering will allow it to pursue an aggressive and cost-effective
marketing campaign for its education simulation software. More specifically, as
a result of the low response to the initial mailing, the Company has brought in
a new Vice President of Marketing and Sales with extensive direct marketing
experience, has revised its marketing plan to produce higher impact promotional
mailings, implemented more productive mailing list segmentation strategies, and
installed systems and procedures to support detailed mail response analysis.
These efforts are being strengthened by research data gathered first-hand from
prospective customers through the Company's newly-implemented market research
programs. In addition to direct mail efforts, the Company is cultivating
relationships with potential software distributors, developing and placing
advertisements in selected publications, and continuing to enhance its Internet
web site. The Company believes that the resources to be available from this
offering will allow it to pursue an aggressive and cost-effective marketing
campaign for its educational simulation software. Nonetheless, there can be no
assurance that the Company's new approach to marketing and sales will be
successful. See "Risk Factors -- Early Stage of Development of Proposed New
Business Lines."
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
will build a sales and marketing team for its products and services and will
also explore sales and marketing agreements with firms that provide
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research services and equipment that are complementary to the Company's proposed
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.
COMPETITION
GENERAL
The Company's simulation software business will operate in industries that
are highly competitive. The Company will be seeking to provide its simulation
software products and services as an alternative to teaching and research
methods that are already established by large numbers of companies that have
substantially greater business, financial and personnel resources than the
Company. The ability of the Company to successfully enter these fields and
compete against established businesses will depend upon the success of the
Company's product development and marketing efforts. At the present time, the
Company believes that there are not a large number of competitors providing
simulation software products or services outside of major aerospace, defense
industry or governmental applications. In addition to these fields, the Company
is aware of a small number of companies using simulation software for
applications involving mechanical, industrial, petrochemical, electronic and
power plant design, testing and control. The Company does not presently plan to
enter these fields. The Company is aware of a limited number of competitors
providing simulation software products and services for the educational
applications the Company plans to develop. However, there may be other companies
currently developing simulation software for these applications and for
pharmaceutical simulations and it should be expected that other competitors will
enter these fields in the future.
The following is a description of the competition in the fields the Company
currently plans to enter.
COMPETITION -- EDUCATIONAL SIMULATION SOFTWARE
The educational software industry in which the Company will operate is very
competitive. The Company will compete against publishers and suppliers of
textbook educational materials which have been and will continue to be the
primary educational resource used in these markets. The Company will compete
against educational software publishers who provide products that are
interactive but not true simulation software. Most educational software
publishers compete in the grades below 9th grade addressing primarily reading
and math skills. The Company will compete in the 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's competitors include many companies that have
substantially greater financial, product development and marketing resources
than those of the Company.
The Company is aware of several companies publishing educational simulation
software. HyperCube produces a $1,200 program called HyperChem that provides
simulation of molecular behavior at the atomic level for researchers at the
university level. Glencore, a division of McGraw-Hill, recently announced
Physics for the Computer Age, a $650 CD-ROM based software package which
includes 27 lessons supporting its textbook which is entitled "Glencore's
Physics: Principles and Problems." Corel, a Canadian corporation, has released
Chemlab, a $79 educational simulation CD-ROM software program that provides
students with a variety of experiment possibilities as well as a complete
textbook-on-disk for high school chemistry. Knowledge Revolution produces a $249
program called Interactive Physics for the high school, college, and university
levels that addresses mechanical motion but does not address other areas studied
in science classes. Logal produces a series of $199 interactive,
simulation-based educational software programs for science and math curriculums
in high schools and colleges. This company reports that its products have been
sold to 3,500 schools in the United States and it reported revenues of
$3,997,000 for its fiscal year ended December 31, 1995. This company reports
that it first initiated sales in the United States in mid-1993. It 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
proposed general education products. However, the Company expects
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that high school and college science and math textbook publishers and other
companies may be developing simulation software products and that additional
competitors will enter this field.
COMPETITION -- 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 will compete against a large 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 in this field include companies with financial, personnel, research
and marketing resources that are substantially greater than those of the
Company.
Major pharmaceutical companies conduct most of these efforts through their
internal development staffs and outsource some of this work. Smaller companies
need to outsource a greater percentage of this research. The Company is aware of
several other companies that are presently developing simulation software or
simulation-software-based services to the pharmaceutical industries for the
purposes of screening compounds. However, pharmaceutical companies and research
companies that serve them may be developing and using computer software as a
part of their screening and testing efforts and it should be expected that
companies will enter this field. There are several companies and universities
that are developing and using computer modeling programs predicting receptor
geometry and many of these entities have financial and personnel resources
significantly greater than those of the Company. However, the receptor
prediction program recently acquired and to be further developed by the Company
is based on a technology that, if successfully developed, will produce results
with significantly greater speed than existing technology.
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 which produces animation software for education in pharmacy and
medicine, but is not aware of any commercial effort by any company to produce
true pharmacokinetic simulation software for education in these fields. The
Company believes the key factors in competing in this field will be its ability
to develop simulation software that can effectively predict the behavior of a
large number of compounds, its ability to develop and maintain a proprietary
database of results of physical experiments that will serve as a basis for
simulated studies, and the ability to develop and maintain relationships with
research and development departments of pharmaceutical companies.
RESEARCH AND DEVELOPMENT
As of the date of this prospectus, the Company employs twelve persons and
two consultants in its research and development efforts. Ten of these persons
work full time at research and development. Six current employees hold Ph.D.'s
in their respective fields of science and engineering. The Company's plan is to
build a research and development team from the proceeds of this offering. The
actual rate of hiring will be scaled to be consistent with the level of revenues
and earnings achieved from the sale of educational and pharmaceutical simulation
products.
RESEARCH AND DEVELOPMENT -- EDUCATIONAL SIMULATIONS
In the area of educational simulations, the Company's R&D activities will
include continuing the development of a wide range of software for high school
and university-level science courses. At the high school level, anticipated
titles include simulated experiments for Physical Sciences (a ninth-grade
introductory science course typically covering topics from physics, chemistry,
biology, and earth 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 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.
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In 1996, the Company received a Phase I Small Business Innovation Research
(SBIR) grant from the National Science Foundation for approximately $51,000 to
develop software to allow physically-disabled science students to perform
simulated laboratory experiments on a computer with minimal physical input,
which grant was fully funded in December 1996. The Company is using its
expertise and technology in designing and building computer access products for
the physically-disabled in developing these programs. These programs are
designed to be used by able-bodied students but will also 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. The Company believes that the fact that its simulation
software can be used by physically-disabled students will provide a marketing
advantage over simulation products that do not incorporate this feature, because
schools can acquire one program through the Company that can be used by its
disabled as well as able-bodied students.
The Company submitted a proposal for a $300,000 Phase II SBIR grant on
February 1, 1997 as a follow-on to the Phase I effort. There can be no assurance
that such a grant, or any portion thereof, will be awarded.
RESEARCH AND DEVELOPMENT -- PHARMACEUTICAL SIMULATIONS
The Company is building a research and development team of experts in
pharmacokinetics and simulation software. Dr. Michael Bolger, Director of Life
Sciences for the Company as of October 1, 1996, and Associate Professor of
Pharmaceutical Sciences at the University of Southern California ("USC"), has
developed a number of pharmacokinetic software simulations, including Cyber
Patient, which won the Innovations in Teaching Award from the American
Association of Colleges of Pharmacy in 1995, and the receptor geometry model
described above. Dr. David D'Argenio, Chairman of the Biomedical Engineering
Department at USC, will provide consulting services in the area of
pharmacokinetics simulation and will serve on the Company's Board of Directors.
Dr. D'Argenio has co-directed the federally-funded Biomedical Simulations
Resource at USC for over 12 years and has authored simulation software that
models a variety of processes of interest to pharmacology, including those of
interest to the Company. The Physical Sciences Department, under the direction
of Dr. Douglas R. Beck, and the Engineering Department, under the direction of
Mr. Jeffrey A. Dahlen, will provide assistance to the Life Sciences Department.
Dr. Beck's experience includes the development of computer simulations at the
molecular level in a variety of programming languages and hardware platforms.
Mr. Dahlen's experience includes over ten years in the development of user
interfaces with Words+ including the proprietary hardware and software interface
that allows disabled students to operate a computer without keyboard or mouse,
and the solution to a variety of difficult high-speed graphics manipulation
problems in the Windows environment required for simulation software.
In the area of pharmaceutical simulations for screening new drug compounds,
the Company will pursue the development of simulations of pharmacokinetics, drug
shelf life, drug absorption and receptor structure of certain transmembrane
proteins.
The Company will build upon the technology in the Cyber Patient educational
simulation program described above, to include graphical representations of the
acid/base properties of the drug, and an interactive three-dimensional graphics
representation of the drug molecule. In addition, the Company intends to extend
the model to include additional compartments and additional factors
representative of absorption in the gastrointestinal tract.
The Company will build upon the technology in the receptor structure
simulation program described above to validate the accuracy of the model by
comparing results to known structures such as bacteriorhodopsin. The Company
will also convert the two-dimensional results currently generated by the program
into three-dimensional receptor structure information.
Simulations of drug degradation depend on good data for the rate constants
of acid and base catalyzed, and spontaneous hydrolysis of ester amide molecules.
The Company intends to develop a database of models for drug degradation based
on the literature values for a variety of known drug molecules. This database
will be used with linear free energy relationships to predict the degradation
profile for novel drug molecules.
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The Company has signed a letter of intent with TSRL to jointly develop a
simulation of the absorption of drug compounds in the gastrointestinal tract.
Under the terms of the letter of intent, upon execution of a definitive License
Agreement, the Company will be granted an exclusive license to TSRL's
proprietary database of absorption measurements from approximately 30 laboratory
experiments in human test subjects, and will receive consulting assistance in
the development of the simulation model from TSRL staff, including Dr. Gordon
Amidon 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
actual human absorption data. The importance of such data is that such data are
the means by which the absorption simulation will be calibrated. Although there
can be no assurance that a successful absorption simulation can be developed
even with the information in the database, or that if a successful simulation if
developed, that it can be marketed profitably, the Company believes that the
strategic advantage of exclusive access to the database, as well as the
expertise of TSRL in absorption modeling, combined with the Company's current
and expected growing expertise in pharmacokinetic simulation, will maximize its
chances for success in this area. Under the terms of the letter of intent, upon
execution of a definitive License Agreement, TSRL will receive a one-time
payment of $75,000 (payable 90 days after execution of the License Agreement)
plus a royalty of 20% of net sales of the absorption simulation, as well as a
non-exclusive right to use the simulation in its own in-house research and in
work performed for its clients. TSRL will not be allowed to transfer the
simulation to any third party. The letter of intent is non-binding and although
the parties have agreed to negotiate a License Agreement in good faith on terms
consistent with those specified in the letter of intent, if a definitive License
Agreement is not executed by June 15, 1997 the letter of intent will be
terminated. There can be no assurance that the Company and TSRL will be able to
successfully complete negotiations of a License Agreement within the time frame
specified in the letter of intent. If the Company and TSRL are not able to
successfully complete negotiations of a License Agreement, then the Company
expects that it would either incur increased costs and longer development time
to complete an absorption simulation or that it would discontinue the
development of the absorption simulation.
The Company considers specific technical details of its efforts in these
areas to be proprietary trade secrets. An important goal within all of these
efforts will be to create, and/or acquire and to continually develop, a
proprietary database of information about a wide range of types of candidate
drug compounds, amino acids, proteins, and other molecules that will enable the
Company to verify the accuracy and reliability of its pharmaceutical
simulations.
In its publication SBIR 96-2, the Department of Health and Human Services
solicits proposals to "Develop personal computer programs for pharmacokinetic
models capable of predicting drug behavior in humans from preclinical
pharmacokinetics data in mice, rats, and dogs," "[develop] computer models of
the blood brain barrier and evaluate potential and actual drug molecules for
their ability to cross or penetrate this barrier," and "Development of
mathematical models and computer simulations" (under the category "Replacement
or Reduction of Animals Used in Research"). It is in areas like these that the
Company will focus its pharmaceutical simulation development efforts, and the
Company plans to submit one or more SBIR (Small Business Innovation Research)
grant proposals in one or more of these areas to supplement its
internally-funded research and development. Although the Company believes it
will submit acceptable proposals, there can be no assurance that any proposals
will be selected for grant awards.
INTELLECTUAL PROPERTY
The Company considers its simulation software programs and the data and
reports related thereto to be proprietary, and will rely primarily on a
combination of copyright, trademark, trade secret and confidential information
laws and employee and third-party non-disclosure and invention assignment
agreements and other methods to protect its proprietary rights. There can be no
assurance that these protections will be adequate to protect the Company's
intellectual property rights or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technologies. The Company does not currently hold any patents
or have any patent applications pending for itself of its simulation software
products but may seek patent protection for simulation software products. The
Company will base its decision on whether to seek patent protection by weighing
the relative costs and benefits that it
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may obtain from obtaining a patent including the time and expense of obtaining
patent protection. The Company enters into non-disclosure and invention
assignment agreements with its employees and enters into non-disclosure
agreements with its consultants, subcontractors and distributors. The Company
does not believe that its proposed simulation software products will infringe on
the proprietary rights of third-parties. However, there can be no assurance that
third-parties will not assert infringement claims against the Company in the
future with respect to simulation software products. See "Risk
Factors -- Limited Protection of Intellectual Property and Proprietary Rights."
DISABILITY PRODUCTS
INDUSTRY BACKGROUND
In the late 1970's a number of companies began to explore the development
of microprocessor-based communication devices for persons unable to speak due to
physical disabilities. In the 1980's, the emergence of several companies in this
field, including Words+, and the parallel growth of the personal computer
industry created more opportunity for the development and marketing of
personal-computer based communication software and devices. Today the industry
is characterized by six major competitors and several smaller ones, most of whom
sell to markets worldwide.
Potential users of these products are persons with physical disabilities
that arise from conditions such as amyotrophic lateral sclerosis (ALS) or "Lou
Gehrig's Disease", cerebral palsy, multiple sclerosis, muscular dystrophy, spina
bifida, spinal cord injury, stroke and traumatic head injury.
The Company believes that the population of non-speaking Americans consists
of over 2 million persons (about 1% of the population) and that the percentage
of non-speaking persons in other countries is also approximately 1% of the
population. According to the SPA, there are more than 50 million Americans with
types of disabilities that impair such persons ability to use a computer. These
include severe visual impairments, severe physical impairments and other
conditions that limit a person's ability to interact with a computer. While this
number is much larger than the number that might use the Company's computer
access products, it indicates that the number of persons in the United States
that may have need for the Company's products is in the millions.
The Company believes that the Unites States market for these products and
services has been expanding due, in part, to an increase in the general
knowledge related to assistive technology devices and services that includes
augmentative communication devices, increased recognition by professionals
serving disabled persons of the importance of this assistive technology,
increased training and practice standards for these professionals with respect
to this technology, and increased access for individuals to these devices and
services through government-directed funding and other third party funding
through private insurance and charities. In 1981 the American
Speech-Language-Hearing Association, which is responsible for the national
clinical certification of speech-language pathologists, formally acknowledged
augmentative and alternative communication ("AAC") devices to be an important
aspect of speech-language therapy. Since then, professional organizations for
speech-language pathologists have developed practice standards for professionals
in regard to AAC devices and services and have increased professional training
in AAC intervention. The United States Congress, beginning in 1986, has amended
several aspects of Federal legislation governing benefits and service programs
for persons with disabilities to expressly incorporate assistive technology as a
covered benefit in a number of these programs. The Federal Rehabilitation Act,
which governs federally-supported vocational rehabilitation programs in every
state, was amended in 1986 to expressly incorporate technology as a benefit to
improve the work potential and performance for persons with severe disabilities,
and was amended in 1992 to increase emphasis on the role of assistive
technology, including augmentative communication devices, as an employment tool.
The Technology Related Assistance for Individuals with Disabilities Act of 1988
(known as the "Tech Act") provided funding for state level programs in every
state whose purposes are to expand awareness of this technology and to pursue
advocacy and information dissemination programs to expand assistive technology
funding and access. In addition, the Tech Act requires these state projects to
provide funding to create a staff position devoted to assistive technology
access and funding within each state's disability advocacy office. These offices
provide information, referral and direct representation to persons with
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disabilities with regard to funding programs. Both the Rehabilitation Act and
the Tech Act also provided funding for grants to national organizations such as
the United Cerebral Palsy Association to create and disseminate information
about assistive technology devices and services and funding for this technology.
Federal legislation and regulations governing early intervention, Head
Start, and primary and secondary public school education of children with
disabilities have been amended to expressly recognize "assistive technology
devices" and "assistive technology services", including those related to
augmentative communication, as covered benefits, the effect of which is to
authorize or mandate these programs and schools to acquire this technology and
make it available to disabled children in their programs. This has prompted
public schools to allocate special education budgets for this purpose. Medicaid
funding for AAC devices began as early as 1979 and has continually expanded
thereafter so that 44 of the 50 state Medicaid programs now provide funding for
AAC devices. Federal courts in three cases have ruled on the availability of
Medicaid funding for augmentative communication devices and each court decision
has supported this funding. Three other court cases are currently pending. The
Company is not aware of any court decision to date which has supported excluding
Medicaid funding for AAC devices. The Company is aware that at least 200 private
insurance providers provide coverage for AAC devices including products produced
by the Company either because it is accepted as a covered benefit or because it
is recognized as useful in reducing stress and depression in patients, thereby
improving the person's overall condition and reducing the cost of health and
disability claims.
PRODUCTS
E Z KEYS FOR WINDOWS
One of the Company's primary software products is E Z Keys for Windows,
which is a program that operates on a Windows-based personal computer. When
coupled with specially-designed input devices, E Z Keys for Windows 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. E Z Keys for Windows was introduced in December 1995 and
replaced E Z Keys for DOS which had been in production since 1986. E Z Keys for
Windows 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. Professor Hawking was instrumental in securing assistance from
Intel Corporation in the Company's development efforts for this new product.
The retail price of E Z Keys for Windows is $1,395. The retail cost of a
complete system including a personal computer, E Z Keys for Windows software and
input devices ranges from $3,100 to approximately $7,000.
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 the 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.
A number of the pictographic symbols used by the Company in Talking Screen
for Windows are purchased from one of the Company's competitors that produces
augmentative communication systems for Apple computers. The Company has no
reason to believe this arrangement will be terminated. If this arrangement were
to be terminated, the Company believes it could develop alternative replacement
symbols at a cost that would not materially adversely affect the Company
although the Company would experience a short-term interruption in the supply of
this product.
The retail price of Talking Screen for Windows is $1,395.
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PEGASUS LITE
Pegasus LITE is a fully-integrated, portable, microprocessor-based
communication system that weighs just four and one-half pounds, which is
significantly smaller and lighter in weight, as well as more powerful, than
comparable competitive devices. Pegasus LITE incorporates a 486/50 MHz
microprocessor, Windows operating system, 340 MB hard drive, 12 MB RAM, 256
color LCD display with built-in touch window, PCMCIA slot for the floppy disk
drive and optional accessories, Windows sound system, and a software voice
synthesizer that can provide male, female or child's voices. Pegasus LITE
measures approximately 8.75" X 12.75" X 1.65". Pegasus LITE can operate either E
Z Keys for Windows or Talking Screen for Windows, although it is used primarily
with Talking Screen.
The retail price of Pegasus LITE is $6,995.
MESSAGEMATE
The Company produces a series of products called MessageMates, which are
hand-held dedicated communication devices that store prerecorded speech or
sounds on integrated circuit chips. The user plays these recorded sounds by
touching one of the keys on the keyboard or using a switch (such as the IST
described below) and scanning to select a position on the keyboard. The
MessageMates are small, lightweight (1 to 1.75 lbs.), easy-to-use communication
devices with up to two 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 the Mini-MessageMate holds
eight messages. Since the MessageMates use recorded messages, they can be used
in any language. The Company has significant sales of MessageMates in foreign
markets and sales of these MessageMates in foreign markets are increasing.
MessageMate retail prices range from $299 to $999.
INFRARED/SOUND/TOUCH (IST) SWITCH
Most of the Company's 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 Switch 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.
The retail price of the IST Switch ranges from $295 to $495.
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 package designed for use with a notebook
computer.
- U-Control -- Wireless infrared remote control device that allows a
person 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 wheelchair mount for
portable computers and other devices.
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PRODUCT DEVELOPMENT
The Company believes it has been an industry technology leader in
introducing and improving augmentative 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. The Company
will also consider acquisitions of other products, businesses and companies that
are complementary to its existing augmentative communication and computer access
business.
MARKETING AND DISTRIBUTION
The Company markets its augmentative communication and computer access
products through a network of independent dealers and outside sales persons. The
Company plans to substantially expand its sales and marketing efforts by adding
additional sales persons and independent dealers.
At the present time the Company has six independent dealers in the United
States, four in Australia, two in Canada and one each in England, Norway, The
Netherlands, New Zealand, Japan, Korea, Israel, Finland, and Malaysia. The
Company has three salary-commission sales persons in the United States; one each
in Northern California, Southern California, New Hampshire. 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 attributes the fact that its sales are lower than some of its
competitors to the fact that these competitors have substantially larger dealer
networks and sales forces. The Company plans to use a portion of the proceeds of
the Offering to substantially increase its sales force. The Company will also
increase its dealer network overseas.
The Company directs its marketing efforts to speech pathologists,
occupational therapists, special education teachers, disabled persons and
parents of disabled children. The Company maintains a mailing list of over
30,000 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 United
States and in other countries which 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 communication and computer access 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.
TRAINING AND TECHNICAL SUPPORT
The Company believes customer training and technical support are important
factors in customer satisfaction of its products and the Company believes it is
an industry leader in providing customer training and technical support. 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 some 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
other persons 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 is provided by the Company's inside sales and support
staff based at its headquarters facilities in Palmdale, California.
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PRODUCTION AND DISTRIBUTION OPERATIONS
The Company's major products are designed and developed by its development
team at its Palmdale, California facility. 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 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 Pegasus LITE, MessageMates and CommPac
are designed by the Company. The Company outsources the extrusion, machining and
manufacturing of most of these components. These products are assembled and
tested by the Company at its facility. The Company manufactures some of the
parts for the IST Switch, acquires some parts from outside sources and assembles
and tests the final product.
The Company incorporates a tablet-style computer manufactured by Epson
America in its Pegasus LITE 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 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.
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.
WARRANTIES AND REPAIRS
The Company's hardware products come with a one-year parts and labor
warranty. The Company's software is warranted for life. Repairs are handled at
the Company's Palmdale, California facility. Expense incurred by the Company
attributable to providing services, repairs and replacements in connection with
customer warranties were approximately $18,000 and approximately $17,000 for its
fiscal years ended August 31, 1995 and August 31, 1996, respectively, and
approximately $7,000 and $6,000 for the six-month periods ended February 29,
1996 and February 28, 1997, respectively.
COMPETITION
The augmentative communication and computer access products industry in
which the Company operates is highly competitive and several of the Company's
competitors have substantially greater financial and personnel resources than
the Company. The industry is made up of six major competitors and several
smaller ones. The Company believes that the six major competitors each have
revenues ranging from $3 Million to $15 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 has five salaried sales representatives (two until
recently) and five independent dealers in the United States compared to some of
its competitors that have as many as 20 to 40 sales representatives. 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 based upon the proceeds of
this offering. 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
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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, and companies already in this industry may
increase their market share through increased technology development and
marketing efforts.
GOVERNMENT REGULATION
Devices that produce radio frequency ("RF") energy are regulated by the
Federal Communications Commission (the "FCC") pursuant to the Communications Act
of 1934, as amended. Part 15 of the FCC's Rules establish technical standards
for devices that generate radio energy but that are not intended to emit RF
energy and do not transmit information on radio frequencies. Such devices are
known as "unintentional radiators." The FCC requires that equipment
authorizations be obtained from the FCC in order to market Part 15 unintentional
radiators and that applicants for equipment authorizations demonstrate that
their equipment satisfies FCC technical requirements relating to RF emissions.
The Company had not sought to obtain FCC equipment authorizations for any of its
products and was recently advised that certain of its products are subject to
Part 15 so that such authorizations are required. The Company also recently
learned that certain of these products did not comply with the FCC's technical
requirements under certain limited circumstances. The Company has completed
making modifications to these products to comply with these technical
requirements and has successfully completed testing at an FCC-certified lab for
all of its current products. Certain of the Company's products are subject to
similar regulatory requirements in certain foreign markets and the Company
believes certain of its products have not complied with these requirements.
These regulations may require similar modifications to the Company's products.
Non-compliance with these requirements can result in fines, halts in sales and
recalls. The Company believes that it may incur fines but that these will not
materially adversely affect the Company's operations or financial position and
that the risk of further adverse consequences as a result of these circumstances
is remote. However, there can be no assurance that these circumstances will not
result in further adverse consequences. See "Risk Factors -- Government
Regulation."
Under the Federal Food, Drug and Cosmetic Act, a "[medical] device" is
defined, in part, as an "instrument, apparatus, implement, machine, contrivance,
or other similar or related article. . .which is. . .intended for use in
the. . .mitigation, treatment or prevention of disease in man or other animals."
The Food and Drug Administration (the "FDA") regulates such devices with respect
to preclinical and clinical testing, manufacturing, labeling, distribution and
promotion. The FDA issued a letter dated April 28, 1995 to one of the Company's
competitors concerning the applicability of FDA rules to disability products
similar to the Company's. This letter stated that the FDA had determined that
communication systems that were the subject of that letter will be considered as
meeting the definition of a medical device only if they are intended to be used
for communications directly with medical personnel or to alert authorities
regarding a medical condition or medical emergency and that the FDA will not
consider communication systems to be medical devices if they are intended to
facilitate communications for physically impaired persons and make no specific
or implied claims for use during a medical emergency. This letter addressed
products of a competitor of the Company. The Company believes that its
disability products are similar in intended use to the product that was the
subject of such letter and that its disability products have not been promoted
or marketed in a way that would suggest that such products are intended to
facilitate communications for physically impaired persons for use during a
medical emergency. Accordingly, the Company believes that its disability
products are not subject to regulation as medical devices in accordance with the
FDA's position expressed in such letter. There can be no assurance that the FDA
will not change its regulatory position in the future and seek to regulate such
products as medical devices or that the Company's disability products will not
otherwise become subject to FDA regulation as medical devices. In the event that
the Company's disability products were to become subject to FDA regulations as
medical devices, the Company would incur added costs and regulatory burdens. See
"Risk Factors -- Government Regulation."
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ENVIRONMENTAL COMPLIANCE
In the ordinary course of its manufacturing and repair processes, the
Company uses batteries, glue and similar materials which are stored on-site. The
waste created by use of these materials is transported off-site on a regular
basis. The Company currently ships batteries to a battery distributor for
recycling and disposes of empty glue containers in accordance with instructions
given to it by the disposal company that disposes of the Company's general
refuse. Although the Company is not aware of any claim involving violation of
environmental or occupational safety and health laws and regulations, there can
be no assurance that such a claim may not arise in the future, which may have a
material adverse effect on the business, financial condition or results of
operations of the Company. See "Risk Factors -- Environmental Compliance."
INTELLECTUAL PROPERTY
The Company regards its E Z Keys for Windows, Talking Screen for Windows,
Pegasus LITE and related software and its simulation software products as
proprietary and relies primarily on a combination of copyright, trademark, trade
secret and confidential information laws and employee and third-party non-
disclosure agreements and other methods to protect its proprietary rights. There
can be no assurance that these protections will be adequate to protect the
Company's intellectual property rights or that the Company's competitors will
not independently develop technologies that are substantially equivalent or
superior to the Company's technologies. The Company does not currently hold any
patents or have any patent applications pending for itself or its products and
has not obtained Federal registration for any of its trademarks. The Company
enters into non-disclosure and invention assignment agreements with its
employees and enters into non-disclosure agreements with its consultants,
subcontractors and distributors. However, there can be no assurance that such
measures will protect the Company's proprietary technology, or that its
competitors will not develop products with features based upon, or otherwise
similar to, the Company's products or that the Company will be able to enjoin
competitors from selling similar products.
The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. The Company
has been conducting business on a world-wide basis in the augmentative
communication and computer alternative access industries without receiving
claims from third parties that its products or names infringe on any proprietary
rights of other parties. There can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
current or future products, trademarks or other Company works or that such
assertion may not require the Company to enter into royalty arrangements or
result in costly litigation. See "Risk Factors -- Limited Protection of
Intellectual Property and Proprietary Rights."
FACILITIES
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. Due to the unavailability
of suitable office space to accommodate the Company's planned growth, the
Company expects that it will need to contract for the construction of a new
building to be occupied in 1998. Leases on the office space currently occupied
by the Company will expire in October 1997 (about 7,000 square feet) and June
1998 (about 4800 square feet). Leases on the newly-acquired 7,000 square feet
allow for month-to-month renewal at the end of the 12-month term in the event
new space is not available by the time the lease expires.
EMPLOYEES
As of May 15, 1997, the Company employed 39 full-time and three part-time
employees, including 12 in research and development, ten in marketing and sales,
seven in accounting and administration, nine in production and operations and
one in repair. Six current employees hold Ph.D.'s in their respective science or
engineering disciplines. Five 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 communication device and computer software
industry is
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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.
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 denying the
allegations specified in such notice 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 made 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 operations,
the Company does not believe that it will have such affect.
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MANAGEMENT
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 POSITIONS
- ---------------------------- --- ----------------------------------------------------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Walter S. Woltosz........... 51 Chairman of the Board, Chief Executive Officer and
President of the Company and Words+
Virginia E. Woltosz......... 45 Senior Vice President, Secretary and Director of the
Company and Words+
Momoko Beran................ 45 Chief Financial Officer of the Company and Words+
Ronald F. Creeley........... 45 Vice President, Marketing and Sales of the Company
Philip R. Lawrence.......... 46 Vice President, Operations of Words+
Dr. David Z. D'Argenio...... 46 Director Nominee and Consultant to the Company
Dr. Richard Weiss........... 61 Director Nominee
CERTAIN KEY EMPLOYEES AND CONSULTANTS:
Dr. Douglas R. Beck......... 31 Director of Physical Sciences
Jeffrey A. Dahlen........... 35 Director of Engineering of the Company and Words+
Dr. Michael Bolger.......... 45 Director of Life Sciences
Richard Chapleau............ 41 Consultant to the Company
</TABLE>
Each of the Company's directors is elected at the annual meeting of
shareholders and serves until the next annual meeting and until his or her
successor is elected and qualified, or until his or her earlier death,
resignation or removal. The Representative of the Underwriters will have the
right for a period of three years after the closing of this offering to receive
notification of, and have an observer present at, all meetings of the Board of
Directors of the Company. No compensation is currently paid to directors for
their service on the Board.
