SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2000 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1937
For the transition period from _________ to _________
Commission file number: 000-21665
SIMULATIONS PLUS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA
(State or other jurisdiction of Incorporation or Organization)
95-4595609
(I.R.S. Employer identification No.)
1220 W. AVENUE J
LANCASTER, CA 93534
(Address of principal executive offices including zip code)
(661) 723-7723
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
------------- -------------
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended August 31, 2000 were
approximately $3,630,000.
As of December 12, 2000, the aggregate market value of the voting stock
held by non-affiliates of the issuer was approximately $2,174,000 based upon the
average closing bid and asked price of such stock on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement relating to the
2001 Annual Meeting of shareholders are incorporated herein by reference into
Part III.
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SIMULATIONS PLUS, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED AUGUST 31, 2000
Table of Contents
Page
----
PART I.
Item 1. Description of Business 1
Item 2. Description of Property 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II.
Item 5. Market for Common Stock and Related Stockholder Matters 14
Item 6. Management's Discussion and Analysis or Plan of Operation 15
Item 7. Financial Statements 21
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 21
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act 22
Item 10. Executive Compensation 22
Item 11. Security Ownership of Certain Beneficial Owners and Management 22
Item 12. Certain Relationships and Related Transactions 22
Item 13. Exhibits and Reports on Form 8-K 22
Signatures 25
Financials F-1
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FORWARD-LOOKING STATEMENTS
--------------------------
The following discussion should be read in conjunction with the
financial statements and the notes thereto appearing elsewhere in this Annual
Report ("Annual Report") on Form 10-KSB for the year ended August 31, 2000 (the
"Form 10-KSB"). In addition to historical information, this Annual Report
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those reflected in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion and
Analysis or Plan of Operation." Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. Simulations Plus, Inc. undertakes no
obligation to publicly revise these forward-looking statements, or to reflect
events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company has
filed and will continue to file from time to time with the Securities and
Exchange Commission.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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Simulations Plus, Inc. (the "Company" or "Simulations Plus") and its
wholly owned subsidiary, Words+, Inc. ("Words+") produce two types of products:
(1) Simulations Plus, formed in 1996, develops and produces simulation software
for use in pharmaceutical research and for education, and also provides contract
research services to the pharmaceutical industry, and (2) Words+, founded in
1981, produces computer software and specialized hardware for use by persons
with disabilities, as well as a personal productivity software program called
Abbreviate! for the retail market.
DESCRIPTION OF SIMULATION SOFTWARE
The types of simulation software produced by the Company are based on
the equations of chemistry and physics that describe or "model" the behavior of
things in the real world. The Company's GastroPlus(TM) pharmaceutical software
simulates the movement, dissolution/precipitation, chemical degradation, and
absorption of orally dosed drug compounds in the human gastrointestinal tract,
and with additional inputs, the blood plasma concentration-time history of the
drug after it reaches the central blood circulation. The recently released
optional PKPlus(TM) module for GastroPlus extends the analysis to fitting
pharmacokinetic parameters for intravenously administered drugs. The Company's
QMPRPlus(TM) program estimates the value of several important physicochemical
characteristics of new drug-like molecules with only the structure of the
molecule as input. The Company's award-winning FutureLab(TM) science experiment
simulations for middle school and high school students incorporate the equations
of chemistry and physics for each experiment (optics, electrical circuits,
gravity, ideal gases, acid/base titration, etc.).
The development of simulation software involves identifying and
understanding the underlying chemistry and physics of the processes to be
simulated, breaking those processes down into the lowest practical level of
individual sub-processes at which the behaviors can be well-represented
mathematically, developing 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 the program are then
compared to known results in order to determine the validity of the model and to
calibrate the simulation to produce a useful tool for predicting new results.
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PHARMACEUTICAL SIMULATION SOFTWARE
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PRODUCTS:
The Company's pharmaceutical software provides cost-effective solutions
to a number of problems in pharmaceutical research as well as in the education
of pharmacy and medical students. The Company's software products and services
to date are focussed on the area of pharmaceutical research known as ADME
(Absorption, Distribution, Metabolism, and Excretion). The Company released its
first product, GastroPlus(TM), in August 1998 and received enthusiastic interest
from researchers in large and small pharmaceutical companies, such as
Astra-Zeneca, Bristol-Myers Squibb, Glaxo, Eli Lilly, Pfizer, Pharmacia, The
Roche Group, Schering AG, Schering-Plough, ScriptGen, and SmithKline Beecham.
The Optimization Module was released in November 1998 and the majority of new
sales have since included this module, generating additional revenue. The
program includes a variety of specialized analysis functions in addition to the
basic absorption and pharmacokinetics simulation. The Parameter Sensitivity
Analysis feature allows researchers to rapidly assess the importance of various
physicochemical and formulation variables on the absorption and pharmacokinetic
behavior of a drug. The Stochastic Simulation feature allows researcher to model
the effects of statistically distributed values for a variety of physiological
and other parameters over large populations.
The Company executed a License Agreement with Therapeutic Systems
Research Laboratories, Inc. ("TSRL"), under which the Company was granted
exclusive rights to TSRL's proprietary absorption simulation technology,
including a database of measurements of drug permeability from nearly 60
laboratory experiments to measure the intestinal permeability of drug compounds
in human and/or rat small intestines. Under the terms of this agreement, the
Company receives consulting assistance in the further development of the
simulation model from TSRL staff, including Dr. Gordon Amidon (past President of
the American Association of Pharmaceutical Scientists and world-renowned expert
in drug absorption) and Dr. John Crison. The Company believes that the strategic
advantage of exclusive access to TSRL's technology and expertise in absorption
modeling, combined with the Company's now well-developed and growing expertise
in absorption and pharmacokinetics simulation, have resulted in GastroPlus
becoming recognized as a unique simulation and analysis capability within the
pharmaceutical industry. The Company is aware that other companies began to
develop similar software, however, there has not been any significant direct
competition for GastroPlus at this time.
The Company released a new version of GastroPlus on November 7, 2000,
which includes two additional optional modules, IVIV Correlation and PKPlus(TM).
The IVIV Correlation Module provides IN VITRO-IN VIVO correlation capabilities
to formulation researchers. IN VITRO-IN VIVO correlation in this context refers
to the ability to determine the relationship between the concentration-time
curve of a drug product in the blood in a human or an animal after an oral dose
(IN VIVO) to the rate at which the same dose is observed to dissolve in a
laboratory experiment (IN VITRO). PKPlus provides a means for pharmaceutical
researchers to solve for the values of certain important pharmacokinetic
parameters from blood concentration-time data taken after an intravenous
injection or infusion of a drug product. The new version of GastroPlus also
included the ability to simulate absorption and pharmacokinetics not only in
human, but also in dog, cat, rat, mouse, and rabbit, making it useful in
analyzing data from animal studies and thereby reducing the need for such
studies by providing a predictive capabilities in those animals.
The Company has developed and is now selling a companion program to
GastroPlus called QMPRPlus(TM) (Quantitative Molecular Permeability
Relationships). QMPRPlus takes as inputs the structures of molecules, and
provides estimates for human effective permeability, octanol-water partition
coefficient (logP), solubility, and diffusivity - all inputs required by
GastroPlus. QMPRPlus thereby extends the utility of GastroPlus into early drug
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discovery, during which pharmaceutical companies may not have yet made many of
the molecules that have been identified as potential drug candidates. By
providing estimates of physicochemical properties from structure alone,
QMPRPlus, coupled with GastroPlus, allows researchers to rank order large
numbers of candidate compounds in terms of their potential for human intestinal
absorption. Because pharmaceutical companies are dealing with millions of
compounds per year, and because the area of ADME has become a bottleneck, high
throughput screening on the computer ("IN SILICO") is becoming not just a
convenience, but a necessity.
The first version of QMPRPlus loaded data in the form of 2-dimensional
structures; however, the Company added the ability to deal with 3-dimensional
structures and released an updated version on 12/06/99, the beginning of the
second quarter of FY2000, increasing the molecular descriptors from less than 30
descriptors in the first version to 150 descriptors in the new version. The
mathematical models have recently been upgraded again and now include more
powerful artificial neural network (ANN) models for logP and solubility, which
the Company believes are among the most accurate such models in the world.
As of November 17, 2000, the Company's pharmaceutical software had been
licensed to 30 research centers in 22 pharmaceutical and biotech companies in
the U.S., Europe, and Japan, and a number of additional companies had indicated
they were in the process of getting approvals to license one or more software
products. In addition, the Company is in detailed discussions with several
pharmaceutical companies regarding contract study services, customized software,
or both. The Company recently competed for and won a contract with the Affymax
subsidiary of Glaxo Wellcome to develop an extension to QMPRPlus in the form of
a predictive model for the permeability of new chemicals in MDCK cells (canine
kidney cells, used in IN VITRO experiments to determine the ability of molecules
to permeate a cell layer). This model is expected to be completed before the end
of calendar 2000, and will enhance the value of QMPRPlus to the Company's
customers.
The Company continues to develop the science of simulation and
mathematical modeling for ADME-related research, and to add new and improved
features to its software products to make them ever more powerful and vital to
the pharmaceutical industry. Among the Company's goals in this area are to
provide comprehensive, highly accurate simulations as well as related software
and services that can save significant amounts of time and money in the
development of new and improved pharmaceutical products, and to reduce the need
for animal testing.
CONTRACT RESEARCH SERVICES:
The Company offers contract research services to the pharmaceutical
industry in the area of gastrointestinal absorption, pharmacokinetics, and
related technologies. The Company performed three study contracts for major
pharmaceutical companies, and is currently in discussions with several for
additional studies. These studies provide an additional source of revenue for
the Company, as well as a means to introduce the Company's software products to
new customers. Management expects the number and size of study contracts to
continue to increase in the future.
PRODUCT DEVELOPMENT:
In the area of simulation software for pharmaceutical research, the
Company is currently pursuing the development of additional modules for
GastroPlus and QMPRPlus, as well as a third program called HelixGen(TM), which
predicts the 3-demensional receptor structure of certain transmembrane proteins.
The Company is also pursuing the development of another core product called
DDDPlus(TM) (Dose Disintegration and Dissolution Plus), which will simulate the
disintegration and dissolution of tablets and capsules in IN VITRO experiments.
