-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UQlrldr47eEEEncem9dbjIVmaxv5iNT9SCvlqfvjBscHPTdBmoFPBz1MCmN1hOBI nxF4O3r6x4RgmlP3g+73yg== 0000950148-97-003058.txt : 19971216 0000950148-97-003058.hdr.sgml : 19971216 ACCESSION NUMBER: 0000950148-97-003058 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971215 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMULATIONS PLUS INC CENTRAL INDEX KEY: 0001023459 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 954595609 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 333-05600-LA FILM NUMBER: 97738461 BUSINESS ADDRESS: STREET 1: 40015 SIERRA HIGHWAY STREET 2: BLDG B-145 CITY: PALMDALE STATE: CA ZIP: 93550 BUSINESS PHONE: 8052668500 MAIL ADDRESS: STREET 1: 40015 SIERRA HWY BLDG B0-110 STREET 2: 40015 SIERRA HWY BLDG B0-110 CITY: PALMDALE STATE: CA ZIP: 93550 10KSB 1 FORM 10-KSB 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER 000-21665 SIMULATIONS PLUS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------ CALIFORNIA 95-4595609 - ------------------------------- -------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 40015 SIERRA HIGHWAY, B-110 PALMDALE, CALIFORNIA 93550 - ---------------------------------------- -------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (805) 266-9294 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.001 PER SHARE ------------ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's revenues for the fiscal year ending August 31, 1997 were approximately $2,493,000. As of December 12, 1997, the aggregate market value of the voting stock held by non-affiliates of the issuer was approximately $6,037,500 based upon the average closing bid and asked price of such stock on such date. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement relating to the 1998 Annual Meeting of shareholders are incorporated herein by reference into Part III. =============================================================================== 2 SIMULATIONS PLUS, INC. FORM 10-KSB For the Fiscal Year Ended August 31, 1997
Table of Contents Page No. PART I. Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . 14 PART II Item 5. Market for Common Stock and Related Stockholder Matters. . . . . . . . . . . . . . . 15 Item 6. Management's Discussion and Analysis or Plan of Operation. . . . . . . . . . . . . . 15 Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . 39 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act . . . . . . . . . . . . . . . . . . . . . . . 39 Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Item 11. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . 42 Item 12. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . 42 Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3 FORWARD-LOOKING STATEMENTS In addition to historical information, this Annual Report contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis or Plan of Operation." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. Simulations Plus, Inc. undertakes no obligation to publicly revise these forward-looking statements, or to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission. PART I Item 1. Description of Business GENERAL - -------------------------------------------------------------------------------- Simulations Plus, Inc. (the "Company" or "Simulations Plus") and its wholly owned subsidiary, Words+, Inc. ("Words+"), produce two types of products: (1) Simulations Plus, formed in 1996, produces computer simulation software for education and is developing simulation software for the pharmaceutical industry, and (2) Words+, founded in 1981, produces computer software and specialized hardware for use by persons with disabilities, and a new personal productivity software program for the retail market. Simulations Plus is producing and developing a series of educational simulation software products under the trade name of FutureLab(TM) for the school and home study markets. These interactive educational software programs simulate science experiments for high school and college level science and engineering classes. These simulations enable students to conduct experiments on a personal computer instead of in a traditional laboratory, thereby increasing safety, decreasing costs, and providing expanded learning opportunities by allowing simulations of situations not possible in a traditional laboratory environment. The Company released the first three titles of FutureLab(TM) in May 1997, an additional title in October 1997, and is currently developing additional new titles as well as converting the titles from Windows only to both Macintosh and Windows platforms. The Company has also been developing simulation software for use in pharmaceutical research and education in pharmacy and medicine. The Company plans to capitalize on its simulation software development expertise and build an expanded simulation software development team of highly skilled software developers, engineers and scientists with broad applications in additional targeted industries. The Company's wholly owned subsidiary, Words+, has been in business since 1981. Words+ is a technology leader in designing and developing augmentative and alternative communication computer 1 4 software and hardware devices for persons who cannot speak due to physical disabilities. Words+ also produces computer access products that enable physically disabled persons to operate a computer. Words+ products enable a disabled person to operate a computer and to communicate through a voice synthesizer, through movements as slight as the blink of an eye. Words+ developed and produces the software for the computerized communication system used by the world-famous theoretical physicist, Professor Stephen Hawking, Lucasian Professor of Mathematics at the University of Cambridge in England, and the author of the best-selling book A Brief History of Time. Words+ markets its products throughout the United States and to other countries through a direct sales staff and independent dealers. Words+ introduced a fully integrated, portable, lightweight personal-computer-based communication system that is meeting favorable market acceptance. Words+ has recently expanded its sales force by hiring three direct sales personnel and plans to further increase its field sales force to increase net sales. Words+ released a new personal productivity software package called Abbreviate! in November 1997. Abbreviate! is based on part of the Company's core technology incorporated in the E Z Keys for Windows software used by Stephen Hawking and thousands of others around the world. The Company extracted this technology and developed a user interface and additional features appropriate for the retail market. Abbreviate! was named "Tool of the Week" by PC Week magazine in their December 1, 1997 issue. PRODUCTS SIMULATION SOFTWARE - -------------------------------------------------------------------------------- The Company is currently developing simulation software: (1) for science courses for high school, community college, and university markets, and (2) for pharmaceutical research. DESCRIPTION OF SIMULATION SOFTWARE There are a number of types of simulation software, including software that simulates the flow of parts and finished goods through a factory, software that simulates battlefield scenarios, and software that simulates the growth of a city. Other simulations incorporate equations and relationships that simulate the laws of physics for a particular process, such as the popular flight simulator software programs now available for home computers. These programs may also incorporate sophisticated graphics in order to display the results of the simulations. The type of simulation software under development by the Company is based on the equations of physics that describe (or "model") the behavior of things in the real world. The Company's science experiment simulations incorporate the equations of physics for each experiment (optics, electrical circuits, gravity, ideal gases, heat transfer, etc.). For example, a simulation of a ball in a gravity experiment might include the acceleration and deceleration of the ball due to gravity, the deceleration of the ball due to aerodynamic drag, the kinetic energy loss (and resultant slight heat gain by the ball and ground) each time the ball bounces, the rotation of the ball as it spins, and other factors. The development of simulation software involves identifying and understanding the underlying physics of the processes to be simulated, breaking those processes down into the lowest practical level of individual sub-processes at which the behaviors can be well-represented mathematically, developing 2 5 appropriate mathematical relationships/equations, and converting them into computer subroutines. The software subroutines representing these individual processes are then assembled into an overall simulation program, with appropriate coordination between modules and design of user-friendly inputs and outputs. The predictions of this program are then compared to known results in order to determine the validity of the model and to calibrate the simulation to produce a useful tool for predicting new results. EDUCATIONAL SIMULATION SOFTWARE The Company is producing and developing a series of interactive simulation educational software programs for the school and home study markets. The Company's initial products, which have won awards from educational software testers, include simulations of laboratory experiments for Physical Science courses under the name FutureLab(TM). The Company released its first three FutureLab(TM) titles in May 1997 (Optics for Physical Science, Gravity for Physical Science, and Circuits for Physical Science), and a new title, IdealGas for Chemistry in November 1997. Additional topics to be developed include Titration for Chemistry, Chemical Equilibria, Genetics for Biology, Heat, Magnetism, Friction, Kinematics and Dynamics, Earth and Space Science, Properties of Matter, Atoms and Bonding, Chemical Reactions, Forces, Forces in Fluids, Waves, Sound, Electric Charges and Currents, Simple Machines, and additional titles for high school Physics, Chemistry and Biology courses. PHARMACEUTICAL SIMULATION SOFTWARE The Company's pharmaceutical software will seek to provide cost-effective solutions to a number of problems in pharmaceutical research and in the education of pharmacy and medical students. The Company is currently developing HelixGen(TM) and GastroPlus(TM). HelixGen(TM) is designed to predict the three-dimensional orientation of a certain class of G-protein coupled transmembrane receptors of interest in the drug discovery process. GastroPlus(TM) is designed to predict the quantity and rate of absorption of candidate new drug compounds in the human gastro-intestinal tract. The Company recently executed a License Agreement with Therapeutic Systems Research Laboratories, Inc. ("TSRL") to have exclusive rights to TSRL's technology for drug compound absorption in animal and human test subjects. Through the formation of this strategic alliance with TSRL, the development costs and time for GastroPlus are significantly reduced. Among the Company's goals in this area are to provide comprehensive, highly accurate simulations that can save a great deal of time and money in the development of pharmaceutical products, and to reduce the need for animal testing in the future. The Company has not yet completed the development of any of its pharmaceutical simulations programs, and has not yet offered any for sale; however, the GastroPlus program began Beta testing in November 1997. The Company expects to release GastroPlus for use by the pharmaceutical industry by the end of January 1998. 3 6 DISABILITY PRODUCTS - -------------------------------------------------------------------------------- E Z KEYS FOR WINDOWS One of the Company's primary software products is E Z Keys for Windows ("E Z Keys"), which is a program that operates on a Windows-based personal computer. When coupled with specially-designed input devices, E Z Keys enables even severely disabled persons to operate a personal computer to generate voice messages through a voice synthesizer and to operate most Windows-based software application programs. Input motion by the user can be as slight as the blink of an eye, or simple eye movement by persons who cannot blink. E Z Keys is one of the two Words+ programs used by Professor Stephen Hawking for computer access and communication. In May 1997, the Company released E Z Keys for Windows 95. TALKING SCREEN FOR WINDOWS Talking Screen for Windows ("Talking Screen") is a software program that operates on a Windows-based personal computer and is designed for persons, usually children, who cannot read and write at the level necessary to adequately operate E Z Keys. Talking Screen provides a system of pages of pictographic and photographic symbols by which the user can produce speech output messages through a voice synthesizer, play recorded sounds and video files, and operate controllers for lights, electrical appliances and other equipment. Like E Z Keys, Talking Screen can be operated through a wide range of alternative input devices. PEGASUSLITE PegasusLITE is a fully-integrated, portable, microprocessor-based communication system that weights just four and one-half pounds, which is significantly smaller and lighter in weight, as well as more powerful, than comparable competitive devices. PegasusLITE currently incorporates a 486DX-5 microprocessor running at 133 MHz, Windows 95(TM) operating system, 16 MB RAM, 340 MB hard disk drive, 256 color LCD display with build-in touch window, PCMCIA slot for a floppy disk drive and optional accessories, Windows sound system, and a software voice synthesizer that can provide male, female or child's voices. PegasusLITE measures approximately 8.75" x 12.75" x 1.65". PegasusLITE can operate either E Z Keys for Windows or Talking Screen for Windows, although it is used primarily with Talking Screen. MESSAGE MATE The Company produces a series of products called MessageMate, which are hand-held, dedicated communication devices that store prerecorded speech or sound on integrated circuit chips. The user plays these recorded sounds by touching one of the keys on the membrane keyboard if they are able to use a keyboard, or by using a switch (such as the IST Switch described below) and scanning to select a position on the keyboard. MessageMates are small, lightweight (1 to 1.75 lbs.), easy-to-use communication devices with up to four minutes of recorded messages. They are known for their extremely rugged design and long battery life. The MessageMate 20 holds twenty messages, the MessageMate 40 holds forty messages, and Mini-MessageMate holds eight messages. In October 1997, the Company released a new model, the Multi-Level MessageMate 40, which holds up to 144 messages in four levels, and provides up to ten minutes of total recording time. Since MessageMates use recorded messages, they can be used in any language. The Company has significant sales of MessageMate in foreign markets and sales of these MessageMate in foreign markets are increasing. 4 7 INFRARED/SOUND/TOUCH (IST) SWITCH Many Words+ customers cannot operate a keyboard or mouse. For some of these persons, the Company has designed and produces a special device called the Infrared/Sound/Touch Switch ("IST Switch"), that enables the person to operate a personal computer or a dedicated communication device with the slightest movement or pressure, including, for example, eye blink, or just eye movement. The IST is activated by infrared reflection, touch, or sound, and transmits a momentary "on" signal to the computer upon detecting these signals. This switch has been in production since 1983, and thousands of physically disabled persons around the world have used it. PERSONAL PRODUCTIVITY SOFTWARE - -------------------------------------------------------------------------------- ABBREVIATE! The Company released a new productivity software program called Abbreviate! in November 1997 at COMDEX. The Company took the abbreviation technology incorporated into E Z Keys for Windows, and turned it into an extraordinary program that can be used by anyone with the ability to use a standard keyboard. While many word processors provide a similar "Quick Correct" feature, the advantage Abbreviate! has over such features is that it runs in the background and works with most all Windows applications. Thus, Abbreviate! allows the user to create a personal library of frequently-used abbreviations, each with its own special keystroke combination, for use in virtually any Windows-based program - fax, e-mail, word processing, database, Internet chat rooms, and spreadsheets. The company is currently pursuing distribution relationships with a number of major software manufacturers for Abbreviate!, as well as implementing an aggressive marketing program. Abbreviate! was named PC Week magazine's "Tool of the Week" in their December 1, 1997 issue. MISCELLANEOUS The Company also sells a number of other miscellaneous and peripheral devices, some of which it designs and produces and others it buys and resells. These include: - MicroCommPac - Communication hardware package designed for use with a notebook computer that provides switch interface and audio amplification. - U-Control - Wireless infrared remote control device that allows the user to control functions and appliances in the home and work environment such as lights, stereo and television equipment, and other appliances. - LUCY - Laser-activated keyboard for those who cannot use a normal keyboard, imported from The Netherlands. - Simplicity Wheelchair Mount - Company-designed and produced wheelchair mount for portable computers and other devices. PRODUCT DEVELOPMENT SIMULATION SOFTWARE - -------------------------------------------------------------------------------- 5 8 EDUCATIONAL SIMULATION SOFTWARE In the area of educational simulations, the Company's research and development activities include continuing the development of a wide range of software for high school and university-lever science courses. At the high school level, anticipated titles include simulated experiments for courses in Physical Science, Physics, Chemistry, Biology and Earth Science. At the university level, anticipated titles include more sophisticated simulations for Physics, Chemistry, and Biology, as well as titles for studies in Engineering and Medicine such as Heat Transfer, Fluid Mechanics, Thermodynamics, Gas Dynamics, Kinematics and Dynamics, Electronic Circuits, and Pharmacokinetics. In the area of Pharmacokinetics, the Company's first title will come from its recently acquired educational simulation called Cyber Patient, which the Company will expand, enhance, and offer to schools of pharmacy and medicine around the world. In 1996, the Company received a Phase I Small Business Innovation Research (SBIR) grant from the National Science Foundation for Approximately $51,000. In October 1997, the Company was awarded a $300,000 Phase II follow-on grant, $75,000 of which was funded in October 1997 with the remainder being funded in three equal payments of $75,000 every six months for an eighteen month period. The purpose of this grant is to further develop software to allow physically disabled science students to perform simulated laboratory experiments on a computer with minimal physical input. The Company is using its expertise and technology in designing and building computer access products for the physically-disabled, as well as its expertise in developing scientific educational simulation software, in developing these programs. These programs are also designed to be used by able-bodied students but will incorporate the Company's proprietary technology for physically disabled persons so that the same programs will be attractive to and used by both physically-disabled and able-bodied persons. PHARMACEUTICAL SIMULATIONS In the area of pharmaceutical simulations for screening new drug compounds, the Company is currently pursuing the development of simulations for drug absorption and the receptor structure of certain transmembrane proteins. The Company executed a definitive License Agreement with Therapeutic Systems Research Laboratories, Inc. ("TSRL"), under which the Company is granted an exclusive license to TSRL's proprietary absorption technology, including a database of measurements of drug permeability from approximately 30 laboratory experiments in human test subjects as well as numerous experiments in animals. The Company is also receiving consulting assistance in the development of the simulation model from TSRL staff, including Dr. Gordon Amdon (incoming President of the American Association of Pharmaceutical Scientists and world-renowned expert in drug absorption) and Dr. John Crison. The TSRL database is believed to be unique in the world, and the Company believes