SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2004
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1937
For the transition period from _________ to _________
Commission file number: 001-32046
SIMULATIONS PLUS, INC.
(Name of small business issuer in its charter)
CALIFORNIA
(State or other jurisdiction)
95-4595609
(I.R.S. Employer Identification No.)
1220 W. AVENUE J
LANCASTER, CA 93534
(Address of principal executive offices including zip code)
(661) 723-7723
(Issuer's telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, 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. [X]
The issuer's revenues for the fiscal year ended August 31, 2004 were
approximately $5,207,000.
As of November 24, 2004, the aggregate market value of the voting stock
held by non-affiliates of the issuer (1,550,343 shares) was approximately
$7,674,198 based upon the November 24, 2004 closing price ($4.95) of such stock
on such date.
As of November 24, 2004, the number of outstanding shares of the
issuer's Common Stock was 3,581,343.
SIMULATIONS PLUS, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED AUGUST 31, 2004
Table of Contents
Page
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PART I
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Item 1. Description of Business 1
Item 2. Description of Property 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
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Item 5. Market for Common Stock and Related Stockholder Matters 11
Item 6. Management's Discussion and Analysis or Plan of Operation 12
Item 7. Financial Statements 18
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 18
Item 8A. Controls and Procedures 18
PART III
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Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 19
Item 10. Executive Compensation 21
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Items 23
Item 12. Certain Relationships and Related Transactions 25
Item 13. Exhibits and Reports on Form 8-K 25
Item 14. Principal Accountant Fees and Services 27
Signatures 28
Financial Statements F-1
Exhibits
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-KSB, OR THE "REPORT," ARE
"FORWARD-LOOKING STATEMENTS." THESE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE
NOT LIMITED TO, STATEMENTS ABOUT THE PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS OF SIMULATIONS PLUS, INC., A CALIFORNIA CORPORATION (REFERRED TO IN
THIS REPORT AS THE "COMPANY") AND OTHER STATEMENTS CONTAINED IN THIS REPORT THAT
ARE NOT HISTORICAL FACTS. FORWARD-LOOKING STATEMENTS IN THIS REPORT OR HEREAFTER
INCLUDED IN OTHER PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, OR THE "COMMISSION," REPORTS TO OUR STOCKHOLDERS AND OTHER
PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY US INVOLVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE OUR ACTUAL RESULTS,
PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE
RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON
MANAGEMENT'S BEST ESTIMATES BASED UPON CURRENT CONDITIONS AND THE MOST RECENT
RESULTS OF OPERATIONS. WHEN USED IN THIS REPORT, THE WORDS "EXPECT,"
"ANTICIPATE," "INTEND," "PLAN," "BELIEVE," "SEEK," "ESTIMATE" AND SIMILAR
EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS,
BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THERE
ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS, INCLUDING OUR
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHER FACTORS.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
--------
Simulations Plus, Inc. (the "Company" or "Simulations Plus", or "we" or "our")
and its wholly owned subsidiary, Words+, Inc. ("Words+") produce different types
of products: (1) Simulations Plus, incorporated in 1996, develops and produces
modeling and simulation software for use in pharmaceutical research and for
education, and also provides contract research services to the pharmaceutical
industry, and (2) Words+, founded in 1981, produces computer software and
specialized hardware for use by persons with disabilities, as well as a personal
productivity software program called Abbreviate! for the retail market.
SIMULATIONS PLUS
----------------
PRODUCTS
--------
We currently offer three software products for pharmaceutical research:
GastroPlus(TM), QMPRPlus(TM), and QMPRchitect(TM).
GastroPlus is a computer program that simulates how drugs are absorbed in the
human gastrointestinal tract and in a number of standard laboratory animals. The
simulation has equations for the movement of the drug through the
gastrointestinal tract, how fast it dissolves in the stomach and intestines,
whether it is converted to a different molecular form by chemical reactions or
by metabolism by enzymes in the gastrointestinal tract, and how fast it is
absorbed through the intestinal wall into the blood stream. If some additional
inputs are provided, it also simulates the amount of drug in the blood plasma
versus time. With an optional module called PDPlus(TM), the program can also
simulate how a drug affects the body, such as reducing pain, reducing blood
pressure, reducing depression, and adverse side effects.
1
We believe GastroPlus is the "gold standard" for simulation of oral drug
absorption in the pharmaceutical industry. In addition to major pharmaceutical
companies, recent sales have included a number of generic drug companies and
drug delivery companies (companies that design the tablet or capsule for a drug
compound that was developed by another company). Although these companies are
considerably smaller than the pharmaceutical giants, they can also save
considerable time and money using our software tools. We believe this part of
the industry, which includes hundreds of companies, represents major growth
potential for GastroPlus.
In 1998, we signed a License Agreement with Therapeutic Systems Research
Laboratories, Inc. ("TSRL"), Ann Arbor, Michigan, to obtain exclusive rights to
TSRL's technology and database, including data from nearly 60 laboratory
experiments to measure the intestinal permeability of drug compounds in human
and/or rat. As a part of this License Agreement, we are also entitled to ongoing
consulting assistance in the development and further enhancement of the
GastroPlus absorption simulation model from TSRL staff, including Dr. Gordon
Amidon. We believe that the strategic advantage of exclusive access to TSRL's
database, technology and expertise, combined with our own expertise in
absorption, pharmacokinetics, and pharmacodynamics simulation, resulted in
GastroPlus becoming the de facto standard for oral drug absorption simulation
and analysis within the pharmaceutical industry.
We are aware that other companies have developed competitive software; however,
based on customer feedback, we believe that the competitive threat to GastroPlus
is limited. We believe that the Metabolism and Transporter Module, the PDPlus
module, and the ongoing upgrades we have made to the core simulation have been
significant advances in the state-of-the-art of oral drug absorption,
pharmacokinetics, and pharmacodynamics analysis. The PBPKPlus(TM) module now in
final development will further extend the utility of GastroPlus within the
industry. "PBPK" stands for physiologically based pharmacokinetic modeling,
wherein the concentration of drug in each of many different tissues is
calculated. Without PBPK modeling, pharmacokinetics is usually calculated using
one, two, or three arbitrary "compartments" that are not associated with any
particular tissues.
Our recognized expertise in oral absorption and pharmacokinetics is evidenced by
the fact that our staff members have been invited speakers or presenters at over
40 prestigious scientific meetings worldwide in the past three years. We also
conduct contracted studies for customers who prefer to have studies run by our
scientists rather than to license our software and train someone to use it.
During the fourth quarter, we received our largest consulting contract to date
and we believe we were able to help a customer avoid a costly human trial that
would have almost certainly failed.
In addition to simulation software, we produce software that consists of
statistically significant numerical models that predict various properties of
chemical compounds from just their molecular structures. When drug companies try
to find new drugs, they search through thousands or millions of potential
molecular structures (combinations of atoms arranged in different ways to make
molecules, most of which have never existed before). In order for a new molecule
to become an approved drug, it must have acceptable values for all of its
properties, such as solubility (e.g., how much can be dissolved in a glass of
water), permeability (how well it gets absorbed through the intestinal wall),
and toxicity, as well as its intended therapeutic effect.