The Company intends to pay its independent Directors an annual fee of
$2,500 per year for their service in that capacity and $500 for each Board of
Directors or committee meeting attended in addition to reimbursement of expenses
for the cost of attending meetings of the Board of Directors.
Each independent Director joining the Board of Directors within 30 days
after consummation of this offering will receive an initial grant of options
under the 1996 Stock Option Plan to purchase 500 shares of Common Stock having
an exercise price equal to the initial offering price of the Common Stock in
this offering. Each independent Director joining the Board of Directors after
the 30th day following consummation of this offering will receive an initial
grant of options under the 1996 Stock Option Plan to purchase 500 shares of
Common Stock having an exercise price equal to the fair market value of a share
of Common Stock on the date such person first becomes a Director. Thereafter,
each independent Director who is serving as a Director on August 31 of each
year, commencing with August 31, 1997, and who has served as such for more than
one year will, on each August 31, automatically receive options under the 1996
Stock Option Plan to purchase 500 shares of Common Stock (or if such director
has served for less than a full year, a prorated portion thereof) having an
exercise price equal to the fair market value of a share of Common Stock on such
date. Such options will become exercisable in three installments, 40% vesting on
the first anniversary of the date of grant and 30% vesting on each of the second
and third anniversaries of the date of grant.
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. Mr. Woltosz has also served in the capacity of Chairman
of the Board of Words+ since its incorporation, a position to which he was
formally elected in August 1996. Prior to founding the Company, Mr. Woltosz
worked for a number of aerospace companies as an engineer and manager and in
various other capacities, including United Technologies Corporation, Thiokol
Corporation and Northrop Services, Inc. Mr. Woltosz holds a Master of Aerospace
Engineering degree from Auburn University, a Master of
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Administrative Science degree from the University of Alabama at Huntsville and a
Bachelor of Aerospace Engineering degree from Auburn University. Mr. Woltosz is
the husband of Virginia E. Woltosz.
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. Mrs. Woltosz resigned from her
position as Treasurer of Words+ in July 1996. Mrs. Woltosz holds a Bachelor of
Science degree in Office Administration from San Jose State University, and is
currently pursuing a Masters in Business Administration through the University
of Phoenix. Virginia E. Woltosz is the wife of Walter S. Woltosz.
MOMOKO BERAN has served as the Company's Chief Financial Officer since its
incorporation in July 1996. Ms. Beran joined Words+ in June 1993 as Director of
Accounting and was named the Company's Chief Financial Officer in July 1996.
From October 1991 to June 1993, Ms. Beran was the Financial Controller of AB
Components & Systems, Inc., a company that distributes components and connectors
to major defense contractors and commercial customers. Ms. Beran holds a
Bachelor of Science, Business Administration degree from California State
University at Northridge. Ms. Beran has passed all of the examinations required
to be a certified public accountant.
RONALD F. CREELEY joined the Company in February 1997 as its Vice
President, Marketing and Sales. From April 1996 through January 1997, Mr.
Creeley was Marketing Director at Union Pen Company, a direct marketer of
advertising specialties selling to businesses in the United States, Canada and
the United Kingdom. From August 1995 through April 1996, Mr. Creeley was
self-employed as a marketing and market research consultant. From December 1992
through July 1995, Mr. Creeley was Marketing Director at Time Resources, a
manufacturer and marketer of advanced time management products and training to
consumers and organizations. Prior thereto, from March 1986 through November
1992, Mr. Creeley was Marketing Director at New England Business Services, Inc.,
an international direct marketing company. Mr. Creeley holds a Bachelor of Arts
degree in Psychology from Merrimack College in Massachusetts.
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, Operations in July 1996. From August 1988 to January
1993, Mr. Lawrence was Vice President, Material of ITT Gilfillian, an aerospace
company. From 1973 to August 1988, Mr. Lawrence was employed by Allied Signal
Oceanics Division, a defense contractor, in various purchasing and
administrative positions and was named as Manager, Material in February 1981 and
as a Director, Material in April 1984. Mr. Lawrence holds a Master of Business
Administration degree from Pepperdine University and a Bachelor of Science
degree in Business/ Finance from California State University at Northridge.
DR. DAVID Z. D'ARGENIO has agreed to serve as a Director of the Company
upon the closing of this offering. Dr. D'Argenio is a consultant to the Company
and will become a member of its Science Advisory Board. 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 ("NIH") since 1985 to
advance the state-of-the-art in biomedical modeling and simulation. He is the
author of the widely-used computational modeling program ADAPT that is currently
in use by over 700 research scientists both in university medical centers and in
the pharmaceutical industry. He has served on numerous NIH review panels and as
a consultant to a number of pharmaceutical companies. Dr. D'Argenio holds a
Bachelor of Electrical Engineering magna cum laude from the University of
Dayton, a Master of Science in Electrical Engineering from Pennsylvania State
University, and a Ph.D. in Biomedical Engineering from the University of
Southern California.
DR. RICHARD R. WEISS has agreed to serve as a Director of the Company upon
the closing of this offering. From October 1994 to the present, Dr. Weiss has
acted as a consultant to a number of aerospace companies and to the United
States 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 United States Department of Defense as its Deputy Director, Space Launch &
Technology, and in such capacity he was in charge of making recommendations on
policy issues relating thereto. From February 1991 through June 1993,
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Dr. Weiss was employed by the United States Air Force Phillips Laboratory
(Rocket Propulsion) as the Director. Dr. Weiss holds a Bachelor of Science
degree in Aeronautical Engineering from the University of Michigan, a Master of
Science degree in Mechanical Engineering from the University of Southern
California and a Ph.D. degree in Mechanical Engineering from Purdue University.
Certain Key Employees and Consultants:
DR. DOUGLAS R. BECK is the Director of Physical Sciences for the Company,
having joined the Company in September 1996. Prior to joining the Company, Dr.
Beck served from June 1991 to June 1996 as a Chemistry Instructor, Lead Teaching
Assistant, and system manager for a Convex C210 mini-supercomputer at the
University of Washington, and in 1989 as a Laboratory Technician with
Weyerhaeuser Corporation. Dr. Beck's experience includes the development of
complex simulation software in a variety of programming languages and on a
variety of hardware platforms. Dr. Beck holds a Bachelor of Arts in Chemistry
from Whitman College in Walla Walla, Washington, and a Ph.D. in Physical
Chemistry from the University of Washington in Seattle.
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 University of Southern California (USC), a co-founder and former
director of CoCensys, Inc., a pharmaceutical firm in Irvine, California, and has
held a number of other teaching and research positions since receiving his Ph.D.
in Pharmaceutical Chemistry from the University of California-San Francisco in
1978. He is the recipient of numerous honors and awards, has applied for and
received numerous research grants in pharmacology, is co-holder on four patents
for drug compounds and production methods, and has authored or co-authored over
90 publications and presentations in the field of pharmacology. 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 will acquire.
MR. JOHN FORS, III, is a consultant to the Company in the design of the
experiments and educational support materials for its educational simulations.
Mr. Fors is a Physical Science and Chemistry teacher at Palmdale High School in
Palmdale, California.
MR. RICHARD CHAPLEAU is a consultant to the Company in the design of the
experiments and user interface for its educational software simulations. Mr.
Chapleau, a chemistry teacher at Lancaster High School in Lancaster, California,
was awarded California Teacher of the Year for 1995-1996.
JEFFREY A. DAHLEN has served as the Company's Director of Engineering since
its incorporation in July 1996 and as the Director of Engineering of Words+
since rejoining the Company in 1989. From 1988 to 1989, Mr. Dahlen was a member
of the technical staff of the NASA Jet Propulsion Laboratory. Mr. Dahlen was a
Senior Engineer at Words+, Inc. from 1986 to 1988. Mr. Dahlen holds a Bachelor
of Science in Electrical Engineering from Stanford University.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation limit the liability of its
directors for monetary damages to the maximum extent permitted by California
law. Such limitation of liability has no effect on the availability of equitable
remedies, such as injunctive relief or rescission.
The Company's Bylaws provide that the Company will indemnify its directors,
officers, employees and other agents against certain liabilities to the maximum
extent permitted by California General Corporation Law, including circumstances
in which indemnification is otherwise discretionary under such law. The Bylaws
also provide that the Company will advance expenses reasonably expected to be
incurred by such director, officer, employee or agent in defending any
proceeding against them.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event
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that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding in connection with the securities being registered), the Company
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue. The Company may obtain directors and officers insurance if
available on acceptable terms.
At the present time, there is no pending litigation or proceeding involving
any director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid or accrued for the fiscal years ended August 31, 1996, 1995 and 1994 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, 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 a 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 1994
President and Chief Executive Officer $70,000 1995
$82,500 1996
</TABLE>
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 of which the Company customarily provides to its other management
employees and to reimbursement of customary, ordinary and necessary business
expenses incurred in connection 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 200% of the price per share of Common Stock
in this offering 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 taxes 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
56
<PAGE> 60
$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 the date of
this Prospectus at an exercise price of $5.00 per share, subject to adjustment
in certain circumstances.
1996 STOCK OPTION PLAN
In September 1996 the Board of Directors adopted and, in September 1996 the
shareholders approved, the Company's 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 May 22, 1997, no options have been granted. The Option Plan
terminates in 2006, unless sooner terminated by the Board of Directors.
Options granted under the Option Plan may be either "incentive stock
options" as defined in Section 422 of the Internal Revenue Code of 1986, as
amended, or nonstatutory stock options and become exercisable in accordance with
terms approved at the time of grant. Options may be granted to any employee of
the Company or any parent, subsidiary or successor of the Company, including
employees who are also officers or directors, selected by the Board of Directors
in its discretion. The Option Plan is currently administered by the Board of
Directors which has the authority to determine optionees, the number of shares
covered by each option, the type of option (i.e., incentive or nonstatutory),
the applicable vesting schedule, the exercise price, the method of payment and
certain other option terms.
The exercise price of an option granted under the Option Plan may not be
less than 85%, in the case of nonstatutory stock option, or 100%, in the case of
an incentive stock option, of the fair market value of the Common Stock subject
to the option on the date of the option grant. The maximum number of shares of
Common Stock which may be granted under an option during any calendar year to
any optionee is 75,000. To the extent that the aggregate fair market value of
the stock subject to incentive stock options that become exercisable for the
first time during any one calendar year exceeds $100,000, the options in excess
of such limit shall be treated as nonstatutory stock options. Options may be
granted under the Option Plan for terms of up to ten years and will typically be
exercisable in installments in accordance with a vesting schedule approved by
the Board of Directors at the time an option is granted. Options are not
transferable other than upon death or between spouses incident to divorce.
Options may be exercised at various periods up to 180 days after the death,
disability or termination of employment (other than for cause) of the optionee
to the extent the option was then exercisable.
CERTAIN TRANSACTIONS
The Company has employment and other compensation agreements with certain
executive officers. See "Management -- Employment and Other Compensation
Agreements."
In August 1996, the Company issued 2,200,000 shares of its Common Stock to
Walter S. Woltosz and Virginia E. Woltosz in exchange for 2,200 shares of
Words+, Inc. Pursuant to the Share Exchange Transaction, Words+, Inc. became a
wholly-owned subsidiary of the Company.
The Company has available a $100,000 revolving line of credit from a bank.
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. All amounts
due and owing on the line of credit were repaid in January 1997, with a portion
of the proceeds that the Company received from the Private Placement. In April
and May 1997, the Company drew down $100,000 of the line of credit. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
During the Fiscal year ended August 31, 1995, the Company, from time to
time, borrowed money from Mr. Woltosz to purchase equipment and supplies used by
the Company. At August 31, 1995, $34,148 was owed to Mr. Woltosz by the Company.
Such amounts were due at the discretion of Mr. Woltosz and bore interest at the
rate of 6% per annum. All such amounts were repaid by the Company to Mr. Woltosz
in June
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<PAGE> 61
1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Out of the proceeds of the Private Placement for the Bridge Loan, the
Company loaned an aggregate of $40,000 to Mr. Woltosz. Such amount bears
interest at the rate of 10% per annum and is to be repaid at the demand of the
Company. Out of the proceeds of this offering, the Company plans to pay Mr.
Woltosz $150,000 in satisfaction of accrued but unpaid compensation. If the loan
to Mr. Woltosz has not already been repaid, it will be repaid at such time as
Mr. Woltosz receives payment for his accrued but unpaid compensation. See "Risk
Factors -- Benefits to Majority Shareholders" and "Use of Proceeds."
In April 1993, the Woltosz' and the Company entered into a lease pursuant
to which the Woltosz' lease to the Company, for use by one of the Company's
salespersons, a 1991 Ford Taurus Sedan. Pursuant to the terms of the lease, the
Company agreed to pay the Woltosz' $300 per month. This car was replaced in
February 1997 with a 1997 Pontiac Grand Am and the Company has agreed to
continue to pay the Woltosz' $300 per month.
All transactions between the Company and its shareholders, officers or
directors or their affiliates will continue to be on terms no less favorable to
the Company than could be obtained from an unaffiliated third party and will be
approved by a majority of the disinterested directors of the Company.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of May 20, 1997 by (i) each person
who is known to own beneficially more than 5% of the outstanding shares of the
Company's Common Stock, (ii) each of the Company's directors and executive
officers, (iii) the Selling Shareholders and (iv) all directors and executive
officers of the Company as a group:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING SHARES AFTER OFFERING(1)
--------------------- BEING ---------------------
BENEFICIAL OWNER(2) NUMBER PERCENT OFFERED NUMBER PERCENT
- ----------------------------------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Walter S. and Virginia E. Woltosz(3)..... 2,200,000 89.80% 0 2,200,000 61.11%
Patricia Ann O'Neil(3)(4)................ 150,000 6.12% 150,000 0 .00%
Fernando Zamudio(4)...................... 100,000 4.08% 100,000 0 .00%
All current directors and officers as a
group
(2 persons)............................ 2,200,000 89.80% 2,200,000 61.11%
</TABLE>
- ---------------
(1) Assumes no exercise of the Over-Allotment Option or other rights held by
employees of the Company to acquire up to an aggregate of 250,000 shares;
gives effect to (i) the issuance of 250,000 shares upon exercise of the
Selling Shareholder Warrants, and the subsequent sale of 250,000 shares
covered by such Selling Shareholder Warrants (see footnote (4) below).
(2) Such persons have sole voting and investment power with respect to all
shares of Common Stock shown as being beneficially owned by them, subject to
community property laws, where applicable, and the information contained in
the footnotes to this table.
(3) The address of Walter S. and Virginia E. Woltosz is c/o the Company, 40015
Sierra Highway, Building B-110, Palmdale, California 93550. The address for
Patricia Ann O'Neil is 187 John Aird Court, Little Venice, London, W.Z. 1UX
England U.K.
(4) Consists of 150,000 shares issuable upon the exercise of warrants held by
Ms. Patricia Ann O'Neil and 100,000 shares issuable upon the exercise of
warrants held by Fernando Zamudio. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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<PAGE> 62
PLAN OF DISTRIBUTION BY SELLING SHAREHOLDERS
The Selling Shareholders may from time to time sell all or a portion of the
securities offered by the Selling Shareholders hereby in transactions at
prevailing market prices on the Nasdaq Stock Market, in privately negotiated
transactions at negotiated prices, or in a combination of such methods of sale.
The securities offered hereby by the Selling Shareholders may be offered and
sold in privately negotiated transactions at negotiated prices. The Selling
Shareholders may sell the securities offered hereby to purchasers directly or
may from time to time offer the securities through dealers or agents who may
receive compensation in the form of discounts, concessions or commissions from
the Selling Shareholders or the purchasers of the securities for whom they may
act as agent. The Selling Shareholders and any persons who participate in the
sale of the securities offered hereby may be deemed to be "underwriters" within
the meaning of the Securities Act and any commissions paid or discounts or
concessions allowed to any such person and any profits received on resale of the
securities offered hereby may be deemed to be underwriting compensation under
the Securities Act.
The Company has been informed by the Representative that there are no
current or future plans, proposals, arrangements or understandings of the
Underwriter(s) with respect to engaging in transactions with the Selling
Shareholders.
In order to comply with the securities laws of certain states, if
applicable, the securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
jurisdictions, the securities may not be offered or sold unless they have been
registered or qualified for sale in such jurisdictions or an exemption from any
registration or qualification requirement is available and the requirements
therefor have been satisfied.
As of the date hereof, there is no public market for the Selling
Shareholder Warrants and the Company does not expect that a public market for
such warrants will develop.
The Company will receive no proceeds from the sale by the Selling
Shareholders of the securities offered hereby although the Company will receive
the proceeds from the exercise price of the Selling Shareholder Warrants if such
warrants are exercised which would aggregate a total $1,000,000 if all such
warrants are exercised. All of the expenses incurred in connection with the
registration of the securities offered hereby will be paid by the Company,
except for commissions of brokers or dealers and any transfer fees incurred in
connection with sales of the securities by the Selling Shareholders which
commissions and fees will be paid by the Selling Shareholders.
There can be no assurance that the Selling Shareholders will sell all or
any of the securities offered by them hereby. To the extent required, the
specific securities to be sold by the Selling Shareholders in connection with a
particular offer will be set forth in an accompanying Prospectus supplement.
Before offers and sales of securities are made by the Selling Shareholders: (a)
to the extent the securities are sold at a fixed price or by option at a price
other than the prevailing market price, this Prospectus will be amended to set
forth such price, and (b) if the compensation paid to broker-dealers is other
than usual customary discounts, concessions or commissions, this Prospectus will
be amended to set forth the terms of the transaction.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue up to 20,000,000 shares of Common Stock.
As of the date of this Prospectus, there were 2,200,000 shares of Common Stock
outstanding, held of record by one shareholder. Holders of Common Stock are
entitled to cast one vote for each share held of record on all matters presented
to shareholders, other than with respect to the election of directors, for which
cumulative voting is currently required under certain circumstances by
applicable provisions of California law. Under cumulative voting, each
shareholder may give any one candidate whose name is placed in nomination prior
to the commencement of voting a number of votes equal to the number of directors
to be elected, multiplied by the number of votes to which the shareholder's
shares are normally entitled, or distribute such number of votes among as many
candidates as the shareholder sees fit. The effect of cumulative voting is that
the holders of a majority of the
59
<PAGE> 63
outstanding shares of Common Stock may not be able to elect all of the Company's
directors. Holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up of
the Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding senior securities. Holders of Common Stock have no preemptive rights
and have no rights to convert their Common Stock into any other securities. The
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be, when issued, validly issued, fully paid and nonassessable.
After completion of this offering, 3,350,000 shares of Common Stock will be
issued and outstanding (assuming no exercise of the Over-Allotment Option, the
Representative's Warrant, the Selling Shareholder Warrants, the Performance
Warrants, the Lender's Warrants and other outstanding rights to acquire Common
Stock).
See "Underwriting" for a description of the Representative's Warrants. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for the description of the
warrants that have been issued to Patricia Ann O'Neil and Fernando Zamudio, the
Selling Shareholders and for a description of the warrants that have been issued
to the Bridge Lenders.
The Company must file all necessary undertakings required by the Commission
in connection with the registration of the shares issuable upon exercise of the
Lender's Warrants. Upon the demand of a majority-in-interest of the holders of
the Lender's Warrants, the Company will file a registration statement or post-
effective amendment so as to permit the holders of the Lender's Warrants to
publicly sell the shares issuable upon exercise of such warrants. The Company
will bear all costs of one such registration statement or post-effective
amendment.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock and the Warrants of
the Company is U.S. Stock Transfer Company, Glendale, California.
SHARES ELIGIBLE FOR FUTURE SALE
After completion of this offering, 3,350,000 shares of Common Stock will be
issued and outstanding assuming no exercise of (i) the Underwriters'
over-allotment option; (ii) the Representative's Warrant; (iii) the Selling
Shareholder Warrants; (iv) the Performance Warrants; (v) the Lender's Warrants
and (vi) other outstanding rights to acquire Common Stock. Of these shares, the
1,150,000 shares of Common Stock sold in this offering will be freely
transferable without restriction or further registration under the Securities
Act by persons other than "affiliates" of the Company (as that term is defined
in Rule 144 under the Securities Act). The remaining 2,200,000 shares of Common
Stock issued by the Company prior to this offering will be "restricted
securities," as that term is defined under Rule 144 promulgated under the
Securities Act, and may be publicly sold only if registered under the Securities
Act or sold in accordance with an applicable exemption from registration such as
Rule 144.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least one year, but less than
two years, will be entitled to sell in any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
Common Stock (approximately 33,500 shares immediately after completion of this
offering) or (ii) the average weekly trading volume during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission (the "Commission"). Sales pursuant to
Rule 144 are subject to certain requirements relating to manner of sale, notice
and availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
of the Company at any time during the 90 days immediately preceding the sale and
who has beneficially owned his or her shares for at least two
60
<PAGE> 64
years would be entitled to sell such shares pursuant to Rule 144(k) without
regard to the volume limitations, manner of sale provisions, notice or other
requirements of Rule 144.
In addition, Restricted Securities issued and sold by the Company in
reliance on Rule 701 of the Securities Act may be resold under Rule 144 without
compliance with certain of Rule 144's requirements. Subject to certain
limitations on the aggregate offering price of a transaction and other
conditions, Rule 701 may be relied upon by the Company with respect to certain
sales of shares of Common Stock by the Company to its employees, directors,
officers, consultants or advisors, pursuant to written compensatory benefit
plans or written contracts relating to the compensation of such persons, such as
the Option Plan. Securities issued in reliance on Rule 701 are restricted
securities and, beginning 90 days after the effective date of this Prospectus,
may be sold pursuant to Rule 144 by persons other than affiliates of the Company
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its two-year minimum holding period
requirements.
The Company intends to file a registration statement under the Securities
Act to register 250,000 shares of Common Stock reserved for issuance upon the
exercise of options which have been or may be granted pursuant to the Option
Plan. Such registration statement is expected to be filed not earlier than 90
days after the date of this Prospectus and is anticipated to become effective
upon its filing. See "Management -- 1996 Stock Option Plan." After the effective
date of such registration statement, certain shares acquired upon the exercise
of such options may generally be sold without restriction in the public market,
subject to Rule 144 notice requirements and volume limitations for shareholders
who are affiliates of the Company.
Each holder of Common Stock who is an officer, director or key employee of
the Company has entered into a "lock-up" agreement providing that such
shareholder will not offer, sell, contract to sell, grant any option for the
sale of, or otherwise dispose of, directly or indirectly, any shares of the
Company's Common Stock or any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for shares of the Company's
Common Stock for a period of 18 months after the effective date of the
Registration Statement without the prior written consent of the Representative.
1,400,000 shares of Common Stock will be eligible for sale after the effective
date of this offering and an additional 2,200,000 shares of Common Stock will be
eligible for sale 18 months after the effective date of this offering, subject
to satisfaction of the applicable conditions of Rule 144.
The Company has also granted the Representative certain registration rights
under the Securities Act with respect to the Common Stock issuable upon the
exercise of the Representative's Warrant.
The Company has issued to the Patricia Ann O'Neil and Fernando Zamudio the
Selling Shareholder Warrants entitling such persons, upon exercise thereof, to
receive an aggregate of 250,000 shares of Common Stock at an exercise price of
$4.00 per share. Such warrants and the shares of Common Stock issuable upon the
exercise of such warrants are eligible for resale pursuant to the Registration
Statement of which this Prospectus is a part.
The Company has issued to the Bridge Lenders (other than Edward Harris),
the Lender's Warrants entitling such persons, upon exercise thereof, to receive
an aggregate of 280,000 shares of Common Stock at an exercise price of $2.50 per
share. The holders of such Lender's Warrants have been granted certain
registration rights under the Securities Act with respect to the Common Stock
issuable upon the exercise of the Lender's Warrants. The Bridge Lenders have,
however, agreed, pursuant to the terms of a "lock-up" agreement, not to resell
or otherwise transfer the Lender's Warrants or the shares of Common Stock
issuable upon exercise thereof until 365 days from the consummation of this
offering.
Prior to this offering, there has been no public market for the Common
Stock of the Company, and no predictions can be made of the effect, if any, that
future sales of restricted shares or the availability of restricted shares for
sale will have on the market price prevailing from time to time. Nevertheless,
sales of substantial amounts of the restricted shares of Common Stock in the
public market could adversely affect the then prevailing market prices for the
Common Stock and could impair the Company's ability to raise capital through the
sale of its equity securities.
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<PAGE> 65
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through the Representative, Waldron & Co., Inc., have
severally agreed to purchase from the Company the following respective number of
Shares at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus, and the Company has
agreed to sell to the Underwriters named below 1,150,000 Shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------------
<S> <C>
Waldron & Co., Inc. ........................................
---------------
Total............................................. 1,150,000
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all Shares offered hereby, if any of such Shares are
purchased. The Company has been advised by the Representative that (i) the
Underwriters propose to offer the Shares purchased by them directly to the
public at the offering price set forth on the cover page of this Prospectus and
to certain dealers at a price that represents a concession of per Share, or
% per Share and (ii) none of the Underwriters intends to sell any Shares to
accounts for which such Underwriter exercises discretionary authority. After the
initial public offering of the Shares, the offering price and the selling terms
may be changed by the Underwriters.
The Company has granted the Underwriters the Over-Allotment Option,
exercisable for 45 days from the effective date of this offering, to purchase up
to 172,500 Shares at the public offering price less the underwriting discounts
and commissions set forth on the cover page of this Prospectus. To the extent
that the Underwriters exercise such option, each of the Underwriters will have a
firm commitment to purchase approximately the same percentage thereof that the
number of Shares to be purchased by it shown in the above table represents to
the total shown, and the Company will be obligated, pursuant to the option, to
sell such Shares to the Underwriters. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the Shares
offered hereby. If purchased, such additional Shares will be sold by the
Underwriters on the same terms as those on which the 1,150,000 Shares are being
offered.
The Company has agreed to pay the Representative a non-accountable expense
allowance in the amount of 3% of the offering proceeds received from the sale of
the Shares, which is estimated at $172,500 (of which $25,000 has already been
paid to the Prior Representative of the Prior Offering), or $198,375 if the
Over-Allotment Option is exercised.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
At the closing of this offering, the Company will issue to the
Representative, for $100, a warrant (the "Representative's Warrant") to purchase
a number of shares (the "Representative's Shares") equal to 10% of the Shares
sold in the offering, excluding any Shares sold upon exercise of the
Over-Allotment Option. The Representative's Warrant will be exercisable for a
four-year period commencing one year from the date of this Prospectus at an
exercise price equal to $6.00 per Share. The Representative's Warrant will
contain anti-dilution provisions providing for appropriate adjustments in the
event of any recapitalization, reclassification, stock dividend, stock split or
similar transaction by the Company. The Representative's Warrant does not
entitle the Representative to any rights as a shareholder of the Company until
such warrant is exercised. The Representative's Warrant may not be transferred
for one year from the date of this Prospectus except to
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<PAGE> 66
officers of the Representative or by will or operation of law. After one year
from the date of this Prospectus, if a transfer of the Representative's Warrant
occurs to a party not an officer or partner of the Representative, then the
Representative's Warrant so transferred must be immediately exercised.
For the period during which the Representative's Warrant is exercisable,
the holder(s) will have the opportunity to profit from a rise in the market
value of the Common Stock, with a resulting dilution in the interests of the
other shareholders of the Company. The holder(s) of the Representative's Warrant
can be expected to exercise it at a time when the Company would, in all
likelihood, be able to obtain any needed capital from an offering of its
unissued Common Stock on terms more favorable to the Company than those provided
for in the Representative's Warrant. Such facts may adversely affect the terms
on which the Company can obtain additional financing.
The Company must file all necessary undertakings required by the Commission
in connection with the registration of the shares issuable upon exercise of the
Representative's Warrant. Upon the Representative's demand, the Company will
file a registration statement or post-effective amendment so as to permit the
Representative to sell publicly the Representative's Shares issued on the
exercise of the Representative's Warrant. The Company will bear all costs of one
such registration statement or post-effective amendment.
The Company has also agreed to appoint the Representative, for a period of
two years, as its non-exclusive advisor for the purpose of identifying and
developing future mergers and acquisition candidates. If, during the term of
this appointment, the Company participates in any merger, acquisition or other
transaction which the Representative has brought to the Company, including an
acquisition of assets or stock and in which it pays for the acquisition, in
whole or in part, with shares of the Company's Common Stock, then it will pay
for the Representative's services an amount equal to 5% of the first million
dollars of value involved in the transaction, 4% of the second million, 3% of
the third million, 2% of the fourth million and 1% of all such value above
$4,000,000.
The officers, directors and key employees of the Company have agreed not to
offer, sell or otherwise dispose of any shares of Common Stock owned or
hereafter acquired by them for 18 months following the date of this Prospectus
without the Representative's prior written consent. See "Shares Eligible For
Future Sale."
The Representative will have the right for a period of three years
following the date of this Prospectus to receive notice of, and to have an
observer present at, meetings of the Board of Directors and shareholders of the
Company and the Company is obligated to reimburse the Representative for the
costs and expenses reasonably incurred by such observer in attending such
meetings.
In connection with the Private Placement, the Company paid Waldron & Co.,
Inc. a commission in the amount of $110,000 and reimbursed Waldron & Co., Inc.
for its expenses relating to Private Placement in the amount of approximately
$10,000, including fees and expenses of its counsel.
While Waldron & Co., Inc. has been in the investment broker's business and
registered NASD members since 1939, it has not previously participated as a
managing underwriter in public offerings of equity securities. Prospective
purchasers of Common Stock in this offering should consider the lack of
experience of Waldron & Co., Inc. in evaluating an investment in the Company.
See "Risk Factors -- Prior Offering" and "Risk Factors -- Lack of Experience of
Waldron & Co., Inc."
Prior to this offering, there has been no public market for any securities
of the Company. Consequently, the initial public offering price for the Shares
will be determined by negotiation between the Company and the Representative.
Among the factors considered in such negotiations will be prevailing market
conditions, the results of operations of the Company in recent periods, the
price-earnings ratios of publicly traded companies that the Company and the
Representative believe to be comparable to the Company, the revenues and
earnings of the Company, estimates of the business potential of the Company, the
present state of the Company's development and other factors deemed relevant.