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Metabolism, Efflux and Transporter Module
-----------------------------------------
The Metabolism, Efflux and Transporter Module will extend the
simulation within GastroPlus to include greater detail for the effects of
certain metabolic processes on drug molecules, the effects of certain proteins
in intestinal cells that return ("efflux") a drug molecule to the intestinal
contents, and the effects of certain other proteins that serve to move
("transport") some drug molecules rapidly into or through intestinal cells.
Metabolism refers to the action of certain enzymes, present primarily within
intestinal cells, blood, and liver, that changes a drug molecule either by
cleaving part of it away or by adding other atoms to it. This effect usually
renders a drug molecule ineffective, but sometimes can turn a molecule into a
useful drug product after the original molecule (in this case called a
"prodrug") has been absorbed. Efflux refers to a process wherein a drug molecule
enters an intestinal cell, but is later returned to the interior of the
intestine by an efflux protein. Transporter proteins are proteins which serve to
carry a drug molecule rapidly into and/or through an intestinal cell, resulting
in a significant increase in permeability. Metabolism, efflux and transport are
all important processes for certain types of drug molecules, so there is
considerable interest within the pharmaceutical industry in modeling
(simulating) the mechanisms by which these processes occur during and subsequent
to intestinal absorption of the drug molecules. The Company expects to release
the Metabolism, Efflux and Transporter Module during the second quarter of
fiscal year 2001.
HelixGen(TM)
------------
HelixGen is a program that predicts the 3-dimensional geometry (i.e.,
the position of each atom) of a special class of proteins known as G-coupled
transmembrane proteins. This type of protein serves as a channel for passage of
certain molecules through the walls of nerve cells and other cells, and is a
target for the majority of neurogenic drugs. Drugs that bind to these sites can
prevent the flow of molecules into and out of the cell, and in so doing may
relieve pain, reduce tremors, improve memory, or other such nerve-related
functions. The ability to predict the geometry of these proteins will enable
researchers to identify likely new drug molecules that could bind to these sites
in the computer, prior to actually synthesizing molecules for experimental
testing. During this fiscal year, development of HelixGen was postponed in order
to focus on the improvements to GastroPlus and QMPRPlus described above.
Development of the program is expected to resume in mid FY 2001.
DDDPlus(TM)
-----------
The Company initiated the Consortium for Dissolution Prediction in
April 2000. The purpose of this consortium is to develop a predictive software
simulation called DDDPlus, which will simulate the disintegration and
dissolution of tablets and capsules in an IN VITRO (laboratory) experiment. The
Company has received indications of interest in joining this consortium from
several companies, and is continuing to pursue its formation. Initial computer
program development was begun in early calendar 2000, but has been on hold
because of higher priorities with GastroPlus and QMPRPlus. Work on both the
Consortium for Dissolution Prediction and the DDDPlus program are expected to
resume in late calendar 2000 or early 2001. The CEO of the Company made an
invited presentation directly related to this area of technology at the
Dissolution Testing conference in the Washington, D.C., area on November
30-December 1, 2000.
MARKETING AND DISTRIBUTION:
The Company markets its pharmaceutical simulation software products,
and research services based on its simulations, to pharmaceutical and biotech
companies, and to the research companies that serve them, through attendance and
presentations at scientific meetings, exhibits at trade shows, seminars at
pharmaceutical companies and government agencies, and through its web pages on
the Internet. The Company is building an in-house sales and marketing team for
its products and services and will also explore sales and marketing agreements
with firms that provide research services and equipment that are complementary
to the Company's existing and proposed (i.e., in development) pharmaceutical
products and services. The Company also uses its web pages on the Internet for
such activities as providing product information, providing software updates,
and as a forum for user feedback and information exchange. The Company plans to
explore distribution through university bookstores for the Academic version of
GastroPlus for students in pharmacy and medicine.
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In August 1998, the Company signed a distribution agreement with Teijin
Systems Technology Ltd. (TST), a division of Teijin Limited of Tokyo, Japan.
Under the terms of the agreement, TST received exclusive distribution rights to
Simulations Plus' GastroPlus(TM) and QMPRPlus(TM) software for pharmaceutical
research and education in Japan. Sales in Japan increased approximately 210%
during fiscal 2000 over such sales in fiscal 1999, accounting for approximately
10% of all pharmaceutical software revenues.
PRODUCTION:
The Company's major products are designed and developed by its
development team at its Lancaster, California facility. The chief materials and
components used in the manufacture of simulation software products include
CD-ROMs and instruction manuals, which are also produced in-house. Robotic CD
burner technology along with in-house graphic art and engineering talent enable
the Company to run its production in the most cost efficient way.
COMPETITION:
In providing simulation-software-based screening, testing and research
services to the pharmaceutical industry, and in marketing simulation software
for these purposes, the Company competes against a number of established
companies that provide screening, testing and research services and products to
these industries that are not based on simulation software. The Company's
competitors in this field include companies with financial, personnel, research
and marketing resources that are greater than those of the Company. While
management believes there is currently no significantly competitive product to
GastroPlus or QMPRPlus, competition can be expected at some time in the future.
Major pharmaceutical companies conduct these efforts through their
internal development staffs and through outsourcing some of this work. Smaller
companies need to outsource a greater percentage of this research. The Company
is aware of a few other companies that are presently developing simulation
software or simulation-software-based services to the pharmaceutical industries
for the purposes of screening compounds.
The Company is not aware of any significant competition in the area of
gastrointestinal absorption simulation. The Company is aware of one other
company called Trega (with a subsidiary called Navicyte) that offers an
absorption simulation. Information obtained by the Company indicates that this
simulation is not simply a software product for sale, but rather is incorporated
into larger development and experimental efforts as part of a consortium
approach. Information obtained by the Company indicates that Navicyte has seven
customers, of which three have since licensed GastroPlus(TM), and a fourth has
requested a quotation for a large multi-unit order. The remaining two are in the
process of evaluating GastroPlus at the time of this writing.
The Company believes the key factors in competing in this field are its
ability to develop simulation software and related products and services to
effectively predict the ADME-related behaviors of new drug-like 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 its ability to
develop and maintain relationships with research and development departments of
pharmaceutical companies and government agencies. There can be no assurances
that the Company will be successful in providing these key factors.
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EDUCATIONAL SIMULATION SOFTWARE
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PRODUCTS:
The Company's initial educational software products, which have won
awards from educational software testers, include simulations of laboratory
experiments for Physical Science and Chemistry courses under the umbrella name
FutureLab(TM). The Company released its first three FutureLab(TM) titles in May
1997 (OPTICS FOR PHYSICAL SCIENCE, GRAVITY FOR PHYSICAL SCIENCE, and CIRCUITS
FOR PHYSICAL SCIENCE), and a new title, IDEAL GAS FOR CHEMISTRY in November
1997, all for Windows-based computers. In August 1998, after a conversion effort
that took over one year for some labs, the Company released new versions of all
of these titles as well as UNIVERSAL GRAVITATION FOR PHYSICAL SCIENCE for both
Windows and Macintosh computers. Macintosh computers account for 40-50% of the
educational market.
FutureLab(TM) 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. FutureLab(TM)
software has received recognition from Computers in Physics magazine, which
declared it a winner in its Eighth Annual Software Contest, as well as from two
educational institutions who perform rigorous educational software evaluation.
PRODUCT DEVELOPMENT:
In the area of educational simulations, the Company decided to freeze
R&D activities after finishing the latest title, TITRATION FOR CHEMISTRY.
Current sales from FutureLab, while steady and showing some signs of increasing,
are not sufficient to provide support for continued development of educational
software.
MARKETING AND DISTRIBUTION:
The Company markets its science experiment simulation software products
through software resellers and its Internet web page. As of August 1999, the
Company reduced its marketing efforts in this area in order to concentrate more
of its resources on the pharmaceutical software market. The Company is relying
on its resellers to provide the majority of the marketing and sales efforts for
its educational software products. FutureLab sales have continued through these
distributors.
PRODUCTION:
The Company's educational software products were designed and developed
by its development team at its Lancaster, California facility. The chief
materials and components used in simulation software products include CD-ROMs
and instruction books which are produced in-house by the Company's personnel.
COMPETITION:
The educational software industry in which the Company operates is
competitive. The Company competes against publishers and suppliers of textbook
educational materials that have been, and will continue to be, the primary
educational resource used in these markets. The Company also competes against
educational software publishers who provide software products that are
interactive, but most are not true simulation software. Most educational
software publishers compete in the grades below 9th grade, addressing primarily
reading and math skills. The Company competes primarily in the middle school,
high school, and college markets addressing primarily science and math subjects.
A smaller number of software publishers are addressing these markets, although
existing competitors may broaden their product lines to these markets, and
additional competitors may enter these markets.
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The Company is aware of several companies publishing various types of
educational simulation software including HyperCube, Glencoe, Corel, Logal
Educational Software and Systems, and Knowledge Revolution. Logal was the only
company of which the Company is currently aware that is producing a range of
educational simulation software that competes directly with the Company's
current and planned educational simulation software products. Logal has gone out
of business and its software is now sold by Riverdeep Group plc of Dublin,
Ireland and Cambridge, Massachusetts. The Company expects that high school and
college science and math textbook publishers and other companies may also be
developing simulation software products and that additional competitors may
enter this field. Information gathered by the Company at conferences for science
teachers and school administrators indicates that these customers and potential
customers prefer the Company's products over those offered by others almost
unanimously, at least for those titles which have been released by the Company
to date.
DISABILITY PRODUCTS
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PRODUCTS:
The Company's wholly owned subsidiary, Words+, Inc. has been in
business since 1981. Words+ is a technology leader in designing and developing
augmentative and alternative communication (AAC) computer software and hardware
devices for persons who cannot speak due to physical disabilities. Words+ also
produces computer access products that enable physically disabled persons to
operate a personal computer as well as to communicate, through movements as
slight as the blink of an eye. Words+ developed and produces the software for
the computerized communication system used by world-famous theoretical
astrophysicist Professor Stephen Hawking, Lucasian Professor of Mathematics at
the University of Cambridge in England, and the author of the best-selling book
A BRIEF HISTORY OF TIME. Words+ markets its products throughout the United
States and to other countries through a direct sales staff and independent
dealers and resellers. Words+ introduced a fully integrated, portable,
lightweight personal-computer-based communication system that is meeting
favorable market acceptance.