QMPRPlus is a different kind of program that provides estimates for
approximately 50 properties of new drug-like molecules with only their
structures as input. Recent product improvements included the prediction of
ionization constants ("pKa's") for molecules, which tells chemists whether the
molecules will ionize (add or give up hydrogen atoms) at different pH levels in
the body. Ionization is especially important because it has a major effect on
many other properties, like solubility. QMPRPlus is now one of the few programs
available in the world that provides accurate prediction of pKas, and we believe
the predictive accuracy of the pKa model in QMPRPlus is unsurpassed.
2
Another new QMPRPlus development was the addition of a prediction based on
simulation for the percent of a new drug that would be absorbed at dose levels
of 1, 10, 100, and 1000 milligrams. This capability lets chemists estimate which
molecules in a series would be likely to have absorption that depends on dose,
and which would not. Some molecules show decreasing percent absorbed as dose
increases because of low solubility and/or poor dissolution.
Finally, we have begun to add an important new capability for toxicity
prediction to QMPRPlus. Toxicity prediction was identified by the U.S. Food and
Drug Administration as a critical need in a white paper released in March 2004.
We released our first toxicity prediction in the fourth quarter, which predicts
whether new molecules are expected to bind to the estrogen receptor. A new
Toxicity Module with at least six different toxicity models is expected to be
released by the end of calendar 2004. There are at least hundreds of types of
toxicity, and we will continue to add toxicity predictions as we are able to
access additional toxicity data.
With these new capabilities, we believe QMPRPlus combines the most comprehensive
and accurate set of predictions for Absorption, Distribution, Metabolism,
Excretion and Toxicity (ADMET) available today.
GastroPlus and/or QMPRPlus are now used by almost every major and a number of
smaller pharmaceutical, drug delivery, and biotech companies in the U.S.,
Europe, and Japan. Our number of customers has grown continuously since our
first product releases in 1998, in spite of the frequent mergers in the
pharmaceutical industry, which reduces the number of customers (but not always
the number of sites and licenses).
Our third core product, QMPRchitect, was released in July of 2003. This
powerful program is used to generate the predictive models used in QMPRPlus in a
small fraction of the time once required to build these models. For example, the
six toxicity models in our new QMPRPlus Toxicity Module were developed in a
matter of a few weeks. Most of that time was spent in cleaning up the databases
(which seem to always contain a number of errors). Prior to the availability of
QMPRchitect, we would have needed as much as three months for each of the six
models to obtain similar results. We believe other toxicity prediction programs
on the market were built over periods of years. We believe the strategic
advantage of having both QMPRPlus and QMPRchitect, which are designed to work
seamlessly together, gives us a distinct advantage as we enter the market for
toxicity prediction.
Pharmaceutical companies spend enormous amounts of money conducting a wide
variety of experiments each year. Using such data to build predictive models can
provide a second return on investment; however, in the past, model-building has
traditionally been a tedious activity that required a specialist. With QMPRPlus
and QMPRchitect, scientists without model-building experience can use their own
experimental data to quickly create high quality predictive models. For example,
if a company has experimental data for solubility for 500 new molecules out of
50,000 molecules that were somewhat similar to each other (called a "chemical
series"); it can use QMPRPlus and QMPRchitect to make a predictive model for
solubility that would be a good predictor for the other 49,500 molecules in the
same series. In the past, a modeling specialist might have needed 2-3 months to
produce equivalent models. With QMPRchitect, the time is now reduced to a few
hours or days for a person with minimal training in modeling.
We continue to enhance GastroPlus, QMPRPlus, and QMPRchitect, and we are
developing new core products to add to our catalog of software for
pharmaceutical research. Two products scheduled to be released during fiscal
year 2005 are DDDPlus(TM) and MembranePlus(TM). These products are described
below.
In addition to our pharmaceutical software, we also produce a set of
award-winning science experiment simulations (computer programs for Windows and
Macintosh computers) for middle school and high school students under the
umbrella name of FutureLab(TM). These simulations incorporate the equations of
chemistry and physics for each experiment (optics, electrical circuits, gravity,
universal gravitation, and ideal gases), and allow students to design and
conduct their own experiments in a virtual laboratory environment. Although
development of FutureLab software was discontinued in 1998, low-level sales have
continued through distributors in the U.S., U.K. Australia, and New Zealand.
3
CONTRACT RESEARCH SERVICES
--------------------------
We offer contract research services to the pharmaceutical industry in the area
of gastrointestinal absorption, pharmacokinetics, structure-property model
building, and related technologies. These studies provide us an additional
source of revenue, as well as a means to introduce our software products to new
customers. Such studies are also beneficial to us to validate and enhance our
products by studying actual data in the pharmaceutical industry. In the fourth
quarter of fiscal year 2004, we received our largest study contract to date. We
believe the results of that study saved our customer from conducting a human
trial that would have inevitably failed. The business of contracted studies is
growing, and we believe it could contribute significantly to our revenues and
earnings; however, we plan to control growth in this area such that it does not
adversely impact our product development stream.
PHARMACEUTICAL SIMULATIONS SOFTWARE PRODUCT DEVELOPMENT
-------------------------------------------------------
In the area of simulation software for pharmaceutical research, we are
developing additional modules for GastroPlus, QMPRPlus, and QMPRchitect.
Although all of our development work cannot be disclosed for competitive
reasons, some of our development efforts include:
(1) PBPKPlus Module
-----------------------
The PBPKPlus Module for GastroPlus was demonstrated at the American Association
of Pharmaceutical Scientists conference in early November 2004. We expect the
module to be fully released for sale in late calendar 2004. This module enables
researchers to predict the amount of drug that reaches different body tissues
and organs. This is an important new capability because it is one of the most
promising technologies for predicting human pharmacokinetics from animal data
(pharmacokinetics refers to what happens to a drug after it enters the body).
With actual human data, this capability will enable scientists to predict the
concentration of drug in various body tissues, which should contribute to a
better understanding of both therapeutic and adverse effects. Without the
ability to predict these effects, clinical trial costs can soar when trials must
be repeated to determine proper dosing levels. We believe the integration of the
GastroPlus absorption model with a complete PBPK capability provides the most
comprehensive simulation capability currently available. This capability was
developed in response to customer requests from several of the largest
pharmaceutical companies in the world.
(2) Multiple Particle Size Dissolution Model
--------------------------------------------
The current dissolution model in GastroPlus uses a single "effective" particle
size. While this has adequately represented the dissolution of most tablets,
capsules, and suspensions to date, formulation researchers know that real dosage
forms do not consist of particles that are all one size. Instead, there is a
distribution of particle sizes from smaller than average to larger than average.
Smaller particles dissolve faster than larger particles. For some drugs, this
results in dissolution behavior that is not well-modeled with a single effective
particle size. This new model will allow formulation researchers to assess the
effects of different particle size distributions on dissolution and absorption.