The offering price does not necessarily bear any direct relation to current
market price, asset value or net book value of the Company.
The Representative has indicated its intention to make a market in the
Company's Common Stock after the offering made hereby. In connection with that
activity, the Representative may but shall not be required to
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<PAGE> 67
effect transactions which stabilize or maintain the market price of the Common
Stock offered hereby at a level above that which might otherwise prevail in the
open market. Such stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of the Company's Common Stock offered hereby
will be passed upon for the Company by Donahue, Mesereau & Leids LLP, Los
Angeles, California. Certain legal matters in connection with the offering will
be passed upon for the Representative by Luce, Forward, Hamilton & Scripps LLP,
San Diego, California. Donahue, Mesereau & Leids LLP provides legal services to
the Representative on a regular basis in matters unrelated to this offering.
EXPERTS
The audited consolidated financial statements of the Company as of August
31, 1996 and 1995 and the related consolidated statements of operations,
shareholders' equity and cash flows for the fiscal years ended August 31, 1996,
1995 and 1994, included elsewhere in this Prospectus, have been so included in
reliance on the report of Singer Lewak Greenbaum & Goldstein LLP, independent
certified public accountants, given on the authority of such firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Washington, D.C. Office of the Commission, a
Registration Statement on Form SB-2 under the Securities Act, with respect to
the securities offered hereby. This Prospectus, which constitutes part of the
Registration Statement, does not contain all of the information set forth in
such Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed therewith. Statements contained in this Prospectus regarding the contents
of any contract or any other document referred to are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission, each such statement being qualified in all respects by such
reference. The Registration Statement and the exhibits and schedules thereto may
be inspected without charge at the principal offices of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional office located at
5670 Wilshire Boulevard, Los Angeles, California 90036, and copies of all or any
part thereof may be obtained from such offices upon the payment of the fees
prescribed by the Commission. The Company is not subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
Upon completion of this offering, the Company will be subject to the
information requirements of the Exchange Act, and, in accordance therewith, will
file reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected at the public
references facility of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.
20549. Copies of such material can be obtained at prescribed rates from the
Commission at such address. Such reports, proxy statements and other information
can also be inspected at the Commission's regional offices at the addresses
indicated above.
64
<PAGE> 68
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Shareholders' Equity (Deficit)............................. F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE> 69
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Simulations Plus, Inc.
We have audited the accompanying consolidated balance sheets of Simulations
Plus, Inc. and Subsidiary as of August 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended August 31, 1996. 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 consolidated 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, 1996 and 1995, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended August 31, 1996 in conformity with generally accepted
accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
October 4, 1996, except for the matter discussed in Note 1,
Basis of Presentation, as to which the date is March 24, 1997
F-2
<PAGE> 70
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1996 AND 1995, AND
FEBRUARY 28, 1997 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 28, --------------------
1997 1996 1995
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash (note 2)............................................ $ 228,262 $174,100 $ 24,177
Accounts receivable, net of allowance for doubtful
accounts of $7,000, $5,000 and $9,415 (note 6)........ 291,559 249,414 309,097
Due from officer (note 8)................................ 40,000
Income tax receivable.................................... 76,057 35,277
Inventory (note 6)....................................... 130,465 99,482 95,259
Deferred tax asset (note 7).............................. 50,855 79,250
----------- -------- --------
Total current assets............................. 766,343 609,128 507,783
Capitalized computer software development costs, net of
accumulated amortization of $104,567, $67,328 and
$3,535................................................... 533,308 222,942 180,112
Furniture and equipment, net (note 3)...................... 192,546 41,969 29,964
Other assets............................................... 23,074 25,939 4,549
Deferred offering costs.................................... 503,001 94,130
----------- -------- --------
$ 2,018,272 $994,108 $722,408
=========== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable (note 6)................................... $ 1,650,000 $200,000
Accounts payable......................................... 122,123 177,488 $143,755
Accrued interest......................................... 39,402
Accrued compensation due to officer (note 8)............. 150,000 150,000 150,000
Accrued payroll and other expenses....................... 102,519 73,464 59,497
Accrued warranty and service costs....................... 39,815 38,441 40,619
Due to officer (note 8).................................. 34,148
Income tax payable (note 7).............................. 23,341
Line of credit (note 5).................................. 93,539 18,942
Current portion of capitalized lease obligations (note
4).................................................... 24,394 6,424 17,713
----------- -------- --------
Total current liabilities........................ 2,128,253 739,356 488,015
Capitalized lease obligations, net of current portion (note
4)....................................................... 68,783 11,690 16,723
Deferred tax liability (note 7)............................ 50,475 48,000
----------- -------- --------
Total liabilities................................ 2,197,036 801,521 552,738
----------- -------- --------
Commitments (notes 4 and 8)
Shareholders' equity (deficit) (note 6)
Common stock; $.001 par value, authorized 20,000,000
shares, issued and outstanding 2,200,000 shares....... 2,200 2,200 2,200
Additional paid-in capital............................... 280,000
Retained earnings (accumulated deficit).................. (460,964) 190,387 167,470
----------- -------- --------
Total shareholders' equity (deficit)............. (178,764) 192,587 169,670
----------- -------- --------
$ 2,018,272 $994,108 $722,408
=========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 71
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994,
AND FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997
AND FEBRUARY 29, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------- YEAR ENDED AUGUST 31,
FEBRUARY 28, FEBRUARY 29, ------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales (note 1)................... $ 1,219,564 $ 1,361,410 $2,600,792 $2,879,358 $2,589,257
Cost of sales........................ 568,298 662,474 1,289,059 1,355,956 1,372,320
----------- ----------- ---------- ---------- ----------
Gross profit......................... 651,266 698,936 1,311,733 1,523,402 1,216,937
----------- ----------- ---------- ---------- ----------
Operating expenses:
Selling, general, and
administrative.................. 938,478 601,743 1,189,737 1,099,620 994,154
Research and development........... 55,876 44,590 107,767 102,466 158,609
----------- ----------- ---------- ---------- ----------
Total operating expenses........ 994,354 646,333 1,297,504 1,202,086 1,152,763
----------- ----------- ---------- ---------- ----------
Income (loss) from operations........ (343,088) 52,603 14,229 321,316 64,174
Other income (expenses):
Income from grant.................. 17,159 34,318
Interest income.................... 1,258
Financing costs (note 6)........... (315,000)
Interest expense................... (50,480) (2,011) (10,037) (13,056) (12,034)
----------- ----------- ---------- ---------- ----------
Income (loss) before provision for
income taxes....................... (690,151) 50,592 38,510 308,260 52,140
Provision (benefit) for income taxes
(note 7)........................... (38,800) 15,188 15,593 115,191 9,436
----------- ----------- ---------- ---------- ----------
Net income (loss).................... $ (651,351) $ 35,404 $ 22,917 $ 193,069 $ 42,704
=========== =========== ========== ========== ==========
Net income (loss) per share.......... $ (0.27) $ 0.01 $ 0.01 $ 0.08 $ 0.02
=========== =========== ========== ========== ==========
Weighted average number of common
shares outstanding................. 2,390,000 2,390,000 2,390,000 2,390,000 2,390,000
=========== =========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 72
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994, AND
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
-------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1993............ 2,200,000 $2,200 $ $ (68,303) $ (66,103)
Net income.......................... 42,704 42,704
--------- ------ --------- --------- ---------
Balance, August 31, 1994............ 2,200,000 2,200 (25,599) (23,399)
Net income.......................... 193,069 193,069
--------- ------ --------- --------- ---------
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
Issuance of warrants for financing
costs (unaudited)................. 280,000 280,000
Net loss (unaudited)................ (651,351) (651,351)
--------- ------ --------- --------- ---------
Balance, February 28, 1997
(unaudited)....................... 2,200,000 $2,200 $ 280,000 $(460,964) $(178,764)
========= ====== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 73
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994,
AND FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997
AND FEBRUARY 29, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------- YEAR ENDED AUGUST 31,
FEBRUARY 28, FEBRUARY 29, -------------------------------------
1997 1996 1996 1995 1994
------------ ------------ --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... $ (651,351) $ 35,404 $ 22,917 $ 193,069 $ 42,704
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization of
furniture and equipment......... 18,309 9,217 20,545 36,666 29,140
Amortization of capitalized
software development costs...... 37,239 26,554 63,793 3,535
Issuance of warrants for financing
costs........................... 280,000
Amortization of loan origination
fees............................ 35,000
Deferred taxes..................... 380 5,942 30,870 65,250 (16,150)
(Increase) decrease in:
Accounts receivable............. (42,145) 60,996 59,683 (32,027) (114,283)
Inventory....................... (59,334) (30,732) (21,976) (50,769) 12,675
Other assets.................... 2,865 623 (21,390) (123) 10,017
Increase (decrease) in:
Accounts payable................ (55,365) (31,552) 33,733 (6,801) 28,562
Accrued interest................ 39,402
Accrued payroll and other
expenses...................... 29,055 (2,249) 13,967 (20,119) 44,372
Accrued warranty and service
costs......................... 1,374 (565) (2,178) 1,582 3,534
Income tax payable.............. (40,780) (32,012) (58,618) 18,355 (16,754)
---------- -------- --------- --------- ---------
Net cash provided by (used in) operating
activities........................... (405,351) 41,626 141,346 208,618 23,817
---------- -------- --------- --------- ---------
Cash flows from investing activities:
Advance to officer...................... (40,000)
Purchase of furniture and equipment..... (54,583) (5,972) (14,797) (13,756) (18,289)
Capitalized computer software
development cost..................... (347,605) (39,784) (106,623) (151,246) (32,401)
---------- -------- --------- --------- ---------
Net cash (used in) investing
activities........................... (442,188) (45,756) (121,420) (165,002) (50,690)
---------- -------- --------- --------- ---------
Cash flows from financing activities:
(Decrease) increase in book overdraft... (9,162) 9,162
Proceeds from line of credit............ 98,637 31,241 95,022 40,000 75,000
Payments on line of credit.............. (192,176) (20,000) (20,425) (51,058) (45,000)
Payments on capitalized lease
obligations.......................... (10,889) (9,721) (16,322) (14,713) (23,989)
Due to officer, net..................... (7,976) (34,148) 15,494 (25,124)
Increase in deferred offering costs..... (443,871) (94,130)
Proceeds from note payable.............. 1,450,000 200,000
---------- -------- --------- --------- ---------
Net cash provided by (used in) financing
activities........................... 901,701 (6,456) 129,997 (19,439) (9,951)
---------- -------- --------- --------- ---------
Net increase (decrease) in cash........... 54,162 (10,586) 149,923 24,177 (36,824)
Cash, beginning of period................. 174,100 24,177 24,177 0 36,824
---------- -------- --------- --------- ---------
Cash, end of period....................... $ 228,262 $ 13,591 $ 174,100 $ 24,177 $ 0
========== ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 74
SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended August 31, 1996, 1995 and 1994, the Company paid
$42,851, $31,586 and $42,661, respectively in income taxes and $10,037, $13,056
and $12,034, respectively in interest. During the six months ended February 28,
1997 and February 29, 1996, the Company paid $1,600 (unaudited) and $40,765
(unaudited), respectively in income taxes and $2,011 (unaudited) and $1,239
(unaudited), respectively in interest.
SCHEDULE OF NONCASH INVESTING AND FINANCING
The Company entered into capital lease obligations of $28,451 and $85,952
(unaudited) during the year ended August 31, 1994 and the six months ended
February 28, 1997, respectively, and transferred $17,753 and $28,351 (unaudited)
of computer hardware from inventory to furniture and equipment during the year
ended August 31, 1996 and the six months ended February 28, 1997, respectively.
F-7
<PAGE> 75
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 IS UNAUDITED.)
NOTE 1 -- SUMMARY OF 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 is developing interactive, educational
software programs that simulate science experiments conducted in high school
science classes.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company has
sustained a substantial loss from operations for the six months ended February
28, 1997 and has used, rather than provided, cash from its operations for the
same period.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to continue to
meet its financing requirements and to succeed in its future operations. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
In accordance with the Company's business plan, it began to expand its
simulations software products in the fall of 1996 in anticipation of its initial
public offering ("IPO"). The business plan anticipated losses from the
simulations operations during the latter part of 1996 and 1997 as these products
were being developed. The proceeds from the IPO that was expected to close in
October of 1996 would be used to finance the expansion of the Company's
operations and provided working capital until such time as the new software
products could be marketed and sold. However, the IPO was delayed and eventually
postponed until the spring of 1997. In the meantime, the Company continued to
expand its operations in accordance with its business plan.
Management has taken the following steps that it believes are sufficient to
provide the Company with the ability to continue in existence.
Promissory Notes Payable
In December 1996 and January 1997 the Company was able to secure $1,100,000
in promissory notes to help finance the expansion of its operations (note
6).
Proposed Offering
The Company has secured a new underwriter and has entered into a firm
letter of intent with such underwriter. The Company plans a registration
and securities offering in the spring of 1997 to raise
F-8
<PAGE> 76
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 IS UNAUDITED.)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$5,750,000 in capital to continue to fund the Company's expansion and to
fund working capital needs until such time as the Company commences selling
the new products.
Interim Financial Information
The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management, are necessary to fairly state the Company's financial
position, the results of their operation and cash flows for the periods
presented. The results of operations for the six months ended February 28, 1997
are not necessarily indicative of results for the entire fiscal year ending
August 31, 1997.
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, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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.
Depreciation is provided using accelerated methods over an estimated useful life
of three to seven years as follows:
<TABLE>
<S> <C>
Equipment............................................. 5 years
Computer equipment.................................... 3 to 7 years
Furniture and fixtures................................ 5 to 7 years
Leasehold improvements................................ 5 years
</TABLE>
Maintenance and minor replacements are charged to expense as incurred. Gains and
losses on disposals are included in the results of operations.
Deferred Offering Costs
Amounts paid for costs associated with an anticipated initial public
offering (IPO) are capitalized and will be recorded as a reduction to additional
paid-in capital upon the completion of the IPO. In the event that the IPO is not
successful, the deferred offering costs will be charged to expense. Included in
deferred offering costs are loan origination fees of $100,000 (unaudited) and
$10,000 at February 28, 1997 and August 31, 1996, respectively. These fees are
being amortized over the term of the notes payable. Amortization of loan
origination fees was $35,000 (unaudited) for the six months ended February 28,
1997.
F-9
<PAGE> 77
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 IS UNAUDITED.)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising
The Company expenses advertising costs as incurred. Advertising costs for
the years ended August 31, 1996, 1995 and 1994 were $44,564, $37,125 and
$32,224, respectively and $89,632 (unaudited) and $15,959 (unaudited) for the
six months ended February 28, 1997 and February 29, 1996, 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 to 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.
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 cost 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 uses the liability method of accounting for income taxes
pursuant to SFAS No. 109 "Accounting for Income Taxes."
F-10
<PAGE> 78
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 IS UNAUDITED.)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, accounts receivable, accounts payable and
accrued expenses, the carrying amounts approximate fair value due to their short
maturities. The amounts shown for debt also approximate fair value because
current interest rates offered to the Company for debt of similar maturities are
substantially the same.
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 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 for all periods presented.
Concentrations and Uncertainties
International sales accounted for 14%, 11% and 17% of net sales for the
years ended August 31, 1996, 1995 and 1994, respectively and 20% (unaudited) and
14% (unaudited) of net sales for the six months ended February 28, 1997 and
February 29, 1996, respectively. Amounts due from Medicaid represented 13%
(unaudited), 20% and 35% of the net accounts receivable balance at February 28,
1997, August 31, 1996 and 1995, respectively.
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.
Future Effect of Recently Issued Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of " (SFAS No. 121). SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
expected future undiscounted cash flows is less than the carrying amount of the
asset, an impairment loss is recognized. Measurement of that loss would be based
on the fair value of the asset. SFAS No. 121 also generally requires long-lived
assets and certain identifiable intangibles to be disposed of to be reported at
the lower of the carrying amount or at the fair value less cost to sell. SFAS
No. 121 is effective for the Company's 1997 fiscal year end. The Company has
made no assessment of the potential impact of adopting SFAS No. 121 at this
time.
F-11
<PAGE> 79
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 IS UNAUDITED.)
NOTE 2 -- CASH
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, 1996 and February 28, 1997, uninsured portions
of balances held at banks aggregated to $101,000 and $98,000 (unaudited),
respectively.
NOTE 3 -- FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 28, ---------------------
1997 1996 1995
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Equipment................................. $ 38,346 $ 36,774 $ 35,075
Computer equipment........................ 291,778 163,200 132,349
Furniture and fixtures.................... 43,923 9,869 9,869
Leasehold improvements.................... 5,900 1,218 1,218
--------- -------- --------
379,947 211,061 178,511
Less accumulated depreciation............. 187,401 169,092 148,547
--------- -------- --------
$ 192,546 $ 41,969 $ 29,964
========= ======== ========
</TABLE>
NOTE 4 -- COMMITMENTS
LEASES
The Company leases certain facilities for its corporate and operations
offices under a noncancelable operating lease agreement that expires in 1998.
The Company also leases certain office and computer equipment under
noncancelable capital lease arrangements.
Future minimum lease payments under noncancelable capital and operating
leases with initial or remaining terms of one year or more at August 31, 1996
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING CAPITAL
AUGUST 31, LEASES LEASES
-------------------------------------------------------- --------- -------
<S> <C> <C>
1997.................................................. $ 116,672 $ 8,000
1998.................................................. 49,261 7,345
1999.................................................. 5,506
--------- -------
$ 165,933 20,851
=========
Less amount representing interest............. 2,737
-------
18,114
Less current portion.......................... 6,424
-------
Long-term portion............................. $11,690
=======
</TABLE>
Included in furniture and equipment are capitalized leased equipment of
$156,907 (unaudited), $70,955 and $70,955, with accumulated amortization of
$80,178 (unaudited), $63,236 and $49,799 at February 28, 1997, August 31, 1996
and 1995, respectively.
Rent expense was $55,939, $54,967 and $55,491 for the years ended August
31, 1996, 1995 and 1994, respectively, and $68,773 (unaudited) and $27,882
(unaudited) for the six months ended February 28, 1997 and February 29, 1996,
respectively.
F-12
<PAGE> 80
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 IS UNAUDITED.)
NOTE 4 -- COMMITMENTS (CONTINUED)
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.
UNAUDITED
The Company has signed a letter of intent with Therapeutic Systems Research
Laboratory ("TSRL") to jointly develop simulation of the absorption of drug
compounds in the gastrointestinal tract. Under the term of the letter of intent,
upon execution of a definitive License Agreement, TSRL will receive a one-time
payment of $75,000, plus a royalty of 20% of net sales of the absorption
simulation.
NOTE 5 -- LINE OF CREDIT
The Company has available an unsecured $95,000 revolving line of credit
from a bank. Interest is payable on a monthly basis at prime plus 3%. The
interest rate at February 28, 1997, August 31, 1996 and 1995 was 11.25%
(unaudited), 11.25% and 11.75%, respectively. The line is personally guaranteed
by the Company's President. Such revolving line of credit was subsequently
increased to $100,000 (unaudited).
NOTE 6 -- PROMISSORY NOTE PAYABLE
The Company entered into a Subscription Agreement whereby the Company
issued a note in the amount of $200,000 and issued 100,000 Warrants to purchase
Common Stock. The Warrants are exercisable at $4.00 per share and expire five
years from the date of grant. The note is collateralized by the Company's
accounts receivable and inventory, and bears interest at 10%. The note is to be
repaid at the earlier of May 31, 1997, or five days after the close of the
Company's initial public offering.
UNAUDITED
In September 1996, the Company entered into Subscription Agreements whereby
the Company issued a note in the amount of $300,000 and issued 150,000 Warrants
to purchase Common Stock. The Warrants are exercisable at $4.00 per share and
expire five years from the date of grant. The note is collateralized by the
Company's accounts receivable and inventory, and bears interest at 10%. The note
is to be repaid at the earlier of May 31, 1997 or five days after the close of
the Company's initial public offering.
In October 1996, the Company purchased pharmaceutical simulation software
packages from Dr. Michael Bolger for an aggregate of $100,000. The purchase
price was paid $50,000 upon execution of the purchase agreement and the
remaining $50,000 is evidenced by a promissory note bearing interest at 8% per
annum, and is due the earlier of one year from the date of such note or seven
days after the closing 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 are unsecured and bear interest at 10%. The notes are to be repaid at
the earlier of December 31, 1997 or five days after the close of the Company's
initial public offering. In connection with such issuance the principal
shareholders of the Company executed a proxy in favor of Waldron & Co., Inc. as
agent for the holders of the notes. In the event of default, Waldron & Co., Inc.
is granted the right to elect a
F-13
<PAGE> 81
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 IS UNAUDITED.)
NOTE 6 -- PROMISSORY NOTE PAYABLE (CONTINUED)
majority of the Board of Directors of the Company for a period of two years from
the occurrence of default on the notes. The Company has 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 for the six months ended February 28, 1997.
NOTE 7 -- 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>
SIX MONTHS ENDED
----------------------------- YEARS ENDED AUGUST 31,
FEBRUARY 28, FEBRUARY 29, -------------------------
1997 1996 1996 1995 1994
------------ ------------ ----- ----- -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income tax computed at federal
statutory tax rate............ (34.0)% 34.0% 34.0% 34.0% 34.0%
State taxes (net of federal
benefit)...................... (6.2) 6.2 6.2 6.2 6.2
Surtax exemption................ 3.3 (11.1) (1.2) (3.2) (22.5)
Change in valuation allowance... 27.4
Limitation on State NOL
Carryforward.................. 4.8
Other........................... (1.3) 0.9 1.5 .4 .4
----- ----- ---- ---- -----
(6.0)% 30.0% 40.5% 37.4% 18.1%
===== ===== ==== ==== =====
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
for income taxes consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 28, ---------------------
1997 1996 1995
------------ -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Accrued payroll and other expenses.............. $ 77,052 $ 72,182 $ 79,248
Accrued warranty and service costs.............. 15,926 15,376 16,248
Net operating loss carryforwards................ 184,133
Warrants issued for financing costs............. 112,000
Other........................................... 2,800 2,000 7,802
---------- -------- --------
391,911 89,558 103,298
Valuation allowance............................... 178,587 0 0
---------- -------- --------
213,324 89,558 103,298
Deferred tax liabilities:
Capitalized computer software development
costs........................................ (213,324) (89,178) (72,048)
---------- -------- --------
Net deferred tax asset (liability)................ $ 0 $ 380 $ 31,250
========== ======== ========
Current........................................... $ 50,855 $ 79,250
Long-term......................................... (50,475) (48,000)
-------- --------
$ 380 $ 31,250
======== ========
</TABLE>
F-14
<PAGE> 82
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 IS UNAUDITED.)
NOTE 7 -- INCOME TAXES (CONTINUED)
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------- YEARS ENDED AUGUST 31,
FEBRUARY 28, FEBRUARY 29, ----------------------------------
1997 1996 1996 1995 1994
------------ ------------ -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal............ $(40,780) $ 5,490 $(12,097) $ 35,879 $ 16,998
State.............. 1,600 3,753 (3,180) 14,062 9,388
-------- ------- -------- -------- --------
(39,180) 9,243 (15,277) 49,941 26,386
-------- ------- -------- -------- --------
Deferred:
Federal............ 293 1,368 23,770 50,079 (13,010)
State.............. 87 4,577 7,100 15,171 (3,940)
-------- ------- -------- -------- --------
380 5,945 30,870 65,250 (16,950)
-------- ------- -------- -------- --------
$(38,800) $ 15,188 $ 15,593 $115,191 $ 9,436
======== ======= ======== ======== ========
</TABLE>
NOTE 8 -- RELATED PARTY TRANSACTIONS
Due to officer at August 31, 1995 of $34,148 consists entirely of amounts
owed to the Company's President for the purchase of equipment and supplies used
by the Company. The amounts due are repaid at the discretion of the President
and bear interest at 6% per annum. The amount was repaid in full during the year
ended August 31, 1996.
Accrued compensation due to officer in the accompanying consolidated
balance sheets represents accrued salary due to the Company's President and is
payable on demand. The amount due does not accrue interest and is expected to be
paid from proceeds received in connection with the Company's initial public
offering.
UNAUDITED
In connection with the Company's initial public offering, the Company will
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.
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 March 21,,
1997, no options have been granted. The Option Plan terminates in 2006, subject
to earlier termination by the Board of Directors.
In January 1997, the Company's President borrowed $40,000 from the Company.
The amount bears interest at 10% per annum and is to be repaid at the demand of
the Company.
F-15
<PAGE> 83
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED BY THE
COMPANY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS
FURNISHED OR SINCE THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 18
Dividend Policy....................... 19
Dilution.............................. 20
Capitalization........................ 21
Selected Consolidated Financial
Data................................ 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 31
Management............................ 53
Certain Transactions.................. 57
Principal and Selling Shareholders.... 58
Plan of Distribution by Selling
Shareholders........................ 59
Description of Securities............. 59
Shares Eligible for Future Sale....... 60
Underwriting.......................... 62
Legal Matters......................... 64
Experts............................... 64
Additional Information................ 64
Index to Financial Statements......... F-1
UNTIL , 1997 (25 DAYS AFTER THE
DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATIONS OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
=============================================
</TABLE>
======================================================
LOGO
1,000,000 SHARES
------------------------
PROSPECTUS
------------------------
WALDRON & CO., INC.
, 1997
======================================================
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
CALIFORNIA STATUTES
Section 317 of the California General Corporation Law, as amended, provides
for the indemnification of the Company's officers, directors, employees and
agents under certain circumstances as follows:
(a) For the purposes of this section, "agent" means any person who is
or was a director, officer, employee or other agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another foreign or domestic corporation, partnership,
joint venture, trust or other enterprise, or was a director, officer,
employee or agent of a foreign or domestic corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of the predecessor corporation; "proceeding" means any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative; and "expenses" includes without limitation
attorneys' fees and any expenses of establishing a right to indemnification
under subdivision (d) or paragraph (4) of subdivision (e).
(b) A corporation shall have the power to indemnify any person who was
or is a party or is threatened to be made a party to any proceeding (other
than an action by or in the right of the corporation to procure a judgment
in its favor) by reason of the fact that the person is or was an agent of
the corporation, against expenses, judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with the proceeding
if that person acted in good faith and in a manner the person reasonably
believed to be in the best interests of the corporation and, in the case of
a criminal proceeding, had no reasonable cause to believe the conduct of
the person was unlawful. The termination of any proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed
to be in the best interests of the corporation or that the person had
reasonable cause to believe that the person's conduct was unlawful.
(c) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending,
or completed action by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was an
agent of the corporation, against expenses actually and reasonably incurred
by that person in connection with the defense or settlement of the action
if the person acted in good faith, in a manner the person believed to be in
the best interests of the corporation and its shareholders.
No indemnification shall be made under this subdivision for any of the
following:
(1) In respect of any claim, issue or matter as to which the person
shall have been adjudged to be liable to the corporation in the
performance of that person's duty to the corporation and its
shareholders, unless and only to the extent that the court in which the
proceeding is or was pending shall determine upon application that, in
view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for expenses and then only to the
extent that the court shall determine.
(2) Of amounts paid in settling or otherwise disposing of a pending
action without court approval.
(3) Of expenses incurred in defending a pending action which is
settled or otherwise disposed of without court approval.
(d) To the extent that an agent of a corporation has been successful
on the merits in defense of any proceeding referred to in subdivision (b)
or (c) or in defense of any claim, issue, or matter therein, the agent
shall be indemnified against expenses actually and reasonably incurred by
the agent in connection therewith.
II-1
<PAGE> 85
(e) Except as provided in subdivision (d), any indemnification under
this section shall be made by the corporation only if authorized in the
specific case, upon a determination that indemnification of the agent is
proper in the circumstances because the agent has met the applicable
standard of conduct set forth in subdivision (b) or (c), by any of the
following:
(1) A majority vote of a quorum consisting of directors who are not
parties to such proceeding.
(2) If such a quorum of directors is not obtainable, by independent
legal counsel in a written opinion.
(3) Approval of the shareholders (Section 153), with the shares
owned by the person to be indemnified not being entitled to vote
thereon.
(4) The court in which the proceeding is or was pending upon
application made by the corporation or the agent or the attorney or
other person rendering services in connection with the defense, whether
or not the application by the agent, attorney or other person is opposed
by the corporation.
(f) Expenses incurred in defending any proceeding may be advanced by
the corporation prior to the final disposition of the proceeding upon
receipt of an undertaking by or on behalf of the agent to repay that amount
if it shall be determined ultimately that the agent is not entitled to be
indemnified as authorized in this section. The provisions of subdivision
(a) of Section 315 do not apply to advances made pursuant to this
subdivision.
(g) The indemnification authorized by this section shall not be deemed
exclusive of any additional rights to indemnification for breach of duty to
the corporation and its shareholders while acting in the capacity of a
director or officer of the corporation to the extent the additional rights
to indemnification are authorized in an article provision adopted pursuant
to paragraph (11) of subdivision (1) of Section 204. The indemnification
provided by this section for acts, omissions, or transactions while acting
in the capacity of, or while serving as, a director or officer of the
corporation but not involving breach of duty to the corporation and its
shareholders shall not be deemed exclusive of any other rights to which
those seeking indemnification may be entitled under any by-law, agreement,
vote of shareholders or disinterested directors, or otherwise, to the
extent the additional rights to indemnification are authorized in the
articles of the corporation. An article provision authorizing
indemnification "in excess of that otherwise permitted by Section 317" or
"to the fullest extent permissible under California law" or the substantial
equivalent thereof shall be construed to be both a provision for additional
indemnification for breach of duty to the corporation and its shareholders
as referred to in, and with the limitations required by, paragraph (11) of
subdivision (1) of Section 204 and a provision for additional
indemnification as referred to in the second sentence of this subdivision.
The rights to indemnity hereunder shall continue as to a person who has
ceased to be a director, officer, employee, or agent and shall inure to the
benefit of the heirs, executors, and administrators of the person. Nothing
contained in this section shall affect any right to indemnification to
which persons other than the directors and officers may be entitled by
contract or otherwise.