E Z Keys for Windows(TM)
------------------------
One of the Company's primary software products is E Z KEYS FOR WINDOWS
("E Z KEYS(TM)"), which is a program that operates on a Windows-based personal
computer. When coupled with specially-designed input devices, E Z KEYS enables
even severely physically disabled persons to operate a personal computer, to
generate voice messages through a voice synthesizer, and to operate most
Windows-based software application programs. Input motion by the user can be
through a standard keyboard, joystick, or mouse, or it can be as slight as the
blink of an eye, or even simple eye movement by persons who cannot blink. E Z
KEYS is one of the two Words+ programs used by Professor Stephen Hawking for
computer access and communication. In May 1997, the Company released E Z KEYS
FOR WINDOWS 95, the current version of which is also compatible with Windows 98.
Talking Screen for Windows(TM)
------------------------------
TALKING SCREEN FOR WINDOWS ("TALKING SCREEN(TM)") is a software program
that operates on a Windows-based personal computer and is designed for persons,
usually children, who cannot read and write at the level necessary to adequately
operate E Z KEYS. TALKING SCREEN provides a system of pages of pictographic and
photographic symbols by which the user can produce speech output messages
through a voice synthesizer, play recorded sounds and video files, and operate
controllers for lights, electrical appliances and other equipment. Like E Z
KEYS, TALKING SCREEN can be operated through a wide range of alternative input
devices.
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Freedom 2000
------------
Words+ released a new communication system called Freedom 2000 in
February 1999. It allows persons with disabilities who read at a second-grade
level and above to speak and write through alternative input methods (rather
than traditional keyboard and mouse). Freedom 2000 with E Z KEYS gives the users
the ability not only to speak and write, but also to play games and control
various items in their environment, such as TV's and telephones. High level
users are also able to deliver lectures to large groups, use the Internet, and
send e-mail. A lighter weight version of the Freedom 2000, called Freedom 2000
LITE, was introduced in October 1999. Although it has a smaller display, the 4.0
lb Freedom 2000 LITE is more attractive to ambulatory users than the 8.0 lb
Freedom 2000.
TuffTalker(TM)
--------------
The Company recently introduced the TuffTalker, a new device that
replaces the PegasusLITE, which was discontinued when Epson, the manufacturer of
the personal computer upon which it was based, ceased production of the
computer. The PegasusLITE previously accounted for about 15% of the company's
revenues, which decreased during the past fiscal year after its discontinuance.
The Company searched for nearly a year before a suitable replacement was found
in a new touch tablet computer from Panasonic. The Company announced the
TuffTalker in July 2000 and is enjoying strong initial sales of the device in
the first quarter of fiscal 2001.
MessageMate
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The Company produces a series of products called MessageMates, which
are hand-held, dedicated communication devices that store recorded speech or
sound on integrated circuit chips. The user plays these recorded sounds by
touching one of the keys on the membrane keyboard if they are able to use a
keyboard, or by using a switch (such as the IST Switch described below) and
scanning to select a position on the keyboard. MessageMates are small,
lightweight (1 to 1.75 lbs.), easy-to-use communication devices with up to ten
minutes of recorded messages. In production since 1992, they are known for their
extremely rugged design and long battery life, and sales have increased year
after year. The MessageMate 20 holds twenty messages, the MessageMate 40 holds
forty messages, the Multi-Level MessageMate holds up to 144 messages, and the
Mini-MessageMate holds eight messages. Since MessageMates use recorded messages
and sounds, they can be used in any language. The Company has significant sales
of MessageMate in foreign markets, including Japan, and sales of MessageMates in
foreign markets are increasing.
In December 1999, the Company completed the development of and released
a new Message Builder feature for the MessageMate, which is an enhancement of
the existing MessageMate product. It enables users to select prerecorded words
or phrases one at a time, and then plays the entire message formed by them.
Infrared/Sound/Touch (IST) Switch
---------------------------------
Many Words+ customers cannot operate a keyboard or mouse. For some of
these persons, the Company has designed and produces a special device called the
Infrared/Sound/Touch Switch ("IST Switch"), that enables the person to operate a
personal computer or a dedicated communication device with the slightest
movement or pressure, including, for example, eye blink, or just eye movement.
The IST is activated by infrared reflection, touch, or sound, and transmits a
momentary "on" signal to the computer upon detecting these signals. This switch
has been in production in ever-improving forms since 1983, and thousands of
physically disabled persons around the world have used it.
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Miscellaneous
-------------
Words+ 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:
o Micro CommPac - Company-designed and produced communication
hardware package designed for use with a notebook computer
that provides switch interface and audio amplification.
o U-Control - Wireless infrared remote control device that
allows the user to control functions and appliances in the
home and work environment such as lights, stereo and
television equipment, and other appliances.
o Simplicity Wheelchair Mount - Company-designed and produced
wheelchair mount for portable computers and other devices.
PRODUCT DEVELOPMENT:
The Company believes it has been an industry technology leader for
nearly 20 years in introducing and improving augmentative and alternative
communication and computer access software and devices for disabled persons and
intends to continue to be at the forefront of the development of new products.
The Company will continue to enhance its major software products, E Z KEYS and
TALKING SCREEN, as well as its growing line of hardware products. The Company
will also consider acquisitions of other products, businesses and companies that
are complementary to its existing augmentative and alternative communication and
computer access business lines.
MARKETING AND DISTRIBUTION:
The Company markets augmentative and alternative communication products
through a network of employee representatives and independent dealers and
resellers.
At the present time the Company has twenty eight sales representatives
worldwide: three salary/commission salespersons - two in California and one in
Maryland, nine independent dealers and four independent resellers in the U.S.,
and twelve sales representatives overseas - four in Australia, and one each in
Canada, England, Norway, The Netherlands, New Zealand, Japan, Finland and
Malaysia. The Company also has four inside sales/support persons who answer
telephone inquiries on the Company's 800 line and who provide technical support.
Additional outside sales persons and independent dealers and resellers are being
actively recruited at this time.
The Company directs its marketing efforts to speech pathologists,
occupational therapists, rehabilitation engineers, special education teachers,
disabled persons and relatives of disabled persons. The Company maintains a
mailing list of over 37,000 persons made up of these professionals, consumers
and relatives and mails various marketing materials to this list. These
materials include the Company's catalog of products and announcements regarding
new and enhanced products.
The Company participates in industry conferences held throughout the
U.S. and in other countries that are attended by speech pathologists,
occupational and physical therapists, special education teachers, parents and
consumers. The Company and others in the industry demonstrate their products at
these conferences and present technical papers that describe the application of
their technologies and research studies on the effectiveness of their products.
The Communication Aids Manufacturers Association (CAMA) organizes tours of
representatives of companies in this field that travel throughout the country
providing seminars and workshops for professionals, consumers and parents in the
field. The Company advertises in selected publications of interest to persons in
this market.
The Company estimates that for approximately 50% of its sales of
augmentative and alternative communication software and hardware, some or all of
the purchase price is provided by third parties such as Medicaid, school special
education budgets, private insurance or other governmental or charitable
assistance. The Company was recently advised that Medicare will begin providing
coverage of augmentative communication devices on January 1, 2001, and that
approximately 50,000 people in need of AAC technology will be eligible for such
coverage.
10
<PAGE>
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. No assurances can be given that such third
party support will continue to be available for the purchase of the Company's
products.
PRODUCTION:
Disability software products are either loaded onto hard drives by the
Company or copied to diskettes or CD-ROM, which is performed in-house.
Microprocessors that are part of dedicated devices are purchased by the Company
and incorporated into its products by the Company. Most software customers buy
their notebook personal computers from the Company, which the Company purchases
at wholesale prices and resells at a markup. Cases, printed circuit boards,
labels and other components of products such as MessageMate and CommPac are
designed by the Company. The Company outsources the extrusion, machining and
manufacturing of certain components. All final assembly and testing are done by
the Company at its facility.
The Company's products are shipped from its Lancaster, California
facility either directly to the customer or to the salesperson, dealer or
reseller. The outside salesperson, dealer or reseller either delivers the
product or visits the customer after delivery to provide training.
COMPETITION:
The AAC industry in which the Company operates is highly competitive
and some of the Company's competitors have greater financial and personnel
resources than the Company. The industry is made up of six major competitors
including the Company, and a number of smaller ones. The Company believes that
the five other major competitors each have revenues ranging from $3 Million to
$20 Million, so that there are no large companies in this industry. Two of these
companies primarily 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, along with strong after-sale support. The
Company believes that it is a leader in the industry in developing and producing
the most technologically advanced products and in providing quality customer
training and technical support. The prices of the Company's products are among
the highest in the industry and the Company has one of the smallest sales forces
and dealer networks in the industry. The Company believes it is positioned to
continue to be a leader in the development and production of the highest quality
technology and that it will be able to develop one of the strongest sales forces
in the industry by increasing the number of sales representatives or
distributors. The Company believes that the sales of its products can increase
significantly due to these factors and the expected continuing expansion of the
size of this market. However, there are few barriers to entry in the form of
proprietary or patented technology or trade secrets in this industry. While the
Company believes that cost of product development and the need for specialized
knowledge and experience in this industry would present some deterrence for new
competition, other companies may enter this industry, including companies with
substantially greater financial resources than the Company. Furthermore,
companies already in this industry may increase their market share through
increased technology development and marketing efforts.
11
<PAGE>
PERSONAL PRODUCTIVITY SOFTWARE
--------------------------------------------------------------------------------
PRODUCT - ABBREVIATE!:
Words+ released a productivity software program called ABBREVIATE! in
November 1997 at COMDEX. The Company extracted the abbreviation technology
incorporated into the E Z KEYS FOR WINDOWS software used by Professor Stephen
Hawking and thousands of others around the world, and turned it into a program
that can be used by anyone with the ability to use a standard keyboard. While
many word processors provide a similar "Quick Correct" feature, the advantage
ABBREVIATE! has over such features is that it runs in the background and works
with almost all Windows applications. Thus, ABBREVIATE! allows the user to
create a personal library of frequently-used abbreviations, each with its own
special keystroke combination, for use in virtually any Windows-based program,
e.g., fax, e-mail, word processing, database, Internet chat rooms, and
spreadsheets. The Company is currently pursuing distribution relationships with
a number of major software manufacturers for ABBREVIATE!. ABBREVIATE! was named
PC Week magazine's "Tool of the Week" in their December 1, 1997 issue, and won
Win95 magazine's Editor's Choice Award in March 1998.