that it is the only such database containing a broad base of actual human absorption data on drugs with a wide range of premeabilities. The Company also believes that the strategic advantage of exclusive access to TSRL's technology in absorption modeling, combined with the Company's current and expected growing expertise in pharmacokinetics simulation, will maximize its chances for success in this area. In November 1997, the Company released the first Beta test version of GastroPlus(TM) to TSRL for testing. These tests are underway as this is written, and initial feedback is quite favorable. Beta 6 9 testing outside of the company and its alliance partner is expected to begin in December 1997, with first product release scheduled for January 1998. GastroPlus(TM) incorporates an absorption model developed by the Company that runs under Windows 95 and thaT provides a stochastic simulation of percent absorbed for a drug under a statistical distribution of input conditions. DISABILITY PRODUCTS - -------------------------------------------------------------------------------- The Company believes it has been an industry technology leader in introducing and improving augmentative and alternative communication and computer access software and devices for disabled persons and intends to continue to be at the forefront of the development of new products. The Company will continue to enhance its major software products, E Z Keys and Talking Screen, as well as its growing line of hardware products. The Company will also consider acquisitions of other products, businesses and companies that are complementary to its existing augmentative and alternative communication and computer access business lines. MARKETING AND DISTRIBUTION SIMULATION SOFTWARE - -------------------------------------------------------------------------------- EDUCATIONAL SIMULATION SOFTWARE The Company markets its science experiment simulation software products through a growing list of software resellers, through exhibits and presentations at conferences and trade shows, through mass mailings to both science teachers and special education teachers across the U.S. and Canada, through its Internet web page, and through advertising in selected publications. The Company is also investigating forming one or more alliances with major textbook publishers and with additional educational software distributors. The Company has established three web pages on the Internet and plans to use them for such activities as providing product information, Java-based interactive demonstrations, and a forum for user feedback and information exchange. PHARMACEUTICAL SIMULATION SOFTWARE The Company will market its pharmaceutical simulation software, and research services based on its simulations, to pharmaceutical and bio-tech companies, and to the research companies that serve them, through attendance and presentations at scientific meetings, exhibits at trade shows, advertising in selected publications, and through its web pages on the Internet. The Company is building an in-house sales and marketing team for its products and services and will also explore sales and marketing agreements with firms that provide research services and equipment that are complementary to the Company's proposed pharmaceutical products and services. As with educational software, the Company plans to use its web pages on the Internet for such activities as providing product information, Java-based interactive demonstrations, and a forum for user feedback and information exchange. The Company will also explore distribution through university bookstores for educational simulations for students in pharmacy and medicine. 7 10 DISABILITY PRODUCTS - -------------------------------------------------------------------------------- The Company markets augmentative and alternative communication products through a network of employee representatives and independent dealers. The Company is currently expanding its sales and marketing efforts by adding additional sales persons and independent dealers. At the present time the Company has seven independent dealers in the U.S., four in Australia and one each in England, Norway, The Netherlands, New Zealand, Japan, Finland and Malaysia. The Company has five salary-commission sales persons in the U.S.: one each in Southern California, Maine, Texas, Wisconsin and Maryland. The Company also employs four inside sales/support persons who answer telephone inquiries on the Company's 800 line and who provide technical support. The Company directs its marketing efforts to speech pathologists, occupational therapists, special education teachers, disabled persons and parents of disabled persons. The Company maintains a mailing list of over 37,000 persons made up of these professionals, consumers and parents and mails various marketing materials to this list. These materials include the Company's newsletter, its catalog of products and announcements regarding new and enhanced products. The Company participates in industry conferences held throughout the U.S. and in other countries that are attended by speech pathologists, occupational and physical therapists, special education teachers, parents and consumers. The Company and others in the industry demonstrate their products at these conferences and present technical papers that describe the application of their technologies and research studies on the effectiveness of their products. The Communication Aids Manufacturers Association (CAMA) organizes tours of representatives of companies in this field that travel throughout the country providing seminars and workshops for professionals, consumers and parents in the field. The Company advertises in selected publications of interest to persons in this market. The Company estimates that for approximately 50% of its sales of augmentative and alternative communication software and hardware, some or all of the purchase price is provided by third parties such as Medicaid, school special education budgets, private insurance or other governmental or charitable assistance. The Company's personnel provide advice and assistance to customers and prospective customers on obtaining third-party financial assistance for purchasing the Company's products. PERSONAL PRODUCTIVITY SOFTWARE - -------------------------------------------------------------------------------- The Company's new Abbreviate! software program was introduced in November 1997 at COMDEX. The Company is currently selling the program itself through a variety of Internet channels, including its own web site (www.abbreviate.com ). The Company is also contacting a large number of software manufacturers and distributors in an effort to secure distribution agreements for Abbreviate!. An aggressive advertising campaign has begun, including placement of space ads in airline magazines, computer publications, additional Internet web sites, and direct mail for targeted groups such as medical transcriptionists and legal secretaries. 8 11 TRAINING AND TECHNICAL SUPPORT - -------------------------------------------------------------------------------- The Company believes customer training and technical support are important factors in customer satisfaction for its products and the Company believes it is an industry leader in providing customer training and technical support. For Disability Products, the Company's salesperson or dealer provides initial training to the customer -- typically two to four hours on major products and one to two hours on certain other products. This training is typically provided not only to the user of the product but also to the person's speech pathologists, teachers, parents and others who will be helping the user. This initial training is provided as a part of the price of the product. The Company and its dealers charge a fee for additional training and service calls. Technical support for both Simulation Software and Disability Products is provided by the Company's inside sales and support staff based at its headquarters facilities in Palmdale, California. The Company provides no-charge toll telephone support offering unlimited 800 number and E-mail support for all disability and educational software products. PRODUCTION AND DISTRIBUTION SIMULATION SOFTWARE - -------------------------------------------------------------------------------- The Company's major products are designed and developed by its development team at its Palmdale, California facility. The Company contracts a substantial portion of its educational simulation software manufacturing activity to third parties. The chief materials and components used in simulation software products include CD-ROMs and instruction books. DISABILITY PRODUCTS - -------------------------------------------------------------------------------- Disability software products are either loaded onto hard drives by the Company or copied to diskettes for sale to customers. Microprocessors that are part of dedicated devices are purchased by the Company and incorporated into its products by the Company. Many software customers buy their notebook personal computers from the Company, which the Company purchases at wholesale prices and resells at a markup. Cases, printed circuit boards, labels and other components of products such as PegasusLITE, MessageMate and CommPac are designed by the Company. The Company outsources the extrusion, machining and manufacturing of certain components. All final assembly and testing is done by the Company at its facility. The Company incorporates a tablet-style computer manufactured by Epson America in its PegasusLITE product. The Company has no written agreements with Epson America other than purchase orders that it submits to Epson America to purchase such computers. The Company and other of Epson America's customers provide projections to Epson America to purchase such computers in order to allow Epson America to estimate the number of units of such computer that it should manufacture in each of its production runs. 9 12 The Company's products are shipped from its Palmdale, California facility either directly to the customer or to the salesperson or dealer. The outside salesperson or dealer either delivers the product or visits the customer after delivery to provide training. PERSONAL PRODUCTIVITY SOFTWARE - -------------------------------------------------------------------------------- The Abbreviate! personal productivity software program is currently manufactured at the Company's Palmdale, California facility. If sales volume wararnts and higher volume capacity is required, the Company will investigate outside sources for fulfillment. COMPETITION SIMULATION SOFTWARE - -------------------------------------------------------------------------------- EDUCATIONAL SIMULATION SOFTWARE The educational software industry in which the Company operates is competitive. The Company competes somewhat against publishers and suppliers of textbook educational materials that have been, and will continue to be, the primary educational resource used in these markets. The Company also competes against educational software publishers who provide software products that are interactive but are not true simulation software. Most education software publishers compete in the grades below 9th grade, addressing primarily reading and math skills. The Company competes primarily in the middle school, high school, and college markets addressing primarily science and math subjects. A smaller number of software publishers are addressing these markets, although existing competitors may broaden their product lines to these markets, and additional competitors may enter these markets. The Company is aware of several companies publishing educational simulation software including HyperCube, Glencore, Corel, Logal and Knowledge Revolution. Logal is the only company of which the Company is currently aware that is producing a range of educational simulation software that competes directly with the Company's current and planned educational simulation software products. The Company expects that high school and college science and math text book publishers and other companies may also be developing simulation software products and that additional competitors may enter this field. Information gathered by the Company at conferences for science teachers and school administrators, primarily during the fall of 1997, indicate that these customers and potential customers prefer the Company's products over those offered by Logal almost unanimously, for those titles which have been released by the Company to date. PHARMACEUTICAL SIMULATION SOFTWARE In providing simulation-software-based screening, testing and research services to the pharmaceutical industry, and in marketing simulation software for these purposes, the Company competes against a number of established companies that provide screening, testing and research services and products to these industries that are not based on simulation software. The Company's competitors 10 13 in this field include companies with financial, personnel, research and marketing resources that are greater than those of the Company. Major pharmaceutical companies conduct these efforts through their internal development staffs and through outsourcing some of this work. Smaller companies need to outsource a greater percentage of this research. The Company is aware of a few other companies that are presently developing simulation software or simulation-software-based services to the pharmaceutical industries for the purposes of screening compounds. The Company is not aware of any significant competition in the area of gastrointestinal absorption simulation. The Company is aware of one company in England that produces animation software for education in pharmacy and medicine, but is not aware of any commercial effort by any company to produce a gastrointestinal absorption simulation software for pharmaceutical research. The Company believes the key factors in competing in this field will be its ability to develop simulation software that can effectively predict the absorption behavior of a large number of compounds, and the ability to develop and maintain relationships with research and development departments of pharmaceutical companies. 11 14 DISABILITY PRODUCTS - ------------------------------------------------------------------------------- The augmentative and alternative communication industry in which the Company operates is highly competitive and some of the Company's competitors have greater financial and personnel resources than the Company. The industry is made up of six major competitors and a number of smaller ones. The Company believes that the six major competitors each have revenues ranging from $3 Million to $12 Million so that there are no large companies in this industry. Two of these companies produce personal-computer based software systems for Apple Macintosh and the others produce dedicated communication devices and/or paper products. The Company believes that the competition in this industry is based primarily on the quality of products, quality of customer training and technical support, and quality and size of sales forces. Price is a competitive factor but the Company believes price is not as important to the customer as obtaining the product most suited to the customer. The Company believes that it is a leader in the industry in developing and producing the most technologically-advanced products and in providing quality customer training and technical support. The prices of the Company's products are among the highest in the industry and the Company has one of the smallest sales forces and dealer networks in the industry. The Company believes it is positioned to continue to be a leader in the development and production of the highest quality technology and that it will be able to develop one of the strongest sales forces in the industry by increasing the number of sales representatives. The Company believes that the sales of its products can increase significantly due to these factors and the expected continuing expansion of the size of this market. However, there are few barriers to entry in the form of proprietary or patented technology or trade secrets in this industry. While the Company believes that cost of product development and the need for specialized knowledge and experience in this industry would present some deterrence for new competition, other companies may enter this industry, including companies with substantially greater financial resources than the Company, the companies already in this industry may increase their market share through increased technology development and marketing efforts. PERSONAL PRODUCTIVITY SOFTWARE - -------------------------------------------------------------------------------- A few products compete with Abbreviate! in the retail market; however, the Company is not aware of any other product that works with virtually any software in Windows 95 without the need to create special links to the software. The Company has priced Abbreviate! at $99, with an introductory price of $49.95, significantly less than competitor SmarType ($295) and matching InstantText ($99). The Company enlisted the help of several medical transcriptionists as beta testers for the product, and the feedback received from those testers and additional medical transcriptionists who are familiar with competitive products has been very favorable. 12 15 EMPLOYEES As of August 31, 1997, the Company employed 40 full-time and 5 part-time employees, including 13 in research and development, 12 in marketing and sales, 9 in administration and accounting, 10 in production and 1 in repair. Three additional research and development employees have started working since then. Nine current employees hold Ph.D.'s in their respective science or engineering disciplines. Four additional employees hold Master's degrees. The Company believes that its future success will depend, in part, on its ability to continue to attract, hire and retain qualified personnel. The competition for such personnel in the augmentative and alternative communication device and computer software industry is intense. None of the Company's employees is represented by a labor union, and the Company has never experienced a work stoppage. The Company believes that its relations with its employees are good. Item 2. Description of Property The Company occupies offices in an office building in Palmdale, California. In September 1996, the Company expanded its office space from approximately 4,800 square feet to approximately 11,800 square feet. The Company expects to outgrow its current space within the next fiscal year. Leases on the office space currently occupied by the Company will expire in October 1998 (about 7,000 square feet) and June 1998 (about 4,800 square feet). Leases on the newly-acquired 7,000 square feet allow for month-to-month renewal or an additional 12-month term renewal at the end of the lease term. The original lease on the 4,800 square foot space allows a 12-month term renewal at the end of the lease term. Item 3. Legal Proceedings The Company is not a party to any litigation and, except as discussed in the next paragraph, is not aware of any pending or threatened litigation against the Company. In January 1997, the Company received notice from a former employee claiming, among other things, that her employment with the Company had been wrongfully terminated and alleging potential causes of action based on negligent misrepresentation, wrongful discharge, breach of contract and sex and race discrimination. Such former employee threatened to commence litigation against the Company if the Company did not respond to her notice by a certain date. The Company responded to such notice at the end of January 1997 and has not received any further communications from such former employee. The Company believes that it has complied with all legal requirements in terminating such former employee and intends to vigorously defend itself against any; and all claims make by such former employee. Although there can be no assurance that such former employee's claims or any related governmental action will not have a material adverse effect on the Company's business, financial condition or results of operation, the Company does not believe that it will have such affect. 13 16 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fiscal year ended August 31, 1997. 14 17 PART II Item 5. Market for Common Stock and Related Stockholder Matters The Company's Common Stock began trading on the Nasdaq SmallCap Market ("NASDAQ") on June 18, 1997 under the symbol "SIMU". According to records of the Company's transfer agent, the Company had five stockholders of record as of August 31, 1997. The following table sets forth, for the period indicated, the low and high sales prices for the Common Stock as reported by NASDAQ.