(h) No indemnification or advance shall be made under this section,
except as provided in subdivision (d) or paragraph (4) of subdivision (e),
in any circumstance where it appears:
(1) That it would be inconsistent with a provision of the articles,
by-laws, a resolution of the shareholders, or an agreement in effect at
the time of the accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other amounts were
paid, which prohibits or otherwise limits indemnification.
(2) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
(i) A corporation shall have power to purchase and maintain insurance
on behalf of any agent of the corporation against any liability asserted
against or incurred by the agent in that capacity or arising out of the
agent's status as such whether or not the corporation would have the power
to indemnify the agent against that liability under this section. The fact
that a corporation owns all or a portion of the shares of
II-2
<PAGE> 86
the company issuing a policy of insurance shall not render this subdivision
inapplicable if either of the following conditions are satisfied: (1) if
the articles authorize indemnification in excess of that authorized in this
section and the insurance provided by this subdivision is limited as
indemnification is required to be limited by paragraph (11) of subdivision
(1) of Section 204; or (2)(A) the company issuing the insurance policy is
organized, licensed, and operated in a manner that complies with the
insurance laws and regulations applicable to its jurisdiction of
organization, (B) the company issuing the policy provides procedures for
processing claims that do not permit that company to be subject to the
direct control of the corporation that purchased that policy, and (C) the
policy issued provides for some manner of risk sharing between the issuer
and purchaser of the policy, on the one hand, and some unaffiliated person
or persons, on the other, such as by providing for more than one
unaffiliated owner of the company issuing the policy or by providing that a
portion of the coverage furnished will be obtained from some unaffiliated
insurer or reinsurer.
(j) This section does not apply to any proceeding against any trustee,
investment manager, or other fiduciary of an employee benefit plan in that
person's capacity as such, even though the person may also be an agent as
defined in subdivision (a) of the employer corporation. A corporation shall
have power to indemnify such a trustee, investment manager, or other
fiduciary to the extent permitted by subdivision (f) of Section 207.
ARTICLES OF INCORPORATION
The Company's Articles of Incorporation provides for the indemnification of
the Company's directors and agents under certain circumstances as follows:
ARTICLE 5
LIABILITY OF DIRECTORS
The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
ARTICLE 6
INDEMNIFICATION
The Corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the Corporations Code) for breach of duty to the
Corporation and its stockholders through bylaws and provisions or through
agreement with the agents, or both, in excess of the indemnification otherwise
permitted by Section 317 of the Corporations Code, as the same may be amended or
replaced from time to time, subject to the limits on such excess indemnification
set forth in Section 204 of the Corporations Code, as the same may be amended or
replaced from time to time.
BY-LAWS
The Company's By-Laws provide for the indemnification of the Company's
directors, officers, employees, or agents under certain circumstances as
follows:
ARTICLE VI: INDEMNIFICATION
1. INDEMNIFICATION OF AGENT
(a) DEFINITIONS. For the purposes of this section, "agent" means any person
who is or was a director, officer, employee, or other agent of this corporation
or its predecessor, and any person who is or was serving as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust or
other enterprise at the request of this corporation or its predecessor;
"proceeding" means any threatened, pending, or completed action or proceeding,
whether civil, criminal, administrative, or investigative; and "expenses"
include but are not limited to attorneys' fees and any expenses of establishing
a right of indemnification under this section.
II-3
<PAGE> 87
(b) LAWSUITS OTHER THAN BY THE CORPORATION. This corporation shall have the
power to indemnify any person who was or is a party, or is threatened to be made
a party to any proceeding (other than an action by or in the right of this
corporation to procure a judgment in its favor) by reason of the fact that such
person is or was an agent of this corporation, against expenses, judgments,
fines, settlements, and other amounts actually and reasonably incurred in
connection with such proceeding, if the agent acted in good faith and in a
manner the agent reasonably believed to be in the best interests of this
corporation. If there are criminal charges, the agent must have had no
reasonable cause to believe that his or her conduct was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction, or
plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that the agent did not act in good faith and in a manner that the
agent reasonably believed to be in the best interests of this corporation, or
that the agent had reasonable cause to believe that his or her conduct was
unlawful.
(c) LAWSUITS BY OR ON BEHALF OF THE CORPORATION. This corporation shall
have the power to indemnify any person who was, is, or is threatened to be made
a party by reason of the fact that that person is or was an agent of this
corporation, to any threatened, pending, or completed legal action by or in the
right of this corporation to procure a judgment in its favor, against expenses
actually and reasonably incurred by the agent in connection with the defense or
settlement of that action, if the agent acted in good faith, in a manner the
agent believed to be in the best interests of this corporation AND ITS
SHAREHOLDERS, and with such care, including reasonable inquiry, as an ordinarily
prudent person would use under similar circumstances. However, the corporation
shall not indemnify:
(1) Any amount paid with respect to a claim, issue, or matter for
which the agent has been adjudged liable to his corporation AND ITS
SHAREHOLDERS in the performance of his or her duty, except for any expenses
(exclusive of judgment or settlement amount) specifically authorized by the
court in which the proceeding is or was pending, in accordance with
statutory requirements;
(2) Any amount paid in settling or otherwise disposing of a pending
lawsuit without court approval; or
(3) Any expenses incurred in defending a pending action that is
settled or otherwise disposed of without court approval.
(d) SUCCESSFUL DEFENSE BY AGENT. If the agent is successful on the merits,
the corporation shall indemnify the agent for expenses actually and reasonably
incurred.
(e) APPROVAL; WHEN REQUIRED. Unless indemnification is mandatory because of
the agent's successful defense on the merits, indemnification can be made only
as to a specific case, upon a determination that indemnification is proper in
the circumstances because the agent has met the applicable standard of conduct,
and must be authorized by one of the following: a majority vote of the board
with a quorum consisting of directors who are not parties to the proceeding;
INDEPENDENT LEGAL COUNSEL IN A WRITTEN OPINION IF A QUORUM OF DIRECTORS WHO ARE
NOT PARTIES TO THE PROCEEDING IS NOT AVAILABLE; the affirmative vote of a
majority of the outstanding shares entitled to vote and present or represented
at a duly held meeting at which a quorum is present or by the written consent of
a majority of the outstanding shares entitled to vote (without counting shares
owned by the person seeking indemnification as either outstanding or entitled to
vote); or the court in which the proceeding is or was pending, upon the
application by the corporation, the agent, the agent's attorney, or other person
rendering services in connection with the defense, regardless of whether the
corporation opposes the application.
(f) ADVANCING EXPENSES. Expenses incurred or to be incurred in defending
any proceeding may be advanced by this corporation before the final dispostion
of the proceeding, on receipt of an undertaking by or on behalf of the agent to
repay the amount of the advance, unless it shall be determined ultimately that
the agent is entitled to be indemnified as authorized in this section.
(g) OTHER CONTRACTUAL RIGHTS. THE INDEMNIFICATION PROVIDED IN THIS SECTION
SHALL NOT BE DEEMED EXCLUSIVE OF ANY OTHER RIGHTS TO WHICH THOSE SEEKING
INDEMNIFICATION MAY BE ENTITLED UNDER ANY BYLAW, AGREEMENT, VOTE OF SHAREHOLDERS
OR DISINTERESTED DIRECTORS OR OTHERWISE, BOTH AS TO ACTION IN AN OFFICIAL
CAPACITY AND AS TO ACTION IN ANOTHER CAPACITY WHILE HOLDING SUCH OFFICE, TO THE
EXTENT SUCH ADDITIONAL RIGHTS TO INDEMNIFICATION ARE AUTHORIZED IN THE ARTICLES
OF INCORPORATION. THE RIGHTS TO INDEMNITY UNDER THIS SECTION
II-4
<PAGE> 88
SHALL CONTINUE AS TO A PERSON WHO HAS CEASED TO BE A DIRECTOR, OFFICER,
EMPLOYEE, OR AGENT AND SHALL INURE TO THE BENEFIT OF THEIR HEIRS, EXECUTORS, AND
ADMINISTRATORS OF THE PERSON. Nothing contained in this section shall affect any
right to indemnification to which persons other than directors and officers of
this corporation or any subsidiary may be entitled by contract or otherwise.
(h) LIMITATIONS. No indemnification or advance shall be made under this
section (except where indemnification is required because of the agent's
successful defense on the merits) if it would be inconsistent with a provision
of the Articles of Incorporation or bylaws, a resolution of the directors or
shareholders, or an agreement in effect at the time the alleged cause of action
occurred which prohibits or limits indemnification, or a condition expressly
imposed by a court in approving a settlement.
(i) INSURANCE. If the board of directors so decides, the corporation may
purchase and maintain insurance on behalf of any agent of the corporation
against any liability asserted against or incurred by the agent in that capacity
or arising out of the agent's status as such, whether or not the corporation
would have the power to indemnify the agent against that liability.
NOTWITHSTANDING THE FOREGOING, IF THE CORPORATION OWNS ALL OR A PORTION OF THE
SHARES OF THE COMPANY ISSUING THE POLICY OF INSURANCE, THE INSURING COMPANY AND
THE POLICY OR BOTH SHALL MEET THE CONDITIONS SET FORTH IN SECTION 317(I) OF THE
CORPORATIONS CODE.
(j) FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. The requirements and limitations
imposed by this section do not apply to any proceeding against any trustee,
investment manager, or other fiduciary of an employee benefit plan in that
person's capacity as such, even though that person may also be an agent of the
corporation. The corporation shall have the power to indemnify, and to purchase
and maintain insurance on behalf of, any such trustee, investment manager, or
other fiduciary of any benefit plan for any of the corporation's directors,
officers, or employees or those of any of its subsidiary or affiliated
corporation. Furthermore, this section shall not limit any right to
indemnification that such a trustee, investment manager, or other fiduciary may
have as a contract right enforceable by law.
(k) SURVIVAL OF RIGHTS. The rights provided by this section shall continue
as to a person who has ceased to be an agent, and shall inure to the benefit of
the heirs, executors, and administrators of such person.
(m) EFFECT OF AMENDMENT. Any amendment, repeal, or modification of this
section shall not adversely affect an agent's right or protection existing at
the time of such amendment, repeal, or modification.
(n) SETTLEMENT OF CLAIMS. The corporation shall not be liable to indemnify
any agent under this section for any amounts paid in settlement of an action or
claim effected without the corporation's written consent, for which consent
shall not be unreasonably withheld, or, any judicial award, if the corporation
was not given a reasonable and timely opportunity to participate, at its
expense, in the defense of such action.
(o) SUBROGATION. In the event of payment under this section, the
corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of the agent, who shall execute all papers required and shall
do everything that may be necessary to secure these rights, including the
execution of such documents as may be necessary to enable the corporation
effectively to bring suit to enforce such rights.
(p) NO DUPLICATION OF PAYMENTS. The corporation shall not be liable under
this section to make any payment in connection with any claim made against the
agent to the extent the agent has otherwise actually received payment, whether
under a policy of insurance, agreement, vote, or otherwise, of the amounts
otherwise indemnifiable under this section.
II-5
<PAGE> 89
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the Shares being registered hereby. All of the amounts shown
are estimates except for the Securities and Exchange Commission (the
"Commission") registration fee, the National Association of Securities Dealers
("NASD") filing fee and the NASDAQ SmallCap fee. None of the expenses of this
offering will be paid by the Selling Shareholders.
<TABLE>
<S> <C>
Commission Registration Fee............................. $ 3,090.90
NASD Filing Fee......................................... $ 1,674.33
NASDAQ SmallCap Fee..................................... $ 9,875.00
Accounting Fees and Expenses............................ $130,000.00
Blue Sky Fees and Expenses.............................. $ 35,000.00
Legal Fees and Expenses................................. $130,000.00
Printing and Engraving Expenses......................... $ 90,000.00
Transfer Agent Fees..................................... $ 5,000.00
Miscellaneous Expenses.................................. $ 45,359.77
TOTAL......................................... $450,000.00
==========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since incorporation of the Registrant on July 17, 1996, the Registrant has
sold and issued the following securities which were not registered under the
Securities Act of 1993, as amended (the "Securities Act"):
In August 1996, the Registrant issued 2,200,000 shares of its Common Stock
to Walter S. Woltosz and Virginia E. Woltosz in exchange for 2,000 shares of
Words+, Inc. (the "Share Exchange Transaction"). Pursuant to the Share Exchange
Transaction, Words+, Inc. became a wholly-owned subsidiary of the Registrant.
The issuance was made in reliance on the exemption from registration afforded by
Section 4(2) of the Securities Act.
In August 1996, the Registrant issued a $200,000 promissory note, secured
by the inventory and accounts receivable of the Registrant and its subsidiary,
and warrants to Fernando Zamudio. In September 1996, the Registrant issued a
$300,000 promissory note, secured by the inventory and accounts receivable of
the Registrant and its subsidiary, and warrants to Patricia Ann O'Neil. The
promissory notes, which pay interest at 10% per annum, mature on the earlier of
(i) five business days following completion of the Registrant's initial public
offering or (ii) May 31, 1997. Mr. Zamudio was granted warrants to purchase
100,000 shares of Common Stock of the Registrant and Ms. O'Neil was granted
warrants to purchase 150,000 shares of Common Stock of the Registrant, which
warrants are being registered in this offering. These offers and sales were
conducted by a NASD member firm in consideration of payment of a commission of
5% of the gross proceeds, or $25,000. The private placement was made in reliance
on the exemption from registration afforded by Section 4(2) of the Securities
Act. Such persons are sophisticated within the meaning of Section 4(2) of the
Securities Act.
In December 1996 and January 1997, the Registrant issued an aggregate of
$1,100,000 principal amount of 10% Convertible Promissory Notes (the
"Convertible Notes") due in December 31, 1997 in a private placement to certain
investors. In connection with such private placement, the Representative was
paid $110,000 in fees and reimbursed approximately $10,000 of its expenses,
including fees and expenses of its counsel. The private placement was made in
reliance on the exemption from registration afforded by Regulation D under the
Securities Act, for transactions not involving a public offering. Each note
bears an appropriate restrictive legend. All such investors are sophisticated
within the meaning of Section 4(a) of the Securities Act.
In May 1997, such Convertible Notes were amended and restated to delete
their convertibility. In consideration for such amendment, the investors were
issued five year warrants, with registration rights, to purchase an aggregate of
280,000 shares of Common Stock, exercisable at $2.50 per share. Such exchange
was made in reliance on the exemption from registration afforded by Section
3(a)(9) of the Securities Act. No brokers fees or commissions were paid in order
to effect such exchange.
II-6
<PAGE> 90
ITEM 27. EXHIBITS
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
1.2 Form of Selected Dealer Agreement
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)
5.1 Opinion of Donahue, Mesereau & Leids LLP re: legality of shares
10.1 Simulations Plus, Inc. 1996 Stock Option Plan (the "Option Plan") and forms 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
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
10.17 Form of Subscription Agreement relative to the Registrant's Private Placement(1)
10.18 Form of Lock-up Agreement with Bridge Lenders
10.19 Form of Indemnification Agreement(1)
10.20 Form of Lock-Up Agreement with the Woltosz'
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
10.23 Form of Warrant issued to Bridge Lenders
23.1 Consent of Donahue, Mesereau & Leids LLP (incorporated by reference to Exhibit 5.1
hereof)
23.2 Consent of Singer Lewak Greenbaum & Goldstein LLP
24.1 Power of Attorney (reference is made to page II-9 hereof)
99.1 Consent of Dr. David Z. D'Argenio pursuant to Rule 438 under the Securities Act(1)
99.2 Consent of Dr. Richard Weiss pursuant to Rule 438 under the Securities Act(1)
</TABLE>
- ---------------
(1) Previously filed.
II-7
<PAGE> 91
(B) FINANCIAL STATEMENT SCHEDULES:
None.
ITEM 28. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act:
(b) To reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which individually, or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each
purchaser.
(5) That, insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(6) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed as part of this Registration Statement
as of the time it was declared effective.
(7) That, for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-8
<PAGE> 92
SIGNATURES
In accordance with the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorized this Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned, in the
City of Los Angeles, State of California, on May 22, 1997.
SIMULATIONS PLUS, INC.
/S/ WALTER S. WOLTOSZ
--------------------------------------
By: Walter S. Woltosz
Chairman of the Board
Chief Executive Officer and President
In accordance with the requirements of the Securities Act, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the dates stated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ----------------------------------------------- ------------------------- ------------------
<C> <S> <C>
/S/ WALTER S. WOLTOSZ Chairman of the Board, May 22, 1997
- ----------------------------------------------- Chief Executive Officer,
Walter S. Woltosz and President (Principal
Executive Officer)
/S/ VIRGINIA E. WOLTOSZ Director May 22, 1997
- -----------------------------------------------
Virginia E. Woltosz
/S/ MOMOKO BERAN Chief Financial Officer May 22, 1997
- ----------------------------------------------- (Principal Financial and
Momoko Beran Accounting Officer) and
Secretary
</TABLE>
II-9
<PAGE> 93
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.................................................
1.2 Form of Selected Dealer Agreement..............................................
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)....................................................
5.1 Opinion of Donahue, Mesereau & Leids LLP re: legality of shares................
10.1 Simulations Plus, Inc. 1996 Stock Option Plan (the "Option Plan") and forms 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............................................................
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.................................................
10.17 Form of Subscription Agreement relating to Registrant's Private Placement(1)...
10.18 Form of Lock-up Agreement with Bridge Lenders..................................
10.19 Form of Indemnification Agreement(1)...........................................
10.20 Form of Lock-Up Agreement with the Woltosz'....................................
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.................................................................
10.23 Form of Warrant issued to Bridge Lenders.......................................
23.1 Consent of Donahue, Mesereau & Leids, LLP (incorporated by reference to Exhibit
5.1 hereof)....................................................................
23.2 Consent of Singer Lewak Greenbaum & Goldstein LLP..............................
24.1 Power of Attorney (reference is made to page II-9 hereof)......................
99.1 Consent of Dr. David Z. D'Argenio pursuant to Rule 438 under the Securities
Act(1).........................................................................
99.2 Consent of Dr. Richard Weiss pursuant to Rule 438 under the Securities
Act(1).........................................................................
</TABLE>
- ---------------
(1) Previously filed.
<PAGE> 1
EXHIBIT 1.1
SIMULATIONS PLUS, INC.
1,150,000 Shares
UNDERWRITING AGREEMENT
________________, 1997
Waldron & Co., Inc.
(As Representative of the Several
Underwriters Named in Schedule 1 hereto)
19000 MacArthur, 8th Floor
Irvine, California 92715
Dear Sirs:
Simulations Plus, Inc., a California corporation (the "Company"), hereby
confirms its agreement (this "Agreement") with the several underwriters named in
Schedule 1 hereto (the "Underwriters"), for whom Waldron & Co., Inc. has been
duly authorized to act as representative (in such capacity, the
"Representative"), as set forth below:
SECTION 1.
DESCRIPTION OF TRANSACTION
The Company proposes to issue and sell to the Underwriters on the
Closing Date (as defined below), pursuant to the terms and conditions of this
Agreement, an aggregate of 1,150,000 shares ("Firm Shares") of the Company's
Common Stock ("Common Stock") at a price of $5.00 per Share on the terms as
hereinafter set forth. The Company also proposes to issue and sell to the
several Underwriters on or after the Closing Date not more than 150,000
additional Shares if requested by the Representative as provided in Section 3.2
of this Agreement (the "Option Shares"). The Firm Shares and any Option Shares
are collectively referred to herein as the "Shares."
SECTION 2.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce the Underwriters to enter into this Agreement, the
Company hereby represents and warrants to and agrees with the Underwriters that:
<PAGE> 2
2.1 Registration Statement and Prospectus. A registration
statement on Form SB- 2 (File No. _______) with respect to the Shares, including
the related prospectus, copies of which have heretofore been delivered by the
Company to the Underwriters, has been filed by the Company in conformity with
the requirements of the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), and one or more
amendments to such registration statement have been so filed. After the
execution of this Agreement, the Company will file with the Commission either
(a) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, a prospectus in the
form most recently included in an amendment to such registration statement (or,
if no such amendment shall have been filed, in such registration statement),
with such changes or insertions as are required by Rule 430A under the Act or
permitted by Rule 424(b) under the Act and as have been provided to and approved
by the Representative prior to the execution of this Agreement, or (b) if such
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Act, an amendment to such registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Representative prior to the execution of this
Agreement. As used in this Agreement, the term "Registration Statement" means
such registration statement on Form SB-2 and all amendments thereto, including
the prospectus, all exhibits and financial statements, as it becomes effective;
the term "Preliminary Prospectus" means each prospectus included in said
Registration Statement before it becomes effective; and the term "Prospectus"
means the prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act or, if no prospectus is required to be filed pursuant to said Rule
424(b), such term means the prospectus included in the Registration Statement
when it becomes effective.
2.2 Accuracy of Registration Statement and Prospectus. Neither
the Commission nor the "blue sky" or securities authority of any jurisdiction
has issued any order preventing or suspending the use of any Preliminary
Prospectus. When (a) any Preliminary Prospectus was filed with the Commission,
(b) the Registration Statement or any amendment thereto was or is declared
effective, and (c) the Prospectus or any amendment or supplement thereto is
filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or such
amendment or supplement is not required to be so filed, when the Registration
Statement or the amendment thereto containing such amendment or supplement to
the Prospectus was or is declared effective) and on the Closing Date the
Prospectus, as amended or supplemented at any such time, such filing (i)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
promulgated thereunder (the "Rules and Regulations") and (ii) did not or will
not include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading in light
of the circumstances under which they were made. The foregoing representation
does not apply to statements or omissions made in any Preliminary Prospectus,
the Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representative specifically for use therein.
2
<PAGE> 3
2.3 Incorporation and Standing. The Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the State of California and is duly qualified to transact business as a
foreign corporation and is in good standing under the laws of all other
jurisdictions where the ownership or leasing of its properties or the conduct of
its business requires such qualification, except where the failure to be so
qualified does not amount to a material liability or disability to the Company.
2.4 Due Power and Authority. The Company has full corporate power
to own or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus; and the Company has full
corporate power to enter into this Agreement and to carry out all the terms and
provisions hereof to be carried out by it. The execution and delivery of this
Agreement and consummation of the transactions contemplated herein have been
duly authorized by the Company and this Agreement has been duly executed and
delivered by the Company and constitutes the legal, valid and binding obligation
of the Company, enforceable against the Company in accordance with the terms
thereof, except as may be limited by applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally and by
general equitable principles, and as rights to indemnity and contribution
hereunder may be limited by applicable law.
2.5 Consents; No Defaults. The issuance, offering and sale of the
Shares to the Underwriters by the Company pursuant to this Agreement, the
compliance by the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (a) require
the consent, approval, authorization, registration or qualification of or with
any governmental authority, except such as have been obtained, or as may be
required under the Act or under the securities or blue sky laws of any
jurisdiction, or (b) conflict with or result in a breach or violation of any of
the terms and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other material agreement or instrument to
which the Company is a party or by which the Company or any of its properties is
bound, or the charter documents or bylaws of the Company, or any statute or any
judgment, decree, order, rule or regulation of any court or other governmental
authority or any arbitrator applicable to the Company.
2.6 No Breach or Default. The Company is not in breach of any
term or provision of its Certificate of Incorporation or Bylaws; no default
exists, and no event has occurred which with notice or lapse of time or both,
would constitute a default, in the Company's due performance and observance of
any term, covenant or condition of any indenture, mortgage, deed of trust,
lease, note, bank loan or credit agreement or any other material agreement or
instrument to which the Company or its properties may be bound or affected in
any respect which would have a material adverse effect on the condition
(financial or otherwise), business, properties, prospects, net worth or results
of operations of the Company.
2.7 Licenses. The Company possesses all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary for the conduct of its business, and the
Company has not received any notice of proceedings relating to the revocation
3
<PAGE> 4
or modification of any such certificate, authorization or permit which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a material adverse change in the condition (financial
or otherwise), business prospects, net worth or results of operations of the
Company, except as described in or contemplated by the Registration Statement.
Each approval, registration, qualification, license, permit, consent, order,
authorization, designation, declaration or filing by or with any regulatory,
administrative or other governmental body or agency necessary in connection with
the execution and delivery by the Company of this Agreement and the consummation
of the transactions contemplated (except such additional actions as may be
required by the National Association of Securities Dealers, Inc. or may be
necessary to qualify the Common Stock for public offering under state securities
or blue sky laws) has been obtained or made and each is in full force and
effect.
2.8 Compliance with Laws. Except as disclosed in the Registration
Statement and in the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), the Company is not in violation of any
laws, ordinances, governmental rules or regulations to which it is subject,
which would have a material adverse effect on the condition (financial or
otherwise), business, properties, prospects, net worth or results of operations
of the Company.
2.9 Existing Capital Structure and Shareholder Rights. The
Company has an authorized, issued and outstanding capitalization as set forth
in, and capital stock conforms in all material respects to the description
contained in, the Prospectus or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus. Except as described in the Registration Statement
and in the Prospectus there are no outstanding (a) securities or obligations of
the Company convertible into or exchangeable for any capital stock of the
Company, (b) warrants, rights or options to subscribe for or purchase from the
Company any such capital stock or any such convertible or exchangeable
securities or obligations, or (c) obligations of the Company to issue such
shares, any such convertible or exchangeable securities or obligations, or any
such warrants, rights or obligations. All of the issued shares of capital stock
of the Company have been duly authorized and validly issued and are fully paid
and nonassessable, and have been issued in compliance with all federal and state
securities laws. No preemptive rights of shareholders exist with respect to any
capital stock of the Company. No shareholder of the Company has any right
pursuant to any agreement which has not been waived or honored to require the
Company to register the sale of any securities owned by such shareholder under
the Act in the public offering contemplated herein except as disclosed in the
Registration Statement. Other than Words+, Inc., a California corporation, the
Company has no subsidiaries, and does not own any shares of stock or any other
equity interest in any firm, partnership, association or other entity.
2.10 Authority for Issuance of Shares. The issuance of the Common
Stock issuable in connection with the Shares has been duly authorized and at any
Firm or Option Closing Date as defined herein after payment therefor in
accordance herewith, such Common Stock will be validly issued, fully paid and
nonassessable. The Shares will conform in all material respects with all
statements with regard thereto in the Registration Statement and the Prospectus.
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2.11 Title to Tangible Property. Except as otherwise set forth in
or contemplated by the Registration Statement and Prospectus, the Company has
good and marketable title to all items of personal property owned by the
Company, free and clear of any security interest, liens, encumbrances, equities,
claims and other defects, except such as do not materially and adversely affect
the value of such property and do not materially interfere with the use made or
proposed to be made of such property by the Company, and any real property and
buildings held under lease by the Company are held under valid, subsisting and
enforceable leases, with such exceptions as are not material and do not
materially interfere with the use made or proposed to be made of such property
and buildings by the Company.
2.12 Title to Intellectual Property. Except as described in the
Prospectus, the Company does not own any patents or trademarks. The Company owns
or possesses, or can acquire on reasonable terms, all material, service marks,
trade names, licenses, copyrights and proprietary or other confidential
information currently employed by it in connection with its business, and the
Company has not received any notice of infringement of or conflict with asserted
rights of any third party with respect to any of the foregoing intellectual
property rights which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding would result in a material adverse
change in the condition (financial or otherwise), business prospects, net worth
or results of operations of the Company, except as described in or contemplated
by the Prospectus.
2.13 Contract Rights. The agreements to which the Company is a
party described in the Registration Statement and Prospectus are valid
agreements, enforceable by the Company in accordance with their terms, except as
the enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditor's rights generally or by equitable principles, and, to the Company's
knowledge, the other contracting party or parties thereto are not in material
breach or material default under any of such agreements.
2.14 No Market Manipulation. The Company has not taken nor will
it take, directly or indirectly, any action designed to cause or result, or
which might reasonably be expected to cause or result, in the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Common Stock.
2.15 No Other Sales or Commissions. The Company has not since the
filing of the Registration Statement (i) sold, bid for, purchased, attempted to
induce any person to purchase, or paid anyone any compensation for soliciting
purchases of, its capital stock or (ii) paid or agreed to pay to any person any
compensation for soliciting another to purchase any securities of the Company
except for the sale of Shares by the Company under this Agreement.
2.16 Accuracy of Financial Statements. The financial statements
and schedules of the Company included in the Registration Statement and the
Prospectus, or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus, fairly present in all material respects the financial
position of the Company and the results of operations and changes in financial
condition as of the
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dates and periods therein specified. Such financial statements and schedules
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as otherwise noted
therein and include all financial information required to be included by the
Act. The selected financial data set forth under the captions "PROSPECTUS
SUMMARY--Summary Financial Information," "SELECTED FINANCIAL DATA" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" in the Prospectus, or, if the Prospectus is not in existence the
most recent Preliminary Prospectus, fairly present in all material respects, on
the basis stated in the Prospectus or such Preliminary Prospectus, the
information included therein.
2.17 Independent Public Accountant. Singer, Lewak, Greenbaun &
Goldstein LLP, which have certified or shall certify certain of the financial
statements of the Company filed or to be filed as part of the Registration
Statement and the Prospectus, are independent certified public accountants
within the meaning of the Act and the Rules and Regulations.
2.18 Internal Accounting. The Company maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (a)
transactions are executed in accordance with management's general or specific
authorization; (b) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (c) access to assets is
permitted only in accordance with management's general or specific
authorization; and (d) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
2.19 Litigation. Except as set forth in the Registration
Statement and Prospectus, there is and at the Closing Date there will be no
action, suit or proceeding before any court or governmental agency, authority or
body pending or to the knowledge of the Company threatened which might result in
judgments against the Company not adequately covered by insurance or which
collectively might result in any material adverse change in the condition
(financial or otherwise), the business or the prospects of the Company, or would
have a material adverse effect on the properties or assets of the Company. The
Company is not subject to the provisions of any injunction, judgement, decree or
order of any court, regulatory body, administrative agency or other governmental
body or arbitral forum, which might result in a material adverse change in the
business, assets or condition of the Company.
2.20 No Material Adverse Change. Subsequent to the respective
dates as of which information is given in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), (a) the Company has not incurred any material adverse
change in or affecting the condition, financial or otherwise, of the Company or
the earnings, business affairs, management, or business prospects of the
Company, whether or not occurring in the ordinary course of business, (b) there
has not been any material transaction entered into by the Company, other than
transactions in the ordinary course of business or transactions specifically
described in the Registration Statement as it may be amended or supplemented,
(c) the Company has
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not sustained any material loss or interference with its business or properties
from fire, flood, windstorm, accident or other calamity, (d) the Company has not
paid or declared any dividends or other distribution with respect to its capital
stock and the Company is not in default in the payment of principal or interest
on any outstanding debt obligations, and (e) there has not been any change in
the capital stock (other than the sale of the Common Stock hereunder or the
exercise of outstanding stock options or warrants as described in the
Registration Statement) or material increase in indebtedness of the Company. The
Company does not have any known material contingent obligation which is not
disclosed in the Registration Statement (or contained in the financial
statements or related notes thereto), as such may be amended or supplemented.