MARKETING AND DISTRIBUTION:
The Company is currently selling the program itself through a variety
of Internet channels, including its own web site (www.abbreviate.cc), and
through distributors. The Company is also contacting large software
manufacturers and distributors in an effort to secure distribution agreements
for Abbreviate!.
PRODUCTION AND DISTRIBUTION:
THE ABBREVIATE! personal productivity software program is currently
manufactured at the Company's Lancaster, California facility. If sales volume
warrants and higher volume capacity is required, the Company will investigate
outside sources for fulfillment.
COMPETITION:
A few products compete with ABBREVIATE! in the retail market; however,
the Company is not aware of any other product that works with virtually any
software in Windows 95/98 without the need to create special links to the
software. The Company has priced ABBREVIATE! significantly less than competitors
SmarType and InstantText. The Company enlisted the help of several medical
transcriptionists as beta testers for the product, and the feedback received
from those testers and additional medical transcriptionists, who are familiar
with competitive products, has been very favorable.
TRAINING AND TECHNICAL SUPPORT
--------------------------------------------------------------------------------
The Company believes customer training and technical support are
important factors in customer satisfaction for its pharmaceutical and disability
products and the Company believes it is an industry leader in providing customer
training and technical support. For pharmaceutical software, the Company
provides in-house seminars at the customer's site to demonstrate GastroPlus and
QMPRPlus. During FY 1999 and 2000, the company delivered such seminars in
numerous locations around the world. The Company has delivered a series of
seminars in Japan to over 150 scientists from over 40 different companies. The
Company also conducted on-site seminars to many hundreds of scientists at
approximately 55 pharmaceutical and related research companies in the U.S. and
Europe. These seminars serve as initial training in the event the potential
customer decides to license the software. Strong technical support is provided
after the sale in the form of in-house training at customer's cost, telephone,
fax, and e-mail assistance to users, as well as an ongoing process of software
upgrades to ensure the product remains at the cutting edge of technology.
Software licenses are on an annual basis, and include all upgrades to the
modules licensed by the customer during the license year.
12
<PAGE>
For Disability Products, the Company's salesperson, dealer or reseller
provides initial training to the customer for full systems -- typically two to
four hours. This training is typically provided not only to the user of the
product but also to the person's speech pathologists, teachers, parents and
others who will be helping the user. This initial training for the purchase of
full systems is usually provided as a part of the price of the product. The
Company and its dealers charge a fee for additional training and service calls.
Technical support for both Simulation Software and Disability Products
is provided by the Company's inside sales and support staff based at its
headquarters facilities in Lancaster, California. The Company provides no-charge
toll telephone support offering unlimited toll-free numbers in the U.S. and
Canada, and E-mail support for all of its simulation software and disability
products.
EMPLOYEES
--------------------------------------------------------------------------------
As of August 31, 2000, the Company employed 33 full-time and 4
part-time employees, including 8 in research and development, 7 in marketing and
sales, 12 in administration and accounting, 9 in production and 1 in repair.
Four current employees hold Ph.D.'s, one is a Pharm. D./M.S., and one is a Ph.D.
candidate in their respective science or engineering disciplines and three
additional employees hold Master's degrees. The Company believes that its future
success will depend, in part, on its ability to continue to attract, hire and
retain qualified personnel. The competition for such personnel in the
augmentative and alternative communication device and computer software industry
is intense. None of the Company's employees is represented by a labor union, and
the Company has never experienced a work stoppage. The Company believes that its
relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company moved its office location from Palmdale, California to
Lancaster, California in July 1999, expanding its office space from
approximately 11,800 square feet to approximately 15,600 square feet. The lease
on the office space currently occupied by the Company will expire in August
2001. The Company is provided two (2) two (2) year Options to Renew term with
not less than three months prior written notice of its intention to exercise
these options. The Company realized a savings of approximately $40,000 per year
through the lease it negotiated on this new property.
ITEM 3. LEGAL PROCEEDINGS
While the Company may from time to time be involved in various claims,
lawsuits or disputes with third parties, the Company is not a party to any
significant litigation and is not aware of any significant pending or threatened
litigation against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2000.
13
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the Nasdaq SmallCap Market
("Nasdaq") on June 18, 1997 under the symbol "SIMU". At the closing on July 2,
1999, the Company's Common Stock was delisted from Nasdaq and is currently
traded on the OTC Bulletin Board. According to records of the Company's transfer
agent, the Company had about 60 stockholders of record and 800 beneficial owners
as of August 31, 2000. The following table sets forth the low and high sale
prices for the Common Stock as reported by Nasdaq, and, subsequent to delisting,
on the OTCBB, for each of the last two fiscal years. The quotations quoted for
the over the counter market reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions. The Company
has not paid dividends on its common stock. The Company currently intends to
retain its earnings for future growth, therefore does not anticipate paying any
cash dividends in the foreseeable future. Any further 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 deem relevant.
<TABLE>
<CAPTION>
LOW SALES PRICE HIGH SALES PRICE
--------------- ----------------
<S> <C> <C>
Fiscal 2000:
Quarter ended August 31, 2000......................... 1.625 2.625
Quarter ended May 31, 2000............................ 2.250 5.187
Quarter ended February 29, 2000....................... 1.850 3.687
Quarter ended November 30, 1999....................... 1.500 2.500
Fiscal 1999:
Quarter ended August 31, 1999......................... 1.500 2.750
Quarter ended May 31, 1999............................ 2.375 3.750
Quarter ended February 28, 1999....................... 0.875 4.000
Quarter ended November 30, 1998....................... 1.000 2.375
</TABLE>
14
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following sets forth selected items from the Company's statements
of operations (in thousands) and the percentages that such items bear to net
sales for the fiscal years ended August 31, 2000 ("FY2000"), August 31, 1999
("FY99") and August 31, 1998 ("FY98").
<TABLE>
<CAPTION>
Year Ended August 31,
------------------------------------------------- ------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------- ---------------------- ------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $3,629 100.0% $3,467 100.0% $2,645 100.0%
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Cost of sales * 1,423 39.2 1,797 51.8 1,850 69.9
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Gross Profit 2,206 60.8 1,670 48.2 795 30.1
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Selling, general, and administrative * 2,143 59.0 2,160 62.3 2,589 97.9
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Research and development 300 8.3 219 6.3 390 14.7
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Total operating expenses 2,443 67.3 2,379 68.6 2,979 112.6
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Income (loss) from operations (237) (6.5) (709) (20.4) (2,184) (82.5)
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Income from grant - - 150 4.3 150 5.7
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Interest income - - 5 0.1 58 2.2
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Interest expense (22) (0.6) (21) (0.6) (16) (0.6)
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Gain on disposal of furniture & equip. 3 0.1 - - - -
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Loss on investment, at equity - - - - (75) (2.8)
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Provision for (benefit from) income taxes 2 0.1 2 0.1 2 0.2
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
Net income (loss) (258) (7.1)% (577) (16.6)% (2,069) (78.2)%
------------------------------------------------- ---------- ----------- ------------ ------------ ----------- -----------
</TABLE>
o The Company reclassified royalty expense and freight-out expense as a part
of cost of sales starting with FY2000. Royalty expenses ($67,000 in FY99
and $13,000 in FY98) and freight-out expenses ($81,000 in FY99 and $81,000
in FY98) are restated reflecting this change in order to provide a fair
comparison between fiscal years.
FY2000 COMPARED WITH FY99
--------------------------------------------------------------------------------
NET SALES
---------
Net sales for FY2000 increased by $162,000 or 4.7%, to $3,629,000
compared to $3,467,000 for FY99. Simulations Plus, Inc.'s sales from
Pharmaceutical and educational software increased approximately $474,000, or
102.8%, and Words+, Inc.'s sales decreased approximately $312,000, or 10.4% for
the year. Management attributes the increase in consolidated net sales to the
significant sales increase in Pharmaceutical software in FY2000 compared with
FY99 in which the first sales were launched. Pharmaceutical software sales
contributed over 300% of the total increase in consolidated sales for the year.
This continuous growth in pharmaceutical sales was offset by a reduction of
sales from Words+, Inc., its subsidiary. The decrease in Words+ sales is due
primarily to the discontinuation of the Pegasus LITE(TM) because of the lack of
key components. The Company announced the advanced replacement called
TuffTalker(TM) in the last quarter of FY2000 and its initial sales began in
September 2000.
15
<PAGE>
COST OF SALES
-------------
The consolidated cost of sales for FY2000 decreased by $374,000 or
20.8% to $1,423,000 from $1,797,000 in FY99. As a percentage of sales, cost of
sales was 39.2% for FY2000, compared to 51.8% for FY99, indicating a 12.6%
decrease. For Simulations Plus, cost of sales decreased $153,000, or 34.4%, of
which the significant portion of cost of sales is the systematic amortization of
capitalized software development costs, which resulted in a 54.4% decrease in
amortization cost. The Company's amortization expenses for the capitalized
software development costs relating to educational software were none in FY2000
as compared to $267,000 in FY99. Although there was an increase in royalty
expense due to the agreement between the Company and TSRL to pay royalties on
GastroPlus sales, reductions in amortization costs outweighed increases in
royalty expense. For Words+, the cost of sales decreased $221,000, or 16.3%.
Management attributes the reduction in cost of sales between FY2000 and FY99 to
a decline in amortization costs and large volume sales on higher margin
products, which outweighed an increase in labor and production supply.
GROSS PROFIT
------------
The consolidated gross profit increased $536,000, or 32.1%, to
$2,206,000 in FY2000 from $1,670,000 in FY99. Management attributes the 12.6%
increase in gross profit margin from 48.2% in FY99 to 60.8% in FY2000 primarily
to the increase in net sales combined with the decline in cost of goods sold,
particularly in amortization cost.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
Selling, general and administrative expenses for FY2000 decreased by
$17,000, or 0.8% to $2,143,000, compared to $2,160,000 for FY99. For Simulations
Plus, the selling, general and administrative expenses increased $19,000, or
2.6% primarily due to an increase in selling expenses, such as travel, trade
conference expense and commission expense, however these increases are offset by
a decrease in legal fees. All other expenses were maintained fairly constant.