The multiple particle size model has already been demonstrated in our
DDDPlus(TM) software, described below. We plan to incorporate it into GastroPlus
as part of a Formulation Module in calendar 2005.
(3) DDDPlus(TM)
---------------
The DDDPlus (Dose Disintegration and Dissolution Plus) project originally began
in 2000, and proceeded at a slow pace until 2003, in between other higher
priority projects. We demonstrated a nearly final version of DDDPlus at the
American Association of Pharmaceutical Scientists conference in early November
4
2004. We expect to release the full version by the end of calendar 2004. DDDPlus
simulates how different tablets and capsules disintegrate and dissolve during in
vitro (laboratory) dissolution experiments. The program includes the effects of
changing formulation excipients (additives that are not the active drug), and
changing the experimental apparatus and fluids used in the experiment. The
program can be used to simulate the effects of changing formulation variables or
changing experimental conditions, and can be used to fit new mathematical models
to understand observed data. We believe this tool will be a valuable asset for
formulation scientists as they search for optimum formulations that provide
desirable properties at minimum cost, as well as optimum experimental conditions
under which to measure disintegration and dissolution to best predict what will
happen in human.
(4) QMPRPlus upgrades
-------------------------
We continue to add new molecular descriptors and new predicted ADMET properties
to QMPRPlus. We announced the release of QMPRPlus 5.0 during the fourth quarter
of fiscal year 2004, which incorporates an optional pKa prediction module that
we believe is the most accurate and cost-effective pKa predictor available
today. This is an important new capability, and comes after two years of
intensive development. The pKa predictor in QMPRPlus is "thermodynamically
accurate" in that it is based on equations that represent the full set of
interactions that occur when a molecule has more than one ionization site
("microequilibria"). We believe that this is the only pKa prediction available
that uses this accurate method.
In fiscal year 2003 we completed the development of a module for predicting the
fraction of a dose that will be absorbed at dose levels of 1, 10, 100, and 1000
milligrams ("Fraction Absorbed Module"), which required the user to provide
their own accurate pKa values. Now, the pKas are calculated internally. Other
enhancements have been included that allow the program to account for a wider
variety of molecular features ("descriptors") to be used in its mathematical
models.
At the American Association of Pharmaceutical Scientists conference in early
November 2004, we showed a preview of the next release of QMPRPlus, which
includes a new Toxicity Module and the ability to depict the structures of
molecules in the spreadsheet output. Structure depiction is an important tool
for chemists and has been requested repeatedly by our customers. This version is
expected to be released in December 2004.
(5) MembranePlus(TM)
--------------------
A second new core product, MembranePlus, is expected to be released in early
calendar 2005. This program is in alpha test at this time. MembranePlus is a
simulation of in vitro permeability experiments (experiments that measure how
well new drugs are able to go through layers of cells or cell-like materials.
The value of such a simulation is in understanding how variations in
experimental conditions can affect the results of these experiments. A
significant problem in the industry today is that results from these experiments
can vary by 100 to 1 between different labs. Through accurate simulation, we
believe that an understanding can be gained for the causes of these variations,
and therefore how to better apply the results to predict permeability in human,
which is the purpose for running these experiments.
MARKETING AND DISTRIBUTION
--------------------------
We market our pharmaceutical simulation software products, and research services
based on our software, to pharmaceutical and biotech companies, and to various
companies that serve them, through attendance and presentations at scientific
meetings, exhibits at trade shows, seminars at pharmaceutical industry companies
and government agencies, through our web pages on the Internet, and to our
compiled database of prospect and customer names. Our scientific team has also
been our sales and marketing team. We believe that this has been more effective
than a separate sales team for several reasons: (1) customers appreciate talking
directly with developers who can answer a wide range of technical questions
about methods and features, (2) our scientists benefit from direct customer
contact by gaining an appreciation for the environment and problems of the
customer, and (3) the relationships we build through scientist-to-scientist
contact are stronger than through salesperson-to-scientist contacts. We are
currently considering candidates for an additional full-time position in
business development, marketing and sales. The addition of a full-time person,
along with other staff members who have now reached a level of expertise that
enables them to conduct on-site seminars, presentations at scientific meetings,
and customer training, is a major increase in manpower for these activities.
Management believes the devotion of additional man-hours to these activities has
the potential to increase sales.
5
We use our web pages on the Internet for such activities as providing product
information, providing software updates, and as a forum for user feedback and
information exchange. We have cultivated significant market share in North
America, Europe, and in Japan, and Internet and e-mail technologies have had a
strong positive influence on our ability to communicate with existing and
potential customers worldwide.
In August 1998, we signed a distribution agreement with Teijin Systems
Technology Ltd. (TST), a division of Teijin Limited of Tokyo, Japan. On April 1,
2001 TST merged with the Infocom Corporation of Japan. We terminated the
agreement with Infocom in the fourth quarter of fiscal year 2004. We have now
appointed Northern Science Consulting (NSC) of Sapporo, Japan, as our exclusive
distributor for Japan. The new agreement with NSC provides for direct billing of
Japanese customers by Simulations Plus, with a commission to be paid to NSC on
each sale. We expect this arrangement to increase revenues and earnings from our
Japanese markets. Sales in Japan generated approximately 27% of our
pharmaceutical software revenues in fiscal year 2004.
PRODUCTION
----------
Our major pharmaceutical software products are designed and developed entirely
by our development team at its Lancaster, California facility. The chief
materials and components used in the manufacture of simulation software products
include CD-ROMs and instruction manuals, which are also produced in-house.
Robotic CD burner technology along with in-house graphic art and engineering
talent enable us to accomplish this production in a cost-efficient manner.
COMPETITION
-----------
In providing software-based research services to the pharmaceutical industry,
and in marketing simulation software for these purposes, we compete against a
number of established companies that provide screening, testing and research
services, as well as products to these industries that are not based on
simulation software. There are also software companies whose products do not
compete directly, but are sometimes closely related. Our competitors in this
field include companies with financial, personnel, research and marketing
resources that are greater than ours. While management believes there is
currently no significant competitive threat to GastroPlus, QMPRPlus, or
QMPRchitect, competition should be expected at some time in the future. We are
aware of several other companies that presently offer simulation or modeling
software, or simulation-software-based services, to the pharmaceutical industry.
Major pharmaceutical companies conduct drug discovery and development efforts
through their internal development staffs and through outsourcing some of this
work. Smaller companies need to outsource a greater percentage of this research.
Thus, we compete not only with other software suppliers, but also with the
in-house development teams at some pharmaceutical companies.
We are not aware of any significant competition in the area of gastrointestinal
absorption simulation. We learned in 2003 that two other companies now offer
absorption simulation software: Cyprotex in the U.K., and a division of Bayer
Technologies AG in Germany. None of our customers have indicated significant
interest in these products, and both new licenses and license renewals for
GastroPlus have continued to grow in spite of this new competition.