PERIOD LOW SALES PRICE HIGH SALES PRICE ------ --------------- ---------------- Fiscal 1998: First quarter. . . . . . . . . . . . . . . . . . . . . . . 5 5 3/4 Fiscal 1997: Fourth quarter (from 6/18/97). . . . . . . . . . . . . . . 5 6 1/8
The Company has never paid any dividends on its Common Stock and does not anticipate paying dividends in the foreseeable future. Item 6. Management's Discussion and Analysis or Plan of Operation RESULTS OF OPERATIONS The following sets forth selected items from the Company's statements of operations (in thousands) and the percentages that such items bear to net sales for the fiscal years ended August 31, 1997 ("FY97"), August 31, 1996 ("FY96") and August 31, 1995 ("FY 95").
- ------------------------------------------------------------------------------------------------------------- Year Ended August 31, - ------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Net sales $ 2,493 100.0% $ 2,601 100.0% $ 2,879 100.0% - ------------------------------------------------------------------------------------------------------------- Cost of sales 1,252 50.2 1,289 49.6 1,356 47.1 - ------------------------------------------------------------------------------------------------------------- Selling, general, and administrative 2,277 91.3 1,190 45.8 1,100 38.2 - ------------------------------------------------------------------------------------------------------------- Research and development 133 5.4 108 4.1 102 3.5 - ------------------------------------------------------------------------------------------------------------- Total operating expenses 2,410 96.7 1,298 49.9 1,202 41.7 - ------------------------------------------------------------------------------------------------------------- Income (loss) from operations (1,169) (46.9) 14 0.5 321 11.2 - ------------------------------------------------------------------------------------------------------------- Income from grant 17 0.7 34 1.3 -- -- - ------------------------------------------------------------------------------------------------------------- Interest income 26 1.0 -- -- -- -- - ------------------------------------------------------------------------------------------------------------- Interest expense 69 2.8 10 0.4 13 0.5 - ------------------------------------------------------------------------------------------------------------- Financing Costs 280 11.2 -- -- -- -- - ------------------------------------------------------------------------------------------------------------- Provision for income taxes (39) (1.6) 15 0.5 115 4.0 - ------------------------------------------------------------------------------------------------------------- Net income (loss) (1,436) (57.6)% 23 0.9% 193 6.7% - -------------------------------------------------------------------------------------------------------------
15 18 FY 96 COMPARED WITH FY 95 - -------------------------------------------------------------------------------- Net sales Net sales for FY 96 decreased by $278,000, or 9.7%, to $2,601,000 compared to $2,879,000 for FY 95. Management attributes this decrease primarily to three factors: (1) delays in shipping new Windows-based versions of its E Z Keys for Windows and Talking Screen for Windows software products, (2) changing from a higher-priced hardware voice synthesizer to a lower-priced voice synthesizer for a significant percentage of its computer based products (3) lack of market acceptance of the original Pegasus communication device. In approximately March 1994, the Company commenced the development of Windows versions of its two major software products, E Z Keys and Talking Screen. Management expected completion of these software projects by December 1994. In approximately October 1994, the Company commenced advertising these products in its product catalog. Due to a variety of technical difficulties encountered in developing n the Windows environment for the first time, Talking Screen for Windows was not released until July 1995, and E Z Keys for Windows was not released until December 1995. In April 1996, the Company began shipping a new software voice synthesizer with a significant number of its computer-based communication systems. This software voice synthesizer has a retail price of $199, whereas the hardware voice synthesizer it replaced had a retail price of $1,195. This reduced the average revenues per sale for such systems by approximately $1,000 per system. Also during late 1994, the development of the original Pegasus communication device was initiated, and the device was released in June 1995. Sales were well below expectations, primarily due to the size and weight (12.5 pounds) of the device. Management believes that the delays in completing the Windows-based software products resulted in delays in orders during the last part of 1995 and early 1996 as customers waited until such Windows-based software products were available instead of placing orders for the Company's already existing comparable DOS-based products, and that the relatively heavy weight of the Pegasus was a major factor in limiting sales of that product. Cost of Sales Cost of sales for FY 96 decreased by $67,000, or $4.9%, to $1,289,000 compared to $1,356,000 for FY 95. As a percentage of net sales, cost of sales was 49.6% for FY 96 compared to 47.1% for FY 95. Management attributes this decrease of $67,000 in cost of sales primarily to the conversion from the hardware voice synthesizer to the software voice synthesizer. Management attributes the increase in the cost of sales as a percentage of total sales primarily to the Company's lower net sales in software products which has a higher gross margin. Selling, General and Administrative Expenses Selling, general and administrative expenses for FY 96 increased by $90,000, or 8.2%, to $1,190,000 compared to $1,100,000 for FY 95. As a percentage of net sales, selling, general and administrative expenses increased by 7.6% to 45.8% in FY 96 from 38.2% in FY 95. Management 16 19 attributes this increase primarily to the following three factors: (1) higher commission costs due to a higher percentage of sales being make through dealers, (2) higher salaries and wages due to increase in personnel and general increases in salaries provided to existing employees, and (3) increased newsletter mailing costs resulting from an expanded database and increased postal rates. Research and Development The Company incurred approximately $215,000 of research and development costs for FY 96, of which approximately $107,000 was capitalized and approximately $108,000 was expensed compared to approximately $253,000 for FY 95, of which approximately $151,000 was capitalized and approximately $102,000 was expensed. The 15.0% decrease in research and development expenditure for FY 96 was primarily due to the Company completing development work on its Windows-based versions of E Z Keys for Windows and Talking Screen for Windows software products. Income from Grant For FY 96, the Company received $34,000 of a $51,000 Phase I SBIR grant from the National Science Foundation to develop software to allow physically-disabled students to perform simulated laboratory experiments on a computer. Interest Expense Interest expense for FY 96 decreased by $3,000, or 23.1%, to $10,000 from $13,000 in FY 95. This decrease is attributable primarily to lower borrowings by the Company on its line of credit. As a percentage of sales, interest expense decreased to 0.4% in FY 96 from 0.5% in FY 95. Income Taxes Income taxed decreased $100,000, or 87% to $15,000 from $115,000 in FY 95 because of the Company's decreased earnings. Net Income Net income for FY 96 declined by $170,000, or 88.1%, to $23,000 compared to $193,000 in FY 95. Management attributes this decline primarily to the decrease in Net Sales, the increase in Selling, general and administrative expenses, the amortization of software development cots and the increased expenses incurred by the Company in its research and development efforts compared to FY 95. FY 97 COMPARED WITH FY 96 - -------------------------------------------------------------------------------- Net Sales 17 20 Net sales decreased by $108,000 or 4.2%, to $2,493,000 compared to $2,601,000 for FY 96. Management attributes the majority of this reduction to the changeover from the MultiVoice hardware voice synthesizer to the Eloquence software voice synthesizer. MultiVoice sales accounted for $120,000 in the 1996 period, but only $14,000 in the 1997 period. Lower Talking Screen software sales, somewhat offset by higher computer sales, accounted for the majority of the remainder of $2,000 difference in net sales for the two periods. Cost of Sales Cost of sales for FY 97 declined by $37,000 or 2.9% from $1,289,000 in FY 96. As a percentage of sales, cost of sales was 50.2% for the 1997 period, compared to 49.6% for the 1996 period. Management attributes this slight percentage change in gross margin primarily to two factors: (1) an approximately 2% decline in cost from the changeover from the MultiVoice to the Eloquence software voice synthesizer, which somewhat offset by, (2) higher computer sales which has higher percentage in cost. Selling, General and Administrative Expenses Selling, general and administrative expenses for FY 97 increased by $1,087,000, or 91.3% to $2,277,000 compared to $1,190,000 for FY 96. As a percentage of net sales, selling, general and administrative expenses increased by 45.5% to 91.3% in FY 97 from 45.8% in FY 96. Management attributes this increase primarily to the expansion of the Company's simulation software efforts as the Company added office space, furniture and equipment, and additional staff, including recruiting and hiring costs, commencing in September 1996 in contemplation of receiving funding from the closing of the a public offering that was scheduled to close in November 1996 but which did not close because the underwriter of such offering had failed to reach agreement with its clearing agent regarding the amount of capital that such clearing agent required such underwriter to maintain in connection with such offering. A portion of the increase was also due to higher professional fees, increases in salaries and wages, increased printing and advertising costs. Research and Development The Company incurred approximately $765,000 of research and development costs for FY 97, of which approximately $632,000 was capitalized and approximately $133,000 was expensed. For FY 96, the Company incurred approximately $215,000 of research and development costs, of which approximately $107,000 was capitalized and approximately $108,000 was expensed. The 255.8% increase in research and development expenditures for FY 97 is due to the expanded development work on educational and pharmaceutical simulation software begun in September 1996. 18 21 Income from Grant For FY 97, the Company received $17,000, the last one-third of a $51,000 Phase I SBIR grant from the National Science Foundation to develop software to allow physically-disabled students to perform simulated laboratory experiments on a computer. For FY 96, the Company received the first two-thirds of this grant. (A follow-on $300,000 Phase II SBIR grant was awarded to the Company in October 1997.) Interest Expense Interest expense for FY 97 increased $59,000, or 590.0%, to $69,000 from $10,000 in FY 96. This increase is primarily due to the interest charges incurred for the $1,600,000 in notes payable issued in August 1996 through January 1997 to help fund the Company's IPO and expand its simulation software operations. Financing Costs Financing costs for FY 97 were $280,000 compared to $0 for FY 96. The increase is due to the issuance of 280,000 warrants in connection with notes payable issued in December 1996 and January 1997. This financing cost was being amortized over the term of the notes and the unamortized portion at the time of the completion of the IPO was charged to earnings. The warrants entitled the holder to purchase one share of the Company's Common Stock for $2.50 per share. The Company issued these warrants which had an exercise price that the Company estimated to be $1.00 less than the fair value of the Company's Common Stock at the date of grant. Accordingly, the Company recognized an additional financing cost of $280,000. Income Taxes Income taxes decreased $54,000, or 360.0% to the tax benefit of $39,000 from the provision of $15,000 for FY 96 because of the Company's decreased earnings. Net Income Net income for FY 97 declined by $1,459,000, or 6,343.5%, to the net loss of $1,436,000 compared to the net income of $23,000. Management attributes this decline primarily to the decrease in Net Sales, the increase in Selling, General and Administrative expenses incurred by the Company for its research and development efforts, and the increased financing costs and interest expenses compared to FY 96. 19 22 Seasonality Sales of the Company's disability products exhibit relatively mild seasonal fluctuations. The following table sets forth net sales information for each of the Company's last 12 calendar quarters. This unaudited net sales information has been prepared on the same basis as the annual information presented elsewhere in this Form 10-KSB and, in the opinion of management, reflects all adjustments (consisting of normal recurring entries) necessary for a fair presentation of the information presented. Net sales for any quarter are not necessarily indicative of sales for any future period. 20 23
- ----------------------------------------------------------------------------------------------------------- Net Sales FY First Second Third Fourth Total Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- (in thousands) - ----------------------------------------------------------------------------------------------------------- 1995 ................................................... 700 618 710 851 2,879 - ----------------------------------------------------------------------------------------------------------- 1996 ................................................... 733 628 621 619 2,601 - ----------------------------------------------------------------------------------------------------------- 1997 ................................................... 541 679 560 713 2,493 - -----------------------------------------------------------------------------------------------------------