2.21 Transactions With Affiliates. Subsequent to the respective
dates as of which information is given in the Registration Statement and
Prospectus or if the Prospectus is not in existence the most recent Preliminary
Prospectus, and except as may otherwise be indicated or contemplated herein or
therein, (a) the Company has not entered into any transaction with an
"affiliate" of the Company, as defined in the Act and the Rules and Regulations,
or (b) declared, paid or made any dividend or distribution of any kind on or in
connection with any class of its capital stock, and (c) the Company has no
knowledge of any transaction between any affiliate of the Company and any
significant customer or supplier of the Company, except in its ordinary course
of business.
2.22 Insurance. Except as otherwise set forth in or contemplated
by the Registration Statement and Prospectus, the Company is insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the business in which it is engaged; the
Company has not been refused any insurance coverage sought or applied for; and
the Company has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), business prospects, net worth or results of operations
of the Company.
2.23 Tax Returns. The Company has filed all foreign, federal,
state and local tax returns that are required to be filed or has requested
extensions thereof and has paid all taxes required to be paid by it and any
other assessment, fine or penalty levied against it, to the extent that any of
the foregoing is due and payable or adequate accruals have been set up to cover
any such unpaid taxes, except for any such assessment, fine or penalty that is
currently being contested in good faith.
2.24 Political Contributions. The Company has not directly or
indirectly, (a) made any unlawful contribution to any candidate for public
office, or failed to disclose fully any contribution in violation of law, or (b)
made any payment to any federal, state, local, or foreign governmental officer
or official, or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any other such jurisdiction.
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2.25 Investment Company Act. The Company conducts its operations
in a manner that does not subject it to registration as an investment company
under the Investment Company Act of 1940, as amended, and the transactions
contemplated by this Agreement will not cause the Company to become an
investment company subject to registration under the Investment Company Act of
1940, as amended.
SECTION 3.
PURCHASE, SALE AND DELIVERY OF THE SHARES
3.1 Purchase of Firm Shares. On the basis of the representations,
warranties, agreements and covenants herein contained and subject to the terms
and conditions herein set forth, the Company agrees to issue and sell to each of
the Underwriters named in Schedule I hereto, and each of the Underwriters,
severally and not jointly, agrees to purchase from the Company, at a purchase
price of $____ per Share, the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule 1 hereto. The Company will make one or more
certificates for Common Stock constituting the Firm Shares, in definitive form
and in such denomination or denominations and registered in such name or names
as the Representative shall request upon notice to the Company at least 48 hours
prior to the Firm Closing Date, available for checking and packaging by the
Representative at the offices of the Company's transfer agent or registrar (or
the correspondent or the agent of the Company's transfer agent or registrar) at
least 24 hours prior to the Firm Closing Date. Payment for the Firm Shares shall
be made by bank wire payable in same day funds to the order of the Company drawn
to the order of the Company for the Firm Shares, against delivery of
certificates therefor to the Representative. Delivery of the documents,
certificates and opinions described in Section 6 of this Agreement, the Firm
Shares and payment for the Firm Shares and the Option Shares shall be made at
the offices of Waldron & Co., Inc., 19000 MacArthur, 8th Floor, Irvine,
California 92715, at 9:00 a.m., Los Angeles time, on the third full business day
following the date hereof (on the fourth full business day if this Agreement is
executed after 12:30 p.m., California time), or at such other places, time or
date as the Representative and the Company may agree upon or as the
Representative may determine pursuant to Section 9 hereof, such time and date of
delivery against payment being herein referred to as the "Firm Closing Date."
3.2 Over-Allotments; Option Shares. For the purpose of covering
any over-allotments in connection with the distribution and sale of the Firm
Shares as contemplated by the Prospectus, the Company hereby grants to you on
behalf of the several Underwriters an option to purchase, severally and not
jointly, the Option Shares. The purchase price to be paid for any Option Shares
shall be the same price per share as the price per Share for the Firm Shares set
forth above in Section 3.1, plus, if the purchase and sale of any Option Share
takes place after the Firm Closing Date and after the Common Stock is trading
"ex-dividend," an amount equal to the dividends payable on the Common Stock
contained in such Option Shares. The option granted hereby may be exercised in
the manner described below as to all or any part of the Option Shares from time
to time within forty-five days after the date of the Prospectus. The
Underwriters shall not be under any obligation to purchase any of the Option
Shares prior to the exercise of such option. The Representative may
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from time to time exercise the option granted hereby by giving notice in writing
or by telephone (confirmed in writing) to the Company setting forth the
aggregate number of Option Shares as to which the several Underwriters are then
exercising the option and the date and time for delivery of and payment for such
Option Shares. Any such date of delivery shall be determined by the
Representative but shall not be earlier than two business days or later than
seven business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representative and the
Company may agree upon or as the Representative may determine pursuant to
Section 9 hereof, is herein called the "Option Closing Date" with respect to
such Option Shares. Upon each exercise of the option as provided herein, subject
to the terms and conditions herein set forth, the Company shall become obligated
to sell to each of the several Underwriters, and each of the Underwriters
(severally and not jointly) shall become obligated to purchase from the Company,
the same percentage of the total number of the Option Shares as to which the
several Underwriters are then exercising the option as such Underwriter is
obligated to purchase of the aggregate number of Firm Shares, as adjusted by the
Representative in such manner as it deems advisable to avoid fractional shares.
If the option is exercised as to all or any portion of the Option Shares, one or
more certificates for the Common Stock contained in such Option Shares, in
definitive form, and payment therefore, shall be delivered on the related Option
Closing Date in the manner, and upon the terms and conditions, set forth in
Section 3.1, except that reference therein to the Firm Shares and the Firm
Closing Date shall be deemed, for purposes of this Section 3.2, to refer to such
Option Shares and Option Closing Date, respectively. No Option Shares shall be
required to be, or be, sold and delivered unless the Firm Shares have been, or
simultaneously are, sold and delivered as provided in this Agreement.
3.3 Default by an Underwriter. It is understood that you,
individually and not as the Representative, may (but shall not be obligated to)
make payment on behalf of any Underwriter or Underwriters for any of the Shares
to be purchased by such Underwriter or Underwriters. No such payment shall
relieve such Underwriter or Underwriters from any of its or their obligations
hereunder.
SECTION 4.
OFFERING BY THE UNDERWRITERS
Upon payment by the Underwriters of the purchase price of $____ per
Share and the Company's authorization of the release of the Firm Shares, the
several Underwriters shall offer the Firm Shares for sale to the public upon the
terms set forth in the Prospectus. The Representative may from time to time
thereafter change the public offering prices and other selling terms. If the
option set forth in Section 3.2 of this Agreement is exercised, then upon the
Company's authorization of the release of the Option Shares the several
Underwriters shall offer such Shares for sale to the public upon the foregoing
terms.
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SECTION 5.
COVENANTS OF THE COMPANY
Except as otherwise stated below, the Company covenants and agrees with
each of the Underwriters that:
5.1 Company's Best Efforts to Cause Registration Statement to
Become Effective. The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto, to become effective as promptly as
possible. If required, the Company will file the Prospectus and any amendment or
supplement thereto with the Commission in the manner and within the time period
required by Rule 424(b) under the Act. During any time when a prospectus
relating to the Common Stock is required to be delivered under the Act, the
Company (a) will comply with all requirements imposed upon it by the Act and the
Rules and Regulations to the extent necessary to permit the continuance of sales
of or dealings in the Common Stock in accordance with the provisions hereof and
of the Prospectus, as then amended or supplemented, and (b) will not file with
the Commission the prospectus or the amendment referred to in the second
sentence of Section 2.1 hereof, any amendment or supplement to such prospectus
or any amendment to the Registration Statement unless and until the
Representative have been advised of such proposed filing, has been furnished
with a copy for a reasonable period of time prior to the proposed filing, and
has given its consent to such filing, which shall not be unreasonably withheld
or delayed.
5.2 Preparation and Filing of Amendments and Supplements. The
Company will prepare and file with the Commission, in accordance with the Rules
and Regulations of the Commission, promptly upon written request by the
Representative or counsel for the Representative, any amendments to the
Registration Statement or amendments or supplements to the Prospectus that may
be reasonably necessary or advisable in connection with the distribution of the
Shares by the several Underwriters, and the Company will use its best efforts to
cause any such amendment to the Registration Statement to be declared effective
by the Commission as promptly as possible. The Company will advise the
Representative, promptly after receiving notice thereof, of the time when the
Registration Statement or any amendment thereto has been filed or declared
effective or the Prospectus or any amendment or supplement thereto has been
filed and will provide evidence satisfactory to the Representative of each such
filing or effectiveness.
5.3 Notice of Stop Orders. The Company will advise the
Representative promptly after receiving notice or obtaining knowledge of: (a)
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or any amendment thereto, or any order preventing or
suspending the use of any Preliminary Prospectus of the Prospectus or any
amendment or supplement thereto; (b) the suspension of the qualification of the
Shares for offering or sale in any jurisdiction; (c) the institution,
threatening or contemplation of any proceeding for any such purpose; or (d) any
request made by the Commission for amending the Registration Statement, for
amending or supplementing the Prospectus or for additional information. The
Company will use
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its best efforts to prevent the issuance of any such stop order and, if any such
stop order is issued to obtain the withdrawal thereof as promptly as possible.
5.4 Blue Sky Qualification. The Company will arrange and
cooperate with counsel to the Representative for the qualification of the Shares
for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representative may designate and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Shares; provided, however, that in connection therewith the
Company shall not be required to qualify as a foreign corporation or to execute
a general consent to service of process in any jurisdiction.
5.5 Post-Effective Amendments. If, at any time when a prospectus
relating to the Shares is required to be delivered under the Act, any event
occurs as a result of which the Prospectus, as then amended or supplemented,
would include any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein not misleading,
in the light of the circumstances under which they were made, or if for any
other reason it is necessary at any time to amend or supplement the Prospectus
to comply with the Act or the Rules or Regulations, the Company will promptly
notify the Representative thereof and, subject to Section 3 hereof, will prepare
and file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
5.6 Delivery of Prospectuses. The Company will, without charge,
provide (a) to the Representative and to counsel for the Representative a signed
copy of the Registration Statement originally filed with respect to the Shares
and each amendment thereto (in each case including exhibits thereto), (b) to
each other Underwriter so requesting in writing, a conformed copy of such
Registration Statement and each amendment thereto (in each case without exhibits
thereto) and (c) so long as a prospectus relating to the Shares is required to
be delivered under the Act, as many copies of each Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto as the Representative may
reasonably request.
5.7 Section 11(a) Financials. The Company will, as soon as
practicable but in any event not later than 90 days after the period covered
thereby, make generally available to its security holders and to the
Representative a consolidated earnings statement of the Company and its
subsidiaries that satisfies the provisions of Section 11(a) of the Act and Rule
158 thereunder covering a twelve-month period beginning not later than the first
day of the Company's fiscal quarter next following the effective date of the
Registration Statement.
5.8 Application of Proceeds. The Company will apply the net
proceeds from the sale of the Shares as set forth in the Prospectus and
Registration Statement and will not take any action that would cause it to
become an investment company under the Investment Company Act of 1940, as
amended.
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5.9 Sales of Securities. The Company will not, directly or
indirectly, without ten (10) days prior written notice to the Representative,
offer, sell, grant any option to purchase or otherwise dispose (or announce any
offer, sale, grant of any option to purchase or other disposition) of any shares
of Common Stock or any securities convertible into, or exchangeable or
exercisable for, shares of Common Stock for a period of two years after the date
hereof, except (a) to the Underwriters pursuant to this Agreement; (b) up to
250,000 options to be granted pursuant a stock option plan to be adopted by the
Company; and (c) up to 300,000 shares of Common Stock reserved for issuance upon
exercise by Walter S. and Virginia Woltosz of certain performance warrants;
provided that such persons have delivered to the Representative the agreement
described in Section 7.7 of this Agreement.
5.10 Application to NASDAQ. The Company will cause the Shares to
be duly included for quotation on the Nasdaq SmallCap Market prior to the
Closing Date. If requested by the Representative, the Company will also cause
the Shares to be duly included for listing on the Pacific Stock Exchange. The
Company will use its best efforts to ensure that the Shares remain included for
quotation on the Nasdaq SmallCap Market and the Pacific Stock Exchange (if
applicable) following the Closing Date for a period of not less than three
years.
5.11 Application for Secondary Market Exemptions. To the extent
necessary or appropriate, the Company will make such applications, file such
documents, and furnish such information as may be necessary to list the Shares
in the securities listing manuals of Standard & Poor's Corporation or Moody's
Industrial Services contemporaneous with the filing of the Prospectus with the
Commission, and shall maintain listing in such manuals thereafter for a period
of no less than five years. As of the first date that the Company and its
securities are eligible, the Company will apply with the Department of
Corporations in the State of California to have the Shares listed as an
"Eligible Security" for purposes of secondary market exemptions in the State of
California. The Company will take such other similar steps as are reasonably
necessary to obtain exemptions for secondary trading of the Company's Shares in
various United States jurisdictions.
5.12 Reports to Shareholders. So long as any Common Stock is
outstanding until five years after the Closing Date, the Company will furnish to
the Representative (a) as soon as available a copy of each report of the Company
mailed to shareholders and filed with the Commission and (b) from time to time
such other information concerning the Company as the Representative may
reasonably request.
5.13 Delivery of Documents. At or prior to the Closing, the
Company will deliver to the Representative true and correct copies of the
certificate of incorporation of the Company and all amendments thereto, all such
copies to be certified by the Secretary of State of the State of California, a
good standing certificate from the Secretary of State of California, dated no
more than five business days prior to the Closing Date; true and correct copies
of the bylaws of the Company, as amended, certified by the Secretary of the
Company and true and correct copies of the minutes of all meetings of the
directors and shareholders of the Company held prior to the Closing Date which
in any way relate to the subject matter of this Agreement.
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5.14 Underwriters' Warrant. On or prior to the Closing Date, the
Company shall deliver to the Representative warrants (the "Underwriter's
Warrants"), at an aggregate purchase price of $100, to purchase Shares equal to
10% of the Firm Shares sold in the Offering, which Underwriter's Warrants shall
be exercisable for a per Share exercise price equal to 120% of the per Share
public offering price of the Firm Shares.
5.15 Cooperation With Representative' Due Diligence. At all times
prior to the Closing Date, the Company will cooperate with the Representative in
such investigation as the Representative may make or cause to be made of all the
properties, business and operations of the Company in connection with the
purchase and public offering of the Shares and the Company will make available
to the Representative in connection therewith such information in its possession
as the Representative may reasonably request.
5.16 Stock Transfer Agent. The Company has appointed U.S. Stock
Transfer, Glendale, California, as Transfer Agent for the Common Stock. The
Company will not change or terminate such appointment for a period of two years
from the effective date without first obtaining the written consent of the
Representative, which consent shall not be unreasonably withheld.
5.17 Publicity. Prior to the Firm Closing Date, or the Option
Closing Date, as the case may be, the Company shall not issue any press release
or other communication directly or indirectly and shall hold no press conference
with respect to the Company, its financial condition, results of operations,
business, properties, assets, liabilities and any of them, or this offering,
without the prior written consent of the Representative. If at any time during
the 90 day period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in the opinion of the Representative the market price of the
Common Stock has been or is likely to be materially affected, regardless of
whether such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus, the Company will, after written notice from the
Representative, evaluate the propriety of disseminating a press release or other
public statement reasonably acceptable to the Representative and their counsel,
commenting on such rumor, publication or event.
5.18 Board of Directors Meetings. The Company shall notify the
Representative of all meetings of the Board of Directors and shareholders of the
Company and shall have the right, for a period of three (3) years from the date
of the Prospectus, to have an observer at such meetings. Such designee shall be
entitled to receive reimbursement for all reasonable costs incurred in attending
such meetings, including, but not limited to, food, lodging, and transportation.
5.19 Forecasts and Projections. For a period of two years from
the effective date of the Registration Statement, the Company shall provide the
Representative with routine internal forecasts if any such reports are prepared
by the Company for dissemination to the public.
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5.20 Key Man Insurance. The Company will maintain for a period of
at least five (5) years, Key Man Insurance on Walt Woltosz in the amount of
$1,000,000. The Representative reserves the right to write the above policy at
the next renewal date thereof providing it can do so on terms no less favorable
to the Company.
SECTION 6.
EXPENSES
6.1 Offering Expenses. The Company will pay upon demand all costs
and expenses incident to the performance of the Company's obligations under this
Agreement, whether or not the transactions contemplated herein are consummated
or this Agreement is terminated pursuant to Section 11 hereof, including all
costs and expenses incident to (a) the printing or other production of documents
with respect to the transactions, including any costs of printing the
Registration Statement originally filed with respect to the Shares and any
amendment thereto, any Preliminary Prospectus and the Prospectus and any
amendment or supplement thereto, this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreement, and any blue sky memoranda, (b) all
arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (c) the fees and disbursements of counsel, accountants and
any other experts or advisors retained by the Company, (d) preparation, issuance
and delivery to the Underwriters of any certificates evidencing the Common
Stock, including transfer agent's and registrar's fees, (e) the qualification of
the Shares under state securities and blue sky laws, including filing fees and
fees and disbursements of counsel for the Representative relating thereto, (f)
the filing fees of the Commission and the National Association of Securities
Dealers, Inc. relating to the Shares, (g) any listing fees for the quotation of
the Common Stock on the Nasdaq SmallCap Market or listing on the Pacific Stock
Exchange (if applicable), (h) one-half the cost of placing "tombstone
advertisements" in any publications which may be selected by the Representative
(provided that any such cost in excess of $5,000 shall require the consent of
both the Company and the Representative), and (i) all other advertising that has
been approved in advance by the Company relating to the offering of the Shares
(other than as shall have been specifically approved in writing by the
Representative to be paid for by the Underwriters). In addition to the
foregoing, the Company agrees to pay to the Representative a non-accountable
expense allowance of 3% of the gross amount to be raised from the sale of the
Shares hereunder, payable at the Closing(s), of which $25,000 has already been
paid by the Company in connection with this offering. If the sale of the Shares
provided for herein is not consummated because any condition to the obligations
of the Underwriters set forth in Section 7 (other than Section 7.5) hereof is
not satisfied, because this Agreement is terminated pursuant to Section 11
hereof or because of any failure, refusal or inability on the part of the
Company to perform all obligations and satisfy all conditions on its part to be
performed or satisfied hereunder other than by reason of a default by any of the
Underwriters, the Company will reimburse the Underwriters severally upon demand
for all out-of-pocket expenses (including counsel fees and disbursements) that
shall have been reasonably incurred by them in connection with the proposed
purchase and sale of the Shares, excluding any costs in excess of $35,000. The
Company shall in no event be liable to any of the Underwriters for the loss of
anticipated profits from the transactions covered by this Agreement.
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6.2 Interim Indemnification. The Company agrees that as an
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding described in Section 8.1 hereof, it will reimburse the
Underwriters on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse the Underwriters for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim reimbursement
payment is so held to have been improper, the Underwriters shall promptly return
such payment to the Company together with interest, compounded daily, determined
on the basis of the prime rate (or other commercial lending rate for borrowers
of the highest credit standing) listed from time to time in THE WALL STREET
JOURNAL which represents the base rate on corporate loans posted by a
substantial majority of the nation's thirty (30) largest banks (the "Prime
Rate"). Any such interim reimbursement payments which are not made to the
Underwriters within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request.
The Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8.2 hereof, they will reimburse the
Company on a monthly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request.
SECTION 7.
CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS
The obligations of the several Underwriters to purchase and pay for the
Firm Shares shall be subject, unless waived by the Representative in its sole
discretion, to the accuracy of the representations and warranties of the Company
contained herein as of the date hereof and as of the Firm Closing Date as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's officers made pursuant to the provisions hereof, to the
performance by the Company of its covenants and agreements hereunder and to the
following additional conditions:
7.1 Effectiveness of Registration Statement. If the Registration
Statement or any amendment thereto filed prior to the Firm Closing Date has not
been declared effective as of the time
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of execution hereof, the Registration Statement or such amendment shall have
been declared effective not later than 11 a.m., California time, on the date on
which the amendment to the Registration Statement originally filed with respect
to the Shares or to the Registration Statement, as the case may be, containing
information regarding the initial public offering price of the Shares has been
filed with the Commission, or such later time and date as shall have been
consented to by the Representative; if required, the Prospectus and any
amendment or supplement thereto shall have been filed with the Commission in the
manner and within the time period required by Rule 424(b) under the Act; no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto shall have been issued, and no proceedings for that purpose
shall have been instituted or threatened or, to the knowledge of the Company or
the Representative, shall be contemplated by the Commission; and the Company
shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) to the reasonable satisfaction of counsel for the underwriters.
7.2 Opinion of Counsel. The Representative shall have received an
opinion, dated the Firm Closing Date, of Donahue & Mesereau, Los Angeles,
California counsel for the Company, substantially to the effect that:
(a) the Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
California, and duly qualified to transact business as a foreign corporation and
is in good standing under the laws of all other jurisdictions where the
ownership or leasing of its properties or the conduct of its business requires
such qualification, except where the failure to be so qualified would not have a
material adverse effect on the Company;
(b) the Company has the corporate power to own or lease
its properties; to conduct its business as described in the Registration
Statement and the Prospectus; to enter into this Agreement and to carry out all
of the terms and provisions hereof to be carried out by it;
(c) the Company has an authorized capital stock as set
forth under the heading "CAPITALIZATION" in the Prospectus; effective upon the
Closing all of the Company's all of the shares have been duly authorized and
validly issued and are fully paid and nonassessable; the shares have been duly
authorized by all necessary corporate action of the Company, and, when issued
and delivered to and paid for pursuant to this Agreement, will be validly
issued, fully paid and nonassessable; the shares have been duly authorized for
quotation on the Nasdaq SmallCap Market; no holders of outstanding shares of
capital stock of the Company are entitled as such to any preemptive or other
rights to subscribe for any of the Shares; and no holders of securities of the
Company are entitled to have such securities registered under the Registration
Statement;
(d) the capital stock of the Company conforms, as to legal
matters, to the statements set forth under the heading "DESCRIPTION OF
SECURITIES" in the Prospectus in all material respects;
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(e) the execution and delivery of this Agreement have been
duly authorized by all necessary corporate action of the Company and this
Agreement is a valid and binding obligation of the Company except as rights to
indemnity and contribution thereunder may be limited by applicable federal or
state securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforceability of creditors' rights generally and subject to general principles
of equity.
(f) no legal or governmental proceedings are pending to
which the Company is a party or to which the property of the Company is subject
that are required to be described in the Registration Statement or the
Prospectus and are not described therein, and, to the best knowledge of such
counsel, no such proceedings have been threatened against the Company or with
respect to any of its properties that can reasonably be expected to, or, if
determined adversely to the Company, would, in any individual case or in the
aggregate, result in any material adverse change in the business, financial
condition or results of operations of the Company;
(g) no contract or other document is required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement that is not described therein or filed as
required;
(h) the issuance, offering and sale of the Shares by the
Company pursuant to this Agreement, the compliance by the Company with the other
provisions of this Agreement and the consummation of the other transactions
herein contemplated do not require the consent, approval, authorization,
registration or qualification of or with any governmental authority, except such
as have been obtained and such as may be required under state securities or blue
sky laws, or conflict with or result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, lease or other agreement or instrument, known to such counsel, to
which the Company is a party or by which the Company or any of its properties
are bound, or the Articles of Incorporation or Bylaws of the Company, or any
statute or any judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator known to such counsel and applicable to
the Company;
(i) the Registration Statement is effective under the Act;
any required filing of the Prospectus pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b); and no stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto has been issued by the Commission, and no proceedings for that purpose
have been instituted or, to the knowledge of such counsel, are threatened or
contemplated by the Commission;
(j) the Registration Statement and the Prospectus and each
amendment or supplement thereto (in each case, other than the financial
statements and other financial and statistical information contained therein, as
to which such counsel need express no opinion) comply as to form in all material
respects with the applicable requirements of the Act and the Rules and
Regulations;
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(k) the Company is not required, and, if the Company uses
the proceeds of the sale of the Firm Shares and the Option Shares solely as
described in the Prospectus, will not be required as a result of the sale of
such Shares to be registered as an investment company within the meaning of the
Investment Company Act of 1940, as amended; and
(l) such counsel shall also state that they have no reason
to believe that the Registration Statement, as of its effective date, contained
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus, as of its date or the date of such opinion,
included or includes any untrue statement of a material fact or omitted or omits
to state a material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided
that in each case such counsel need not express any opinion as to the financial
statements and other financial and statistical information contained therein.
In rendering any such opinion, such counsel may rely as to matters of fact, to
the extent such counsel deems proper, on certificates of responsible officers of
the Company and public officials. The foregoing opinion may be limited to the
laws of the United States, the laws of the State or California and the General
Corporation Law of the State of California. References to the Registration
Statement and the Prospectus in this Section 7.2 shall include any amendment or
supplement thereto at the date of such opinion. Such counsel shall permit Luce,
Forward, Hamilton & Scripps LLP to rely upon such opinion in rendering its
opinion in Section 7.3.
7.3 Review by and Opinion of Representative' Counsel. The
Representative shall have received an opinion, dated the Firm Closing Date, of
Luce, Forward, Hamilton & Scripps LLP, counsel for the Representative, with
respect to certain matters as the Representative may reasonably require, and the
Company shall have furnished to such counsel such documents and certificates as
they may reasonably request for the purpose of enabling them to pass upon such
matters.
7.4 Accountant's Letter. The Representative shall have received
from Singer, Lewak, Greenbaum & Goldstein LLP, a letter or letters dated,
respectively, the date hereof and the Closing Date, in form and substance
reasonably satisfactory to the Representative, substantially to the effect that:
(a) they are independent accountants with respect to the
Company within the meaning of the Act and the Rules and Regulations;
(b) in their opinion, the financial statements audited by
them and included in the Registration Statement and the Prospectus comply in
form in all material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
(c) on the basis of a reading of the audited financial
statements of the Company, for the years ended August 31, 1996, August 31, 1995,
and August 31, 1994 and the unaudited financial statements of the Company for
the period ended December 31, 1996 and the notes
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thereto, carrying out certain specified procedures (which do not constitute an
audit made in accordance with generally accepted auditing standards) that would
not necessarily reveal matters of significance with respect to the comments set
forth in this paragraph, a reading of the minute books of the shareholders, the
board of directors and any committees thereof of the Company, and inquiries of
certain officials of the Company who have responsibility for financial and
accounting matters, nothing came to their attention that caused them to believe
that:
(i) the unaudited condensed financial statements
of the Company included in the Registration Statement and the Prospectus do not
comply in form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations
thereunder or are not in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the audited
financial statements included in the Registration Statement and the Prospectus;
and
(ii) at a specific date not more than five
business days prior to the date of such letter, there were any changes in the
capital stock or long-term debt of the Company or any decreases in net current
assets or shareholders' equity of the Company, in each case compared with
amounts shown on the December 31, 1996 balance sheet included in the
Registration Statement and the Prospectus, or for the period from December 31,
1996 to such specified date there were any decreases, as compared with the
corresponding period in the preceding year, in net sales, gross profit, selling,
general and administrative expenses, employee plans and bonuses, income (loss)
from operations, interest expenses, income (loss) before income taxes, provision
(benefit) for income taxes, net income (loss) or net income (loss) per share of
the Company, except in all instances for changes, decreases or increases set
forth in such letter; and
(d) they have carried out certain specified procedures,
not constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records of
the Company and are included in the Registration Statement and the Prospectus,
and have compared such amounts, percentages and financial information with such
records of the Company and with information derived from such records and have
found them to be in agreement, excluding any questions of legal interpretation.
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representative deems such explanation unnecessary, and such changes, decreases
or increases do not, in the sole judgment of the Representative, make it
impractical or inadvisable to proceed with the purchase and delivery of the
Shares as contemplated by the Registration Statement, as amended as of the date
hereof.
References to the Registration Statement and the Prospectus in this
Section 7.4 with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
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7.5 Officer's Certificate. The Representative shall have received
a certificate, dated the Firm Closing Date, of the president and the principal
financial or accounting officer of the Company to the effect that:
(a) the representations and warranties of the Company in
this Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing Date, does
not include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading, in light
of the circumstances in which they were made and the Prospectus, as amended or
supplemented as of the Firm Closing Date, does not include any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein not misleading, in the light of the circumstances under
which they were made; and the Company has in all material respects performed all
covenants and agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to the Firm Closing Date;
(b) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to the best
of their knowledge, are contemplated by the Commission; and
(c) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company has not sustained any material loss or interference with its business or
properties from fire, flood, hurricane, accident or other calamity, whether or
not covered by insurance, or from any labor dispute or any legal or governmental
proceeding, and there has not been any material adverse change, or any
development involving a prospective material adverse change, in the condition
(financial or otherwise), business prospects, net worth or results of operations
of the Company, except in each case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement thereto).
7.6 NASD Review. The NASD, upon review of the terms of the public
offering of the Firm Shares and Option Shares, shall not have objected to the
Underwriters' participation in such offering.
7.7 Lockups. The Representatives shall have received from each
person who owns Common Stock, or securities convertible into Common Stock, an
agreement to the effect that such person will not, directly or indirectly,
without the prior written consent of the Representative, offer, sell or grant
any option to purchase or otherwise dispose (or announce any offer, sale, grant
of an option to purchase or other disposition) of any shares of Common Stock or
any securities convertible into, or exchangeable for, shares of Common Stock for
a period of eighteen months.
7.8 Due Diligence Examination. The counsel to the Representative
and other persons retained by the Representative to conduct a due diligence
investigation with respect to the offering, shall be reasonably satisfied with
the results of their respective due diligence investigations.
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7.9 Blue Sky Qualification. The Shares shall be qualified in such
states as the Representative may reasonably request pursuant to Section 5.4, and
each such qualification shall be in effect and not subject to any stop order or
other proceeding on the Closing Date or Option Closing Date, as the case may be.