We believe the key factors in competing in this field are our ability to develop
simulation and modeling software and related products and services to
effectively predict the ADMET-related behaviors of new drug-like compounds, our
ability to develop and maintain a proprietary database of results of physical
experiments that will serve as a basis for simulated studies and empirical
models, our ability to continue to attract and retain a highly skilled
scientific and engineering team, and our ability to develop and maintain
6
relationships with research and development departments of pharmaceutical
companies, universities and government agencies. Although we now have a 5-year
record of sustained growth in revenues and earnings, there can be no assurances
that we will be successful in providing these key factors in the future.
WORDS+
------
PRODUCTS
--------
Our wholly owned subsidiary, Words+, Inc. has been an industry technology leader
for over 23 years in introducing and improving augmentative and alternative
communication ("AAC") and computer access software and devices for disabled
persons, and intends to continue to be at the forefront of the development of
new products. We will continue to enhance our major software products, E Z Keys
and Talking Screen, as well as our growing line of hardware products. We will
also consider acquisitions of other products, businesses and companies that are
complementary to our existing augmentative and alternative communication and
computer access business lines. We announced the purchase of the Say-it! SAM
technologies from SAM Communications, LLC of San Diego in December 2003. This
acquisition gave us our smallest, lightest augmentative communication system,
which is based on a Compaq iPAQ personal digital assistant (PDA). PDA-based
communication devices have been very successful in the augmentative
communication market, and this technology purchase has enabled us to move into
this market segment faster and at lower cost than developing the product
ourselves.
At the Closing the Gap conference in October 2004, we demonstrated our new
Windows CE tablet-computer-based augmentative communication system, called the
SAM Tablet, based on a version of the Say-it! SAM software. This new device
received enthusiastic responses from both potential customers
and Words+ dealers alike. We also showed an improved table mount for PC's and
other devices. We believe that tablet-based communication systems are in high
demand in this market, and that this addition fills a significant gap we
had in our product
line.
MARKETING AND DISTRIBUTION
--------------------------
We market augmentative and alternative communication products through a network
of employee representatives and independent dealers and resellers.
At the present time we have 35 sales representatives worldwide: 2
salary/commission salespersons in California, 12 independent distributors and 8
independent resellers in the U.S., and 15 sales representatives overseas - 4 in
Australia, and 1 each in New Zealand, Canada, England, Norway, Finland, The
Netherlands, France, Israel, Japan, Korea and Malaysia. We also have two inside
sales/support persons who answer e-mails and telephone inquiries on our
toll-free telephone line and who provide technical support. Additional outside
sales persons and independent dealers and resellers are being actively recruited
at this time.
We direct our marketing efforts to speech pathologists, occupational therapists,
rehabilitation engineers, special education teachers, disabled persons and
relatives of disabled persons. We maintain a mailing list of over 10,000 people
made up of these professionals, consumers and relatives, and we mail various
marketing materials to this list. These materials include our catalog of
products and announcements regarding new and enhanced products.
We participate in industry conferences held worldwide that are attended by
speech pathologists, occupational and physical therapists, special education
teachers, parents and consumers. We and others in the industry demonstrate our
products at these conferences and present technical papers that describe the
application of our technologies and research studies on the effectiveness of our
7
products. The Communication Aids Manufacturers Association (CAMA), co-founded by
our CEO over ten years ago, organizes cooperative tours of company
representatives in this field that travel throughout the world providing
seminars and workshops for professionals, consumers and parents in the field. We
advertise in selected publications of interest to persons in this market.
We estimate that for approximately 50% of our sales of AAC software and
hardware, some or all of the purchases are funded by third parties such as
Medicaid, Medicare, school special education budgets, private insurance or other
governmental or charitable assistance. Medicare began providing coverage of
augmentative communication devices on January 1, 2001.
Our personnel provide advice and assistance to customers and prospective
customers on obtaining third-party financial assistance for purchasing our
products. Third party funding has grown slowly but continuously for 20 years.
The addition of Medicare coverage for AAC devices in 2001 was the largest single
increase in third party funding in our history. Our Medicare/Medicaid sales have
grown from approximately 5% of total sales to approximately 45% in the last
three years. Such sales are subject to funding caps that limit the amounts paid
for our products, and payment by some agencies can be slow, making this market
segment somewhat more difficult than others.
PRODUCTION
----------
Disability software products are either loaded onto computer hard disk drives by
our employees or copied to diskettes or CD-ROM, which is performed in-house. We
purchase microprocessors that are part of dedicated devices such as
MessageMates(TM). Most software customers also buy their notebook personal
computers from us, which we purchase at wholesale prices and resell at a markup.
We design our cases, printed circuit boards, labels and other components of
products such as MessageMates and CommPacs(TM). We outsource the extrusion,
machining and manufacturing of certain components. All final assembly and
testing operations are done by our employees at our facility.
Our products are shipped from our Lancaster, California facility either directly
to the customer or to the salesperson, dealer or reseller. For major products,
the outside salesperson, dealer or reseller either delivers the product or
visits the customer after delivery to provide training.
COMPETITION
-----------
The AAC industry in which we operate is highly competitive and some of our
competitors have greater financial and personnel resources than ours. The
industry is made up of about six major competitors including Words+, and a
number of smaller ones. Based on personal conversations with our outside dealers
and customers, we believe that the other major competitors each have revenues
ranging from $3 Million to under $50 Million, so that there are no large
companies in this industry.
We believe 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 we believe
price is not as important to the customer as obtaining the product most suited
to the customer's needs, along with strong after-sale support. We believe that
we are a leader in the industry in developing and producing some of the most
technologically advanced products and in providing quality customer training and
technical support. The prices of our products are among the highest in the
industry and we have one of the smallest sales forces and dealer networks in the
industry. We believe that the potential exists for significant increases in the
sales of our disability products; however, there are few barriers to entry in
the form of proprietary or patented technology or trade secrets in this
industry. While we believe that cost of product development and the need for
specialized knowledge and experience in this industry would present some barrier
to entry for new competition, other companies may enter this industry, including
8
companies with substantially greater financial resources than ours. Furthermore,
companies already in this industry may increase their market share through
increased technology development and marketing efforts.
TRAINING AND TECHNICAL SUPPORT
------------------------------
We believe customer training and technical support are important factors in
customer satisfaction for both our pharmaceutical and disability products, and
we believe we are an industry leader in providing customer training and
technical support. For pharmaceutical software, we provide in-house seminars at
the customer's site to demonstrate GastroPlus, QMPRPlus, and QMPRchitect. We
have conducted on-site seminars to thousands of scientists at many
pharmaceutical and related research companies in North America, Europe and
Japan. These seminars often serve as initial training in the event the potential
customer decides to license or evaluate any of our software. Strong technical
support is provided after the sale in the form of on-site training (at
customer's expense), telephone, fax, and e-mail assistance to users, as well as
software upgrades, if any, that may be released during the customer's license
period. Software licenses are on an annual basis, and include all maintenance
upgrades to the modules licensed by the customer during the license year.