In general, management believes sales to schools are seasonal, with greater sales to schools during the Company's third and fourth fiscal quarter (March-May and June-August). There is not sufficient historical data at this time to allow a detailed analysis of the seasonality of educational simulation software. Sales of pharmaceutical simulations, expected to begin in the first calendar quarter of 1998, are not expected to show significant seasonal behavior. Liquidity and Capital Resources: The Company's principal sources of capital have been cash flows from its operations, a bank line of credit, a government grant, cash loans from the officers on an as-needed basis, and proceeds from the Company's initial public offering. The Company has available a $100,000 revolving line of credit from a bank. Interest is payable on a monthly basis at the bank's prime rate plus 3.0%. The interest rate at August 31, 1996 and 1997 was 11.25% and 11.50%, respectively. At August 31, 1996, the outstanding balance under the revolving line of credit was approximately $94,000, and at August 31, 1997, the outstanding balance under the revolving line of credit was $0, with $100,000 available on that date. The revolving line of credit is not secured by any of the assets of the Company but is personally guaranteed by Mr. Walter S. Woltosz, the Company's Chief Executive Officer, President and Chairman of the Board of Directors In 1996, the Company was awarded a $51,000 Phase I SBIR grant from the National Science Foundation, the purpose of which was to help fund the Company's development of educational simulation software for the school and home study markets. In October 1997, the Company was also awarded a follow-on $300,000 Phase II SBIR grant for the same purpose, which will be paid in four equal payments of $75,000 semi-annually. The first payment on such grant was received in October 1997. The Company believes that the net proceeds from the sale of the shares of Common Stock offered in the IPO, together with existing capital and anticipated funds from operations, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next 13 months. Thereafter, if cash generated from operations is insufficient to satisfy the Company's capital requirements, the Company may have to sell additional equity or debt securities or obtain expanded 21 24 credit facilities. In the event such financing is needed in the future, there can be no assurance that such financing will be available to the Company, or, if available, that it will be in amounts and on terms acceptable to the Company. 22 25 Item 7. Financial Statements REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Simulations Plus, Inc. We have audited the accompanying consolidated balance sheet of Simulations Plus, Inc. and subsidiary as of August 31, 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended August 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Simulations Plus, Inc. and subsidiary as of August 31, 1997, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended August 31, 1997 in conformity with generally accepted accounting principles. SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California October 31, 1997 23 26 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AS OF AUGUST 31, 1997 - --------------------------------------------------------------------------------
ASSETS CURRENT ASSETS Cash and cash equivalents (Note 2) $ 2,156,761 Accounts receivable, net of allowance for doubtful accounts of $15,000 375,051 Income tax receivable 57,426 Inventory 222,798 ----------- Total current assets 2,812,036 CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS, net of accumulated amortization of $175,414 746,720 FURNITURE AND EQUIPMENT, net (Note 3) 183,973 OTHER ASSETS 34,996 ----------- TOTAL ASSETS $ 3,777,725 =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 140,542 Accrued payroll and other expenses 150,709 Accrued warranty and service costs 51,859 Current portion of capitalized lease obligations (Note 4) 25,857 ----------- Total current liabilities 368,967 CAPITALIZED LEASE OBLIGATIONS, net of current portion (Note 4) 55,727 ----------- Total liabilities 424,694 COMMITMENTS (Note 4) SHAREHOLDERS' EQUITY (Notes 5, 7, and 8) Common stock, $.001 par value 20,000,000 shares authorized 3,350,000 shares issued and outstanding 3,350 Additional paid-in capital 4,595,771 Accumulated deficit (1,246,090) ----------- Total shareholders' equity 3,353,031 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,777,725 ===========
The accompanying notes are an integral part of these financial statements. 24 27 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED AUGUST 31, - --------------------------------------------------------------------------------
1997 1996 ----------- ----------- NET SALES (Note 1) $ 2,493,101 $ 2,600,792 COST OF SALES 1,252,343 1,289,059 ----------- ----------- GROSS PROFIT 1,240,758 1,311,733 ----------- ----------- OPERATING EXPENSES Selling, general, and administrative 2,277,022 1,189,737 Research and development 133,023 107,767 ----------- ----------- Total operating expenses 2,410,045 1,297,504 ----------- ----------- INCOME (LOSS) FROM OPERATIONS (1,169,287) 14,229 ----------- ----------- OTHER INCOME (EXPENSE) Interest income 25,709 -- Income from grant 17,159 34,318 Interest expense (68,858) (10,037) Financing costs (Note 5) (280,000) -- ----------- ----------- Total other income (expense) (305,990) 24,281 ----------- ----------- INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES (1,475,277) 38,510 PROVISION FOR (BENEFIT FROM) INCOME TAXES (Note 6) (38,800) 15,593 ----------- ----------- NET INCOME (LOSS) $(1,436,477) $ 22,917 =========== =========== NET INCOME (LOSS) PER SHARE $ (0.57) $ 0.01 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,527,370 2,390,000 =========== ===========
The accompanying notes are an integral part of these financial statements. 25 28 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED AUGUST 31, - --------------------------------------------------------------------------------
Retained Common Stock Additional Earnings ----------------------------- Paid-in (Accumulated Shares Amount Capital Deficit) Total ---------- ----------- ---------- ----------- ---------- BALANCE, AUGUST 31, 1995 2,200,000 $ 2,200 $ - $ 167,470 $ 169,670 NET INCOME 22,917 22,917 ---------- ----------- ---------- ----------- ---------- BALANCE, AUGUST 31, 1996 2,200,000 2,200 -- 190,387 192,587 SALE OF COMMON STOCK IN INITIAL PUBLIC OFFERING (Note 7) 1,150,000 1,150 5,748,850 5,750,000 OFFERING COSTS (1,433,079) (1,433,079) ISSUANCE OF WARRANTS FOR FINANCING COSTS (Note 5) 280,000 280,000 NET LOSS (1,436,477) (1,436,477) ---------- ----------- ---------- ----------- ---------- BALANCE, AUGUST 31, 1997 3,350,000 $ 3,350 $4,595,771 $(1,246,090) $3,353,031 ========== =========== ========== =========== ==========
The accompanying notes are an integral part of these financial statements. 26 29 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31, - --------------------------------------------------------------------------------
1997 1996 ----------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $(1,436,477) $ 22,917 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation and amortization of furniture and equipment 31,777 20,545 Amortization of capitalized software development costs 108,087 63,793 Deferred taxes 380 30,870 Issuance of warrants for financing activities 280,000 -- (Increase) decrease in Accounts receivable (125,637) 59,683 Income tax receivable (22,149) -- Inventory (130,736) (21,976) Other assets (9,057) (21,390) Increase (decrease) in Accounts payable (36,946) 33,733 Accrued compensation due to officer (150,000) -- Accrued payroll and other expenses 77,245 13,967 Accrued warranty and service costs 13,418 (2,178) Income tax payable -- (58,618) ----------- --------- Net cash provided by (used in) operating activities (1,400,095) 141,346 ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of furniture and equipment (80,409) (14,797) Capitalized computer software development cost (631,865) (106,623) ----------- --------- Net cash used in investing activities (712,274) (121,420) ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from line of credit 201,603 95,022 Payments on line of credit (295,142) (20,425) Payments on capitalized lease obligations (22,482) (16,322) Due to officer, net -- (34,148) Increase in deferred offering costs (1,338,949) (94,130) Proceeds from notes payable 1,400,000 200,000 Payments on notes payable (1,600,000) -- Payments to officer (40,000) -- Proceeds from officer 40,000 -- Proceeds from the sale of common stock 5,750,000 -- ----------- --------- Net cash provided by financing activities 4,095,030 129,997 ----------- ---------
The accompanying notes are an integral part of these financial statements. 27 30 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, - --------------------------------------------------------------------------------
1997 1996 ---------- -------- Net increase in cash during year $1,982,661 $149,923 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 174,100 24,177 ---------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $2,156,761 $174,100 ========== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION During the years ended August 31, 1997 and 1996, the Company paid $10,354 and $42,851, respectively, in income taxes and $137,608 and $10,037, respectively, in interest. During the year ended August 31, 1997, the Company received $28,985 in income tax refunds. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES The Company entered into capital lease obligations of $85,952 during the year ended August 31, 1997 and transferred $7,420 and $17,753 of computer hardware from inventory to furniture and equipment during the years ended August 31, 1997 and 1996, respectively. The accompanying notes are an integral part of these financial statements. 28 31 NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Organization Simulations Plus, Inc. was incorporated on July 17, 1996. On August 29, 1996, the shareholders of Words+, Inc. exchanged their 2,000 shares of Words+, Inc. common stock for 2,200,000 shares of Simulations Plus, Inc. common stock, and Words+, Inc. became a wholly-owned subsidiary of Simulations Plus, Inc. (collectively the "Company"). The effect of the stock-for-stock exchange is presented retroactively in the accompanying consolidated financial statements. All intercompany accounts and transactions have been eliminated. Line of Business The Company designs and develops computer software and manufactures augmentative communication devices and computer access products that provide a voice for those who cannot speak and allow physically-disabled persons to operate a standard computer. The Company also designs interactive, educational software programs that simulate science experiments conducted in high school science classes. In addition, the Company is developing pharmaceutical simulation software to promote cost-effective solutions to a number of problems in pharmaceutical research and in the education of pharmacy and medical students. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly-liquid investments purchased with original maturities of three months or less to be cash equivalents. Inventory Inventory is stated at the lower of cost (first-in, first-out basis) or market and consists primarily of computers and peripheral computer equipment. Furniture and Equipment Furniture and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using accelerated methods over the estimated useful lives as follows: The accompanying notes are an integral part of these financial statements. 29 32 NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Furniture and Equipment (Continued) Equipment 5 years Computer equipment 3 to 7 years Furniture and fixtures 5 to 7 years Leasehold improvements 5 years Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations. Advertising The Company expenses advertising costs as incurred. Advertising costs for the years ended August 31, 1997 and 1996 were $88,422 and $44,564, respectively. Research and Development Costs Research and development costs are charged to expense as incurred until technological feasibility has been established. These costs consist primarily of salaries and direct payroll related costs. Software Development Costs Software development costs are capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. The establishment of technological feasibility and the ongoing assessment for recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Capitalized software development costs are comprised primarily of salaries and direct payroll related costs and the purchase of existing software to be used in the Company's software products. Amortization of capitalized software development costs is provided on a product-by-product basis on the straight-line method over the estimated economic life of the products (not to exceed three years). Management periodically compares estimated net realizable value by product with the amount of software development costs capitalized for that product to ensure the amount capitalized is not in excess of the amount to be recovered through revenues. Any such excess of capitalized software development costs to expected net realizable value is expensed at that time. 30 33 NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue Recognition The Company recognizes revenues related to software licenses and software maintenance in accordance with the American Institute of Certified Public Accountants ("AICPA") Statements of Position No. 91-1, "Software Revenue Recognition." Product revenue is recorded at the time of shipment, net of estimated allowances and returns. Post-contract customer support ("PCS") obligations are insignificant; therefore, revenue for PCS is recognized at the time of shipment, and the costs of providing such support services are accrued and amortized over the obligation period. The Company provides, for a fee, additional training and service calls to its customers and recognizes revenue at the time the training or service call is provided. Income Taxes The Company accounts for income taxes under the liability method required by SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities reflect the expected future tax consequences of events that have been included in the financial statements and tax returns. Deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities, using the enacted tax rates in effect for the year in which the differences are expected to reverse. Fair Value of Financial Instruments The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued payroll and other expenses, and accrued warranty and service costs, the carrying amounts approximate fair value due to their short maturities. The amounts shown for capitalized lease obligations also approximate fair value because current interest rates offered to the Company for leases of similar maturities are substantially the same. Stock Options The Company has adopted only the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." It applies Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plan and does not recognize compensation expense for its stock-based compensation plan other than for restricted stock and options/warrants issued to outside third parties. 31 34 NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net Income (Loss) Per Share Net income (loss) per share is based on the weighted average number of common and common equivalent shares outstanding during each year. In connection with the Company's initial public offering ("IPO"), stock options and warrants issued for consideration below the IPO per share price during the twelve months before the filing of the registration statement have been included in the calculation of common stock equivalent shares using the treasury stock method as if they had been outstanding throughout the interim period (February 28, 1997) included in the IPO prospectus. The determination of common stock and equivalents outstanding for the remainder of fiscal year 1997 has been determined on a basis consistent with APB 15. That is, outstanding options and warrants are included in the earnings per share computation using the treasury stock method only if they have a dilutive effect. Concentrations and Uncertainties International sales accounted for 17% and 14% of net sales for the years ended August 31, 1997 and 1996, respectively. Amounts due from Medicaid represented 20% of the net accounts receivable balance at August 31, 1997. The Company operates in the computer software industry which is highly competitive and changes rapidly. The Company's operating results could be significantly affected by its ability to develop new products and find new distribution channels for new and existing products. The Company does not manufacture certain of its components including the computer that is used in one of the Company's products. Such computer is sourced by the Company from a single vendor. The Company also uses a number of pictographic symbols that are used in its software products which are licensed from a third party. The inability of the Company to obtain computers used in its products or to renew its licensing agreement to use pictographic symbols could negatively impact the Company's financial position, results of operations, and cash flows. Recently Issued Accounting Pronouncement The Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share," which is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. SFAS No. 128 requires public companies to present basic earnings per share and, if applicable, diluted earnings per share instead of primary and fully-diluted earnings per share. The Company does not believe that diluted earnings per share in accordance with SFAS No. 128 will be materially different from the earnings per share previously reported. 