For Words+, expenses decreased $36,000, or 2.5%, due to reductions in the
employee field sales force and their payroll-related expenses, reducing trade
shows and travel expenses, while expanding independent dealers and resellers
nationwide. These reductions outweighed increases in other expenses such as
commissions to independent sales representatives and catalog printing costs. All
other overhead expenses remained relatively constant.
RESEARCH AND DEVELOPMENT
------------------------
The Company incurred approximately $432,000 of research and development
costs for both companies during FY2000. Of this amount, $132,000 was capitalized
and $300,000 was expensed. For FY99, the Company incurred approximately $415,000
of research and development costs, of which approximately $196,000 was
capitalized and approximately $219,000 was expensed. The 4.1% increase in
research and development expenditure from FY99 to FY2000 was due to additions to
staff and increases in salaries.
LOSS FROM OPERATION
-------------------
During FY2000, the Company incurred a loss of approximately $237,000 as
compared to a loss of $709,000 for FY99. Management attributes the reduction in
net loss from operations to a combination of increased sales, decreased cost of
sales, and more efficient operations as reflected in reduced selling, general
and administrative expenses.
16
<PAGE>
INCOME FROM GRANT
-----------------
For FY2000, the Company did not receive any grant income. For FY99 the Company
received the final $150,000 of a $300,000 Phase II SBIR grant from the National
Science Foundation to develop software to allow physically-disabled students to
perform simulated laboratory experiments on a computer. This grant resulted in
the development of our FutureLab educational software.
INTEREST INCOME
---------------
Interest income for FY2000 decreased to $0 from $5,000 in FY99. This
decrease is primarily due to the interest earned on investment activities in
commercial notes through a highly qualified financial institution being reduced
because portions of the Company's capital resources were used in the Company's
operations.
INTEREST EXPENSE
----------------
Interest expense for FY2000 increased to $22,000, or 4.8%, from $21,000
in FY99. This slight increase is primarily due to interest charges incurred for
the Company's revolving line of credit and interest on capitalized lease
obligations.
GAIN ON DISPOSAL OF FURNITURE & EQUIPMENT
-----------------------------------------
Gain on disposal of furniture & equipment for FY2000 was $3,000 while
there was no such gain in FY99. During FY2000, the Company claimed a loss of
stolen computers to our insurance company, and the results of proceeds less
depreciated book value resulted in this gain of $3,000.
INCOME TAXES
------------
Income taxes were $1,600 for FY2000 as well as FY99. This represents
the minimum corporation tax in the state of California for the two companies.
NET LOSS
--------
Net loss for FY2000 decreased $319,000, or 55.3%, to a net loss of
$258,000, compared to the net loss of $577,000 for FY99. Management attributes
this decline primarily to increases in sales, decreases in cost of sales, and
more efficient operations as evidenced in decreases in selling, general and
administrative expenses which outweighed the increases in research and
development expenses compared to FY99.
FY99 COMPARED WITH FY98
--------------------------------------------------------------------------------
NET SALES
---------
Net sales for FY99 increased by $822,000 or 31.1%, to $3,467,000
compared to $2,645,000 for FY98. Simulations Plus, Inc.'s sales from
Pharmaceutical and educational software increased approximately $400,000, or
649.2%, and Words+, Inc.'s sales increased approximately $422,000, or 16.3% for
the year. Management attributes the increase in consolidated net sales to the
first sales from Pharmaceutical software launched in FY99, and to increased
sales from Words+, Inc., its subsidiary. Pharmaceutical software sales
contributed over 45% of the total increase in consolidated sales for the year.
The increase in Words+ sales is due primarily to its Multi-Level MessageMate and
Freedom 2000 communication products being well received by the marketplace. The
Company has noticed a steady increase in Words+ orders that began in February
1999 and continues through the end of FY99.
17
<PAGE>
COST OF SALES
-------------
The consolidated cost of sales for FY99 decreased by $53,000 or 2.9% to
$1,797,000 from $1,850,000 in FY98. As a percentage of sales, cost of sales was
51.8% for FY99, compared to 69.9% for FY98, indicating an 18.1% decrease. For
Simulations Plus, cost of sales decreased $40,000, or 8.3%, of which the
significant portion of cost of sales is the systematic amortization of
capitalized software development costs, which resulted in a 19.2% decrease in
amortization cost. The Company expensed $183,000 of capitalized software
development costs relating to educational software in FY99 and $350,000 in FY98.
There will be no further write off against revenue generated from the sales of
educational software starting from FY2000. A significant increase in royalty
expense was experienced due to the agreement between the Company and TSRL to pay
royalties on GastroPlus sales; however, reduction in amortization cost
outweighed the increase in royalty expense. For Words+, the cost of sales
decreased $13,000, or 1.0%. Management attributes the reduction in cost of sales
between FY99 and FY98 to a decline in amortization costs and labor costs, which
outweighed an increase in material and warranty costs.
GROSS PROFIT
------------
The consolidated gross profit increased $875,000, or 110.1%, to
$1,670,000 in FY99 from $795,000 in FY98. Management attributes the 18.1%
increase in gross profit margin from 30.1% in FY98 to 48.2% in FY99 primarily to
the increase in net sales combined with the decline in cost of goods sold,
particularly in amortization cost.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
Selling, general and administrative expenses for FY99 decreased by
$429,000, or 16.6% to $2,160,000, compared to $2,589,000 for FY98. As a
percentage of net sales, selling, general and administrative expenses decreased
by 35.6% to 62.3% in FY99 from 97.9% in FY98. For Simulations Plus, the selling,
general and administrative expenses decreased $187,000, or 20.0% primarily due
to the downsizing of educational software development activities as the Company
reduced staff, significant reduction in educational software marketing expenses,
and other associated overhead costs. Another large reduction was realized in
facility lease expense after the Company moved to its current location in July
1999. For Words+, expenses decreased $242,000, or 14.0%, due to reductions in
the employee field sales force and their payroll related expenses, reducing
trade shows and travel expenses, reducing marketing cost by consolidating the
management of two companies' marketing departments into one person, and reducing
advertising and newsletter printing costs. These reductions outweighed increases
in other expenses such as commissions to independent sales representatives,
utilities and royalties.
RESEARCH AND DEVELOPMENT
------------------------
The Company incurred approximately $415,000 of research and development
costs for both companies during FY99. Of this amount, $196,000 was capitalized
and $219,000 was expensed. For FY98, the Company incurred approximately
$1,015,000 of research and development costs, of which approximately $625,000
was capitalized and approximately $390,000 was expensed. The 59.1% decrease in
research and development expenditure from FY98 to FY99 was due to the
significant reduction in educational simulation development, as well as a
reduction in Words+'s R&D expenses.
LOSS FROM OPERATIONS
--------------------
During FY99, the Company incurred a loss of approximately $709,000 as
compared to a loss of $2,184,000 for FY98. Management attributes the reduction
in net loss from operations to increased sales and decreased expenses, including
selling, general and administrative expenses.
INCOME FROM GRANT
-----------------
For FY99, the Company received the final $150,000 of a $300,000 Phase
II SBIR grant from the National Science Foundation to develop software to allow
physically-disabled students to perform simulated laboratory experiments on a
computer. For FY98, the Company received $150,000, the first two $75,000
semi-annual payments under this grant.
18
<PAGE>
INTEREST INCOME
---------------
Interest income for FY99 decreased to $5,000 from $58,000 in FY98. This
decrease is primarily due to the interest earned on investment activities in
commercial notes through a highly qualified financial institution being reduced
because portions of the Company's capital resources were used in the Company's
operations.
INTEREST EXPENSE
----------------
Interest expense for FY99 increased to $21,000, or 31.3%, from $16,000
in FY98. This increase is primarily due to interest charges incurred for the
Company's revolving line of credit and interest on capitalized lease
obligations.
LOSS ON INVESTMENT IN HEALTHWEB, INC., AT EQUITY
------------------------------------------------
Loss on investment for FY99 was reduced to $0 from the loss of $75,000
in FY98. During FY98, the Company incurred approximately $75,000 of expenses in
forming a joint venture called HealthWeb, Inc. to provide health information
through its Internet web site HealthData.com. The Company holds 4,500,000 (50%)
shares of the 9,000,000 shares issued in HealthWeb, Inc., which is a California
corporation. Because of limited resources, the Company discontinued its support
of HealthWeb, Inc. and currently HealthWeb, Inc. is in a state of non-operation.
INCOME TAXES
------------
Income taxes were $1,600 for FY99 as well as FY98.
NET LOSS
--------
Net loss for FY99 decreased $1,492,000, or 72.1%, to a net loss of
$577,000, compared to the net loss of $2,069,000 for FY98. Management attributes
this decline primarily to the significant increases in sales, decreases in cost
of sales, decreases in selling, general and administrative expenses, and
decreases in research and development expenses compared to FY98.
SEASONALITY
--------------------------------------------------------------------------------
Sales of the Company's disability products exhibit no discernable
seasonal fluctuation. The following table sets forth net sales information for
each of the Company's last 12 calendar quarters. In each of the last three
years, the highest quarters and the lowest quarters have been in three different
quarters. This unaudited net sales information has been prepared on the same
basis as the annual information presented elsewhere in this Annual Report on
Form 10-KSB and, in the opinion of management, reflects all adjustments
(consisting of normal recurring entries) necessary for a fair presentation of
the information presented. Net sales for any quarter are not necessarily
indicative of sales for any future period.
<TABLE>
<CAPTION>
Net Sales
--------------------------- -------------- ------------- -------------- -------------- -------------
First Second Third Fourth Total
FY Quarter Quarter Quarter Quarter
--------------------------- -------------- ------------- -------------- -------------- -------------
(in thousands)
--------------------------- -------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
2000...................... 814 1,092 743 980 3,629
--------------------------- -------------- ------------- -------------- -------------- -------------
1999...................... 881 778 929 879 3,467
--------------------------- -------------- ------------- -------------- -------------- -------------
1998...................... 543 560 730 812 2,645
--------------------------- -------------- ------------- -------------- -------------- -------------
</TABLE>
19
<PAGE>
In general, management believes sales to schools are seasonal, with
greater sales to schools during the Company's third and fourth fiscal quarter
(March-May and June-August). There is not sufficient historical data at this
time to allow a detailed analysis of the seasonality of educational simulation
software. Sales of pharmaceutical simulations, which began in the first quarter
of FY99, are not expected to show significant seasonal behavior.