7.10 Other Documents. On or before the Firm Closing Date, the
Representative and counsel for the Representative shall have received such
further certificates, documents or other information as they may have reasonably
requested from the Company.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representative. The
Company shall furnish to the Representative such conformed copies of such
opinions, certificates, letters and documents in such quantities as the
Representative and the counsel to the Representative shall reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Shares shall be subject, in the Representative' discretion,
to each of the foregoing conditions to purchase the Firm Shares, except that all
references to the Firm Shares and the Firm Closing Date shall be deemed to refer
to such Option Shares and the related Option Closing Date, respectively.
SECTION 8.
INDEMNIFICATION AND CONTRIBUTION
8.1 Indemnification by Company. The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934 (the "Exchange Act") against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter or such
controlling person may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon:
(a) any untrue statement or alleged untrue statement made
by the Company in Section 2 of this Agreement;
(b) any untrue statement or alleged untrue statement of
any material fact contained in (i) the Registration Statement or any amendment
thereto or any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or (ii) any application or other document, or any amendment
or supplement thereto, executed by the Company and based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to qualify the Shares under the securities or blue sky laws thereof or
filed with the Commission or any securities association or securities exchange
(each an "Application"); or
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(c) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances in which they are made, and
will reimburse, as incurred, each Underwriter and each such controlling person
for any legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating, defending against or
appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement or
any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or any Application in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representative specifically for use therein; and provided further,
that the Company will not be liable to any Underwriter or any person controlling
such Underwriter with respect to any such untrue statement or omission made in
any Preliminary Prospectus that is corrected in the Prospectus (or any amendment
or supplement thereto) if the person asserting any such loss, claim, damage or
liability purchased Shares from such Underwriter but was not sent or given a
copy of the Prospectus (as amended or supplemented), other than the documents
incorporated by reference therein at or prior to the written confirmation of the
sale of such Shares to such person in any case where such delivery of the
Prospectus (as amended or supplemented) is required by the Act, unless such
failure to deliver the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with Section 5.5 of this Agreement. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have. The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of such Underwriter and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.
8.2 Indemnification by Underwriters. Each Underwriter will
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act against any losses, claims, damages or liabilities to which
the Company, any such director or officer of the Company or any such controlling
person of the Company may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (a) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or any Application or (b) the omission
or the alleged omission to state therein a material fact required to be stated
in the Registration Statement or any amendment
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thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or any Application or necessary to make the statements
therein not misleading in light of the circumstances in which they are made, in
each case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through the Representative specifically for use therein; and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company or any director, officer or controlling person of the Company in
connection with investigation or defending against or appearing as a third-party
witness in connection with any such loss, claim, damage, liability or any action
in respect thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have. No Underwriter will,
without the prior written consent of the Company, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim, action,
suit or proceeding in respect of which indemnification may be sought hereunder
(whether or not the Company, any of its directors, any of its officers who
signed the Registration Statement or any person who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a
party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of the Company and each
such director, officer and controlling person from all liability arising out of
such claim, action, suit or proceeding.
8.3 Notice of Defense. Promptly after receipt by an indemnified
party under this Section 8 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought against
any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other indemnifying
party and the indemnified party shall have reasonably concluded that there may
be one or more legal defenses available to it and/or other indemnified parties
which are different from or additional to those available to the indemnifying
party, the indemnifying party shall not have the right to direct the defense of
such action on behalf of such indemnified party or parties and such indemnified
party or parties shall have the right to select separate counsel to defend such
action on behalf of such indemnified party or parties. After notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and approval by such indemnified party of counsel appointed to
defend such action, the indemnifying party will not be liable to such
indemnified party (which may not be unreasonably withheld or delayed) under this
Section 8 for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof, unless (a) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that in connection with such action the
indemnifying party shall not be liable for the expenses of more than one
separate counsel at any one time in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or
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circumstances, designated by the Representative in the case of Section 8.1,
representing the indemnified parties under such Section 8.1 who are parties to
such action or actions) or (b) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party, unless such indemnified party
waived its rights under this Section 8 in which case the indemnified party may
effect such a settlement without such consent.
8.4 Contribution. In circumstances in which the indemnity
agreement provided for in the preceding paragraphs of this Section 8 is
unavailable or insufficient to hold harmless an indemnified party in respect of
any losses, claims, damages or liability (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (a) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Shares or (b) if the
allocation provided by the foregoing clause (a) is not permitted by applicable
law, not only such relative benefits but also the relative fault of the
indemnifying party or parties on the one hand and the indemnified party on the
other in connection with the statements or omissions or alleged statements or
omissions that resulted in such losses, claims, damages or liability (or action
in respect thereof). The relative benefits received by the Company on the one
hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total proceeds from the offering (after deducting expenses)
received by the Company bear to the total underwriting discounts and commissions
received by the Underwriters. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the
Underwriters, the parties' relative intents, knowledge, access to information
and opportunity to correct or prevent such statement or omission, and any other
equitable considerations appropriate in the circumstances. The Company and the
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation that does not take into account the equitable consideration
referred to in the first sentence of this Section 8.4. Notwithstanding any other
provision of this Section 8.4, no Underwriter shall be obligated to make
contributions hereunder that in the aggregate exceed the underwriter discount on
the Shares purchased by such Underwriter under this Agreement, less the
aggregate amount of any damages that such Underwriter has otherwise been
required to pay in respect of the same or any substantially similar claim, and
no person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute hereunder are several in proportion to their respective underwriting
obligations and not joint, and contributions among Underwriters shall be
governed by the provisions of the Agreement Among Underwriters. For purposes of
this Section 8.4, each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act or Section 20 of the
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Exchange Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall
have the same right to contribution as the Company as the case may be.
SECTION 9.
DEFAULT OF UNDERWRITERS
If one or more Underwriters default in their obligations to purchase
Firm Shares, or Option Shares hereunder and the aggregate number of such Shares
that such defaulting Underwriter or Underwriters agreed but failed to purchase
is ten percent or less of the aggregate number of Firm Shares or Option Shares
to be purchased by all of the Underwriters at such time hereunder, the other
Underwriters may make arrangements satisfactory to the Representative for the
purchase of such Shares by other persons (who may include one or more of the
non-defaulting Underwriters, including the Representative), but if no such
arrangements are made by the Firm Closing Date or the related Option Closing
Date, as the case may be, the other Underwriters shall be obligated severally in
proportion to their respective commitments hereunder to purchase the Firm
Shares, or Option Shares that such defaulting Underwriter or Underwriters agreed
but failed to purchase. In the event of any default by one or more Underwriters
as described in this Section 9, the Representative shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 3 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purpose and delivery of the Firm Shares or Option Shares, as
the case may be. As used in this Agreement, the term "Underwriter" includes any
persons substituted for an Underwriter under this Section 9. Nothing herein
shall relieve any defaulting Underwriter from liability for its default.
SECTION 10.
SURVIVAL
The respective representations, warranties, agreements, covenants,
indemnities and other statements of the Company, its officers and directors and
the several Underwriters set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall remain in full force and
effect, regardless of (a) any investigation made by or on behalf of the Company,
any of its officers or directors, any Underwriter or any controlling person
referred to in Section 8 hereof and (b) delivery of and payment for the Shares.
The respective agreements, covenants, indemnities and other statements set forth
in Sections 5 and 8 hereof shall remain in full force and effect, regardless of
any termination or cancellation this Agreement.
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SECTION 11.
TERMINATION
11.1 By Representative. This Agreement may be terminated with
respect to the Firm Shares or any Option Shares in the sole discretion of the
Representative by notice to the Company given prior to the Firm Closing Date or
the related Option Closing Date, respectively, in the event that the Company
shall have failed, refused or been unable to perform all obligations and satisfy
all conditions on its part to be performed or satisfied hereunder at or prior
thereto or, if at or prior to the Firm Closing date or such Option Closing Date,
respectively:
(a) the Company shall have sustained any material loss or
interference with its business or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or any legal or governmental proceeding or there shall have been
any material adverse change, or any development involving a prospective material
adverse change (including financial or otherwise), in the business prospects,
net worth or results of operations of the Company, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment or
supplement thereto);
(b) trading in the Common Stock shall have been suspended
by the Commission or the National Association of Securities Dealers Automated
Quotation SmallCap Market or trading in securities generally on the New York
Stock Exchange or the American Stock Exchange shall have been suspended or
minimum or maximum prices shall have been established on any such exchange or
market system;
(c) a banking moratorium shall have been declared by New
York, California, or United States authorities; or
(d) there shall have been (i) an outbreak or escalation of
hostilities between the United States and any foreign power, (ii) an outbreak or
escalation of any other insurrection or armed conflict involving the United
States or (iii) any other calamity or crisis having an effect on the financial
markets that, in the reasonable judgment of the Representative, makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares as contemplated by the Registration Statement, as amended as of
the date hereof.
11.2 Effect of Termination Hereunder. Termination of this
Agreement pursuant to this Section 11 shall be without liability of any party to
any other party, except as provided in Section 10 hereof.
26
<PAGE> 27
SECTION 12.
INFORMATION SUPPLIED BY UNDERWRITERS
The statements set forth in the last paragraph on the front cover page
and under the heading "Underwriting" in any Preliminary Prospectus or the
Prospectus, to the extent such statements relate to the Underwriters constitute
the only information furnished by any Underwriter through the Representative to
the Company for the purposes of Section 8 and 10 hereof. The Underwriters
represent and warrant to the Company that such statements, to such extent, are
correct as of the date hereof and at each Closing Date.
SECTION 13.
NOTICES
All communications hereunder shall be in writing and, if sent to any of
the Underwriters, shall be mailed (certified or registered mail, postage
prepaid, return receipt requested) or delivered or sent by facsimile
transmission and confirmed in writing to Waldron & Co., Inc., 19000 MacArthur,
8th Floor, Irvine, California 92715, Attention: Mr. Cery Perle (with a copy to
James A. Mercer III, Esq., Luce, Forward, Hamilton & Scripps LLP, 600 West
Broadway, Suite 2600, San Diego, CA 92101), if sent to the Company, shall be
mailed (certified or registered mail, postage prepaid, return receipt
requested), delivered or telegraphed and confirmed in writing to the Company at
40015 Sierra Highway, Bldg. B-110, Palmdale, California 93550, Attention: Walt
Woltosz (with a copy to Asher Leids, Esq., Donahue & Mesereau, 1900 Avenue of
the Stars, Suite 2700, Los Angeles, California 90067). Notices shall be
effective if mailed, 48 hours after deposit in the mail properly addressed, sent
by facsimile, upon receipt and in any other instance, when delivered.
SECTION 14.
SUCCESSORS
This Agreement shall inure to the benefit of and shall be binding upon
the several Underwriters, the Company and their respective successors and legal
Representative, and nothing expressed or mentioned in this Agreement is intended
or shall be construed to give any other person any legal or equitable right,
remedy or claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person except that (a) the indemnities of the
Company contained in Section 8 of this Agreement shall also be for the benefit
of any person or persons who control any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act and (b) the indemnities
of the Underwriters contained in Section 8 of this Agreement shall also be for
the benefit of the directors of the Company, the officers of the Company who
have signed the Registration Statement and any person or persons who control the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act. No purchaser of Shares from any Underwriter shall be deemed a
successor because of such purchase.
27
<PAGE> 28
SECTION 15.
APPLICABLE LAW
The validity and interpretation of this Agreement, and the terms and
conditions set forth herein, shall be governed by and construed in accordance
with the laws of the State of California without giving effect to any provisions
relating to conflicts of laws.
SECTION 16.
COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company, and each of the
several Underwriters.
Very truly yours,
SIMULATIONS PLUS, INC.
By:_____________________________________
Walter S. Woltosz
Chief Executive Officer
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
Waldron & Co., Inc.
(As Representative of the several
Underwriters named in Schedule 1 hereto)
By:______________________________________
28
<PAGE> 29
SCHEDULE 1
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriter to be purchased
- ----------- ---------------
<S> <C>
Waldron & Co., Inc.
---------------
Total 1,500,000
</TABLE>
<PAGE> 1
EXHIBIT 1.2
SIMULATIONS PLUS, INC.
1,150,000 Shares
SELECTED DEALER AGREEMENT
____________, 1997
Dear Sirs:
Waldron & Co., Inc. and the other Underwriters named in the Prospectus
relating to the above shares (the "Underwriters"), acting through us as
Representative, is severally offering for sale an aggregate of 1,150,000 Shares
(the "Firm Shares") of common stock ("Common Stock") of Simulations Plus, Inc.
(the "Company") at a price of $5.00 per Share. In addition, the several
Underwriters have been granted an option to purchase from the Company up to an
additional 150,000 Shares (the "Option Shares") to cover over-allotments in
connection with the sale of the Firm Shares. The Firm Shares and any Option
Shares purchased are herein called the "Shares". The Shares and the terms under
which they are to be offered for sale by the several Underwriters are more
particularly described in the Prospectus.
The Underwriters are offering the Shares pursuant to a Registration
Statement (the "Registration Statement") under the Securities Act of 1933, as
amended, subject to the terms of (a) their Underwriting Agreement with the
Company, (b) this Agreement, and (c) the Representative's instructions which may
be forwarded to the Selected Dealers from time to time. This invitation is made
by the Representative only if the Shares may be lawfully offered by dealers in
your state. The terms and conditions of this invitation are as follows:
1. Offer to Selected Dealers. The Representative is hereby soliciting
offers to buy, upon the terms and conditions hereof, a portion of the Shares
from Selected Dealers who are to act as principal. Shares are to be offered to
the public at a price of $5.00 per Share (the "Offering Price"). Selected
Dealers who are members of the National Association of Securities Dealers, Inc.
(the "NASD") will be allowed, on all Shares sold by them, a concession of
$______ payable as hereinafter provided. Selected Dealers may reallow other
dealers who are members of the NASD a portion of that concession up to the
amount of $_____ per Share with respect to Shares sold by or through them. No
NASD member may reallow commissions to any non-member broker-dealer including
foreign broker-dealers registered pursuant to the Securities Exchange Act of
1934. This offer is solicited subject to the Company's issuance and delivery of
certificates and other documents evidencing its Shares and the acceptance
thereof by the Representative, to the approval of legal matters by counsel, and
to the terms and conditions set forth herein.
2. Revocation of Offer. The Selected Dealer's offer to purchase, if made
prior to the effective date of the Registration Statement, may be revoked in
whole or in part without obligation or commitment of any kind by it any time
prior to acceptance and no offer may be accepted by the
<PAGE> 2
Representative and no sale can be made until after the Registration Statement
covering the Shares has become effective with the Securities and Exchange
Commission. Subject to the foregoing, upon execution by the Selected Dealer of
the Offer to Purchase below and the return of same to the Representative, the
Selected Dealer shall be deemed to have offered to purchase the number of Shares
set forth in its offer on the basis set forth in Section 1 above. Any oral offer
to purchase made by the Selected Dealer shall be deemed subject to this
Agreement and shall be confirmed by the Representative by the subsequent
execution and return of this Agreement. Any oral notice by the Representative of
acceptance of the Selected Dealer's offer shall be followed by written or
telegraphic confirmation preceded or accompanied by a copy of the Prospectus. If
a contractual commitment arises hereunder, all the terms of this Selected Dealer
Agreement shall be applicable. The Representative may also make available to the
Selected Dealer an allotment to purchase Shares, but such allotment shall be
subject to modification or termination upon notice from the Representative any
time prior to an exchange of confirmations reflecting completed transactions.
All references hereafter in this Agreement to the purchase and sale of Shares
assume and are applicable only if contractual commitments to purchase are
completed in accordance with the foregoing.
3. Selected Dealer Sales. Any Shares purchased by a Selected Dealer
under the terms of this Agreement may be immediately re-offered to the public at
the Offering Price in accordance with the terms of the offering thereof set
forth herein and in the Prospectus, subject to the securities or blue sky laws
of the various states or other jurisdictions. Shares shall not be offered or
sold by the Selected Dealers below the Offering Price. The Selected Dealer
agrees to advise the Representative, upon request, of any Shares purchased by it
remaining unsold and, the Representative has the right to purchase all or a
portion of such Shares, at the Public Offering Price less the selling concession
or such part thereof as the Representative shall determine.
4. Payment for Shares. Payment for Shares which the Selected Dealer
purchases hereunder shall be made by the Selected Dealer on or before three (3)
business days after the date of each confirmation by certified or bank cashier's
check payable to the Representative. Certificates for the securities shall be
delivered as soon as practicable after delivery instructions are received by the
Representative.
5. Open Market Transactions; Stabilization.
5.1 For the purpose of stabilizing the market in the Shares, the
Representative has been authorized to make purchases and sales of the Company's
Shares in the open market or otherwise, and, in arranging for sales, to
overallot. If, in connection with such stabilization, the Representative
contracts for or purchases in the open market any Shares sold to the Selected
Dealer hereunder and not effectively placed by the Selected Dealer, the
Representative may charge the Selected Dealer for the accounts of the several
Underwriters an amount equal to the Selected Dealer concession on such Shares,
together with any applicable transfer taxes, and the Selected Dealer agrees to
pay such amount to the Representative on demand. Certificates for Shares
delivered on such repurchases need not be the identical certificates originally
purchased.
5.2 The Selected Dealer will not, until advised by the
Representative that the entire offering has been distributed and closed, bid for
or purchase Shares in the open market or otherwise
<PAGE> 3
make a market in the Shares or otherwise attempt to induce others to purchase
Shares in the open market. Nothing contained in this section shall prohibit the
Selected Dealer from acting as an agent in the execution of unsolicited orders
of customers in transactions effectuated for them through a market maker.
6. Allotments. The Representative reserves the right to reject all
subscriptions, in whole or in part, to make allotments and to close the
subscription books at any time without notice. If an order from a Selected
Dealer is rejected or if a payment is received which proves insufficient, any
compensation paid to the Selected Dealer shall be returned by the Selected
Dealer either in cash or by a charge against the account of the Selected Dealer,
as the Representative may elect.
7. Reliance on Prospectus. The Selected Dealer agrees not to use any
supplemental sales literature of any kind without prior written approval of the
Representative unless it is furnished by the Representative for such purpose. In
offering and selling the Company's Shares, the Selected Dealer will rely solely
on the representations contained in the Prospectus. Additional copies of the
current Prospectus will be supplied by the Representative in reasonable
quantities upon request.
8. Representations of Selected Dealer. By accepting this Agreement, the
Selected Dealer represents that it: (a) is registered as a broker-dealer under
the Securities Exchange Act of 1934, as amended; (b) is qualified to act as a
Dealer in the States or other jurisdictions in which it offers the Shares; (c)
is a member in good standing with the NASD; (d) will maintain all such
registrations, qualifications, and memberships throughout the term of this
Agreement; (e) will comply with all applicable Federal laws relating to the
offering, including, but not limited to, Rule 15c2-8 under the Securities
Exchange Act of 1934 and Release No. 4968 under the Securities Act of 1933
relating to delivery of preliminary and final prospectuses; (f) will comply with
the laws of the state or other jurisdictions concerned; (g) will comply the
rules and regulations of the NASD including, but not limited to, full compliance
with Rules 2100, 2730 2740, 2720 and 2750 of the Conduct Rules of the NASD and
the interpretations of such sections promulgated by the Board of Governors of
the NASD including an interpretation with respect to "Free-Riding and
Withholding" dated November 1, 1970, and as thereafter amended; and (h) confirms
that the purchase of the number of Shares it has subscribed for and may be
obligated to purchase will not cause it to violate the net capital requirements
of Rule 15c3-1 under the Exchange Act.
9. Blue Sky Qualification. The Selected Dealer agrees that it will offer
to sell the Shares only (a) in states or jurisdictions in which it is licensed
as a broker-dealer under the laws of such states, and (b) in which the
Representative has been advised by counsel that the Shares have been qualified
for sale under the respective securities or Blue Sky laws of such states. The
Representative assumes no obligation or responsibility as to the right of any
Selected Dealer to sell the Shares in any state or as to any sale therein.
10. Expenses. No expenses will be charged to Selected Dealers. A single
transfer tax, if any, on the sale of the Shares by the Selected Dealer to its
customers will be paid when such Shares are delivered to the Selected Dealer for
delivery to its customers. However, the Selected Dealer will pay its
proportionate share of any transfer tax or any other tax (other than the single
transfer tax
<PAGE> 4
described above) if any such tax shall be from time to time assessed against the
Underwriters and other Selected Dealers.
11. No Joint Venture. No Selected Dealer is authorized to act as the
Underwriters' agent, or otherwise to act on our behalf, in the offering or
selling of Shares to the public or otherwise. Nothing contained herein will
constitute the Selected Dealers an association or other separate entity or
partners with the Underwriters, or with each other, but each Selected Dealer
will be responsible for its share of any liability or expense based on any claim
to the contrary.
12. Communications. This Agreement and all communications to the
Underwriters shall be sent to the Representative at the following address or, if
sent by facsimile, to the number set forth below:
Mr. Cery Perle
Waldron & Co., Inc.
19000 MacArthur, 8th Floor
Irvine, CA 92715
Fax No. (800) 641-6942
Any notice to the Selected Dealer shall be properly given if mailed, telephoned,
or transmitted by facsimile to the Selected Dealer at its address or number set
forth below its signature to this Agreement. All communications and notices
initially transmitted by facsimile shall be confirmed in writing.
13. Governing Law. This Agreement shall be governed by and construed
according to the laws of the State of California.
14. Representative's Authority and Obligations. The Representative shall
have full authority to take such actions as it may deem advisable in respect of
all matters pertaining to the offering or arising thereunder. The Representative
shall not be under any liability to the Selected Dealer, except such as may be
incurred under the Securities Act of 1933 and the rules and regulations
thereunder, except for lack of good faith and except for obligations assumed by
it in this Agreement, and no obligation on its part shall be implied or inferred
herefrom.
15. Assignment. This Agreement may not be assigned by the Selected
Dealer without the Representative's prior written consent.
16. Termination. The Selected Dealer will be governed by the terms and
conditions of this Agreement until it is terminated. This Agreement will
terminate upon the termination of the Offering.
17. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, and all of which together shall constitute
one instrument. A copy of an executed counterpart of this Agreement may be sent
via facsimile by any party to the other party, and the other party may deem such
facsimile copy of the executed counterpart to be an original.
<PAGE> 5
18. Application. If you desire to purchase any of the Shares, please
confirm your application by signing and returning to us your confirmation on the
duplicate copy of this letter, even though you may have previously advised us
thereof by telephone or telegraph. Our signature hereon may be by facsimile.
WALDRON & CO., INC.
Dated: _____________, 1997 By:_____________________________________
Cery Perle, President
<PAGE> 6
OFFER TO PURCHASE
The undersigned does hereby offer to purchase (subject to the right to
revoke set forth in Section 2) _______ Shares in accordance with the terms and
conditions set forth above.
-----------------------------------------
By:______________________________________
Its:_____________________________________
Address:_____________________________
Facsimile Number:____________________
Telephone Number:____________________
("Selected Dealer")
Date of Acceptance: ________________________
Accepted By: _______________________________
IRS Employer Identification No.: ___________
Share Allocation: __________________________
<PAGE> 1
EXHIBIT 5.1
[DONAHUE, MESEREAU & LEIDS LLP LETTERHEAD]
May 23, 1997
Simulations Plus, Inc.
40015 Sierra Highway
Building B-110
Palmdale, California 93550
Re: Simulations Plus, Inc.
Registration Statement on Form SB-2
(Registration No. 333-6680)
Ladies and Gentlemen:
We have examined the Registration Statement on Form SB-2 filed by you
with the Securities and Exchange Commission (the "Commission") on March 25, 1997
(Registration No. 333-6680), as amended by Amendment No. 1 to Form SB-2 filed by
you with the Commission on May 27, 1997 (as amended, the "Registration
Statement"), in connection with the registration under the Securities Act of
1933, as amended, of up to 1,322,500 shares (the "Shares") of Common Stock,
including 172,500 shares of Common Stock to cover over-allotments (the "Option
Shares"). The Shares are to be sold to the Underwriters as described in the
Registration Statement for resale to the public. As your counsel in connection
with this transaction, we have examined the proceedings taken and are familiar
with the proceedings proposed to be taken by you in connection with the sale and
issuance of the Shares.
It is our opinion that, upon conclusion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares and the Option Shares and upon completion of the proceedings being taken
in order to permit such transactions to be carried out in accordance with the
securities laws of the various states where required, the Shares and the Option
Shares, when sold in the manner described in the Registration Statement, will be
legally issued, fully paid and nonassessable.
<PAGE> 2
Simulations Plus, Inc.
May 23, 1997
Page Two
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in such
Registration Statement, including the prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
/s/ DONAHUE, MESEREAU & LEIDS LLP
Donahue, Mesereau & Leids LLP
<PAGE> 1
EXHIBIT 10.12
WARRANT TO PURCHASE SHARES OF COMMON STOCK
SIMULATIONS PLUS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
THIS CERTIFICATE evidences the right of Walter S. Woltosz and Virginia
E. Woltosz (the "Holders") to purchase, for the Warrant Price (as defined
below), shares of Common Stock of Simulations Plus, Inc. a California
corporation (the "Company"), subject to the terms and conditions hereinafter set
forth.
1. Term of Warrant.
Subject to the terms and conditions set forth herein, this
Warrant (the "Warrant") may be exercised on or after the date this Warrant vests
as set forth in Section 2, and at any time prior to 5 P.M. Pacific Standard Time
on that date which is five (5) years from the date of the Company's Prospectus
for its initial public offering, at which time this Warrant shall become void,
and all rights hereunder shall thereupon cease.
2. Right to Exercise. The Warrant shall vest and become exercisable
according to the following terms:
2.1 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
$3,000,000.00 or more, than the Holders are granted the right to purchase
300,000 shares of the Company's Common Stock.
2.2 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
$2,000,000.00 to $3,000,000.00 than the Holders are granted rights 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 each such fiscal year, the Holders are
entitled to receive warrants to acquire 10,000 shares of the Company's Common
Stock.
3. Exercise Price; Adjustment of Price and Number of Shares.
All shares of Common Stock offered pursuant to paragraphs 2.1
& 2.2 above shall be exercisable at an exercise price of $5.00 per share (the
"Exercise Price"), with the Exercise Price and the number of shares of Common
Stock purchasable upon the exercise of this Warrant, subject to adjustment from
time to time on same terms and conditions set forth in Section 12 of the Warrant
to be issued to Waldron & Co., Inc., a copy of which is attached as Exhibit
10.22 to the Company's Registration Statement relating to its initial public
offering, except that for purposes hereof, the Exercise Price shall be $5.00 per
share.
4. Manner of Exercise.
4.1 The Holders of this Warrant may exercise this Warrant, in whole or
in part, upon surrender of this Warrant with the form of subscription attached
hereto duly executed, to the Company at its corporate office in Palmdale,
California, and upon compliance with and subject to the conditions set forth
herein, together with the full Warrant Price, in lawful money of the United
1
<PAGE> 2
States or by certified check, bank draft or postal or express money order
payable in United States dollars to the order of the Company, for each share of
Common Stock to be purchased.
4.2 Upon receipt of this Warrant, the form of subscription duly
executed, and payment of the aggregate Warrant Price for the shares of Common
Stock for which this Warrant is being exercised, the Company shall cause to be
issued certificates for the total number of whole shares of Common Stock for
which this Warrant is being exercised in such denominations as are required for
delivery to the Holders of this Warrant, and the Company shall thereupon deliver
such certificate or certificates to the Holders or their nominee.
4.3 In case the Holders shall exercise this Warrant with respect to
less than all of the shares of the Common Stock that may be purchased under this
Warrant, the Company shall execute a new Warrant for the balance of the shares
of Common Stock that may be purchased upon exercise of this Warrant and shall
deliver such new Warrant to the Holders.
5. Restrictions on Exercise.
The Warrant may not be exercised if the issuance of the shares
of Common Stock upon such exercise would constitute a violation of any
applicable federal or state securities laws or other laws or regulations. As a
condition to the exercise of the Warrant, the Company may require the Holders to
make such representations and warranties as may be required by applicable law or
regulation.
6. Stock Fully Paid; Reservation of Shares.
The Company covenants and agrees that all shares of Common
Stock will, upon issuance and payment in accordance herewith, by fully paid,
validly issued and nonassessable. The Company further covenants and agrees that
during the term of the Warrant the Company will at all times have authorized and
reserved for the purpose of this issue upon exercise of the Warrant at least the
maximum number of shares of the Company's Common Stock as are issuable upon the
exercise of the Warrant.
7. Fractional Shares.
No fractional shares of Common Stock will be issued in
connection with any subscription hereunder but, in lieu of fractions shares, the
Company shall make a cash payment therefor upon the basis of the fair market
value of the shares.
8. Payment of Taxes.
The Company covenants and agrees that it will pay, when due
and payable, any and all taxes which may be payable relating to the issuance of
this Warrant, or the issuance of any shares of Common Stock upon the exercise of
this Warrant. The Company shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issuance or delivery
of this Warrant or of the shares of Common Stock in a name other than that of
Holders at the time of surrender, and until the payment of such tax, the Company
shall not be required to issue such shares of Common Stock.
2
<PAGE> 3
9. Restrictions on Transfer.
The Warrant is restricted from sale, transfer, assignment or
hypothecation by operation of law. The Warrant has not been registered under the
Securities Act of 1933 (the "Act") or any applicable state securities laws, and
may not be offered for sale, sold, transferred, pledged or hypothecated without
an effective registration statement under the Act and under any applicable state
securities law, or an opinion of counsel, satisfactory to the Company, that an
exemption from such registration is available. The Holders understand that
because the Warrant is not registered, the Holders must hold the Warrant
indefinitely unless it is registered under the Act and any applicable state
securities laws or must obtain exemptions from registration. The Holders
represent and warrant that the Holders are purchasing the Warrant for their own
account for investment and not with the view to distribution, assignment, resale
or other transfer of the Warrant. Except as specifically stated herein, no other
person has a direct or indirect beneficial interest in the Warrant.
10. No Rights as Shareholder.
Holders, as Holders of the Warrant, shall not be entitled to
vote or receive dividends or be considered a shareholder of the Company for any
purpose, nor shall anything in this Certificate be construed to confer on
Holders, as such, any rights of a shareholder of the Company or any right to
vote, give or withhold consent to any corporate action, to receive notice of
meetings of shareholders, to receive dividends or subscription rights or
otherwise.