32 35 NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recently Issued Accounting Pronouncement (Continued) SFAS No. 129, "Disclosure of Information about Capital Structures," issued by FASB is effective for financial statements ending after December 15, 1997. The new standard reinstates various securities disclosure requirements previously in effect under APB 15, "Computing Earnings per Share," which has been superseded by SFAS No. 128. The Company does not expect adoption of SFAS No. 129 to have a material effect, if any, on its financial position or results of operations. SFAS No. 130, "Reporting Comprehensive Income," issued by FASB is effective for financial statements with fiscal years beginning after December 15, 1997. Earlier application is permitted; SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company does not expect adoption of SFAS No. 130 to have a material effect, if any, on its financial position or results of operations. NOTE 2 - CASH AND CASH EQUIVALENTS The Company maintains cash deposits at banks located in California. Deposits at each bank are insured by the Federal Deposit Insurance Corporation up to $100,000. As of August 31, 1997, uninsured portions of balances held at banks aggregated to $91,206. In addition, the Company also had on deposit with a high-quality financial institution cash and cash equivalents in the amount of $2,006,251 that are uninsured. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. NOTE 3 - FURNITURE AND EQUIPMENT Furniture and equipment at August 31, 1997 consisted of the following: Equipment $ 40,556 Computer equipment 294,465 Furniture and fixtures 43,921 Leasehold improvements 5,900 -------- 384,842 Less accumulated depreciation and amortization 200,869 TOTAL $183,973 ========
33 36 NOTE 4 - COMMITMENTS Leases The Company leases certain facilities for its corporate and operations offices under a non-cancelable operating lease agreement that expires in 1999. The Company also leases certain office and computer equipment under non-cancelable capital lease arrangements. Future minimum lease payments under non-cancelable capital and operating leases with initial or remaining terms of one year or more are as follows:
Year Ending Operating Capital August 31, Leases Leases ---------- ------ ------ 1998 $104,335 $36,438 1999 5,449 34,602 2000 29,588 2001 704 -------- ------- 109,748 101,332 ======= Less amount representing interest 81,584 Less current portion 25,857 ------- LONG-TERM PORTION $55,727 =======
Included in furniture and equipment is capitalized leased equipment of $156,907 with accumulated amortization of $80,178 at August 31, 1997. Rent expense was $142,195 and $55,939 for the years ended August 31, 1997 and 1996, respectively. Employee Agreement The Company entered into an employment agreement with its president that extends until August 31, 1999. The employment agreement provides for an annual salary of $150,000 and an annual bonus based on the Company's performance not to exceed $150,000. License Agreement The Company entered into an agreement with Therapeutic Systems Research Laboratory ("TSRL") to jointly develop simulation of the absorption of drug compounds in the gastrointestinal tract. Upon execution of a definitive License Agreement, TSRL received a one-time payment of $75,000, plus a royalty of 20% of net sales of the absorption simulation. 34 37 Litigation The Company is involved in various legal proceedings and claims which arise in the ordinary course of its business. Management does not believe that the outcome of these matters will have a material adverse effect on the Company's consolidated financial position or results of operations. NOTE 5 - PROMISSORY NOTES PAYABLE In August and September 1996, the Company entered into two Subscription Agreements whereby the Company issued two notes in the amount of $200,000 and $300,000, respectively, and issued 100,000 and 150,000 warrants, respectively, to purchase shares of common stock. The warrants are exercisable at $4.00 per share and expire five years from the date of grant. The notes were repaid upon the completion of the Company's IPO. In January 1997, the Company entered into Subscription Agreements whereby the Company issued notes in the amount of $1,100,000 and issued 280,000 warrants to purchase common stock. The warrants are exercisable at $2.50 per share, are subject to a 12-month lock-up period, and expire five years from the grant date. The notes were repaid upon the completion of the Company's IPO. The Company determined that the fair value of these warrants at the date of grant was $3.50 per warrant due to the time between grant date and the expected completion of the IPO based on the condition of the Company on the grant date and the 12-month lock-up period (from the date of the IPO) associated with these warrants. Accordingly, the Company has recognized additional financing costs associated with the $1,100,000 notes of $280,000 which was being amortized over the term of the notes. The unamortized portion of this additional financing cost upon the completion of the IPO was charged to earnings. NOTE 6 - INCOME TAXES A reconciliation of the expected income tax computed using the federal statutory income tax rate to the Company's effective income tax rate is as follows:
1997 1996 ------- ------- Income tax computed at federal statutory tax rate (34.0)% 34.0% State taxes, net of federal benefit 0.1 6.2 Surtax exemption -- (1.2) Change in valuation allowance 31.1 -- Other 0.2 1.5 ------- ------- TOTAL (2.6)% 40.5% ======= =======
35 38 Significant components of the Company's deferred tax assets and liabilities for income taxes at August 31, 1997 consisted of the following: Deferred tax assets Accrued payroll and other expenses $ 32,715 Accrued warranty and service costs 20,744 Net operating loss carryforward 625,498 Other 6,000 --------- 684,957 Valuation allowance 378,756 --------- 306,201 Deferred tax liabilities Fixed assets (7,513) Capitalized computer software development costs (298,688) --------- NET DEFERRED TAX ASSET $ - =========
The Company's valuation allowance increased $378,756 during the year ended August 31, 1997. At August 31, 1997, the Company had net operating loss carryforwards of approximately $1,800,000 that expire in 2012. The components of the income tax provision for the years ended August 31, 1997 and 1996 are as follows:
1997 1996 -------- -------- Current Federal $(40,780) $(12,097) State 1,600 (3,180) -------- -------- (39,180) (15,277) -------- -------- Deferred Federal 293 23,770 State 87 7,100 -------- -------- 380 30,870 -------- -------- TOTAL $(38,800) $ 15,593 ======== ========
NOTE 7 - SHAREHOLDERS' EQUITY Issuance of Common Stock In June 1997, the Company completed an IPO where it sold 1,150,000 shares of common stock at $5.00 per share. Gross proceeds from the sale were $5,750,000. 36 39 Stock Option Plan In September 1996, the board of directors adopted and the shareholders approved the 1996 Stock Option Plan (the "Option Plan") under which a total of 250,000 shares of common stock has been reserved for issuance. As of August 31, 1997, no options have been granted. The Option Plan terminates in 2006, subject to earlier termination by the board of directors. NOTE 8 - RELATED PARTY TRANSACTIONS As of August 31, 1996, accrued compensation due to officer was $150,000 which represents accrued salary due to the Company's president. The amount due does not accrue interest and was repaid from proceeds received in connection with the Company's IPO. 37 40 NOTE 8 - RELATED PARTY TRANSACTIONS (CONTINUED) In connection with the Company's IPO, the Company agreed to grant to its president warrants to purchase up to 300,000 shares of the Company's common stock. The number of warrants to be granted will be based on net income for the year ended August 31, 1998, but cannot exceed 300,000 shares. All such warrants granted will be exercisable for a period of five years at an exercise price of $5.00 per share. Any difference between the price of the Company common stock and the exercise price of $5.00 per share on the measurement date will be recorded as an expense in accordance with APB 25. In January 1997, the Company's president borrowed $40,000 from the Company. The amount bears interest at 10% per annum and was repaid upon the completion of the Company's IPO. NOTE 9 - LINE OF CREDIT The Company has available an unsecured $100,000 revolving line of credit from a bank with interest payable on a monthly basis at prime (8.5% at August 31, 1997) plus 3%. The line is personally guaranteed by the Company's president. As of August 31, 1997, no amounts were drawn against the line of credit. 38 41 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. DIRECTORS AND EXECUTIVE OFFICERS The directors, executive officers and key employees of the Company and their ages and positions held with the Company are as follows:
NAME AGE POSITION WITH THE COMPANY DIRECTORS AND EXECUTIVE OFFICES: Walter S. Woltosz 52 Chairman of the Board, Chief Executive Officer and President of the Company and Words+. Virginia E. Woltosz 46 Vice President, Secretary and Director of the Company and Words+. Dr. David Z. D'Argenio 47 Director and Consultant to the Company Dr. Richard Weiss 62 Director Ron F. Creeley 46 Vice President, Marketing and Sales of the Company Philip R. Lawrence 47 Vice President, Operations of Words+ Momoko A. Beran 45 Chief Financial Officer of the Company and Words+ CERTAIN KEY EMPLOYEES AND CONSULTANTS: Dr. Michael Bolger 46 Director of Life Sciences Dr. Gregory Moore 38 Director of Engineering and Physical Sciences of the Company
39 42 Walter S. Woltosz is a co-founder of the Company and has served as its Chief Executive Officer and President and as Chairman of the Board of Directors since its incorporation in July 1996. Mr. Woltosz is also a co-founder of Words+ and has served as its Chief Executive Officer and President since its incorporation in 1981. Virginia E. Woltosz is a co-founder of the Company and has served as its Vice President and Secretary since its incorporation in July 1996. Mrs. Woltosz is also a co-founder of Words+ and has served as its Vice President, Secretary and Treasurer since its incorporation in 1981. Virginia E. Woltosz is the wife of Walter S. Woltosz. Ronald F. Creeley joined the Company in February 1997 as its Vice President, Marketing and Sales. Prior to joining the Company, Mr. Creeley had been Marketing Director at Union Pen Company, Time Resources, and New England Business Services, Inc., with experience in marketing and research. Philip R. Lawrence joined Words+ in January 1993 as a sales representative. He was promoted to Director of Marketing and Sales of Words+ in 1995, and was Promoted to Vice President, Operation of Words+. Dr. David Z. D'Argenio started to serve as a Director of the Company in June 1997. He is currently Professor and Chairman of Biomedical Engineering at the University of Southern California ("USC"), and has been on the faculty at USC since 1979. He also serves as the Co-Director of the Biomedical Simulations Resource Project at USC, a project funded by the National Institutes of Health since 1985. Dr. Richard R. Weiss started to serve as a Director of the Company in June 1997. From October 1994 to the present, Dr. Weiss has acted as a consultant to a number of aerospace companies and to the U.S. Department of Defense through his own consulting entity, Richard R. Weiss Consulting Services. From June 1993 through July 1994, Dr. Weiss was employed by the U.S. Department of Defense as its Deputy Director, Space Launch & Technology. Momoko A. Beran joined Words+ in June 1993 as Director of Accounting and was named the Company's Chief Financial Officer in July 1996. Certain Key Employees and Consultants: Dr. Michael B. Bolger is the Director, Life Sciences for the Company, having joined the Company in October 1996. Dr. Bolger is Associate Professor of Pharmacy at the USC, a co-founder and former director of CoCensys, Inc., a pharmaceutical firm in Irvine, California. He is the author of 16 computer programs related to molecular chemistry, pharmacokinetics, cellular growth, and data reduction in pharmacology and related areas, including the Cyber Patient, drug shelf life, and receptor structure simulation programs the Company acquired. Dr. Gregory Moore joined the Company in October 1997 as the Company's Director of Engineering and Physical Science. Dr. Moore holds a Ph.D. from the University of California, Santa Barbara, in Mechanical Engineering. Previously, Dr. Moore was employed at the MacNeal-Schwendler 40 43 Corporation, specializing in the development and marketing of large-scale structural optimization software tools. His expertise focuses on the development and application of computer-based numerical simulation and optimization techniques. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT: Section 16(a) of the Securities Exchange Act of 1934 as amended (the "Exchange Act") requires the Company's officers and directors, and persons who own more than ten percent of its Common Stock to file reports of ownership and changes of ownership with the Securities and Exchange Commission and NASDAQ. Such persons are also required to furnish the Company with copies of all Section 16(a) forms they file. Based solely on the Company's review of the copies of those forms received by the Company, or written representations from such persons that no Forms 5 were required to be filed, it appears that all reports due were timely filed. Item 10. Executive Compensation The following table sets forth certain information concerning compensation paid or accrued for the fiscal year ended August 31, 1997, 1996 and 1995 by the Company to or for the benefit of the Company's President. No other executive officers of the Company received total annual compensation for the fiscal year ended August 31, 1997, 1996 and 1995 that exceeded $100,000. As permitted under the rules of the Securities and Exchange Commission, no amounts are shown in the table below with respect to any perquisites paid to named officer because the aggregate amount of such perquisites (e.g., auto allowance) did not exceed the lessor of (i) $50,000 or (ii) 10% of the total annual salary and bonus of a named officer.