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------
The Company's principal sources of capital have been cash flows from
its operations, a bank line of credit, a government grant, cash loans from the
officers on an as-needed basis, accruing and not paying full salaries to certain
executive officers and managers, and the remaining proceeds from the Company's
initial public offering.
The Company has available a $100,000 revolving line of credit from a
bank. Interest is payable on a monthly basis at the bank's prime rate plus 3.0%.
The interest rate was 12.5% at August 31, 2000 and 11.0% at August 31, 1999. At
August 31, 2000, the outstanding balance under the revolving line of credit was
approximately $99,000, and at August 31, 1999, the outstanding balance under the
revolving line of credit was $90,000. 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.
Beginning in August 1998, certain executive officers and managers
accepted reduced salaries on a temporary basis in order to protect the cash
assets of the Company. The unpaid portions of salaries are being accrued and
will be paid at such future time as management deems the Company's cash flow and
cash reserves are sufficient to make such payment without adverse effects to the
Company's financial position. As of this time, only the Company's CEO and CFO
are receiving reduced salaries, with the unpaid amounts being accrued. As of
August 31, 2000, the amount of accrued and unpaid salaries due to the Company's
executive officers was $298,000.
In October 1997, the Company was awarded a follow-on $300,000 Phase II
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 grant was paid in four equal payments of
$75,000 semi-annually and the Company received the final payment in June 1999.
The Company believes that existing capital and anticipated funds from
operations, cost reductions from downsizing certain segments of operations, and
temporary salary reductions for senior management 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. If
cash flows from operations are insufficient to continue operations at the
current level, and if no additional financing is obtained, then management will
restructure the Company in a way to preserve its pharmaceutical and disability
businesses while maintaining expenses within operating cash flows.
20
<PAGE>
In order to maintain quotation of its securities on the Nasdaq SmallCap
Market ("Nasdaq"), the Company has to maintain certain minimum financial
requirements. As of August 31, 1998 the Company ceased to meet one of the
requirements for continued listing, namely the Company's net tangible assets as
of August 31, 1998 were $1,284,000 which was below the $2,000,000 required by
the Nasdaq. On July 2, 1999, the Company was informed that its securities were
being delisted from the Nasdaq effective at the close of business on July 2,
2000 because the Company did not meet the requirements for continued listing on
Nasdaq. Accordingly, trading in the shares of the Company's Common Stock is now
conducted on the Nasdaq's "Electronic Bulletin Board." Consequently, the
liquidity of the Company's securities may be impaired, not only in the number of
securities which can be bought and sold, but also through delays in the timing
of the transactions, reductions in security analysts' and the new media's
coverage of the Company, and lower prices for the Company's securities than
otherwise may be attained.
As a result of the delisting, the Company's securities are 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 the sale. Consequently,
the rule may adversely affect the ability of broker-dealers to sell the
Company's 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 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 penny stock
from associating with a broker-dealer or participating in the 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 would be severely
adversely affected.
ITEM 7. FINANCIAL STATEMENTS
The response to this item is submitted as a separate section of this Form 10KSB
(see pages F-1 - F-21.)
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
21
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 9 is incorporated by reference from
the Company's definitive proxy statement (the "Proxy Statement") for its 2001
annual shareholders' meeting.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated by reference from
the Company's Proxy Statement for its 2001 annual shareholders' meeting.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated by reference from
the Company's Proxy Statement for its 2001 annual shareholders' meeting.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12, which is incorporated by reference
from the Company's Proxy Statement for its 2001 annual shareholders' meeting.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report as required by
Item 601 of Regulation S-B:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation of the Registrant (1)
3.2 Amended and Restated Bylaws of the Registrant (1)
4.1 Articles of Incorporation of the Registrant (incorporated by reference
to Exhibit 3.1 hereof) and Bylaws of the Registrant (incorporated by
reference to Exhibit 3.2 hereof)
4.2 Form of Common Stock Certificate (1)
4.3 Share Exchange Agreement (1)
10.1 Simulations Plus, Inc. 1996 Stock Option Plan (the "Option Plan") and
terms of agreements relating thereto (1)+
10.2 Subscription Agreement with Patricia Ann O'Neil (1)
10.3 Security Agreement with Patricia Ann O'Neil (1)
10.4 Promissory Note made by the Registrant in favor of Patricia Ann O'Neil
(1)
10.5 Warrants to purchase 150,000 shares of Common Stock of the Registrant
issued to Patricia Ann O'Neil (1)
10.6 First Amendment to Agreement with Patricia Ann O'Neil (1)
10.7 Subscription Agreement with Fernando Zamudio (1)
10.8 Security Agreement with Fernando Zamudio (1)
22
<PAGE>
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. Woltosz + Virginia E. Woltosz (2) +
10.13 Software Acquisition Agreement by and Between the Registrant and
Michael B. Bolger (1)
10.14 Sublease Agreement dated May 7, 1993 by and between the Registrant and
Westholme Partners (along with Consent to Sublease and master lease
agreement) (1)
10.15 Lease Agreements dated August 22, 1996 by and between Words+, Inc. and
Abbey-Sierra LLC (1)
10.16 Form of 10% Amended and Restated Promissory Note issued in connection
with the Registrant's Private Placement (2)
10.17 Form of Subscription Agreement relative to the Registrant's Private
Placement (1)
10.18 Form of Lock-Up Agreement with Bridge Lenders (2)
10.19 Form of Indemnification Agreement (1)
10.20 Form of Lock-Up Agreement with the Woltosz' (2)
10.21 Letter of Intent by and between the Registrant and Therapeutic Systems
Research Laboratories (1)
10.22 Form of Representative's Warrant to be issued by the Registrant in
favor of the Representative (2)
10.23 Form of Warrant issued to Bridge Lenders (2)
10.24 License Agreement by and between the Registrant and Therapeutic Systems
Research Laboratories (3)
10.25 Grant Award Letter from National Science Foundation (4)
10.26 Distribution Agreement with Teijin Systems Technology LTD. (4)
10.27 Lease Agreements by and between Simulations Plus, Inc. and Martin
Properties, Inc. (4)
10.28 Software OEM Agreement for Assistive Market Developer by and between
Words+, Inc. and Digital Equipment Corporation. (4)
10.29 Purchase Agreement by and between Words+, Inc. and Epson America, Inc.
(4)
10.30 License Agreement with Absorption Systems, LP. (5)
10.31 Service contract with The Kriegsman Group. (5)
10.32 Letter of Engagement with Banchik & Associates. (5)
10.33 Letter of Intent for Cooperative Alliance with Absorption Systems, LP.
(5)
10.34 OEM/Remarketing Agreement between Words+, Inc. and Eloquent Technology,
Inc. (6)
27.1 Financial Data Schedule (6)
---------------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2 (Registration No. 333-6680) filed on March 25, 1997 (the
"Registration Statement").
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement filed on May 27, 1997.
(3) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended August 31, 1997.
23
<PAGE>
(4) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended August 31, 1998.
(5) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended August 31, 1999.
(6) Filed herewith.
+ Management Contract or Compensatory Plan.
(b) Reports on Form 8-K
None.
24
<PAGE>
SIGNATURES
In accordance with Section 13or15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Lancaster, State of
California, on December 14, 2000.
SIMULATIONS PLUS, INC.
By /s/ Momoko A. Beran
-----------------------------
Momoko A. Beran
CHIEF FINANCIAL OFFICER
In accordance with Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of Registrant and in the
capacities indicated on December 14, 2000.
SIGNATURE TITLE
/s/ Walter S. Woltosz Chairman of the Board of Directors
----------------------------- and Chief Executive Officer
Walter S. Woltosz
/s/ Virginia E. Woltosz Vice President, Secretary and
----------------------------- Director of the Company and Words+
Virginia Woltosz
/s/ Dr. David Z. D'Argenio Director and Consultant to the
----------------------------- Company
Dr. David Z. D'Argenio
/s/ Dr. Richard Weiss Director
-----------------------------
Dr. Richard Weiss
/s/ Momoko A. Beran Chief Financial Officer of the
----------------------------- Company
Momoko A. Beran
25
<PAGE>
SIMULATIONS PLUS, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
AUGUST 31, 2000 AND 1999
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONTENTS
AUGUST 31, 2000
--------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Simulations Plus, Inc.