11. Notices.
All demands, notices, consents and other communications to be
given hereunder shall be in writing and shall be deemed duly given when
delivered personally or five days after being mailed by first-class mail,
postage prepaid, properly addressed, if to the Company at Simulations Plus,
Inc., 40015 Sierra Highway, Bldg. B-110, Palmdale, CA 93350, or if to Holders at
. The Company and Holders may change such address at any time or
times by notice hereunder to the other.
12. Amendments; Waivers; Terminations.
The Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
13. Governing Law.
The Warrant 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. The Company and Holders
recognize and hereby irrevocably consent to the exclusive jurisdiction over it
or them, 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 the Warrants, or any other document relating hereto or delivered in
connection with the transactions contemplated hereby.
3
<PAGE> 4
14. Captions.
The captions used in this Certificate are solely for the convenience of
the parties hereto and such captions do not constitute a part of the Warrant.
Dated as of ______________, 1996. SIMULATIONS PLUS, INC.
By: ___________________________
Name: ___________________________
Title: ___________________________
4
<PAGE> 5
SIMULATIONS PLUS, INC.
SUBSCRIPTION FORM
(To be completed and signed only upon exercise of the Warrant)
TO: Simulations Plus, Inc.
40015 Sierra Highway, Bldg. B-110
Palmdale, CA 93550
Attention: Secretary
The undersigned, the Holders and registered owners of the attached
Warrant, hereby irrevocably and unconditionally elect to exercise such Warrant
and to purchase * shares of Simulations Plus, Inc. Common Stock, pursuant to the
terms and conditions of the Warrant, and herewith tender a check in the amount
of $________ in full payment of the purchase price for such shares, and request
that the certificate(s) for such shares be issued in the name of and delivered
to:
(Please print name and address)
Dated: Signature:
- ------------------ -------------------------------------
- ------------------ -------------------------------------
*Insert here the number of shares called for on the face of the Warrant
(or in the case of partial exercise, that portion as to which the Warrant is
being exercised), without naming any adjustment or additional Common Stock or
any other securities or property which, under the adjustment provisions of the
Warrants, may be deliverable upon exercise.
5
<PAGE> 1
EXHIBIT 10.16
AMENDED AND RESTATED PROMISSORY NOTE
US$________________________
Los Angeles, California Dated: , 1996
THIS NOTE (THE "NOTE") HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR QUALIFIED UNDER ANY STATE SECURITIES LAWS.
THIS NOTE MAY NOT BE SOLD, HYPOTHECATED, ASSIGNED OR OTHERWISE TRANSFERRED IN
ANY WAY IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND
COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION
UNDER SUCH ACT AND SUCH LAWS.
This Note is issued pursuant to a Subscription Agreement dated as of
_______________, 1996, between the Borrower (as hereinafter defined) and the
Lender (as hereinafter defined) (the "Subscription Agreement"), a copy of which
agreement is available for inspection at the Borrower's principal office,
relating to the issuance by the Borrower of up to an aggregate of $1,500,000 in
principal amount of its 10% Promissory Notes. This Note is one of a series of
Notes of the Borrower issued in such private placement designated as 10%
Promissory Notes which, together with this Note, are herein referred to as the
Notes. This Note is entitled to the benefit of certain terms, conditions,
covenants and agreements contained in the Subscription Agreement. Any transferee
or transferees of the Note, by their acceptance hereof, assume the obligations
of the Lender in the Subscription Agreement with respect to the conditions and
procedures for transfer of the Note. Reference to the Subscription Agreement
shall in no way impair the absolute and unconditional obligation of the Borrower
to pay both principal and interest hereon as provided herein.
1. Principal.
FOR VALUE RECEIVED, the undersigned, SIMULATIONS PLUS, INC., a
California corporation ("Borrower"), hereby promises to pay to the order of
__________________________________________ (hereinafter called "Lender"), the
principal sum of ___________ United States Dollars (US$_________) (the "Loan"),
with interest from the date of this Note on the unpaid principal at a rate equal
to ten percent (10%) per annum (the "Stated Rate").
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2. Payment of Principal and Interest; Acceleration of Maturity
Date.
All interest due hereunder shall be computed on the basis of a
year of 365 days for the actual number of days elapsed.
Notwithstanding any other provision of this Note, on December
31, 1997 (the "Maturity Date") the unpaid principal balance hereon on such date,
together with any and all accrued and unpaid interest hereunder, shall be paid
in full. Borrower may at any time prepay all or part of the principal balance
due under this Note without premium or penalty. If prior to the Maturity Date,
this Note shall be automatically due and payable on that date which is five (5)
business days after the closing of Borrower's initial public offering.
Except as provided in the immediately following paragraph, all
payments received by Lender under this Note shall be credited first to any
charges or other expenses for which Lender is entitled to payment hereunder,
next to accrued but unpaid interest, and third to unpaid principal.
Notwithstanding anything to the contrary set forth in this
Note, if, at any time until payment in full of all amounts due Lender hereunder,
the amount payable under the Stated Rate by Borrower pursuant to this Note
exceeds the amount payable under the highest rate of interest permissible under
any law which a court of competent jurisdiction shall, in a final determination,
deem applicable hereto (the "Maximum Lawful Rate"), then in such event and so
long as the Maximum Lawful Rate would be so exceeded, the rate of interest
payable hereunder shall be equal to the amount payable under the Maximum Lawful
Rate; provided, however, that if at any time thereafter the Stated Rate is less
than the Maximum Lawful Rate, Borrower shall continue to pay interest hereunder
at the Maximum Lawful Rate until such time as the total interest received by
Lender hereunder is equal to the total interest which Lender would have received
had the Stated Rate been (but for the operation of this paragraph) the interest
rate payable since the date hereof. Thereafter, the interest rate payable
hereunder shall be the Stated Rate unless and until the Stated Rate again
exceeds the Maximum Lawful Rate, in which event this paragraph shall again
apply. In no event shall the total interest payable by Borrower hereunder exceed
the amount payable under the Maximum Lawful Rate. In the event that a court of
competent jurisdiction shall make a final determination that Lender has received
interest hereunder in excess of the amount payable under the Maximum Lawful
rate, Lender shall, to the extent permitted by applicable law, promptly apply
such excess in the following order: (i) then due and payable fees and expenses;
(ii) then due and payable interest payments; (iii) then due and payable
principal payments on the Loan; (iv) then to any other
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unpaid obligations of Borrower to Lender under this Note; and (v) thereafter as
a refund to Borrower or as a court of competent jurisdiction may otherwise
order.
3. Manner of Payment.
Principal and interest on the Loan, and all other amounts
payable hereunder, are payable in lawful currency of the United States of
America in immediately available funds, and Borrower shall deliver all such
payments to Lender, payable to Lender at
____________________________________________________, ________________, or at
such other place as may be designated in writing by Lender.
4. Events of Default/Remedies.
a. Events of Default. Any of the following events shall
constitute an Event of Default:
(1) breach by Borrower of any of Borrower's
obligations or covenants under this Note or under any other Note; or
(2) Borrower (A) becomes insolvent or admits in
writing Borrower's inability to pay Borrower's debts as they mature, (B) makes
any assignment for the benefit of creditors, or (C) applies for or consents to
the appointment of a receiver or trustee for Borrower or for a substantial part
of Borrower's property or business, or a receiver or trustee otherwise is
appointed and is not discharged within thirty (30) days after such appointment;
and
(3) any bankruptcy, insolvency, reorganization
or liquidation proceeding or other proceeding for relief under any bankruptcy
law or any law for the relief of debtors is instituted by or against Borrower;
and
(4) the failure to apply the proceeds of this
Note in accordance with the description of the use of proceeds contained in the
Borrower's Confidential Term Sheet dated December 16, 1996 utilized in
connection with the issuance and sale of this Note.
b. Remedies. Upon the occurrence and during the
continuance of an Event of Default, all indebtedness under this Note shall
automatically be immediately due and payable. In addition, Lender, at his
option, and without notice to Borrower, may take one or more of the actions
described below:
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(1) declare all indebtedness under this Note
immediately due and payable and credit any sums received thereafter in such
manner as it elects upon such indebtedness; provided, however, that such
application of sums so received shall not serve to waive or cure any default
existing under this Note nor to invalidate any notice of default or any act done
pursuant to such notice and shall not prejudice any rights of Lender; and
(2) exercise any or all rights provided or
permitted by law or granted pursuant to this Note or the Subscription Agreement
in such order and in such manner as Lender may, in his sole judgment, determine.
c. No Waiver of Remedies. No waiver of any breach of or
default under any provision of this Note shall constitute or be construed as a
waiver by Lender of any subsequent breach of or default under that or any other
provision of this Note.
d. Remedies Not Exclusive. No remedy herein conferred
upon Lender is intended to be exclusive of any other remedy herein or in any
other agreement between the parties hereto or by law provided or permitted, but
each shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law, in equity or by statute.
5. [Intentionally omitted]
6. [Intentionally omitted]
7. [Intentionally omitted]
8. Restrictions on Transfer.
The Lender agrees that prior to making any disposition of the
Note, the Lender shall give written notice to the Borrower describing briefly
the manner in which any such proposed disposition is to be made; and no such
disposition shall be made if the Borrower has notified the Lender that in the
opinion of counsel reasonably satisfactory to the Lender a registration
statement or other notification or posteffective amendment thereto (hereinafter
collectively a "Registration Statement") under the Act and applicable state
securities laws is required with respect to such disposition and no such
Registration Statement has been filed by the Borrower with, and declared
effective, if necessary, by, the Securities and Exchange Commission and the
securities regulators of any such states. The Lender represents and warrants to
the Borrower that the Lender is purchasing this Note for his own account for
investment and not with the view to distribution, assignment, resale, or other
transfer of the Note. Except as specifically stated herein no
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other person has a direct or indirect beneficial interest in the
Note.
9. Additional Covenants and Agreements.
Borrower hereby makes the following covenants, which shall be
deemed to be continuing covenants until payment in full of all indebtedness of
Borrower to Lender arising under this Note:
a. Borrower agrees to furnish to Lender, upon request,
such other information relating to the affairs, the operations and/or the
financial condition of Borrower as Lender may from time to time reasonably
request.
b. Borrower shall promptly notify Lender in writing of
the occurrence of any act or event including, without limitation, the
commencement or threat of any action, suit, claim or proceeding against or
investigation of Borrower, which could materially and adversely affect Borrower
or which could impair the validity, effectiveness or enforceability of, or
impair Borrower's ability to perform its obligations under, this Note, and of
the occurrence of any Event of Default or any event which with the giving of
notice, the lapse of time, or both, would become and Event of Default and the
action Borrower proposes to take with respect thereto.
c. Borrower shall, at any time and from time to time,
upon the written request of Lender, execute and deliver to Lender such further
documents and instruments and do such other acts and things as Lender may
reasonably request in order to effectuate fully the purpose and intent of this
Note.
10. Waiver.
Borrower hereby waives any right of offset Borrower may now or
hereafter have against Lender, and Borrower hereby also waives diligence,
presentment, protest and demand, notice of protest, dishonor and nonpayment of
this Note and expressly agrees that, without in any way affecting the liability
of Borrower hereunder, Lender may extend any maturity date or the time for
payment of any installment due hereunder, accept security, release any party
liable hereunder and release any security now or hereafter securing this Note.
Borrower further waives, to the full extent permitted by law, the right to plead
any and all statutes of limitations as a defense to any demand on this Note, or
on any deed of trust, security agreement, lease assignment, guaranty or other
agreement nor or hereafter securing this Note.
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11. Choice of Law and Venue; Jury Trial Waiver.
THE VALIDITY OF THIS NOTE, ITS CONSTRUCTION, INTERPRETATION,
AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ALL
MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA,
WITHOUT GIVING EFFECT TO ITS CONFLICT OF LAWS PRINCIPLES. THE PARTIES AGREE THAT
ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE
TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY
OF LOS ANGELES, STATE OF CALIFORNIA. EACH OF BORROWER AND LENDER WAIVES, TO THE
EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE
DOCTRINE OF FORUM NOW CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY
PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 12. BORROWER AND LENDER
HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS NOTE OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND LENDER
REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY
WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE
EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT
TO A TRIAL BY THE COURT.
12. [Intentionally Omitted]
13. Notice.
All notices, requests, consents and demands shall be made in
writing and shall be mailed first class, certified mail, return receipt
requested, to the Company or the Lender at such respective addresses as may be
furnished in writing to the other party hereto.
14. Legal Fees.
Borrower agrees to pay all costs and expenses, including
without limitation reasonable attorneys' fees, incurred by Lender in connection
with the enforcement of any obligation of Borrower under this Note.
15. Severability.
In case any term or any provision of this Note shall be
invalid, illegal or unenforceable, such provision shall be severable from the
rest of this Note and the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
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16. Headings.
Headings used in this Note are inserted for convenience only
and shall not be deemed to constitute a part hereof.
17. Amendments.
This Note and any term or provision hereof may only be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought.
Borrower:
SIMULATIONS PLUS, INC.,
a California corporation
By: ______________________________
Name: ______________________________
Title: ______________________________
Lender:
By: ______________________________
Name: ______________________________
Title: ______________________________
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EXHIBIT 10.18
LOCK-UP AGREEMENT
This Lock-Up Agreement ("Agreement") is effective as of _____________,
1997 by, between and among Simulations Plus, Inc., a California corporation (the
"Company"), ___________________, a shareholder of the Company (the
"Shareholder") and Waldron & Co., Inc., a California corporation (the
"Underwriter").
R E C I T A L S
WHEREAS, the Shareholder acquired warrants (the"Warrants") which are
exercisable for shares of common stock, par value (0.01 per share (the "Common
Stock"), of the Company at an exercise price of $2.50 per share;
WHEREAS, the Underwriter has informed the Company and the Shareholder
that it would be in the best interests of the Shareholder, the Company and the
Underwriter if the Shareholder agreed to execute this Agreement;
A G R E E M E N T
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by each of the Shareholder the
Underwriter and the Company, the parties hereto hereby agree as follows:
1. Lock-up. The Company is currently in the process of preparing a
registration statement on Form SB-2, as the same may be amended from time to
time (collectively, the "Registration Statement") which will register shares of
the Company's Common Stock to be sold by the Underwriter on a "firm commitment"
basis all as more fully set forth in the Registration Statement. In order to
induce the Underwriter to undertake the firm commitment public offering of the
Company's shares of Common Stock, the Shareholder agrees that he, she or it, as
the case may be, will not, offer, sell, pledge, hypothecate, contract to sell,
grant any option for the sale of, or otherwise dispose of or transfer, directly
or indirectly, any Warrants or any shares of the Company's Common Stock issuable
upon exercise of the Warrants or any security or other instrument which by its
terms is convertible into, exercisable for, or exchangeable for shares of the
Company's Common Stock beginning on the date hereof and ending three hundred
sixty five (365) days after the effective date of the Registration Statement.
2. Successors. The provisions of this Agreement shall be deemed to
obligate, extend to and inure to the benefit of the successors, assigns,
transferees, grantees, and indemnities of each of the parties to this Agreement.
3. Attorneys Fees. In the event of a dispute between the
<PAGE> 2
parties concerning the enforcement or interpretation of this Agreement, the
prevailing party in such dispute, whether by legal proceedings or otherwise,
shall be reimbursed immediately for the reasonably incurred attorney's fees and
other costs and expenses by the other parties to the dispute.
4. Choice of Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California without reference to its
choice of law rules.
5. Arbitration. Any dispute or claim arising out of or in any way
related to this Agreement shall be settled by arbitration in Irvine, California.
Such arbitration shall be conducted in accordance with the rules and regulations
oft he American Arbitration Association ("AAA"). AAA shall designate an
arbitrator from an approved list of arbitrators following both parties' review
and deletion of those arbitrators on the approved list having a conflict of
interest with either party. Each party shall pay its own expenses associated
with such arbitration (except as set forth in Section 3 above). A demand for
arbitration shall be made within a reasonable time after the claim, dispute or
other matter has arisen and in no event shall such demand be made after the date
when institution of legal or equitable proceedings based on such claim, dispute
or other matter in question would be barred by the applicable statutes of
limitations. The decision of the arbitrators shall be rendered within 60 days of
submission of any included in the arbitration. The decision of the arbitrator
shall be binding upon the parties and judgment in accordance with that decision
may be entered in any court having jurisdiction thereof.
6. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but
all of which, taken together, shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above.
SIMULATIONS PLUS, Inc.
By:_________________________________________
Its:________________________________________
SHAREHOLDER
____________________________________________
WALDRON & CO., INC.
By:_________________________________________
Its:________________________________________
<PAGE> 1
EXHIBIT 10.20
LOCK-UP AGREEMENT
FOR SHAREHOLDERS
This Lock-Up Agreement ("Agreement") is effective as of _____________,
1997 by and between Simulations Plus, Inc., a California corporation (the
"Company"), __________ a shareholder of the Company (the "Shareholder"), and
Waldron & Co., Inc., (the "Underwriter"). The parties hereto agree as follows:
1. Lock Up. The Company is currently in the process of preparing a
registration statement on Form SB-2 (the "Registration Statement") which will
register shares of the Company's common stock (the "Shares") to be sold by the
Underwriter on a "firm commitment" basis. In order to induce the Underwriter to
undertake the firm commitment public offering of the Company's Shares the
Shareholder agrees that it will not, without the Underwriter's prior written
consent, offer, sell, pledge, contract to sell, grant any option for the sale
of, or otherwise dispose of, directly or indirectly, any shares of the
Company's common stock or any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for shares of the Company's
common stock beginning on the date hereof and ending twelve (12) months after
the effective date of the Registration Statement.
2. Successors. The provisions of this Agreement shall be deemed to
obligate, extend to and inure to the benefit of the successors, assigns,
transferees, grantees, and indemnitees of each of the parties to this Agreement.
3. Attorneys Fees. In the event of a dispute between the parties
concerning the enforcement or interpretation of this Agreement, the prevailing
party in such dispute, whether by legal proceedings or otherwise, shall be
reimbursed immediately for the reasonably incurred attorneys' fees and other
costs and expenses by the other parties to the dispute.
4. Choice of Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California without
reference to its choice of law rules.
5. Arbitration. Any dispute or claim arising to or in any way
related to this Agreement shall be settled by arbitration in San Diego,
California. All arbitration shall be conducted in accordance with the rules
and regulations of the American Arbitration Association ("AAA"). AAA shall
designate an arbitrator from an approved list of arbitrators following both
parties' review and deletion of those arbitrators on the approved list having a
conflict of interest with either party. Each party shall pay its own expenses
associated with such arbitration (except as set forth in Section 3 above). A
demand for arbitration shall be made within a reasonable time after the claim,
dispute or other matter has arisen and in no event shall such demand be made
after the date when institution of legal or equitable proceedings based on such
claim, dispute or other matter in question would be barred by the applicable
statutes of limitations. The decision of the arbitrators shall be rendered
within 60 days of submission of any claim or dispute, shall be in writing and
mailed to all the parties included in the arbitration. The decision of the
arbitrator shall
<PAGE> 2
be binding upon the parties and judgment in accordance with that decision may
be entered in any court having jurisdiction thereof.
6. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which,
taken together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth next to his or its signature.
SIMULATIONS PLUS, INC.
By: ______________________________
Its: ______________________________
SHAREHOLDER
__________________________________
WALDRON & CO.
By: ______________________________
Its: ______________________________
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EXHIBIT 10.22
THESE SECURITIES MAY NOT BE PUBLICLY OFFERED OR SOLD UNLESS AT THE TIME OF SUCH
OFFER OR SALE, THE PERSON MAKING SUCH OFFER OR SALE DELIVERS A PROSPECTUS
MEETING THE REQUIREMENTS OF SECTION 10 OF THE SECURITIES ACT OF 1933 FORMING A
PART OF A REGISTRATION STATEMENT, OR POST-EFFECTIVE AMENDMENT THERETO, WHICH IS
EFFECTIVE UNDER SAID ACT, UNLESS IN THE OPINION OF COUNSEL TO THE COMPANY SUCH
OFFER AND SALE IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF SAID ACT.
WARRANT
For the Purchase of Shares of Common Stock
of
SIMULATIONS PLUS, INC.
Void After 5 P.M. _______________, 2002
No. 1
Warrant to Purchase One Hundred Thousand (100,000) Shares of Common Stock
THIS IS TO CERTIFY, that, for value received, Waldron & Co., Inc. (the
"Underwriter") or registered assigns, is entitled, subject to the terms and
conditions hereinafter set forth, on or after ____________, 1998 and at any time
prior to 5 P.M., Pacific Standard Time ("PST"), on _______________, 2002, but
not thereafter, to purchase such number of shares of Common Stock (the "Shares")
of Simulations Plus, Inc., a California corporation (the "Company"), from the
Company as is set forth above and upon payment to the Company of $____ per Share
(the "Purchase Price"), if and to the extent this Warrant is exercised, in whole
or in part, during the period this Warrant remains in force, subject in all
cases to adjustment as provided in Section 2 hereof, and to receive a
certificate or certificates representing the Shares so purchased, upon
presentation and surrender to the Company of this Warrant, with the form of
subscription attached hereto, including changes thereto reasonably requested by
the Company, duly executed, and accompanied by payment of the Purchase Price of
each Share.
SECTION 1.
TERMS OF THIS WARRANT
1.1 Time of Exercise. Subject to the provisions of Sections 1.5 and 3.1
hereof, this Warrant may be exercised at any time and from time to time after
9:00 A.M., PST, on __________, 1998 (the "Exercise Commencement Date"), but no
later than 5:00 P.M., _________, 2002 (the "Expiration Time") at which it shall
become void, and all rights hereunder shall thereupon cease.
<PAGE> 2
1.2 Manner of Exercise.
1.2.1 The holder of this Warrant (the "Holder") may exercise
this Warrant, in whole or in part, upon surrender of this Warrant with the form
of subscription attached hereto duly executed, to the Company at its corporate
office in Palmdale, California together with the full Purchase Price for each
Share to be purchased in lawful money of the United States, or by certified
check, bank draft or postal or express money order payable in United States
dollars to the order of the Company, and upon compliance with and subject to the
conditions set forth herein.
1.2.2 Upon receipt of this Warrant with the form of
subscription duly executed and accompanied by payment of the aggregate Purchase
Price for the Shares for which this Warrant is then being exercised, the Company
shall cause to be issued certificates for the total number of whole Shares for
which this Warrant is being exercised in such denominations as are required for
delivery to the Holder, and the Company shall thereupon deliver such
certificates to the Holder or its nominee. Such payment shall be made either by
check payable to the order of the Company or the holder may elect to receive
that number of Warrant Shares equal to the value (as determined below) of this
Warrant, in which event the Company shall issue to the holder of this Warrant
the number of shares of Common Stock determined by using the following formula:
Y (A - B)
X = ---------
A
where X = the number of shares of Common Stock (or Warrant Shares) to be issued
to the holder; Y = the number of Warrant Shares subject to this Warrant; A = the
Fair Market Value of one (1) Warrant Share; B = the Exercise Price per Warrant
Share. Certificates for the Warrant Shares so purchased shall be delivered to
the Warrantholders, at their respective addresses designated in the completed
Exercise Forms, within a reasonable time, in no event exceeding 10 days after
the rights represented by this Warrant shall have been so exercised, and, unless
this Warrant has expired or been exercised in full, a new Warrant representing
the number of shares (if any) with respect to which this Warrant shall not then
have been exercised shall also be issued to the Warrantholders within such time.
1.2.3 In case the Holder shall exercise this Warrant with
respect to less than all of the Shares that may be purchased under this Warrant,
the Company shall execute a new Warrant for the balance of the Shares that may
be purchased upon exercise of this Warrant and deliver such new Warrant to the
Holder.
1.2.4 The Company covenants and agrees that it will pay when
due and payable any and all taxes which may be payable in respect of the issue
of this Warrant, or the issue of any Shares upon the exercise of this Warrant.
The Company shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issuance or delivery of this Warrant
or of the Shares in a name other than that of the Holder at the time of
surrender, and until the payment of such tax the Company shall not be required
to issue such Shares.
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1.3 Exchange of Warrant. This Warrant may be split-up, combined or
exchanged for another Warrant or Warrants of like tenor to purchase a like
aggregate number of Shares. If the Holder desires to split-up, combine or
exchange this Warrant, he shall make such request in writing delivered to the
Company at its corporate office and shall surrender this Warrant and any other
Warrants to be so split-up, combined or exchanged, the Company shall execute and
deliver to the person entitled thereto a Warrant or Warrants, as the case may
be, as so requested. The Company shall not be required to effect any split-up,
combination or exchange which will result in the issuance of a Warrant entitling
the Holder to purchase upon exercise a fraction of a Share. The Company may
require the Holder to pay a sum sufficient to cover any tax or governmental
charge that may be imposed in connection with any split-up, combination or
exchange of Warrants.
1.4 Holder as Owner. Prior to due presentment for registration of
transfer of this Warrant, the Company may deem and treat the Holder as the
absolute owner of this Warrant (notwithstanding any notation of ownership or
other writing hereon) for the purpose of any exercise hereof and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
1.5 Transfer and Assignment. Prior to one year from the date hereof,
this Warrant may not be sold, hypothecated, exercised, assigned or transferred,
except to individuals who are officers of the Underwriter or any successor to
its business or pursuant to the laws of descent and distribution, and thereafter
and until its expiration shall be assignable and transferable in accordance with
and subject to the provisions of the Securities Act of 1933 and applicable state
securities laws; provided, however, that if not exercised immediately upon such
transfer, this Warrant shall lapse.
1.6 Method of Assignment. Any assignment permitted hereunder shall be
made by surrender of this Warrant to the Company at its principal office with
the form of assignment attached hereto duly executed and funds sufficient to pay
any transfer tax. In such event, the Company shall, without charge, execute and
deliver a new Warrant in the name of the assignee named in such instrument of
assignment and this Warrant shall promptly be canceled. This Warrant may be
divided or combined with other Warrants which carry the same rights upon
presentation thereof at the corporate office of the Company together with a
written notice signed by the Holder, specifying the names and denominations in
which such new Warrants are to be issued.
1.7 Rights of Holder. Nothing contained in this Warrant shall be
construed as conferring upon the Holder the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company. If, however, at any time prior to
the expiration of this Warrant and prior to its exercise, any of the following
shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a dividend
or distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings;
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<PAGE> 4
as indicated by the accounting treatment of such dividend or distribution on the
books of the Company; or
(b) the Company shall offer to the holders of its Common
Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any option, right or warrant to subscribe therefor; or
(c) there shall be proposed any capital reorganization or
reclassification of the Common Stock, or a sale of all or substantially all of
the assets of the Company, or a consolidation or merger of the Company with
another entity; or
(d) there shall be proposed a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall cause to be mailed to
the Holder, at the earliest practicable time (and, in any event, not less than
twenty (20) days before any record date or other date set for definitive
action), written notice of the date on which the books of the Company shall
close or a record shall be taken to determine the shareholders entitled to such
dividend, distribution, convertible or exchangeable securities or subscription
rights, or entitled to vote on such reorganization, reclassification, sale,
consolidation, merger, dissolution, liquidation or winding up, as the case may
be. Such notice shall also set forth such facts as shall indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Purchase Price and the kind and amount of the Shares and other securities
and property deliverable upon exercise of this Warrant. Such notice shall also
specify the date as of which the holders of the Common Stock of record shall
participate in said distribution or subscription rights or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, sale, consolidation, merger, dissolution,
liquidation or winding up, as the case may be (on which date, in the event of
voluntary or involuntary dissolution, liquidation or winding up of the Company,
the right to exercise this Warrant shall terminate).
Without limiting the obligation of the Company to provide notice to the
holder of actions hereunder, it is agreed that failure of the Company to give
notice shall not invalidate such action of the Company.
1.8 Lost Certificates. If this Warrant is lost, stolen, mutilated or
destroyed, the Company shall, on such reasonable terms as to indemnity or
otherwise as it may impose (which shall, in the case of a mutilated Warrant,
include the surrender thereof), issue a new Warrant of like denomination and
tenor as, and in substitution for, this Warrant, which shall thereupon become
void. Any such new Warrant shall constitute an additional contractual obligation
of the Company, whether or not the Warrant so lost, stolen, destroyed or
mutilated shall be at any time enforceable by anyone.
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1.9 Covenants of the Company. The Company covenants and agrees as
follows:
1.9.1 At all times it shall reserve and keep available for the
exercise of this Warrant such number of authorized shares of Common Stock as are
sufficient to permit the exercise in full of this Warrant.
1.9.2 Prior to the issuance of any Shares upon exercise of this
Warrant, the Company shall secure the listing of such Shares upon any securities
exchange or automated quotation system upon which the Company's Common Stock is
listed for trading.
1.9.3 The Company covenants that all Shares when issued upon the
exercise of this Warrant will be validly issued, fully paid, non-assessable and
free of preemptive rights.
SECTION 2.
ADJUSTMENT OF PURCHASE PRICE
AND NUMBER OF SHARES PURCHASABLE UPON EXERCISE
2.1 Stock Splits. If the Company at any time or from time to time after
tthe issuance date of this Warrant effects a subdivision of the outstanding
Common Stock, the Purchase Price then in effect immediately before that
subdivision shall be proportionately decreased and the number of shares
purchasable hereunder shall be proportionately increased, and conversely, if the
Company at any time or from time to time after the issuance date of this Warrant
combines the outstanding shares of Common Stock, the Purchase Price then in
effect immediately before the combination shall be proportionately increased and
the number of shares purchasable hereunder shall be proportionately decreased.
Any adjustment under this subsection 2.1 shall become effective at the close of
business on the date the subdivision or combination becomes effective.
2.2 Dividends and Distributions. In the event the Company at any time,
or from time to time after the issuance date of this Warrant makes, or fixes a
record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in additional shares of Common
Stock, then and in each such event the Purchase Price then in effect shall be
decreased as of the time of such issuance or, in the event such a record date is
fixed, as of the close of business on such record date, by multiplying the
Purchase Price then in effect by a fraction (i) the numerator of which is the
total number of shares of Common Stock issued and outstanding immediately prior
to the time of such issuance or the close of business on such record date, and
(ii) the denominator of which shall be the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such issuance or
the close of business on such record date plus the number of shares of Common
Stock issuable in payment of such dividend or distribution; provided, however,
that if such record date is fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Purchase Price
shall be recomputed accordingly as of the close of business on such record date
and thereafter the Purchase Price shall be adjusted pursuant to this subsection
2.2 as of the time of actual payment of such dividends or distributions.