NAME AND FISCAL PRINCIPAL POSITION SALARY YEAR ------------------ ------ ---- Walter S. Woltosz . . . . . . . . . . . . . . . . . . $ 70,000 1995 President and Chief Executive Officer $ 82,500 1996 $300,000 * 1997
* Includes $150,000 accrued but unpaid compensation paid from proceeds of the Company's Initial Public Offering. EMPLOYMENT AND OTHER COMPENSATION AGREEMENTS The Company has an employment agreement with Walter Woltosz commencing September 1, 1996 that extends until August 31, 1999. The agreement provides for an annual salary of $150,000. Pursuant to such agreement, Mr. Woltosz is entitled to such health insurance and other benefits that are not inconsistent with that which the Company customarily provides to its other management employees and to reimbursement of customary, ordinary and necessary business expenses incurred in connection 41 44 with the rendering of services to the Company. The agreement also provides that the Company may terminate the agreement upon 30 days' written notice if termination is without cause and that the Company's only obligation to Mr. Woltosz would be for a payment equal to the greater of (i) 12 months of salary or (ii) the remainder of the term of the employment agreement from the date of notice of termination. Further, the agreement provides that the Company may terminate the agreement for cause (as defined) and that the Company's only obligation to Mr. Woltosz would be limited to the payment of Mr. Woltosz' salary and benefits through and until the effective date of any such termination. Commencing with the Company's fiscal year ending 1997 and for each fiscal year thereafter, Walter and Virginia Woltosz are entitled to receive bonuses not to exceed $150,000 and $60,000, respectively, equal to 5% of the Company's net annual income before taxes. In addition, if the closing price of the Company's Common Stock averages in excess of $10 per share for a period of 20 consecutive trading days during any fiscal year, then the Company will grant to each of Mr. And Mrs. Woltosz options under the 1996 Stock Option Plan, exercisable for five years, to purchase 50 shares of Common Stock for each $1,000 of net income before taxed that the Company earns with respect to such fiscal year (up to a Maximum of 60,000 options each until August 31, 1999) at an exercise price equal to the market value per share as of the date of grant. If the Company's after tax net income for the fiscal year ending August 31, 1998 as reflected in the Company's audited financial statements is $3,000,000 or more, Walter and Virginia Woltosz will be granted warrants to purchase 300,000 shares of the Company's Common Stock. If such after tax net income is $2,000,000 to $3,000,000, then the Woltosz' shall be granted warrants to acquire 200,000 shares of the Company's Common Stock, and for each additional $100,000 of after tax net income above $2,000,000 for such fiscal year, the Woltosz' shall be entitled to receive warrants to acquire 10,000 shares of Common Stock. All such warrants shall be exercisable for a period of five years from June 18, 1997 at an exercise price of $5.00 per share, subject to adjustment in certain circumstances. Item 11. Security Ownership of Certain Beneficial Owners and Management The information required by Item 11 will be contained in the Company's definitive proxy statement (the "Proxy Statement") for its 1998 annual shareholders' meeting, which is hereby incorporated by reference. Item 12. Certain Relationships and Related Transactions The information required by Item 12 will be contained in the Proxy Statement, which is incorporated by reference. 42 45 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report as required by Item 601 of Regulation S-B:
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) 10.9 Promissory Note made by the Registrant in favor of Fernando Zamudio(1) 10.10 Warrant to purchase 100,000 shares of Common Stock of the Registrant issued to Fernando Zamudio(1) 10.11 Employment Agreement by and between the Registrant and Walter S. Woltosz(1)+ 10.12 Performance Warrant Agreement by and between the Registrant and Walter S. and Virginia E. Woltosz(2)+ 10.13 Software Acquisition Agreement by and between the Registrant and Michael B. Bolger(1) 10.14 Sublease Agreement dated May 7, 1993 by and between the Registrant and Westholme Partners (along with Consent to Sublease and master lease agreement)(1) 10.15 Lease Agreements dated August 22, 1996 by and between Words+, Inc. and Abbey-Sierra LLC(1) 10.16 Form of 10% Amended and Restated Promissory Note issued in connection with the Registrant's Private Placement(2) 10.17 Form of Subscription Agreement relative to the Registrant's Private Placement(1) 10.18 Form of Lock-up Agreement with Bridge Lenders(2) 10.19 Form of Indemnification Agreement(1) 10.20 Form of Lock-Up Agreement with the Woltosz'(2) 10.21 Letter of Intent by and between the Registrant and Therapeutic Systems Research Laboratories(1) 10.22 Form of Representative's Warrant to be issued by the Registrant in favor of the Representative(2) 10.23 Form of Warrant issued to Bridge Lenders(2) 10.24 License Agreement by and between the Registered Therapeutic Systems Research Laboratories(3) 27.1 Financial Data Schedule(3)
- --------------- (1) Incorporated by reference to the Company's Registration Statement on Form SB-2 (Registration No. 333-6680) filed on March 25, 1997 (the "Registration Statement"). (2) Incorporated by reference to Pre-Effective Amendment No. 1 to the Registration Statement filed on May 27, 1997. (3) Filed herewith. + Management Contract or Compensatory Plan. (b) Reports on Form 8-K None. 43 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Palmdale, State of California, On December 15, 1997. SIMULATIONS PLUS, INC. By /s/ Momoko A. Beran ------------------------------- Momoko A. Beran Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities indicated on December 15, 1997.
SIGNATURE TITLE /s/ Walter S. Woltosz - ----------------------------------------- Chairman of the Board of Directors, President Walter S. Woltosz and Chief Executive Officer /s/ Virginia E. Woltosz - ----------------------------------------- Virginia Woltosz Senior Vice President, Secretary and Director of the Company - ----------------------------------------- Dr. David Z. D'Argenio Director and Consultant to the Company /s/ Dr. Richard Weiss - ----------------------------------------- Dr. Richard Weiss Director
44 47 /s/ Momoko A. Beran - ----------------------------------------- Momoko A. Beran Chief Financial Officer (Principal Financial and Accounting Officer) of the Company
45 EX-10.24 2 EXHIBIT 10.24 1 EXHIBIT 10.24 EXCLUSIVE SOFTWARE LICENSING AGREEMENT This Exclusive Software Licensing Agreement (the "Agreement") made as of the 30th day of June, 1997 is by and between Therapeutic Systems Research Laboratories "("TSRL"), a Michigan corporation, (the "Licensor") with its principal place of business at 540 Avis Drive, Suite A, Ann Arbor, Michigan 48108, and Simulations Plus, Inc., a California Corporation, with its principal place of business at 40015 Sierra Highway, Suite B110, Palmdale, California 93550, (the "Licensee"). WITNESSETH WHEREAS, subject only to those exceptions disclosed in this Agreement, Licensor owns all right, title, and interest in and to certain computer software based technologies (the "Software Technology"), and certain biological databases (the "Databases") the functional specifications for which are set forth in Exhibit A attached hereto; WHEREAS, Licensor desires to license the Software Technology and Databases exclusively to Licensee, and Licensee desires to acquire a license to the Software Technology and Databases, in accordance with the terms and conditions of this Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Licensor and Licensee, intended to be legally bound, hereby agree as follows: SECTION 1. DEFINITIONS SOFTWARE TECHNOLOGY. "Software Technology" means the computer program for gastrointestinal tract absorption prediction referred to as "Gastro" (as defined in Exhibit A) licensed by Simulations Plus, Inc. and includes: (i) source code form of the computer Software "Gastro" in all forms, including machine-readable, visually-perceptible or otherwise; (ii) all associated documentation, manuals and other printed or visually-perceptible materials describing the use or design of the Software Technology; (iii) any revisions or updates provided by Licensor to Licensee pursuant to the terms of this Agreement; and (iv) any additional computer programs as the parties may from time to time designate in writing. Modifications, enhancements and/or any software, technology or other programs derived from the Software Technology for the purpose of gastrointestinal tract absorption prediction shall be jointly owned by the Licensee and Licensor following termination as discussed in Sections 6 and 19 herein. DATABASES. "Databases" means the experimentally derived Effective Permeabilities (Peff), determined for a set of proprietary and non-proprietary drugs (as defined in Exhibit A) by performing plug flow and mixing tank drug absorption experiments on the following species: human, rat, dog, and rabbit. 1 2 ACCEPTANCE DATE. "Acceptance Date" means the date upon which the Licensor receives from the Licensee the Acceptance Notice pursuant to Section 16 and the License Fee pursuant to Section 10.1. SECTION 2. CONVEYANCE OF RIGHTS 2.1 Subject to the following terms and conditions, Licensor, effective as of the Acceptance Date, grants to Licensee a nontransferable, exclusive license to use the Software Technology and Databases on any and all of Licensee's computer systems, whether owned, leased, rented or otherwise under the control of Licensee. The term "use" shall mean the right to copy or utilize all or any portion of the Software Technology and Databases. 2.2 Licensee shall have the right to adapt the Software Technology and Databases, in machine-readable form, for its own use and merge it into other program material to form a composite work. Licensee shall have the right to modify the Software Technology after the Acceptance Date and subject to the terms and conditions set forth in Section 6, infra. Upon termination or discontinuance of the license as discussed in Section 19, infra, Licensee shall completely remove the Software Technology and Databases from its computer systems and shall discontinue use of the Software Technology and Databases. Upon any termination of the license grant under this Agreement, Licensee shall return to Licensor (or, at Licensor's option, destroy and certify in writing to Licensor that it has destroyed) the original and all copies of the Software Technology and Databases. Following the Acceptance Date and thereafter for so long as this Agreement remains in effect, Licensor shall work exclusively with Licensee to develop absorption prediction software. 2.3 Licensee shall have the right, after the Acceptance Date, to copy, in whole or in part, the Software Technology and Databases and shall be permitted to make as many copies of the Software Technology and Databases as it deems necessary. The original and any copies of the Software Technology and Databases, in whole or in part, shall at all times be the joint property of the Licensee and Licensor together. Each copy of the Software Technology shall so state in the following language: This copy of the Gastro program is the property of Simulations Plus Inc. and TSRL and is protected under the copyright, trade secret and confidentiality laws of the United States and Canada. Licensee shall keep a record of each copy made, where such copy is located and in whose custody it is. SECTION 3. DELIVERY OF PHYSICAL OBJECTS 2 3 Licensor, on or before July 31, 1997, shall deliver to Licensee (1) a master copy of the Software Technology in source code and executable form and Databases in machine readable form (spreadsheet or database), which shall be in a form suitable for copying; and (2) all system and user documentation pertaining to the Software Technology and Databases, including design or development specifications, technical papers, presentations, error reports, and related correspondence and memoranda. SECTION 4. REPRESENTATIONS AND WARRANTIES OF LICENSOR 4.1 Licensor represents and warrants to Licensee that it is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan, and it has the corporate power and is authorized under its Articles of Incorporation and its Bylaws to carry on its business as now conducted; 4.2 Licensor represents and warrants to Licensee that it has performed all corporate actions and received all corporate authorizations necessary to execute and deliver this Agreement and to perform its obligations hereunder; 4.3 Licensor represents and warrants to Licensee that the execution of this Agreement will not result in any violation or default of or conflict with: (i) Licensor's Articles of Incorporation or Bylaws; (ii) the provisions of any other agreement to which it is a party or to which it is bound; or (iii) any law, judgment, or regulation of any governmental authority; 4.4 Licensor represents and warrants to Licensee that there are no persons who are entitled to any notice of the transaction contemplated hereunder or whose consent is required for the consummation of the transaction contemplated hereunder; 4.5 Licensor represents and warrants to the Licensee that Licensee shall receive, pursuant to this Agreement, as of the effective date of this Agreement, an exclusive license in the Software Technology and Databases; 4.6 Licensor represents and warrants to Licensee that, to Licensor's knowledge (i) the Software Technology and Databases do not infringe any patent, copyright, or trade secret of any third party; (ii) the Software Technology and Databases are fully eligible for protection under applicable copyright law and have not been forfeited to the public domain (except for the databases of effective permeability that were developed by government funding mechanisms and are considered to be public information); and (iii) the source code and system specifications for the Software Technology have been maintained in confidence; 4.7 Licensor represents and warrants to Licensee that there are no agreements or arrangements in effect with respect to the marketing, distribution, licensing or promotion of the Software Technology and Databases by any independent salesperson, distributor or other remarketer or sales organization which would interfere with the execution of this Agreement; 3 4 4.8 Licensor represents and warrants to Licensee that it has not granted any rights in the Software Technology and Databases to third parties which rights would interfere with Licensee's exclusive license to the Software Technology and Databases pursuant to this Agreement. SECTION 5. REPRESENTATIONS AND WARRANTIES OF LICENSEE 5.1 Licensee represents and warrants to Licensor that it is a corporation duly organized, validly existing and in good standing under the laws of the State of California, and it has the corporate power and is authorized under its Articles of Incorporation and its Bylaws to carry on its business as now conducted; 5.2 Licensee represents and warrants to Licensor that it has performed all corporate actions and received all corporate authorizations necessary to execute and deliver this Agreement and to perform its obligations hereunder; 5.3 Licensee represents and warrants to Licensor that the execution of this Agreement will not result in any violation or default of or conflict with: (i) Licensee's Articles of Incorporation or Bylaws; (ii) the provisions of any other agreement to which it is a party or to which it is bound; or (iii) any law, judgment, or regulation of any governmental authority; and 5.4 Licensee represents and warrants to Licensor that there are no persons who are entitled to any notice of the transaction contemplated hereunder or whose consent is required for the consummation of the transaction contemplated hereunder. SECTION 6. OWNERSHIP OF MODIFICATIONS TO THE SOFTWARE TECHNOLOGY After the Acceptance Date, Licensee may modify, enhance and otherwise change the Software Technology without the prior written consent of Licensor. Licensee agrees that a modification or enhancement of the Software Technology developed by Licensee, with or without the advice or support of Licensor, whether or not developed in conjunction with Licensor shall jointly be the property of Licensee and Licensor who, subject to the provisions of Sections 16 and 19, shall thereafter own all right, title and interest to any patents, inventions, discoveries, applications or processes, software and computer programs devised, planned, applied, created, discovered or invented for the purposes of gastrointestinal tract absorption prediction, relating in any way to the Software Technology. This Section shall survive termination of this Agreement. SECTION 7. WARRANTY 7.1 Licensor represents and warrants to Licensee that the Software Technology 4 5 and Databases provided by Licensor to Licensee conform in all material respects to the functional specifications set forth in Exhibit A. 7.2 Among the remedies available to Licensee at law or in equity for breach of the foregoing warranties, Licensee can require Licensor to correct any material nonconformance to such specifications within ten (10) days of Licensor receiving notice from Licensee. Licensor shall not be liable to Licensee for any direct, incidental, consequential or other damages and expenses suffered by Licensee as a result of any breach of this Warranty by Licensor. 