We have audited the accompanying consolidated balance sheet of Simulations Plus,
Inc. (a California corporation) and subsidiary as of August 31, 2000, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the two years in the period ended August 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Simulations Plus,
Inc. and subsidiary as of August 31, 2000, and the consolidated results of their
operations and their consolidated cash flows for each of the two years in the
period ended August 31, 2000 in conformity with generally accepted accounting
principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
October 25, 2000
F-1
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2000
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 37,535
Accounts receivable, net of allowance for
doubtful accounts of $13,337 542,569
Inventory 158,317
-----------
Total current assets 738,421
CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $1,340,354 549,773
FURNITURE AND EQUIPMENT, net 125,868
OTHER ASSETS 51,778
-----------
TOTAL ASSETS $1,465,840
===========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2000
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 99,081
Accounts payable 239,058
Accrued payroll and other expenses 509,046
Accrued warranty and service costs 44,020
Deferred revenue 38,868
Current portion of capitalized lease obligations 14,839
------------
Total current liabilities 944,912
CAPITALIZED LEASE OBLIGATIONS, net of current portion 34,860
------------
Total liabilities 979,772
------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $0.001 par value
10,000,000 shares authorized
no shares issued and outstanding -
Common stock, $0.001 par value
20,000,000 shares authorized
3,385,831 shares issued and outstanding 3,386
Additional paid-in capital 4,632,278
Accumulated deficit (4,149,596)
------------
Total shareholders' equity 486,068
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,465,840
============
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------------------------------------------------
2000 1999
------------ ------------
NET SALES $ 3,629,551 $ 3,466,805
COST OF SALES 1,423,391 1,797,064
------------ ------------
GROSS PROFIT 2,206,160 1,669,741
------------ ------------
OPERATING EXPENSES
Selling, general, and administrative 2,142,948 2,160,274
Research and development 299,875 218,514
------------ ------------
Total operating expenses 2,442,823 2,378,788
------------ ------------
LOSS FROM OPERATIONS (236,663) (709,047)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 382 5,388
Income from grant - 150,000
Interest expense (22,327) (21,406)
Gain on disposal of furniture and equipment 2,606 -
------------ ------------
Total other income (expense) (19,339) 133,982
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (256,002) (575,065)
PROVISION FOR INCOME TAXES 1,600 1,600
------------ ------------
NET LOSS $ (257,602) $ (576,665)
============ ============
BASIC LOSS PER SHARE $ (0.08) $ (0.17)
============ ============
DILUTED LOSS PER SHARE $ (0.08) $ (0.17)
============ ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 3,384,968 3,377,543
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31,
-----------------------------------------------------------------------------------------------
<CAPTION>
Common Stock Additional
--------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31,
1998 3,350,000 $ 3,350 $ 4,595,771 $(3,315,329) $ 1,283,792
ISSUANCE OF COMMON
STOCK FOR LEASEHOLD
IMPROVEMENTS 33,531 34 33,497 33,531
NET LOSS (576,665) (576,665)
------------ ------------ ------------ ------------ ------------
BALANCE, AUGUST 31,
1999 3,383,531 3,384 4,629,268 (3,891,994) 740,658
EXERCISE OF STOCK
OPTIONS 2,300 2 3,010 3,012
NET LOSS (257,602) (257,602)
------------ ------------ ------------ ------------ ------------
BALANCE, AUGUST 31,
2000 3,385,831 $ 3,386 $ 4,632,278 $(4,149,596) $ 486,068
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31,
-----------------------------------------------------------------------------------------
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(257,602) $(576,665)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization of furniture and equipment 82,778 80,497
Amortization of capitalized software development costs 178,374 423,267
Gain on disposal of furniture and equipment (2,606) -
(Increase) decrease in
Accounts receivable 27,777 (194,576)
Income tax receivable - 28,941
Inventory 34,857 155,501
Other assets (1,777) (4,013)
Increase (decrease) in
Accounts payable (4,989) (90,712)
Accrued payroll and other expenses 79,008 244,655
Accrued warranty and service costs (26,741) 22,265
Deferred revenue 38,868 -
---------- ----------
Net cash provided by operating activities 147,947 89,160
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of furniture and equipment 3,665 -
Purchases of furniture and equipment (6,232) -
Capitalized computer software development costs (132,157) (196,130)
---------- ----------
Net cash used in investing activities (134,724) (196,130)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit 59,000 -
Payments on line of credit (49,747) (7,300)
Payments on capitalized lease obligations (40,276) (31,561)
Proceeds from the exercise of stock options 3,012 -
---------- ----------
Net cash used in financing activities (28,011) (38,861)
---------- ----------
Net decrease in cash and cash equivalents (14,788) (145,831)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 52,323 198,154
---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 37,535 $ 52,323
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-6
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended August 31, 2000 and 1999, the Company paid $1,600 and
$1,600, respectively, in income taxes and $22,327 and $21,406, respectively, in
interest.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company entered into capital lease obligations of $54,053 and $6,183 during
the years ended August 31, 2000 and 1999, respectively.
During the year ended August 31, 1999, the Company issued 33,531 shares of
common stock in exchange for $33,531 of leasehold improvements.
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
Simulations Plus, Inc. was incorporated on July 17, 1996. On August 29,
1996, the shareholders of Words+, Inc. exchanged their 2,000 shares of
Words+, Inc. common stock for 2,200,000 shares of Simulations Plus,
Inc. common stock, and Words+, Inc. became a wholly owned subsidiary of
Simulations Plus, Inc. (collectively, the "Company"). The effect of the
stock-for-stock exchange is presented retroactively in the accompanying
consolidated financial statements.
Lines 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. In addition, the
Company designs and develops pharmaceutical simulation software to
promote cost-effective solutions to a number of problems in
pharmaceutical research and in the education of pharmacy and medical
students. The Company also developed and sells interactive, educational
software programs that simulate science experiments conducted in high
school science classes.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
Simulations Plus, Inc. and its wholly owned subsidiary, Words+, Inc.
All significant intercompany accounts and transactions are eliminated
in consolidation.
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three
months or less to be cash equivalents.
F-8
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, including equipment under capital leases, are
recorded at cost, less accumulated depreciation and amortization.
Depreciation and amortization are provided using the straight-line
method over the estimated useful lives as follows:
Equipment 5 years
Computer equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Leasehold improvements 5 years
Maintenance and minor replacements are charged to expense as incurred.
Gains and losses on disposals are included in the results of
operations.
Advertising
-----------
The Company expenses advertising costs as incurred. Advertising costs
for the years ended August 31, 2000 and 1999 were $34,997 and $3,656,
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.
F-9
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Software Development Costs (Continued)
--------------------------
Amortization of capitalized software development costs is provided on a
product-by-product basis on the straight-line method over the estimated
economic life of the products (not to exceed three years). Management
periodically compares estimated net realizable value by product with
the amount of software development costs capitalized for that product
to ensure the amount capitalized is not in excess of the amount to be
recovered through revenues. Any such excess of capitalized software
development costs to expected net realizable value is expensed at that
time. As of August 31, 2000 and 1999, the Company expensed $0 and
$182,925, respectively, of capitalized software development costs
relating to educational software.
Reclassifications
-----------------
Certain amounts included in the prior year financial statements have
been reclassified to conform with the current year presentation.
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. 97-2,
"Software Revenue Recognition." Product revenue is recorded at the time
of shipment, net of estimated allowances and returns. Post-contract
customer support ("PCS") obligations are insignificant; therefore,
revenue for PCS is recognized at the time of shipment, and the costs of
providing such support services are accrued and amortized over the
obligation period. The Company provides, for a fee, additional training
and service calls to its customers and recognizes revenue at the time
the training or service call is provided.
Income Taxes
------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws
and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
F-10
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF BUSINESS AND 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 and cash equivalents,
accounts receivable, accounts payable, accrued payroll and other
expenses, and accrued warranty and service costs, the carrying amounts
approximate fair value due to their short maturities. The amounts shown
for capitalized lease obligations also approximate fair value because
current interest rates offered to the Company for leases of similar
maturities are substantially the same.
Stock Options and Warrants
--------------------------
The Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value
based method of accounting for stock-based compensation. However, SFAS
No. 123 allows an entity to continue to measure compensation cost
related to stock and stock options issued to employees using the
intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." Entities electing to remain with the accounting method of
APB 25 must make pro forma disclosures of net income and earnings per
share, as if the fair value method of accounting defined in SFAS No.
123 had been applied. The Company has elected to account for its
stock-based compensation to employees under APB 25.
Net Loss per Share
------------------
The Company reports loss per share in accordance with SFAS No. 128,
"Loss per Share." Basic loss per share is computed by dividing loss
available to common shareholders by the weighted-average number of
common shares available. Diluted loss per share is computed similar to
basic loss per share except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the
additional common shares were dilutive. Because the Company has
incurred net losses, basic and diluted loss per share are the same.
Concentrations and Uncertainties
--------------------------------
International sales accounted for 18% and 19% of net sales for the
years ended August 31, 2000 and 1999, respectively. Amounts due from
Medicaid represented 12% of the net accounts receivable balance at
August 31, 2000.
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.
F-11
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations and Uncertainties (Continued)
--------------------------------
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.
Comprehensive Income
--------------------
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting comprehensive income
and its components in a financial statement. Comprehensive income as
defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include
foreign currency translation adjustments and unrealized gains and
losses on available-for-sale securities. Comprehensive income is not
presented in the Company's financial statements since the Company did
not have any of the items of comprehensive income in any period
presented.
Recently Issued Accounting Pronouncements
-----------------------------------------
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," to
provide guidance on the recognition, presentation, and disclosure of
revenue in financial statements. Changes in accounting to apply the
guidance in SAB No. 101 may be accounted for as a change in accounting
principle effective January 1, 2000. Management has not yet determined
the complete impact of SAB No. 101 on the Company; however, management
does not expect that application of SAB No. 101 will have a material
effect on the Company's revenue recognition and results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation," (an
Interpretation of Accounting Principles Bulletin Opinion No. 25 ("APB
25")) ("FIN 44"). FIN 44 provides guidance on the application of APB
25, particularly as it relates to options. The effective date of FIN 44
is July 1, 2000, and the Company has adopted FIN 44 as of that date.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Instruments and Certain Hedging Activities." This statement is not
applicable to the Company.
In June 2000, the FASB issued SFAS No. 139, "Rescission of FASB
Statement No. 53 and Amendments to Statements No. 63, 89, and 121."
This statement is not applicable to the Company.
F-12
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements (Continued)
-----------------------------------------
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of FASB Statement No. 125." This statement
is not applicable to the Company.
NOTE 2 - CASH AND CASH EQUIVALENTS
The Company maintains cash deposits at banks located in California.
Deposits at each bank are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
NOTE 3 - FURNITURE AND EQUIPMENT
Furniture and equipment at August 31, 2000 consisted of the following:
Equipment $ 104,236
Computer equipment 338,071
Furniture and fixtures 45,036
Leasehold improvements 39,433
---------------
526,776
Less accumulated depreciation and amortization 400,908
---------------
TOTAL $ 125,868
===============
Depreciation and amortization expense was $82,778 and $80,497 for the
years ended August 31, 2000 and 1999, respectively.
NOTE 4 - LINE OF CREDIT
The Company has available an unsecured $100,000 revolving line of
credit from a bank with interest payable on a monthly basis at prime
(9.5% at August 31, 2000), plus 3%. The line is personally guaranteed
by the Company's President. As of August 31, 2000, the amount drawn
against the line of credit was $99,081.
F-13
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
--------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases certain facilities for its corporate and operations
offices under a non-cancelable operating lease agreement that expires
in August 2001. The Company also leases certain office and computer
equipment under non-cancelable capital lease arrangements.
Future minimum lease payments under non-cancelable operating and
capital leases with initial or remaining terms of one year or more at
August 31, 2000 were as follows:
Year Ending Operating Capital
August 31, Leases Leases
------------ ----------- ------------
2001 $ 140,400 $ 20,987
2002 - 17,352
2003 - 13,966
2004 - 10,704
2005 - 64
----------- ------------
$ 140,400 63,073
===========
Less amount representing interest 13,374
------------
49,699
Less current portion 14,839
------------
LONG-TERM PORTION $ 34,860
============
Included in furniture and equipment is capitalized leased equipment of
$174,000 with accumulated amortization of $133,798 at August 31, 2000.