For disability products, our salesperson, dealer or reseller provides initial
training to the customer for major systems -- typically two to four hours. This
training is typically provided not only to the user of the product but also to
the person's speech pathologists, teachers, parents and others who will be
assisting the user. This initial training for the purchase of full systems is
often provided as a part of the price of the product. We and our dealers charge
a fee for additional training and service calls.
Technical support for both pharmaceutical software and disability products is
provided by our life sciences team and our inside sales and support staff based
at our headquarters facilities in Lancaster, California. We provide free
telephone support offering unlimited toll-free numbers in the U.S. and Canada,
and e-mail support for all of our pharmaceutical software and disability
products worldwide. Technical support for pharmaceutical software products is
minimal, averaging a few person-hours per month. Technical support for Words+
products varies from none for most customers to as much as several hours for
others. Words+ dealers usually train new customers at the customer's location,
which significantly reduces technical support demands on our staff.
RESEARCH AND DEVELOPMENT
------------------------
We believe that our ability to grow and remain competitive in our markets is
strongly dependent on significant investment into research and development
("R&D"). R&D activities include both enhancement of existing products and
development of new products. Development of new products is capitalized in
accordance with Financial Accounting Standards No. 86 and AICPA Statement Of
Position 98-1. R&D expenditures were approximately $736,000
during fiscal year 2004, of which $221,000 was capitalized. R&D expenditures
during fiscal year 2003 were approximately $601,000, of which $222,000 was
capitalized.
Our pharmaceutical business R&D activities during fiscal year 2004 were focused
on improving our GastroPlus, QMPRPlus, and QMPRchitect products, and
developing two new pharmaceutical software products, DDDPlus, and
MembranePlus. R&D activities for our Words+ subsidiary were focused on
improvement of our E Z Keys(TM) and Say-it! SAM(TM) software products, and the
development of a new product, the Windows CE-based SAM Tablet(TM).
9
EMPLOYEES
---------
As of November 25, 2004, we employed 23 full-time and 3 part-time employees,
including 10 in research and development, 5 in marketing and sales, 5 in
administration and accounting, 5 in production and 1 in repair. Three current
employees hold Ph.D.'s and one is a Ph.D. candidate in their respective science
or engineering disciplines and four additional employees hold one or more
Master's degrees. All but two of the senior management team and Board of
Directors hold graduate degrees. We believe that our future success will depend,
in part, on our ability to continue to attract, hire and retain qualified
personnel. The competition for such personnel in the pharmaceutical industry and
in the augmentative and alternative communication device and computer software
industry is intense. None of our employees is represented by a labor union, and
we have never experienced a work stoppage. We believe that our relations with
our employees are good.
PATENTS
-------
We own no patents, but we protect our intellectual property through copyrights
and trade secrecy. Our intellectual property consists primarily of source code
for computer programs and data files for various applications of those programs
in both the pharmaceutical software and the disability products businesses. In
the disability products business, electronic device schematics, mechanical
drawings, and design details are also intellectual property. The expertise of
our technical staff is a considerable asset closely related to intellectual
property, and attracting and retaining highly qualified scientists and engineers
is essential to our business.
EFFECT OF GOVERNMENT REGULATIONS
--------------------------------
Our pharmaceutical software products are tools used in research and development
and are not approved or approvable by the Food and Drug Administration or other
government agency. Approximately 33% of our products for the disabled are funded
by Medicare or Medicaid programs. Changes in government regulations regarding
the allowability of augmentative communication aids and other assistive
technology under such funding could affect our business. On January 1, 2001,
Medicare began funding augmentative communication devices for the first time.
Over our 23-year history, the trend has been toward increasing funding from
government agencies; however, there can be no assurance that government funding
for such devices will continue, or if it does continue, that our products will
continue to meet the requirements imposed for funding of such devices.
ITEM 2. DESCRIPTION OF PROPERTIES
We lease approximately 15,600 square feet of office space in Lancaster,
California. Our office lease expires in August 2005. The current monthly rent
for our offices is approximately $17,600. Although we received a proposal from
the lessor for a renewal of 5 years through August 2010, management is currently
considering other options.
ITEM 3. LEGAL PROCEEDINGS
While we may from time to time be involved in various claims, lawsuits or
disputes with third parties, we are not currently a party to any significant
litigation and are not aware of any significant pending or threatened litigation
against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of FY04.
10
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Common Stock is currently traded on the American Stock Exchange (AMEX) under
the symbol "SLP". According to records of our transfer agent, we had about 71
stockholders of record and approximately 600 beneficial owners as of August 31,
2004. The following table sets forth the low and high sale prices for the Common
Stock on the AMEX for the periods from March 17, 2004 to August 31, 2004 and on
the OTCBB under the symbol "SIMU" for the periods prior to March 17, 2004
indicated below in each of the last two fiscal years. The quotations quoted for
the over-the-counter market reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions. We have not
paid cash dividends on our Common Stock. We currently intend to retain our
earnings for future growth, and therefore do not anticipate paying cash
dividends in the foreseeable future. Any further determination as to the payment
of dividends will be at the discretion of our Board of Directors and will depend
among other things, on our financial condition, results of operations, capital
requirements and such other factors as the Board of Directors deems relevant.
LOW SALES PRICE HIGH SALES PRICE
--------------- ----------------
FY04:
Quarter ended August 31, 2004 . . . . . . . . . . . . . 4.52 3.22
Quarter ended May 31, 2004 . . . . . . . . . . . . . . 7.55 4.35
Quarter ended February 28, 2004 . . . . . . . . . . . . 7.55 4.20
Quarter ended November 30, 2003 . . . . . . . . . . . . 5.95 3.05
FY03:
Quarter ended August 31, 2003 . . . . . . . . . . . . . 2.00 3.10
Quarter ended May 31, 2003. . . . . . . . . . . . . . . 2.20 2.95
Quarter ended February 28, 2003 . . . . . . . . . . . . 1.45 3.50
Quarter ended November 30, 2002 . . . . . . . . . . . . 1.20 1.70
11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
REPORT.
RESULTS OF OPERATIONS
The following sets forth selected items from our statements of operations (in
thousands) and the percentages that such items bear to net sales for the fiscal
years ended August 31, 2004 ("FY04") and August 31, 2003 ("FY03").