7.3 Except as expressly provided in Section 13 of this Agreement, Licensor shall not be responsible to Licensee for, or have any duty to conduct or perform, any training or instruction; pre-sale or post-sale marketing support; any licensing, sublicensing, leasing, or distribution; or any modification, correction, updating, enhancement or technical support of the Software Technology and Databases. 7.4 Licensor shall have no obligation to make repairs or replacements to the Software Technology or Databases except as provided in Section 7.2., and Section 13.2 SECTION 8. CONFIDENTIALITY 8.1 Each of Licensor and Licensee shall hold in confidence and not at any time disclose (except on a confidential basis to their employees who need to know and who have signed a confidentiality agreement) all Proprietary Information received from the other party in the same manner and to the same extent as it holds in confidence its own Proprietary Information, and shall not use any such Proprietary Information except for the purposes contemplated by this Agreement. As used in this Agreement, "Proprietary Information" shall mean all confidential and proprietary information, including but without limitation, components, drawings, data, plans, programs, specifications, techniques, processes, algorithms, inventions or other information or material owned, possessed or used by either Licensor or Licensee which is at any time so designated by such party in writing, whether by letter or by the use of a proprietary stamp or legend, prior to the time any such Proprietary Information is disclosed to the other party. In addition, information which is orally disclosed to the other party shall constitute Proprietary Information if identified as such at such time and if within ten (10) days after such disclosure the disclosing party delivers to the receiving party a written document describing such Proprietary Information and referencing the place and date of such oral disclosure and the name of the employees of the party to whom such disclosure was made. 8.2 Licensee shall take all reasonable steps to safeguard the Software Technology and Databases so as to insure that no unauthorized person shall have access to them, and that no persons authorized to have access shall make any unauthorized copy. Licensee shall promptly report to Licensor any unauthorized disclosure or any use of the Software Technology and Databases of which it becomes aware and shall take such further steps as reasonably may be requested by Licensor to prevent unauthorized use thereof. 5 6 8.3 Notwithstanding the obligations herein, the obligations herein shall not be applicable to information which: (i) was in the possession of the receiving party free of any obligation of confidence or was in the public domain at the time the furnishing party communicated it to the receiving party, through no fault of the receiving party; (ii) was rightfully communicated to the receiving party free of any obligation of confidence or entered the public domain subsequent to the time the furnishing party communicated it to the receiving party, through no fault of the receiving party; (iii) was developed by employees or agents of the receiving party independently and without knowledge of, or access to, any information which the furnishing party has disclosed in confidence to the receiving party or to any third party, provided that the receiving party shall have the burden of so establishing; (iv) is released from confidential treatment by written consent of the disclosing party; (v) is disclosed to the receiving party by a third party with the legal right to do so; or (vi) is required to be disclosed pursuant to any legal proceeding. SECTION 9. ASSIGNMENT Neither this Agreement nor any rights or licenses granted hereunder may be assigned or delegated without the written consent of Licensor and Licensee. This Agreement further provides that any assignee or transferee of rights or obligations under this Agreement must agree in writing to be bound by all of the terms of this Agreement and any incidental agreements entered into by the parties in furtherance of this Agreement. The Agreement shall inure to the benefit of and be binding upon any permitted successors or assigned of the parties. SECTION 10. PAYMENT 10.1 In consideration of the transfer of complete rights to the Software Technology and Databases granted pursuant to this Agreement, Licensee shall pay to Licensor a license fee (the "License Fee") of $75,000.00, payable in full on or before September 30, 1997. (The failure of Licensee to pay the License Fee in full on or before that date shall, for all purposes, be deemed a rejection by the Licensee of the Software Technology and Databases under Section 16 and a termination of this Agreement under Section 19. 10.2 Additionally, Licensee shall pay to Licensor a royalty (the "Royalty"), equal to twenty percent (20%) of the net revenues received by the Licensee (e.g., gross revenues less returns, discounts and allowances, determined in accordance with generally accepted accounting principles), from the licensing, sale or other distribution of the Software Technology or the Databases. For the period beginning on the date of this Agreement and ending on August 31, 1999, the Royalty will be payable on the basis of actual net revenues and will not be subject to any minimum payment. If this Agreement continues in effect as of September 1, 1999 or as of any September 1st thereafter, then, for the 12-month period beginning on each such September 1st, the Royalty will be equal to 20% of the actual net revenues received by the Licensee during such 12-month period but in no event less than $50,000 per year. The Royalty will be computed on a quarterly basis, with the Royalty for each quarter payable in full not later than 45 days following the 6 7 close of that quarter. If, as of the last quarter of any 12-month period to which the $50,000 minimum applies, the cumulative Royalties paid with respect to that 12-month period are less than $50,000, then the payment for the last quarter of that 12-month period shall include the amount required in order to satisfy the minimum Royalty for such 12-month period. The Licensee shall include with each payment of the Royalty a detailed accounting of the licenses, sales and other distributors of the Software Technology and Databases during the calendar quarter for which that payment is being made, identifying the licensee/purchasers of the Software Technology and Databases and the amounts paid by such licensees/purchasers. Any installment of the Royalty not paid on or before its due date will bear interest at the prevailing prime rate (as reported in the Wall Street Journal) from the due date to the date of payment. SECTION 11. PAYMENT: TAXES All license fee and royalty amounts payable pursuant to this Agreement are exclusive of all federal, state, local and municipal or other excise, sales, use, property or similar taxes and fees (but not any tax measured by income of the Licensor), now in force or enacted in the future, and all such taxes and fees shall be paid by Licensee. Licensee shall obtain and provide Licensor with any certificate of exemption or similar document required to exempt any transaction under this Agreement from sales tax, use tax or other tax liability. SECTION 12. RECORDS AND AUDIT Licensee shall maintain complete and accurate records relating to the net revenues received by Licensee for the Software Technology and Databases. Such records shall include information sufficient to determine the royalties due to Licensor. Licensee agrees to allow Licensor's licensed certified accountants to audit Licensee's records pertaining to the Software Technology and Databases and verify the accuracy of the royalties due to Licensor. Any such audit shall be permitted by Licensee within twenty (20) days of Licensee's receipt of Licensor's written request to audit. Such audit shall be conducted during normal business hours at a time mutually agreed upon by Licensee and Licensor. Licensee's accounting information shall be kept confidential by the auditors, and Licensee may require that Licensor's accountants enter into a written confidentiality agreement reasonably acceptable to Licensee. Such audits will not exceed one (1) per twelve (12) month period. In the event that Licensee does not agree with the results of the audit performed by Licensor's licensed certified accountant, then Licensor and Licensee will mutually choose an independent third party licensed certified accountant who will audit Licensee's records relating to the net revenues received by Licensee. The determination of that third party certified accountant shall be conclusive and binding upon the Licensor and the Licensee. If it is determined that there was no underpayment by the Licensee of the Royalty for the period subject to the audit, the Licensor shall bear the entire expense of its certified accountant and, if applicable, the Licensee's certified accountant and the third party certified accountant. If it is determined that there was an underpayment of the Royalty for the period subject to the audit but that the underpayment was equal to or less than five percent (5%) of the total Royalty which should have 7 8 been paid for such period, then each party shall be responsible for the cost of its own certified accountant and the cost of the third party certified accountant shall be borne in equal shares by the Licensor and the Licensee. If it is determined that there was an underpayment of the Royalty for the period subject to the audit and if such underpayment was more than five percent (5%) of the total Royalty which should have been paid for such period, then the Licensee shall be responsible for the cost of its certified accountant, the Licensor's certified accountant, and, if applicable, the third party certified accountant. SECTION 13. DELIVERY, INSTALLATION AND SUPPORT 13.1 TECHNICAL SUPPORT. Licensor will deliver and provide installation instructions for the Software Technology and Databases with the program documentation at a time mutually agreed upon by the parties. Licensor will provide technical support to Licensee relating to the development of the Software Technology and Databases on the following basis: Licensor will provide a maximum of fifteen (15) hours of non-compensated technical (non-programming) support per month, including support in developing representative customer databases, for as long as this Agreement is in effect. Additional technical support provided by Licensor to Licensee will be mutually agreed upon by the parties and Licensee will compensate Licensor for any technical support provided to Licensee in excess of fifteen hours per month. Licensee may carry over unused technical support time to another month upon mutual agreement with Licensor. The amount of compensation to be paid by Licensee to Licensor for technical support will be at the normal rate charged to Licensor's other clients during the previous twelve months. 13.2 LICENSOR MAINTENANCE SUPPORT. Licensor agrees to provide maintenance support for the Software Technology and Databases. All revisions, updates, maintenance and support of the Software Technology and Databases shall be provided to Licensee when such products or services are available. 13.3 LICENSEE MAINTENANCE SUPPORT. Licensee agrees to provide maintenance support for the Software Technology. Licensee agrees to provide programming, project management, debugging, and other related services to Licensor when such products or services are available. 13.4 MARKETING AND CONSULTING SERVICES. (a) Licensor will provide reasonable assistance at mutually agreeable times and places in creating worldwide visibility at national and international symposia and one on one visibility with leaders within major pharmaceutical companies. Licensor will provide scientific after-market support, consulting and other related services to Licensee at mutually agreeable times. (b) Licensee agrees to provide advertising and distribution for the Software Technology. Licensee agrees to perform field research to assess customer acceptance and future demand. 8 9 13.5 EXPENSE REIMBURSEMENT. Licensee will reimburse Licensor for all out-of-pocket expenses reasonably incurred by the Licensor and its personnel, and approved in advance by Licensee, in providing the technical support, maintenance support and marketing support and consulting services described in Section 13.1, 13.2, and 13.4. Such reimbursement shall be in addition to the specified compensation in those sections for services rendered. SECTION 14. RIGHTS TO ABSORPTION DATABASES 14.1 Following the Acceptance Date and thereafter for so long as this Agreement remains in effect, Licensee shall have unlimited access to the Databases developed by Licensor and Dr. Amidon. Licensee and Licensor will have the right to further develop the Databases, with Licensee compensating Licensor at a rate to be mutually agreed upon by the parties for any further development by Licensor. 14.2 Licensee shall have unlimited access to data and information from the Databases which is in the public domain or otherwise discoverable under the Freedom of Information Act or any similar provision of any Federal or state law, statute or regulation. This Section shall survive termination of this Agreement. 