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2.3 Recapitalization or Reclassification. If the Shares issuable upon
the exercise of the Warrant are changed into the same or a different number of
shares of any class or classes of stock, whether by recapitalization,
reclassification or otherwise (other than a subdivision or combination of shares
or stock dividend or a reorganization, merger, consolidation or sale of assets,
provided for elsewhere in this Section 2, then and in any such event each holder
of Warrants shall have the right thereafter to exercise such Warrant as to the
kind and amount of stock and/or other securities and property receivable upon
such reclassification or other change, by the holder of the number of shares of
Shares as to which such Warrant might have been exercised immediately prior to
such reclassification or exchange, all subject to further adjustment as provided
herein.
2.4 Sale of the Company. If at any time or from time to time there is a
capital reorganization of the Common Stock (other than a recapitalization,
subdivision, combination, reclassification or exchange of shares provided for
elsewhere in this Section 2 or a merger or consolidation of the Company with or
into another Company, or the sale of all or substantially all of the Company's
properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation or sale, provision shall be made so that
the holders of the Warrants shall thereafter be entitled to receive upon
exercise of the Warrants, the number of shares of stock or other securities or
property of the Company, or of the successor Company resulting from such merger
or consolidation or sale, to which a holder of Shares deliverable upon exercise
would have been entitled on such capital reorganization, merger, consolidation,
or sale. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 2 with respect to the rights of
the holders of the Warrants after the reorganization, merger, consolidation or
sale to the end that the provisions of this Section (including adjustment of the
Purchase Price then in effect and number of shares purchasable upon exercise of
the Warrants) shall be applicable after that event and be as nearly equivalent
to the provisions hereof as may be practicable.
2.5 Observance of Duties. The Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company but will at all
times in good faith assist in the carrying out of all the provisions of this
section 2 and in the taking of all such action as may be necessary or
appropriate in order to protect the Exercise Rights of the holders of the
Warrants against dilution or other impairment.
SECTION 3.
REGISTRATION UNDER THE SECURITIES ACT OF 1933
3.1 Registration and Legends. This Warrant and the Shares issuable upon
exercise of this Warrant have not been registered under the Securities Act of
1933, as amended ("the Act"). Upon exercise, in part or in whole, of this
Warrant, the certificates representing the Shares shall bear the following
legend:
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THIS SECURITY HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES
ACT OF 1933 ("ACT") OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND
MAY NOT BE OFFERED AND SOLD UNLESS REGISTERED AND/OR QUALIFIED PURSUANT
TO THE RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES OR BLUE SKY
LAWS OR AN EXEMPTION FROM SUCH REGISTRATION OR QUALIFICATION
APPLICABLE. THEREFORE, NO SALE OR TRANSFER OF THIS SECURITY SHALL BE
MADE, NO ATTEMPTED SALE OR TRANSFER SHALL BE VALID, AND THE ISSUER
SHALL NOT BE REQUIRED TO GIVE ANY EFFECT TO ANY SUCH TRANSACTION UNLESS
(A) SUCH TRANSACTION SHALL HAVE BEEN DULY REGISTERED UNDER THE ACT AND
QUALIFIED OR APPROVED UNDER APPROPRIATE STATE OR BLUE SKY LAWS, OR (B)
THE ISSUER SHALL HAVE FIRST RECEIVED AN OPINION OF COUNSEL SATISFACTORY
TO IT THAT SUCH REGISTRATION, QUALIFICATION OR APPROVAL IS NOT
REQUIRED.
3.2 No Action Letter. The Company agrees that it shall be satisfied
that no post-effective amendment or new registration is required for the public
sale of the Shares if it shall be presented with a letter from the Staff of the
Securities and Exchange Commission (the "Commission") stating in effect that,
based upon stated facts which the Company shall have no reason to believe are
not true in any material respect, the Staff will not recommend any action to the
Commission if such shares are offered and sold without delivery of a prospectus,
and that, therefore, no post-effective amendment to the Registration Statement
under which such Shares are to be registered or new registration statement is
required to be filed.
3.3 Demand Registration Rights. The Company has agreed, upon the
Underwriter's demand, to register the Shares, to file a new Registration
Statement, and to file all necessary undertakings with the Commission so as to
permit the Underwriter, or any assignee of the Underwriter, the right to sell
publicly the Shares issued on exercise of this Warrant on two occasions at any
time within five (5) years from the effective date of the Company's first
Registration Statement as filed in 1997. In connection with the first request,
the Company will bear all expenses attendant to registering the securities
(subject to Section 3.5(e)), and in connection with the second request, the
holders of the securities will bear all expenses.
3.4 Piggyback Registration Rights. In the event that the Underwriter
does not exercise its right to demand that the Shares be registered, the Company
agrees to include any appropriate Shares issuable upon exercise of the Warrants
in any Registration Statement filed by the Company at any time within seven (7)
years from the effective date of the Company's first Registration Statement as
filed in 1997 (except for any registration on Forms S-4 or S-8 or similar
forms).
3.5 Covenants Regarding Registration. In connection with any
registration under Section 3.3 or 3.4 hereof, the Company covenants and agrees
as follows:
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(a) The Company will, within twenty days after written request from
the Representative, take all steps necessary to effectuate preparation and
filing with the Securities and Exchange Commission of the registration statement
as required by and in compliance with the Act.
(b) The Company shall keep such registration statement effective
for the lesser of (i) one hundred twenty (120) days, or (ii) the period of time
in which the Holders of such securities have effected the distribution of their
Shares. During such period the Company shall prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Act with respect to the disposition of all
securities covered by such registration statement.
(c) The Company shall notify each Holder of Shares covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing.
(d) The Company shall furnish to the Holders such numbers of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of the Shares owned by them.
(e) The Company shall pay all costs, fees, and expenses in
connection with new registration statements under Section 3.3 (excluding the
costs attendant to a second demand registration) and Section 3.4 hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses, except that the Company shall not pay for
any of the following costs and expenses: (i) underwriting discounts and
commissions allocable to the Shares, (ii) state transfer taxes, (iii) brokerage
commissions, (iv) fees and expenses of counsel and accountants for the holders
of this Warrant or the Shares.
(f) The Company will take all necessary action which may be
required in qualifying or registering the Shares included in any Registration
Statement or post-effective amendment or new registration statement for offering
and sale under the securities or blue sky laws of such states as are reasonably
requested by the holders of such Shares, provided that the Company shall not be
obligated to execute or file any general consent to service of process or to
qualify as a foreign corporation to do business under the laws of any such
jurisdiction.
(g) The Holder shall be entitled to pay the Purchase Price for the
Shares purchasable upon the exercise of this Warrant out of the proceeds of any
sale of the Shares purchasable upon its exercise.
3.6 Indemnity.
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3.6.1 The Company shall indemnify and hold harmless each person
registering securities pursuant to this Section (the "Seller") and each
underwriter, within the meaning of the Act, who may purchase from or sell for
any Seller any of the Common Stock from and against any and all losses, claims,
damages, and liabilities caused by any untrue statement or alleged untrue
statement of a material fact contained in any new registration statement or any
supplemented prospectus under the Act included therein required to be filed or
furnished by reason of this Section, or caused by any omission or alleged
omission to state therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or alleged untrue statement or omission or
alleged omission based upon information furnished or required to be furnished in
writing to the Company by such Seller or underwriter within the meaning of such
Act; provided, however, that the indemnity agreement set forth in this Section
3.6 with respect to any prospectus which shall be subsequently amended prior to
the written confirmation of sale of any Shares shall not inure to the benefit of
any Seller or underwriter from whom the person asserting any such losses,
claims, damages or liabilities purchased such Shares which are the subject
thereof (or to the benefit of any person controlling such Seller or
underwriter), if such Seller or underwriter failed to send or give a copy of the
prospectus as amended to such person at or prior to the written confirmation of
the sale of such Shares and if such amended prospectus did not contain any
untrue statement or alleged untrue statement or omission or alleged omission
giving rise to such cause, claim, damage, or liability.
3.6.2 Each Seller which avails itself of the procedures under this
Section 3 shall indemnify and secure the agreement of any underwriter which the
Seller employs to indemnify the Company, its directors, each officer signing the
related post-effective amendment or registration statement and each person, if
any, who controls the Company, within the meaning of the Act from and against
any losses, claims, damages, and liabilities caused by any untrue statement or
alleged untrue statement of a material fact contained in any post-effective
amendment or registration statement or any prospectus required to be filed or
furnished by reason of this Section 3 or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, insofar as such losses,
claims, damages, or liabilities are caused by any untrue statement or alleged
untrue statement or omission or alleged omission based upon information
furnished in writing to the Company by any such Seller or underwriter expressly
for use therein.
3.7 Survival of Obligations. The agreements in this Section 3 shall
continue in effect regardless of the exercise and surrender of this Warrant.
SECTION 4.
OTHER MATTERS
4.1 Payment of Taxes. The Company will from time to time promptly pay,
subject to the provisions of paragraph (4) of Section 1.2 hereof, all taxes and
charges that may be imposed upon the Company in respect of the issuance or
delivery of this Warrant or the Shares purchasable upon the exercise of this
Warrant.
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4.2 Binding Effect. All the covenants and provisions of this Warrant by
or for the benefit of the Company shall bind and inure to the benefit of its
successors and assigns hereunder.
4.3 Notices. Notices or demands pursuant to this Warrant to be given or
made by the Holder to or on the Company shall be sufficiently given or made if
sent by certified or registered mail, return receipt requested, postage prepaid,
or facsimilie and addressed, until another address is designated in writing by
the Company, as follows:
Simulations Plus, Inc.
40015 Sierra Highway, Bldg. B-110
Palmdale, California 93550
Notices to the Holder provided for in this Warrant shall be deemed given or made
by the Company if sent by certified or registered mail, return receipt
requested, postage prepaid, and addressed to the Holder at his last known
address as it shall appear on the books of the Company.
4.4 Governing Law. The validity, interpretation and performance of this
Warrant shall be governed by the laws of the State of California.
4.5 Parties Bound and Benefitted. Nothing in this Warrant expressed and
nothing that may be implied from any of the provisions hereof is intended, or
shall be construed, to confer upon, or give to, any person or corporation other
than the Company and the Holder any right, remedy or claim under promise or
agreement hereof, and all covenants, conditions, stipulations, promises and
agreements contained in this Warrant shall be for the sole and exclusive benefit
of the Company and its successors and of the Holder, its successors and, if
permitted, its assignees.
4.6 Headings. The Section headings herein are for convenience only and
are not part of this Warrant and shall not affect the interpretation thereof.
IN WITNESS WHEREOF, this Warrant has been duly executed by the Company
under its corporate seal as of the ___ day of ________, 1997.
SIMULATIONS PLUS, INC.
By:______________________________________________
Walter S. Woltosz, Chief Executive Officer
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SIMULATIONS PLUS, INC.
Assignment of Warrant
FOR VALUE RECEIVED, Waldron & Co., Inc. hereby sells, assigns and
transfers unto ____________________________________________ the within Warrant
and the rights represented thereby, and does hereby irrevocably constitute and
appoint _______________________________ Attorney, to transfer said Warrant on
the books of the Company, with full power of substitution.
Dated: _____________________
Signed:_______________________________
Signature guaranteed:
_____________________________
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SIMULATIONS PLUS, INC.
40015 Sierra Highway, Bldg. B-110
Palmdale, CA 93550
Subscription Agreement for the Exercise of Warrants
The undersigned hereby irrevocably subscribes for the purchase of
_____________ Shares pursuant to and in accordance with the terms and conditions
of this Warrant, and herewith makes payment, covering such Shares which should
be delivered to the undersigned at the address stated below, and, if said number
of Shares shall not be all of the Shares purchasable hereunder, that a new
Warrant of like tenor for the balance of the remaining Shares purchasable
hereunder be delivered to the undersigned at the address stated below.
The undersigned agrees that: (1) the undersigned will not offer, sell,
transfer or otherwise dispose of any Shares unless either (a) a registration
statement, or post-effective amendment thereto, covering the Shares has been
filed with the Securities and Exchange Commission pursuant to the Securities Act
of 1933, as amended (the "Act"), such sale, transfer or other disposition is
accompanied by a prospectus meeting the requirements of Section 10 of the Act
forming a part of such registration statement, or post-effective amendment
thereto, which is in effect under the Act covering the Shares to be so sold,
transferred or otherwise disposed of, and all applicable state securities laws
have been complied with, or (b) counsel to Simulations Plus, Inc. satisfactory
to the undersigned has rendered an opinion in writing and addressed to
Simulations Plus, Inc. that such proposed offer, sale, transfer or other
disposition of the Shares is exempt from the provisions of Section 5 of the Act
in view of the circumstances of such proposed offer, sale, transfer or other
disposition; (2) Simulations Plus, Inc. may notify the transfer agent for the
Shares that the certificates for the Shares acquired by the undersigned are not
to be transferred unless the transfer agent receives advice from Simulations
Plus, Inc. that one or both of the conditions referred to in (1)(a) and (1)(b)
above have been satisfied; and (3) Simulations Plus, Inc. may affix the legend
set forth in Section 3.1 of this Warrant to the certificates for the Shares
hereby subscribed for, if such legend is applicable.
Dated: ______________________ Signed:_______________________________
Signature guaranteed: Address:______________________________
______________________________________
_____________________________
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EXHIBIT 10.23
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A
VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE
OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.
WARRANTS TO PURCHASE __________ SHARES OF COMMON STOCK
SIMULATIONS PLUS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
Void after June 30, 2002
THE WARRANTS evidenced by this certificate have been issued for good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged.
THIS CERTIFICATE evidences the right of ______________________________
("Holder") to purchase, for the Warrant Price (as defined below), __________
Shares of Common Stock (the "Shares"), of SIMULATIONS PLUS, INC., a California
corporation (the "Company"), subject to the terms and conditions hereinafter set
forth.
1. Term of Warrants. The Warrants may be exercised only during
the five-year period (the "Warrant Term") commencing on the earlier of (i) the
effective date of the registration statement filed by the Company with the U.S.
Securities and Exchange Commission ("Commission") under the Securities Act of
1933, as amended (the "Act"), in connection with the initial public offering of
securities of the Company )the ("IPO"), or (ii) June 30, 1997, and ending five
years after the commencement of such Term, and may be exercised only in
accordance with the terms and conditions hereinafter set forth.
2. Exercise of Warrants.
(a) Right to Exercise. The Warrants shall vest and become
exercisable upon commencement of the Warrant Term and may be exercised in whole
or in part at any time or from time to time during the Warrant Term.
(b) Method of Exercise; Payment. The Warrants may be
exercised by Holder, in whole or in part, by the surrender of this Certificate,
properly endorsed, at the principal office of the Company, and by payment to the
Company by certified or cashier's check of the then applicable Warrant Price.
Alternatively, exercise of the Warrants may be effected by "cashless exercise"
through a registered broker-dealer or escrow agent on terms
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acceptable to Maker pursuant to which the Warrant Price is paid from the
proceeds of the sale of the underlying Shares by such broker-dealer or escrow
agent on behalf of the Holder to the Company. Each Warrant shall be exercisable
for one Share of common Stock. In the event of any exercise of the Warrants,
certificates for Shares so purchased shall be delivered to Holder within a
reasonable time after the Warrants shall have been so exercised, and unless the
Warrants have expired, a new certificate representing the right to purchase the
number of Shares, if any, with respect to which this Certificate shall not then
have been exercised shall also be issued to Holder within such time. All such
new certificates shall be dated the date hereof and shall be identical with this
Certificate except as to the number of Shares issuable pursuant thereto. The
Company shall pay all documentary, stamp or other transactional taxes (other
than transfer taxes) attributable to the issuance or delivery of shares of
Common Stock of the Company upon exercise of the Warrants.
(c) Restrictions on Exercise. The Warrants may not be
exercised if the issuance of the Shares upon such exercise would constitute a
violation of any applicable federal or state securities laws or other laws or
regulations. As a condition to the exercise of the Warrants, the Company may
require Holder to make such representations and warranties to the Company as may
be required by applicable law or regulation.
3. Stock Fully Paid; Reservations of Shares; The Company
covenants and agrees that all Shares will, upon issuance and payment in
accordance herewith, be fully paid, validly issued and nonassessable. The
Company further covenants and agrees that during the Warrant Term the Company
will at all times have authorized and reserved for the purpose of the issue upon
exercise of the Warrrants at least the maximum number of shares of the Company's
Common Stock as are issuable upon the exercise of the Warrants.
4. Adjustment of Purchase Price and Number of Shares: The number
and kind of securities purchasable upon the exercise of the Warrants and the
Warrant Price shall be subject to adjustment from time to time upon the
happening of certain events, as follows:
(a) Consolidation, Merger or Reclassification: If the
Company at any time while the Warrants remain outstanding and unexpired shall
consolidate with or merge into any other corporation, or sell all or
substantially all of its assets to another corporation, or reclassify or in any
manner change the securities then purchasable upon the exercise of the Warrants
(any of which shall constitute a "Reorganization"), then lawful and adequate
provision shall be made whereby this Certificate shall thereafter evidence the
right to purchase such number and kind of securities and other property as would
have been issuable or distributable on account of such Reorganization upon or
with
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respect to the securities which were purchasable under the Warrants immediately
prior to the Reorganization. The Company shall not effect any such
Reorganization unless prior to or simultaneously with the consummation thereof
the successor corporation (if other than the Company) resulting from such
Reorganization shall assume by written instrument executed and mailed or
delivered to Holder, at the last address of Holder appearing on the books of the
Company, the obligation to deliver to Holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, Holder may be entitled
to purchase. Notwithstanding anything in this Section 4(a) to the contrary, the
prior two sentences shall be inoperative and of no force and effect and those
Warrants which are unexercised shall expire on the completion of such
Reorganization if upon the completion of any such Reorganization the
shareholders of the Company immediately prior to such event do not own at least
50% of the equity interest of the entity resulting form such Reorganization, the
notice required by Section 4(e) hereof has been duly given and the Warrants were
fully exercisable at the time such notice was provided.
(b) Subdivision or Combination of Shares. If the Company
at any time while the Warrant remains outstanding and unexpired shall subdivide
or combine its Common Stock, the Warrant Price shall be adjusted to that price
determined by multiplying the Warrant Price in effect immediately prior to such
subdivision or combination by a fraction (i) the numerator of which shall be the
total number of shares of Common Stock outstanding immediately prior to such
subdivision or combination and (ii) the denominator of which shall be the total
number of shares of Common Stock outstanding immediately after such subdivision
or combination.
(c) Certain Dividends and Distributions. If the Company
at any time while the Warrants are outstanding and unexpired shall take a record
of the holders of its Common Stock for the purpose of:
(i) Stock Dividends. Entitling them to receive a
dividend payable in, or other distribution without consideration of, Common
Stock, then the Warrant Price shall be adjusted to that price determined by
multiplying the Warrant Price in effect immediately prior to each dividend or
distribution by a fraction (A) the numerator of which shall be the total number
of shares of Common Stock outstanding immediately prior to such dividend or
distribution, and (B) the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after such dividend or
distribution; or
(ii) Distribution of Assets, Securities, etc.
Making any distributions without consideration with respect to its Common Stock
(other than a cash dividend) payable otherwise than in its Common Stock, Holder
shall, upon the exercise of the Warrants, be entitled to receive, in addition to
the number of shares
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receivable thereupon, and without payment of any additional consideration
therefor, such assets or securities as would have been payable to him as owner
of that number of Shares receivable thereupon, and without payment of any
additional consideration therefor, such assets or securities as would have been
payable to him as owner of that number of Shares receivable by exercise of the
Warrants and had he been the holder of record of such Shares on the record date
for such distribution, and an appropriate provision therefore shall be made a
part of any such distribution.
(d) Adjustment of Number of Shares. Upon each adjustment
in the Warrant Price pursuant to Subsections (b) or (c)(1) of this Section 4,
the number of Shares purchasable hereunder shall be adjusted to that number
determined by multiplying the number of such Shares, as the case may be,
purchasable upon the exercise of the Warrants immediately prior to such
adjustment by a fraction, the numerator of which shall be the Warrant Price
immediately prior to such adjustment and the denominator of which shall be the
Warrant Price immediately following such adjustment.
(e) Notice. In case at any time:
(i) The Company shall pay any dividend payable
in stock upon its Common Stock or make any distribution, excluding a cash
dividend, to the holders of its Common Stock;
(ii) The Company shall offer for subscription pro
rata to the holders of its Common Stock any additional shares of stock of any
class or other rights;
(iii) There shall be any reclassification of the
Common Stock of the Company, or consolidation or merger of the Company with, or
sale of all or substantially all of its assets to, another corporation; or
(iv) There shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder at
least 10 days' prior written notice (or, in the event of notice pursuant to
Section 4(e)(iii), at least 30 days' prior written notice) of the date on which
the books of the Company shall close or a record shall be taken for such
dividend, distribution or subscription rights or for determining rights to vote
in respect to any such reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up. Such notice in accordance with the
foregoing clause shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto, and such notice in accordance with the
foregoing clause shall also specify the date on which the holders of Common
Stock shall be
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entitled to exchange their Common Stock for securities or other property
deliverable upon such reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be. Each such written
notice shall be given by first-class mail, postage prepaid, addressed to Holder
at the address of Holder as shown on the books of the Company.
(f) No Change in Certificate. The form of this
Certificate need not be changed because of any adjustment in the Warrant Price
or in the number of Shares purchasable on its exercise. The Warrant Price or the
number of Shares shall be considered to have been so changed as of the close of
business on the date of adjustment.
5. Fractional Shares. No fractional Shares will be issued in
connection with any subscription hereunder but, in lieu of such fractional
Shares, the Company shall make a cash payment therefor upon the basis of the
fair market value of the Shares.
6. Restrictions on Transfer. The Warrants are restricted from
sale, transfer, assignment or hypothecation by operation of law. The Warrants
have not been registered under the Act or any applicable state securities laws,
and may not be offered for sale, sold, transferred, pledged or hypothecated
without an effective registration statement under the Act and under any
applicable state securities law, or an opinion of counsel, satisfactory to the
Company, that an exemption from such registration is available. The Holder
understands that because the Warrants are not registered, the Holder must hold
the Warrants indefinitely unless they are registered under the Act and any
applicable state securities laws or must obtain exemptions from registration.
The Holder represents and warrants that the holder is purchasing the Warrants
for his own account for investment and not with the view to distribution,
assignment, resale or other transfer of the Warrants. Except as specifically
stated herein, no other person has a direct or indirect beneficial interest in
the Warrants.
7. Registration rights.
(a) Registration and Legends. This Warrant and the Shares
issuable upon exercise of this Warrant have not been registered under the
Securities Act of 1933, as amended (the "Act"). Upon exercise, in part or in
whole, of this Warrant, the certificates representing the Shares shall bear the
following legend:
THIS SECURITY HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933 ("ACT") OR THE SECURITIES OR BLUE SKY
LAWS OF ANY STATE AND MAY NOT BE OFFERED AND SOLD UNLESS
REGISTERED AND/OR QUALIFIED PURSUANT TO THE RELEVANT
PROVISIONS OF FEDERAL AND STATE
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SECURITIES OR BLUE SKY LAWS OR AN EXEMPTION FROM SUCH
REGISTRATION OR QUALIFICATION IS APPLICABLE. THEREFORE, NO
SALE OR TRANSFER OF THIS SECURITY SHALL BE MADE, NO ATTEMPTED
SALE OR TRANSFER SHALL BE VALID, AND THE ISSUER SHALL NOT BE
REQUIRED TO GIVE ANY EFFECT TO ANY SUCH TRANSACTION UNLESS (A)
SUCH TRANSACTION SHALL HAVE BEEN DULY REGISTERED UNDER THE ACT
AND QUALIFIED OR APPROVED UNDER APPROPRIATE STATE OR BLUE SKY
LAWS, OR (B) THE ISSUER SHALL HAVE FIRST RECEIVED AN OPINION
OF COUNSEL SATISFACTORY TO IT THAT SUCH REGISTRATION,
QUALIFICATION OR APPROVAL IS NOT REQUIRED.
(b) No Action Letter. The Company agrees that it shall be
satisfied that no post-effective amendment or new registration is required for
the public sale of the Shares if it shall be presented with a letter from the
Staff of the Securities and Exchange Commission (the "Commission") stating in
effect that, based upon stated facts which the Company shall have no reason to
believe are not true in any material respect, the Staff will not recommend any
action to the Commission if such shares are offered and sold without delivery of
a prospectus, and that, therefore, no post-effective amendment to the
Registration Statement under which such Shares are to be registered or new
registration statement is required to be filed.
(c) Demand Registration Rights. The Company has agreed,
upon the demand of a majority-in-interest ("Majority-in- Interest") of holders
of Warrants who acquired their Warrants in the private placement (the "Private
Placement") that the Company made in December 1996 and January 1997, to register
the Shares, to file a new Registration Statement, and to file all necessary
undertakings with the Commission so as to permit such holders, or any assignee
of such holders, the right to sell publicly the Shares issued on exercise of
this Warrant on two occasions at any time within five (5) years from the
effective date of the Company's first Registration Statement as filed in 1997.
In connection with the first request, the Company will bear all expenses
attendant to registering the securities (subject to Section 7(e)(v)), and in
connection with the second request, the holders of the securities will bear all
expenses.
(d) Piggyback Registration Rights. In the event that the
Holder does not exercise his, her or its, as the case may be, right to demand
that the Shares be registered, the Company agrees to include any appropriate
Shares issuable upon exercise of the Warrants in any Registration Statement
filed by the Company at any time within seven (7) years from the effective date
of the Company's first Registration Statement as filed in 1997 (except for any
registration on Forms S-4 or S-8 or similar forms).
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(e) Covenants Regarding Registration. In connection with
any registration under Section 7(c) or (d) hereof, the Company covenants and
agrees as follows:
(i) The Company will, within twenty days after
written request from a Majority-in-Interest, take all steps necessary to
effectuate preparation and filing with the Securities and Exchange Commission of
the registration statement as required by and in compliance with the Act.
(ii) The Company shall keep such registration
statement effective for the lesser of (1) one hundred twenty (120) days, or (2)
the period of time in which the holders of such securities have effected the
distribution of their Shares. During such period the Company shall prepare and
file with the SEC such amendments and supplements to such registration statement
and the prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement.
(iii) The Company shall notify each holder of
Shares covered by such registration statement at any time when a prospectus
relating thereto is required to be delivered under the Act of the happening of
any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing.
(iv) The Company shall furnish to the holders
such numbers of copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Act, and such other documents as they
may reasonably request in order to facilitate the disposition of the Shares
owned by them.
(v) The Company shall pay all costs, fees, and
expenses in connection with new registration statements under Section 7(c)
(excluding the costs attendant to a second demand registration) and Section 7(d)
hereof including, but without limitation, the Company's legal and accounting
fees, printing expenses, blue sky fees and expenses, except that the Company
shall not pay for any of the following costs and expenses: (1) underwriting
discounts and commissions allocable to the Shares, (2) state transfer taxes, (3)
brokerage commissions, (4) fees and expenses of counsel and accountants for the
holders of this Warrant or the Shares.
(vi) The Company will take all necessary action
which may be required in qualifying or registering the Shares included in any
Registration Statement or post-effective amendment
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<PAGE> 8
or new registration statement for offering and sale under the securities or blue
sky laws of such states as are reasonably required by the holders of such
Shares, provided that the Company shall not be obligated to execute or file any
general consent to service of process or to qualify as a foreign corporation to
do business under the laws of any such jurisdiction.
8. No Rights as Shareholder. Holder, as holder of the Warrants,
shall not be entitled to vote or receive dividends or be considered a
shareholder of the Company for any purpose, nor shall anything in this
Certificate be construed to confer on Holder, as such, any rights of a
shareholder of the Company or any right to vote, give or withhold consent to any
corporate action, to receive notice of meetings of shareholders, to receive
dividends or subscription rights or otherwise.
9. Definitions. As used in this Certificate:
(a) "Warrants" shall mean the rights evidenced by this
Certificate.
(b) "Warrant Price" shall mean $2.50 per share.
10. Notices. All demands, notices, consents and other
communications to be given hereunder shall be in writing and shall be deemed
duly given when delivered personally or five days after being mailed by
first-class mail, postage prepaid, properly addressed, if to the Company at
SIMULATIONS PLUS, INC., 40015 Sierra Highway, Bldg. B-110, Palmdale, CA 93350,
or if to Holder at . The Company and Holder may change such address at any time
or times by notice hereunder to the other.
11. Amendments; Waivers, Terminations, Governing Law; Headings.
The Warrants and any term hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought. The
Warrants shall be governed by and construed and interpreted in accordance with
the laws of the State of California. The headings in this Certificate are for
convenience of reference only and are not part of the Warrants.
Dated as of , 1997.
SIMULATIONS PLUS, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
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SIMULATIONS PLUS, INC.
SUBSCRIPTION FORM
(To be completed and signed only upon exercise of the Warrants)
TO: SIMULATIONS PLUS, INC.,
40015 Sierra Highway, Blvd. B-110
Palmdale, CA 93550
Attention: Secretary
The undersigned, the holder and registered owner of the attached
Warrants, hereby irrevocably and unconditionally elects to exercise such
Warrants and to purchase *______ shares of SIMULATIONS PLUS, INC. Common Stock,
pursuant to the terms and conditions of the Warrants, and herewith tenders a
check in the amount of $ ______ in full payment of the purchase price for such
shares and warrants, and requests that the certificate(s) for such shares and
warrants be issued in the name of and delivered to:
(Please print name and address)
_________________________________________
_________________________________________
_________________________________________
Dated:______________________________ Signature: ___________________________
*Insert here the number of shares called for on the face of the
Warrants (or in the case of partial exercise, that portion as to which the
Warrants are being exercised), without naming any adjustment or additional
Common Stock or any other securities or property which, under the adjustment
provisions of the Warrants, may be deliverable upon exercise.
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CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form SB-2 of our
report dated October 4, 1996, except for the matter discussed in Note 1, Basis
of Presentation, as to which the date is March 24, 1997, on our audit of the
consolidated financial statements of Simulations Plus, Inc. and its subsidiary.
We also consent to the reference to our firm under the caption "Experts."
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
May 23, 1997