FY04 FY03
---------------------- -----------------------
Net sales $5,207 100.0% $5,485 100.0%
Cost of sales 1,557 29.9 1,538 28.0
---------- ----------- ----------- -----------
Gross profit 3,650 70.1 3,947 72.0
---------- ----------- ----------- -----------
Selling, general, and administrative 2,508 48.2 2,302 42.0
Research and development 515 9.9 379 6.9
---------- ----------- ----------- -----------
Total operating expenses 3,023 58.1 2,681 48.9
---------- ----------- ----------- -----------
Income (loss) from operations 627 12.0 1,265 23.1
---------- ----------- ----------- -----------
Interest income 73 1.4
Interest expense, net (1) - (5) (0.1)
Loss on sale of assets - - (2) -
---------- ----------- ----------- -----------
Net income (loss) before taxes 699 13.4 1,258 22.9
---------- ----------- ----------- -----------
Provision for (benefit of) income taxes (138) (2.7) (1,248) (22.8)
---------- ----------- ----------- -----------
Net income (loss) 837 16.1% 2,506 45.7%
---------- ----------- ----------- -----------
FY04 COMPARED WITH FY03
-----------------------
NET SALES
---------
Our net sales for FY04 decreased by $278,000 or 5.1%, to $5,207,000 compared to
$5,485,000 for FY03. Sales from pharmaceutical and educational software
("Simulations Plus sales") decreased approximately $250,000, or 8.1%, and
Words+, Inc.'s sales decreased approximately $28,000, or 1.29% for the year. We
attribute the decrease in consolidated net sales to a decrease in pharmaceutical
software sales in FY04 compared with FY03, in addition to the slight decrease in
Words+ sales. The reason for the decrease in pharmaceutical software licenses
was that in FY03 we received an exceptionally large order for a modified ADME
Partners package, which offers multiple software licenses for multiple years. We
recognized the revenue from this $1.2 million dollar, 3-year license agreement
in full in FY03, except for a discount of $79,000 to record the receivable at
its net present value of $1,121,000. This method of revenue recognition is in
accordance with our understanding of SOP 97-2, 98-4, and 98-9 for software
revenue recognition. Although we received another modified ADME Partners license
agreement in FY03, the magnitude of this new order was much smaller than the
order obtained in FY03.
For Words+, our overall product sales were increased by sales of our new Say-it!
SAM(TM) product that was acquired in December 2003, which outweighed lower sales
for our TuffTalker(TM) product and larger discounts taken by Medicare/Medicaid.
The decrease was due primarily to a one-time service contract we received in
FY03, while no such service contract was received in FY04.
12
COST OF SALES
-------------
Our consolidated cost of sales for FY04 increased by $19,000 or 1.2%, to
$1,557,000 from $1,538,000 in FY03. As a percentage of sales, cost of sales was
29.9% for FY04, compared to 28.0% for FY03, a 1.9% increase. For Simulations
Plus, cost of sales increased $19,000, or 6.4%. A significant portion of this
increase is royalty expense, the result of a proportional increase in GastroPlus
sales (which are subject to royalty payment) over other software products. We
also had an increase in the systematic amortization of capitalized software
development costs since one new product, the pKa module for QMPRPlus, was
released for sale in early FY04. In accordance with SFAS No. 86, we began
amortizing our capitalized software development costs when the product was
offered for sale.
For the Words+ subsidiary, cost of sales for FY04 was almost the same as FY03.
As a percentage of sales, cost of sales was 52.4% in FY04, compared to 51.8% in
FY03; however, excluding the revenue from the one-time service contract in FY03,
which had no cost of materials, our percentage of cost of sales to product sales
declined to 52.4% in FY04 from 52.9% in FY03. Our restructuring of Words+ in the
4th quarter of FY04 overcame the lower profit margin Words+ generated in the
previous quarters of FY04. The percentage of cost of sales to product sales
improved in spite of an increase in Medicare/Medicaid orders, which have a lower
profit margin due to their required discounts, and a decrease in sales of higher
margin products such as MessageMate(TM).
GROSS PROFIT
------------
Consolidated gross profit decreased $297,000, or 7.5%, to $3,650,000 in FY04
from $3,947,000 in FY03, and the gross profit margin decreased 1.9%, to 70.1% in
FY04, compared to 72.0% in FY03, primarily due to the lower sales of
pharmaceutical software compared with the large ADME Partners order in FY03, in
addition to the slightly lower gross profit generated by Words+.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
Selling, general and administrative ("SG&A") expenses for FY04 increased by
$206,000, or 9.0%, to $2,508,000, compared to $2,302,000 for FY03. For
Simulations Plus, SG&A expenses increased $125,000, or 11.7%, primarily due to
increases in employee bonuses, travel expense, trade shows, printer/copier
operating lease, insurance, accounting/legal fees, investor relations fees,
American Stock Exchange listing fees, and
taxes paid on pharmaceutical software sales in Japan. These increases outweighed
decreases in annual bonuses to our President and Secretary, commission expense,
vacation expense, and depreciation.
For Words+, expenses increased $81,000, or 6.6%, due to increases in
administrative personnel wages including larger bonuses to employees in December
2003, payroll-related expenses, selling expenses such as catalogs and
commissions to independent sales representatives, travel expenses, trade shows,
depreciation expense, and insurance expense. These increases outweighed
decreases in other expenses such as subscriptions, postage, utilities, supplies,
and technical support costs.
13
RESEARCH AND DEVELOPMENT
------------------------
We incurred approximately $736,000 of research and development costs for both
companies during FY04. Of this amount, $221,000 was capitalized and $515,000 was
expensed. For FY03, we incurred approximately $601,000 of research and
development costs, of which approximately $222,000 was capitalized and
approximately $379,000 was expensed. The 22.5% increase in research and
development expenditure from FY03 to FY04 was due to greater development of
improvements to existing products (which are expensed, as opposed to new product
development efforts, which are capitalized), as well as increased R&D staff and
increases in salaries and bonuses.
INCOME FROM OPERATIONS
----------------------
During FY04, we generated income from operations of $627,000, as compared to
$1,265,000 for FY03. We attribute this decrease to the decrease in sales in
pharmaceutical software and services from the previous year (which included the
$1.2 million order), and losses in our Words+ subsidiary in the first three
quarters, as well as increases in cost of sales, selling, general and
administrative expense, and research and development expense.
INTEREST EXPENSE
----------------
Interest expense for FY04 decreased by $4,000, or 80.0%, to $1,000, compared to
$5,000 for FY03. Interest in FY04 was due primarily to interest expense on
leased equipment. Our strong cash flow enabled us to maintain our debt-free
position.
GAIN (LOSS) ON DISPOSAL OF ASSETS
---------------------------------
We sold out-dated office equipment in FY03, resulting a loss of $2,000. No such
loss occurred during FY04.
PROVISION FOR (BENEFIT OF) INCOME TAXES
---------------------------------------
For FY04, because of our net operating loss ("NOL") carry forward applicable to
Federal tax, and multiple tax credits applicable to both Federal and State, we
accrued only the minimum Franchise tax of $1,600 in the state of California for
the two companies. For FY03, the Company accrued a State Income tax provision
of $43,000. Although we had an NOL carried forward which was applied to our
Federal income tax liability, the State of California suspended the NOL carry
forward for two years beginning with fiscal years that began after January 2002,
resulting in a $43,000 tax provision to the state of California. However, due to
the Enterprise Zone Credit applicable to the Company, the actual tax payment to
California was the minimum Franchise tax of $1,600 for the two companies. This
change in FY03 estimated taxes resulted in a $35,000 tax benefit in FY04.