Rent expense was $173,912 and $157,257 for the years ended August 31,
2000 and 1999, respectively.
Employee Agreement
------------------
The Company entered into an employment agreement with its President
that expires on August 31, 2002. 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. The agreement also provides that
the Company may terminate the agreement upon 30 days written notice if
termination is without cause. The Company's only obligation would be to
pay its President the greater of a) 12 months salary or b) the
remainder of the term of the employment agreement from the date of
notice of termination.
F-14
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
--------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
License Agreement
-----------------
The Company entered into an agreement with Therapeutic Systems Research
Laboratory ("TSRL") to jointly develop a computer simulation of the
absorption of drug compounds in the gastrointestinal tract. Upon
execution of a definitive License Agreement, TSRL received a one-time
payment of $75,000, plus a royalty of 20% of net sales of the
absorption simulation. For the year ended August 31, 2000 and 1999, the
Company paid royalties of $105,922 and $46,511, respectively.
Listing on Stock Exchange
-------------------------
In order to maintain quotation of its securities on the NASDAQ Small
Cap Market (the "NASDAQ"), the Company has to maintain certain minimum
financial requirements. As of August 31, 2000 and 1999, the Company has
ceased to meet one of the requirements for continued listing, namely
the Company's net tangible assets as of August 31, 2000 and 1999 were
$486,000 and $754,000, respectively, which is below the $2,000,000
required by the NASDAQ. Further, as of November 16, 1999, the market
value of the Company's public float was below the $4,000,000 required
for continued NASDAQ listing. The Company was unable to increase its
net tangible assets and the market value of its public float to meet
the NASDAQ's requirements for continued listing. The Company's
securities were delisted from NASDAQ effective at the closing of July
2, 1999. Trading, if any, of the shares of common stock now need to be
conducted in the over-the-counter markets in the so-called "pink
sheets" or on the NASDAQ'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 otherwise might be
attained.
NOTE 6 - SHAREHOLDERS' EQUITY
Warrants
--------
In August and September 1996, the Company entered into two Subscription
Agreements whereby the Company issued 100,000 and 150,000 warrants,
respectively, to purchase shares of common stock. The warrants are
exercisable at $4 per share and expire five years from the date of
grant.
In January 1997, the Company entered into Subscription Agreements
whereby the Company issued notes in the amount of $1,100,000 and issued
280,000 warrants to purchase common stock. The warrants are exercisable
at $2.50 per share, are subject to a 12-month-lock-up period, and
expire five years from the grant date. The notes were repaid upon the
completion of the Company's stock offering.
F-15
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
--------------------------------------------------------------------------------
NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plan
-----------------
In September 1996, the Board of Directors adopted and the shareholders
approved the 1996 Stock Option Plan (the "Option Plan") under which a
total of 250,000 shares of common stock had been reserved for issuance.
In March 1999, the shareholders approved an increase in the number of
shares that may be granted under the Option Plan to 500,000.
Furthermore, in February 2000, the shareholders approved an increase in
the number of shares that may be granted under the Option Plan to
1,000,000. The Option Plan terminates in 2006, subject to earlier
termination by the Board of Directors.
The following summarizes the stock option transactions:
Weighted-
Average
Exercise
Number Price
of Options Per Share
----------- -----------
Outstanding, August 31, 1998 43,740 $ 4.25
Granted 263,990 $ 1.35
Expired/canceled (13,410) $ 2.04
------------
Outstanding, August 31, 1999 294,320 $ 1.74
Granted 568,750 $ 2.49
Exercised (2,300) $ 1.31
Expired/canceled (18,597) $ 1.98
------------
OUTSTANDING, AUGUST 31, 2000 842,173 $ 2.24
============
EXERCISABLE, AUGUST 31, 2000 62,373 $ 2.00
============
F-16
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
--------------------------------------------------------------------------------
NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plan (Continued)
-----------------
The weighted-average remaining contractual life of options outstanding
issued under the Plan is 9.03 years at August 31, 2000. The exercise
prices for the options outstanding at August 31, 2000 ranged from $1.31
to $4.25, and the information relating to these options is as follows:
<TABLE>
<CAPTION>
Weighted- Weighted- Weighted-
Average Average Average
Remaining Exercise Exercise
Stock Stock Contractual Price Price
Exercise Options Options Life of Options of Options of Options
Price Outstanding Exercisable Outstanding Outstanding Exercisable
---------------- --------------- -------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.31 - 2.25 557,231 48,457 8.92 years $ 1.77 $ 1.35
$ 2.26 - 4.25 284,942 13,916 9.15 years $ 3.15 $ 4.25
--------------- --------------
842,173 62,373
=============== ==============
</TABLE>
The Company has adopted only the disclosure provisions of SFAS No. 123.
It applies APB 25 and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options issued
to outside third parties. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for
awards under this plan consistent with the methodology prescribed by
SFAS No. 123, the Company's net loss and loss per share would be
reduced to the pro forma amounts indicated below for the years ended
August 31, 2000 and 1999:
2000 1999
----------- -----------
Net loss
As reported $ (257,602) $ (576,665)
Pro forma $ (429,939) $ (595,196)
Basic and diluted loss per common share
As reported $ (0.08) $ (0.17)
Pro forma $ (0.13) $ (0.17)
The fair value of these options was estimated at the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended August 31, 2000 and
1999: dividend yields of 0% and 0%, respectively; expected volatility
of 100% and 100%, respectively; risk-free interest rates of 6% and 6%,
respectively; and expected life of five and five years, respectively.
The weighted-average fair value of options granted during the years
ended August 31, 2000 and 1999 was $2.12 and $0.97, respectively, and
the weighted-average exercise price was $2.49 and $1.35, respectively.
F-17
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
--------------------------------------------------------------------------------
NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plan (Continued)
-----------------
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Other Stock Options
-------------------
As of August 31, 2000, the Company granted the Board of Directors a
total of 3,206 stock options at exercise prices ranging from $1.50 to
$5.25.
During the year ended August 31, 1999, the Company entered into an
investor relations agreement for $4,000 per month and 30,000 stock
options at an exercise price of $1, which equaled the fair market value
on the date of grant. As of August 31, 2000, 30,000 of these options
were exercisable.
NOTE 7 - INCOME TAXES
A reconciliation of the expected income tax (benefit) computed using
the federal statutory income tax rate to the Company's effective income
tax rate is as follows for the years ended August 31:
2000 1999
---------- ----------
Income tax computed at federal
statutory tax rate (34.0)% (34.0)%
State taxes, net of federal benefit 0.1 0.1
Change in valuation allowance 34.0 34.0
---------- ----------
TOTAL 0.1% 0.1%
========== ==========
F-18
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
--------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and
liabilities for income taxes for the years ended August 31 consisted of
the following:
2000 1999
------------ ------------
Deferred tax assets
Accrued payroll and other expenses $ 171,715 $ 159,959
Accrued warranty and service costs 17,608 28,304
Net operating loss carryforward 1,621,262 1,527,770
Furniture and equipment 8,676 -
------------ ------------
1,819,261 1,716,033
Valuation allowance 1,599,352 1,474,384
------------ ------------
219,909 241,649
------------ ------------
Deferred tax liabilities
Furniture and equipment - (3,253)
Capitalized computer software
development costs (219,909) (238,396)
------------ ------------
(219,909) (241,649)
------------ ------------
NET DEFERRED TAX ASSETS $ - $ -
============ ============
The Company's valuation allowance increased by $124,968 during the year
ended August 31, 2000. At August 31, 2000, the Company had federal and
state net operating loss carryforwards of approximately $4,190,000 and
$2,200,000, respectively, that expire throughout the year 2020.
The components of the income tax provision for the years ended August
31 were as follows:
2000 1999
------------ ------------
Current
Federal $ - $ -
State 1,600 1,600
------------ ------------
1,600 1,600
------------ ------------
Deferred
Federal - -
State - -
------------ ------------
- -
------------ ------------
TOTAL $ 1,600 $ 1,600
============ ============
F-19
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
--------------------------------------------------------------------------------
NOTE 8 - RELATED PARTY TRANSACTIONS
As of August 31, 2000, included in accrued compensation due to officer
was $170,583, which represents accrued salary due to the Company's
President. The amount due does not accrue interest and is included in
the "accrued payroll and other expenses" account.
As of August 31, 2000, included in accrued compensation due to officer
was $20,833, which represents accrued salary due to the Company's Vice
President of Human Resources. The amount due does not accrue interest
and is included in the "accrued payroll and other expenses" account.
In connection with the Company's stock offering, the Company agreed to
grant to its President 300,000 warrants to purchase up to 300,000
shares of the Company's common stock. The number of warrants to be
granted was based on net income for the year ended August 31, 1999, but
cannot exceed 300,000 warrants. Since the Company did not meet the net
income requirement, the warrants were not granted.
NOTE 9 - LINES OF BUSINESS
For internal reporting purposes, management segregates the Company into
two divisions as follows for the years ended August 31:
<TABLE>
<CAPTION>
August 31, 2000
--------------------------------------------------------------------
Simulations
Plus, Inc. Words+, Inc. Eliminations Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 935,404 $ 2,694,147 $ - $ 3,629,551
Income (loss)
from operations $ (359,549) $ 122,886 $ - $ (236,663)
Identifiable assets $ 1,146,550 $ 638,095 $ (318,805) $ 1,465,840
Capital expenditures $ 3,742 $ 2,490 $ - $ 6,232
Depreciation and
amortization $ 44,238 $ 38,540 $ - $ 82,778
</TABLE>
F-20
<PAGE>
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
--------------------------------------------------------------------------------
NOTE 9 - LINES OF BUSINESS (CONTINUED)
<TABLE>
<CAPTION>
August 31, 1999
--------------------------------------------------------------------
Simulations
Plus, Inc. Words+, Inc. Eliminations Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 461,306 $ 3,005,499 $ - $ 3,466,805
Income (loss)
from operations $ (896,189) $ 187,142 $ - $ (709,047)
Identifiable assets $ 1,449,960 $ 713,414 $ (552,120) $ 1,611,254
Capital expenditures $ - $ - $ - $ -
Depreciation and
amortization $ 38,660 $ 41,837 $ - $ 80,497
</TABLE>
Most corporate expenses, such as legal and accounting expenses and
public relations expenses, are included in Simulations Plus, Inc.
F-21