14.3 Following the Acceptance Date and thereafter for so long as this Agreement remains in effect, Licensee shall have unlimited access to information from the Databases which is proprietary to Licensor and Licensor's right to the Databases is limited to use for internal purposes only, including in conjunction with Licensor's client-related projects, and shall not be licensed, transferred, or otherwise conveyed to any other party. SECTION 15. RISK OF LOSS If the Software Technology and Databases or any documentation relating to the Software Technology and Databases is lost or damaged during shipment, Licensor shall replace that which is lost or damaged, together with necessary program storage media at no additional charge, to Licensee. If the Software Technology and Databases is lost or damaged while in possession of Licensee, Licensor will replace it and the Licensee will reimburse the Licensor for all costs incurred by Licensor in providing that replacement. SECTION 16. INSTALLATION AND ACCEPTANCE Licensor, on or before July 31, 1997, shall deliver to the Licensee the Software Technology, Databases and all related documentation and shall oversee the installation of the same onto the Licensee's computer system for purposes of testing. The Licensee shall thereupon 9 10 have the right to test the Software Technology and the Databases from the period of that installation through September 30, 1997 to determine, in the discretion of the Licensee, if the Software Technology and the Databases will satisfy the Licensee's intended uses and expectations. The Licensor, at no cost to the Licensee, will provide timely responses to questions raised by the Licensee during this period and, if mutually agreed by the Licensor and Licensee, the Licensor will make modifications to the Software Technology and the Databases to conform to the Licensee's uses and expectations. If, during such period, the Licensee determines that the Software Technology and the Databases are satisfactory for its intended uses and expectations, then the Licensee shall deliver a written notice to the Licensor ("the Acceptance Notice") on or before September 30, 1997 and include with that Acceptance Notice a check for the License Fee as required in Section 10.1. If the Licensee delivers the Acceptance Notice and the check for the License Fee on or before such date, then this Agreement shall remain in effect, the Licensee may retain the copies of the Software Technology and the Databases delivered by the Licensor and the Licensor and the Licensee shall proceed with this Agreement in accordance with its terms. If the Licensee does not deliver such Acceptance Notice and such check for the License Fee by such date, then this Agreement shall automatically terminate, the Licensee shall immediately at its expense return to the Licensor the Software Technology and the Databases (including all copies or extracts thereof made by Licensee during the period of possession) and upon such return, except for the obligations of confidentiality contained in Section 8, all rights and obligations of the Licensor and the Licensee under this Agreement shall be null, void, and of no further effect. The Licensee expressly acknowledges that its rights to use, copy, adapt, modify, enhance or otherwise exploit the Software Technology and the Databases shall not arise and become effective unless and until the Licensee delivers the Acceptance Notice and the check for the License Fee on or before the date specified above. SECTION 17. INJUNCTIVE RELIEF Because unauthorized use of the Software Technology and Databases or dissemination of information regarding the Software Technology and Databases may substantially diminish the value of such materials and irreparably harm the parties, if either party is threatened with disclosure of the information covered by this Agreement or if either party breaches this Agreement, the potentially harmed or actually harmed party shall be entitled to equitable relief (including, but not limited to, injunctive relief without the need to post a bond therefor), in addition to other remedies afforded by the law. SECTION 18. ASSIGNMENT Except as hereinafter provided, neither Licensor nor Licensee shall have the right to assign this Agreement without the prior written consent of the other party hereto, which consent shall not be unreasonably withheld. Each party acknowledges that consent to an assignment may be withheld and shall be considered reasonable if, as a result of such assignment, a third party who or which is a competitor of the non-assigning party will be the assignee or an affiliate of the 10 11 assignee. Each party acknowledges that the prohibition against assignments in this Section will apply not only to direct sales or assignments but also to indirect sales or assignments by reason of a merger of Licensor or Licensee into or with any other entity or a sale of substantially all of the assets or purchases a majority interest in the voting stock or otherwise assumes the business of the Licensor or Licensee. Any purported assignment not in accordance with this Section 18 shall be void and not merely voidable. When assigned as permitted herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of the parties hereto. SECTION 19. TERMINATION 19.1 This Agreement shall terminate as follows: 19.1.1 This Agreement shall automatically terminate as of September 30, 1997 unless, on or prior to that date, the Licensee delivers to the Licensor the Acceptance Notice and the check for the License Fee as required in Section 16.1. 19.1.2 The Licensee reserves the right to terminate this Agreement at any time upon written notice delivered to the Licensor, with such termination to be effective on the fifth business day following the date of delivery of such notice (or such later date as may be specified by the Licensee in such notice). 19.1.3 If the Licensee breaches its obligation to pay any Royalty or other amount due to the Licensor under this Agreement on or before its due date and fails to remedy such breach within ten (10) days after written demand by the Licensor for payment, then the Licensor shall have the right, by delivery of written notice to the Licensee following the expiration of that 10-day period, to terminate this Agreement, effective immediately upon the date of delivery of such notice of termination. Acceptance of payment of such amount by Licensor prior to delivery of such notice shall constitute remedy of such breach. 19.1.4 If either party breaches any material obligation under this Agreement (other than an obligation which is addressed in Section 19.1.3) and fails to remedy such breach within thirty (30) days after their written notice by the non-breaching party demanding such remedial action, then the non-breaching party shall have the right, by delivery of written notice at any time on or after the expiration of such 30-day period, to terminate this Agreement effective immediately upon the date of such notice of termination. 19.1.5 If either party files a petition under chapter of the Bankruptcy Code, as amended, or for the appointment of a receiver, or if any involuntary petition in bankruptcy is filed against such party and said petition is not discharged with thirty (30) days, or if either party shall become insolvent or make a general assignment for the benefit of its creditors, or if the business or property of either party shall come into possession of its creditors or of a governmental agency or of a receiver, or if any proceedings supplementary to judgment shall be commenced against wither 11 12 party, or if any judgment against either party, not fully bonded shall remain unpaid in whole or in part for at least five (5) days after entry thereof, then, in any case, the other party may at its option terminate this Agreement. 19.2 Upon termination of this Agreement, the following shall apply: 19.2.1 Upon termination of this Agreement, except for termination as a result of breach by Licensor, Licensee shall promptly return to Licensor, at Licensee's sole cost and expense, in good repair, condition and working order, ordinary wear and tear resulting from proper use thereof alone excepted, all elements which comprise the Software Technology, including, without limitation, all documentation and other information delivered by Licensor to Licensee pursuant hereto, and all other documents, notes, and other materials specific to gastrointestinal absorption prediction, related to the Software Technology and Databases in Licensee's possession, together with written certification by an authorized officer of Licensee that the original and all copies of the Software Technology and Databases, including any unauthorized copies, and other related materials in Licensee's possession, are no longer in use and have been returned to Licensor or destroyed. 19.2.2 Licensee shall return to Licensor, at Licensee's sole cost and expense, in good repair, condition and working order, ordinary wear and tear resulting from proper use thereof alone excepted, all elements which comprise the Databases, including, without limitation, all documentation and other information delivered by Licensor to Licensee pursuant hereto, and all other documents, notes, and other materials specific to gastrointestinal tract absorption prediction and related to the Software Technology and Databases in Licensee's possession, together with written certification by an authorized officer of Licensee that the original and all copies of the Software Technology and Databases, including any unauthorized copies, and other related materials in Licensee's possession, are no longer in use and have been returned to Licensor or destroyed. Licensee shall not be responsible for returning those portions of the Databases that are in the public domain, or otherwise discoverable as described in Section 14.2, supra, or which the parties have mutually agreed will remain with the Licensee pursuant to a separate written agreement. 19.2.3 Licensee shall immediately discontinue all development, marketing, licensing, sale or other distribution of the Software Technology or the Databases. 19.2.4 Licensee shall immediately pay to the Licensor all Royalties and other amounts due to the Licensor under this Agreement for "net revenues" received by the Licensee prior to the effective date of termination. Licensee shall thereafter pay when and as due under the terms of this Agreement all Royalties payable to the Licensor for "net revenues" received by the Licensee from and after the termination of this Agreement. The Licensee shall pay to the Licensor when and as due under the terms of this Agreement any deficiency required to fund the minimum Royalty due under this Agreement for the 12-month period during which the termination of this Agreement occurred. For the 12-month period in which the term of the license terminates, the $50,000 minimum Royalty payable according to Section 10.2 will be proportionately adjusted, based upon the portion of the 12-month period during which the term of the license was in effect, based upon a 365-day year. 12 13 19.2.5 If either party files petition under any chapter of the Bankruptcy Code, as amended, or for the appointment of a receiver, or if any involuntary petition in bankruptcy is filed against such party and said petition is not discharged within thirty (30) days, or if either party shall become insolvent or make a general assignment for the benefit of its creditors, or if the business or property of either party shall come into the possession of its creditors or of a governmental agency or of a receiver, or if any proceedings supplementary to judgment shall be commenced against either party, or if any judgment against either party, not fully bonded shall-remain unpaid in whole or in part for at least five (5) days after entry thereof, then, in any case, the other party may at its option terminate this Agreement. SECTION 20. REFORMATION, SEVERABILITY AND SURVIVAL The provisions of this Agreement have been negotiated by sophisticated parties with equal bargaining power and the parties agree that such provisions are fair, reasonable and necessary under the circumstances. The provisions set forth herein are intended as separate covenants and if any of these provisions should ever be adjudicated to exceed the limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum limitations permitted by applicable law. If any one of such provisions is declared invalid for any reason whatsoever, and if any one of such provisions cannot be reformed as aforesaid, such ruling shall not affect the validity of the remainder of the provisions. The other provisions shall remain in effect as if the provisions had been executed without the invalid provisions. The parties hereby declare that they intend that the remaining provisions continue to be effective without any that have been declared invalid and not reformed as aforesaid. SECTION 21. GOVERNING LAW AND VENUE This Agreement shall be governed by, and construed in accordance with, the internal substantive laws of the State of California, without regard to choice of law or conflicts of law principles. Each of the parties hereto recognizes and hereby irrevocably consents to the exclusive jurisdiction over it or him, as the case may be, of the Federal District Court for the Central District of California or the Superior Court of California, County of Los Angeles, in connection with any action or proceeding (whether it be for contract or tort, at law or in equity, or otherwise) arising out of or relating in any way to this Agreement, or any other document relating hereto or delivered in connection with the transactions contemplated hereby. 13 14 SECTION 22. REPRESENTATION BY COUNSEL Each party hereto represents and agrees with the others that it has been represented by, or had the opportunity to be represented by, independent counsel of its own choosing, and that it has had the full right and opportunity to consult with its respective attorneys, that to the extent, if any, that it desired, it availed itself of this right and opportunity, that each party is fully aware of the contents thereof and its meaning, intent and legal effect, and that its authorized officer is competent to execute this Agreement and has executed this Agreement free from coercion, duress or undue influence. SECTION 23. NOTICES All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been delivered three business days after having been mailed in a general or branch U.S. post office and enclosed in a registered or certified post-paid envelope; one business day after having been sent by overnight courier; when telecopied on a business day, or otherwise on the next succeeding business day thereafter; and, in each case, addressed to the respective parties at the addresses stated below or to such other changed addresses the parties may have fixed by notice as provided herein: To the Licensor: TSRL, Inc. 540 Avis Drive - Suite A Ann Arbor, MI 48108 With a copy to (not in lieu of notice to Licensor) James R. Beuche Hooper, Hathaway, Price, Beuche, & Wallace 126 South Main Street Ann Arbor, MI 48104 To the Licensee: Simulations Plus, Inc. 40015 Sierra Highway, Suite B110 Palmdale, CA 93550 Attention: Walter S. Woltosz President Telephone 805-266-9294 Facsimile 805-266-9394 With a copy to (not in lieu of notice to Licensee) Asher M. Leids, Esq. Susan H. Tregub, Esq. 14 15 Donahue, Mesereau & Leids LLP 1900 Avenue of the Stars, Suite 2700 Los Angeles, CA 90067 Telephone (310) 277-1441 Facsimile (310) 277-2888 SECTION 24. FEES AND COSTS Except as otherwise provided herein, in the event of any claim or controversy relating to this Agreement or the breach of this Agreement and any action or proceeding brought by Licensor or Licensee against the other (whether it be for contract or tort, at law or in equity, or otherwise) the substantially prevailing party in such action or proceeding will be entitled to recover from the other its costs and expenses incurred in taking or defending such action or proceeding, including the appeal of such action, and including reasonable fees of attorneys and other technical advisors. SECTION 25. CAPTIONS The captions used in this Agreement are solely for the convenience of the parties hereto and such captions do not constitute a part of this Agreement. SECTION 26. COUNTERPARTS This Agreement may be executed by the parties in two or more counterparts, each of which together shall constitute one and the same instrument. SECTION 27. ENTIRE AGREEMENT 27.1 This Agreement sets forth the entire agreement of the parties hereto with respect to the transactions contemplated hereby. This Agreement may not be amended except by an instrument in writing signed by the parties hereto, and no claimed amendment, modification, termination or waiver shall be binding unless in writing and signed by the party against whom or which such claimed amendment, modification, termination or waiver is sought to be enforced. 27.2 This Agreement merges and supersedes all prior and contemporaneous agreements, assurances, representations, and communications between the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement 15 16 effective as of the date shown above. Licensor Licensee By: /s/ Gordon L. Amidon By: /s/ Walter S. Woltosz --------------------------- ---------------------------------- Title: Chairman, TSRL Inc. Title: President, Simulations Plus, Inc. --------------------------- ---------------------------------- Date: July 7, 1997 Date: July 9, 1997 16 17 EXHIBIT A Functional Specifications of the Software Technology and Databases The Software Technology and Databases are more particularly described and identified as "Gastro" which can be identified according to the following models: 1. 17 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 YEAR AUG-31-1997 SEP-01-1996 AUG-31-1997 2,156,761 0 390,051 15,000 222,798 2,812,036 384,842 200,869 3,777,725 368,967 0 0 0 3,350 3,349,681 3,777,725 2,493,101 2,493,101 1,252,343 2,410,045 0 0 348,858 (1,475,277) (38,800) (1,436,477) 0 0 0 (1,436,477) 0.57 0.57
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