In FY04, the tax benefits from NOL and tax credits for $105,000 were recorded in
addition to the deferred tax assets of $1,291,000 recorded in FY03, resulting in
a new total deferred tax asset of $1,396,000. Because of our consistent growth
in revenue and improved net income (loss) for the last eight years, Management
determined that it is appropriate to assess Federal tax benefits at this time,
as is customary for profitable companies.
NET INCOME (LOSS)
-----------------
Net income for FY04 decreased by $1,669,000, or 66.6%, to $837,000, compared to
$2,506,000 for FY03. We attribute this decrease in net income to three major
reasons. First, as discussed above, a significant portion of the decrease was
caused by a release of a valuation allowance for deferred tax assets in FY03,
which relied heavily on Management's forecasts and estimates. In FY04, we
recorded a tax benefit of $105,000 compared with $1,291,000 in FY03. Second,
orders for our ADME Partners package in FY04 were smaller than ones we received
in FY03. Third, Words+ net income declined approximately $100,000. Our
restructuring of Words+ in the 4th quarter of FY04 made that quarter profitable;
however, this did not overcome the previous 3 quarters' losses.
14
SEASONALITY
-----------
Sales of our pharmaceutical and disability products exhibit very little
discernable seasonal fluctuation. In the last two years, the highest quarters
were in the 3rd and 4th quarters, and the lowest quarters were in the 1st and
2nd quarters. This unaudited net sales information has been prepared on the same
basis as the annual information presented elsewhere in this Annual Report on
Form 10-KSB and, in the opinion of management, reflects all adjustments
(consisting of normal recurring entries) necessary for a fair presentation of
the information presented. Net sales for any quarter are not necessarily
indicative of sales for any future period.
In general, management believes sales of its Words+ products to schools are
slightly seasonal, with greater sales to schools during our third and fourth
fiscal quarter (March-May and June-August), as shown in the table below.
-----------------------------------------------------------------------------------------------------------------
Net Words+ Sales
First Second Third Fourth
FY Quarter Quarter Quarter Quarter Total
-------------------------------------------- --------- --------- --------- --------- ---------
(in thousands)
2004 . . . . . . . . . . . . . . . . . . . 496 627 630 598 2,351
2003 . . . . . . . . . . . . . . . . . . . 571 538 646 624 2,379
-----------------------------------------------------------------------------------------------------------------
Sales of pharmaceutical simulations, which began in the first quarter of FY99,
are not expected to show significant seasonal behavior. Although a significant
portion of the pharmaceutical industry receives extended summer holidays, the
fourth quarter was the strongest quarter for fiscal year 2004, 2003 and 2002,
but was the lowest in FY01. Although no seasonal trend is observed or expected,
management believes that with the advent of larger multi-year licenses for its
pharmaceutical software, such as the $1.2 million license we received in August
2003, sales may show quarterly spikes when such orders are received, with
relatively smaller quarterly revenues in quarters during which such large orders
are not received. Management believes that the net growth of revenues and sales
will continue to be strong on an average (e.g., trailing twelve months) basis,
and that shareholders should expect uneven sales in the future resulting from
the timing of large multi-year orders. Although management believes that large
orders will be forthcoming, there can be no assurances that such orders will, in
fact, materialize.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Our principal sources of capital have been cash flows from our operations and a
bank line of credit. We have available a $500,000 revolving line of credit from
a bank. Interest is payable on a monthly basis at the bank's prime rate plus
1.5%. The revolving line of credit is secured by our personal property, now
owned or hereafter acquired, and all proceeds of the foregoing (including
insurance) and is personally guaranteed by Mr. Walter S. Woltosz, our Chief
Executive Officer, President and Chairman of the Board of Directors. As of
August 31, 2004, the line of credit was unused.
CASH FLOWS
----------
We believe that existing capital and anticipated funds from operations will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for the foreseeable future. Thereafter, if cash generated from
operations is insufficient to satisfy our capital requirements, we may have to
sell additional equity or debt securities or obtain expanded credit facilities.
15
In the event such financing is needed in the future, there can be no assurance
that such financing will be available to us, or, if available, that it will be
in amounts and on terms acceptable to us. If cash flows from operations became
insufficient to continue operations at the current level, and if no additional
financing was obtained, then management would restructure the Company in a way
to preserve its pharmaceutical and disability businesses while maintaining
expenses within operating cash flows.
INFLATION
---------
We have not been affected materially by inflation, and no material effect is
expected in the near future.
RECENT ACCOUNTING ANNOUNCEMENTS
-------------------------------
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities." The provisions of this standard apply to disposal activities
initiated after December 31, 2002. The adoption of this standard did not have a
material impact on the financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of SFAS No. 123. SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair-value-based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require more prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. This statement is effective for
financial statements for fiscal years ending after December 15, 2002. SFAS No.
148 will not have any impact on our financial statements as management does not
intend to change to the fair value method.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN46)
"Consolidation of Variable Interest Entities, and Interpretation of ARB 51."
This interpretation addresses consolidation by business enterprises of certain
variable interest entities (VIEs). The Interpretation as amended is effective
immediately for all enterprises with interests in VIEs created after January 31,
2003. In December 2003, the FASB issued a revised version of FIN 46 (FIN 46R),
which clarified the provisions of FIN46 by addressing implementation issues. FIN
46R must be applied to all entities subject to the Interpretation as of the
first interim quarter ending after March 15, 2004. The adoption of this
Interpretation did not impact the financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting and reporting for derivative instruments and hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is effective for derivative instruments and
hedging activities entered into or modified after June 30, 2003, except for
certain forward purchase and sale securities. For these forward purchase and
sale securities, SFAS No. 149 is effective for both new and existing securities
after June 30, 2003. Management does not expect adoption of SFAS No. 149 to have
a material impact on our statements of earnings, financial position, or cash
flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS No. 150 will be effective for financial instruments entered
into or modified after May 31, 2003 and otherwise will be effective at the
beginning of the first interim period beginning after June 15, 2003. We have no
outstanding preferred stock; however if and when we issue such stock, we will
reclassify our redeemable preferred stock as a liability accordingly.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) was signed into law. The Act introduced a prescription
drug benefit under Medicare Part D and a federal subsidy to sponsors of
retirement health care plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. In May 2004, the FASB issued FSP FAS 106-2, which
provides accounting guidance to sponsors of postretirement health care plans
that are impacted by the Act. The FSP is effective for interim or annual periods
beginning after June 15, 2004. Since the company does not offer postretirement
health care plans, the adoption of this Act did not impact the financial
statements.
CRITICAL ACCOUNTING POLICIES
----------------------------
Our consolidated financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States of
America. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenue, and expenses. These estimates and assumptions are affected by
management's application of accounting policies. Critical accounting policies
for us include revenue recognition, accounting for capitalized software
development costs, and accounting for income taxes.
16
REVENUE RECOGNITION
-------------------
We account for the licensing of software in accordance with American Institute
of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2,
"SOFTWARE REVENUE RECOGNITION". The application of SOP 97-2 requires judgment,
including whether a software arrangement includes multiple elements, and if so,
whether vendor-specific objective evidence (VSOE) of fair value exists for those
elements.
The end users receive certain elements of our products over a period of time.
These elements include free post-delivery telephone support and the right to
receive unspecified upgrades/enhancements. In accordance with SOP 97-2, we have
evaluated these agreements and we have recognized the entire license fee on the
date the software is delivered to and accepted by the customer. In order to
recognize the fee in this manner, we have met all the criteria required,
including:
o The Post Contract Customer Support ("PCS") fee is included in
the initial licensing fee,
o The PCS included with the license is for one year or less,
o The estimated cost of providing the PCS during the arrangement
is insignificant, and
o Unspecified upgrades/enhancements during the PCS arrangements
have been and are expected to continue to be minimal and
infrequent.
Changes to the elements in a software arrangement, the ability to identify VSOE
for those elements, the fair value of the respective elements, the costs
associated with providing PCS and changes to a product's estimated life cycle
could materially impact the amount of earned and unearned revenue. Judgment is
also required to assess whether future releases of certain software represent
new products or upgrades and enhancements to existing products.
From time to time, we offer certain customers three-year contracts with extended
payment terms. SOP 97-2 requires us to evaluate these contracts to determine if
they qualify for recognition of revenue in a manner similar to our one-year
contracts. On these contracts, we evaluate the collection and concession history
with these customers and products to overcome the presumption that revenue
should be recognized in line with cash collections. To date, we have recognized
these contracts on delivery to and acceptance by the customer of the product.
Substantial judgment is required in evaluating the relevant history and contract
economics of these extended contracts, and could materially impact recorded
revenue and unearned revenue in our financial statements.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
--------------------------------------
Capitalized computer software development costs are capitalized in accordance
with 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
including, but not limited to, technological feasibility, anticipated future
gross revenues, estimated economic life, and changes in software and hardware
technologies. Any changes to these estimates could materially impact the amount
of amortization expense, research and development expense recognized in the
consolidated statement of operations and the amount recognized as capitalized
software development costs in the consolidated balance sheet.
17
INCOME TAXES
------------
SFAS No. 109, "ACCOUNTING FOR INCOME TAXES", establishes financial accounting
and reporting standards for the effect of income taxes. The objectives of
accounting for income taxes are to recognize the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in an entity's
financial statements or tax returns. Judgment is required in assessing the
future tax consequences of events that have been recognized in our financial
statements or tax returns. Fluctuations in the actual outcome of these future
tax consequences could materially impact our financial position or our results
of operations.
During the year ended August 31, 2003, we recognized a significant income tax
benefit from the release of a previously recorded reserve for deferred tax
assets. The evaluation of the deferred tax assets is based on our history of
generating taxable profits and our projections of future profits as well as
expected future tax rates to determine if the realization of the deferred tax
asset is more-likely-than-not. Significant judgment is required in these
evaluations, and differences in future results from our estimates, could result
in a material differences in the realizability of these assets.
ITEM 7. FINANCIAL STATEMENTS
The responses to this item are included elsewhere in this Form 10-KSB (see pages
F-1 - F-25) and incorporated herein by this reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES.
Our management, with the participation of its Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures as of August 31, 2004. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective for gathering, analyzing and disclosing
the information we are required to disclose in the reports we file under the
Securities Exchange Act of 1934, within the time periods specified in the
Commission's rules and forms. Such evaluation did not identify any change in the
year ended August 31, 2004 that has materially affected, or is reasonable likely
to materially affect, our internal control over financial reporting.
18
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
Our directors currently have terms which will end at our next annual meeting of
our shareholders or until their successors are elected and qualify, subject to
their prior death, resignation or removal. Officers serve at the discretion of
the Board of Directors. Except as set forth below, there are no family
relationships among any of our directors and executive officers. The following
sets forth certain biographical information concerning our directors and current
executive officers.
NAME AGE POSITION WITH THE COMPANY SINCE
---------------------------- ------- -------------------------------------------------------------- ---------
Walter S. Woltosz 59 Chairman of the Board, Chief Executive Officer and 1996
President of the Company
Virginia E. Woltosz 53 Secretary, Treasurer and Director of the Company 1996
Dr. David Z. D'Argenio 55 Director and Consultant to the Company 1997
Dr. Richard R. Weiss 71 Director 1997
Momoko A. Beran 52 Chief Financial Officer of the Company and Words+ 1996
Ronald F. Creeley 53 Vice President, Marketing and Sales of the Company and 1997
Words+
Jeffrey A. Dahlen 43 President of Words+ 2003
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 served as its Senior Vice
President and Secretary from its incorporation in July 1996 till January 31,
2003. Mrs. Woltosz is also a co-founder of Words+ and served as its Vice
President, Secretary and Treasurer from its incorporation in 1981 until January
31, 2003. Mrs. Woltosz has retired from the position of Vice President as of
January 31, 2003, but remains as Secretary and Treasurer of Simulations Plus.
Virginia E. Woltosz is the wife of Walter S. Woltosz.
Dr. David Z. D'Argenio has served as a Director of the Company since June 1997.
He is currently Professor and former 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.
19
Dr. Richard R. Weiss has served as a Director of the Company since 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 Chief Financial Officer of Simulations Plus in July 1996. Prior to joining
Words+, Ms. Beran had been Financial Controller at AB Component Systems, Inc.,
which had its headquarters in the UK. Since February 1, 2003, Ms. Beran has also
been our Director of Human Resources.
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.
Jeffrey A. Dahlen rejoined the Company in April 2003 as Vice President of
Research and Development for Words+ after five years with iAT, a software
consulting firm he co-founded based in Pasadena, California. Jeff was promoted
to President of Words+ in April 2004. He is a graduate of Stanford University in
Electrical Engineering and has 20 years' experience in both software and
hardware design, which includes development of extremely high speed processing
hardware with the Jet Propulsion Laboratory at the California Institute of
Technology, and over 10 years of software and hardware design and development at
Words+.
COMMITTEES OF THE BOARD OF DIRECTORS
------------------------------------
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee reviews, acts on and reports to the Board of Directors with
respect to various auditing and accounting matters, including selecting our
independent auditors, the scope of the annual audits, fees to be paid to the
auditors, the performance of our independent auditors and our accounting
practices. Mr. Walter Woltosz, Dr. Richard R. Weiss and Dr. David Z. D'Argenio
are members of the Audit Committee. Dr. Weiss and Dr. D'Argenio are independent
directors.
The Compensation Committee reviews and approves the compensation and benefits of
our key executive officers, administers our employee benefit plans and makes
recommendations to the Board of Directors regarding such matters. Dr. Richard R.
Weiss and Dr. David Z. D'Argenio are members of the Compensation Committee.
CODE OF ETHICS
--------------
Our Code of Ethics is posted on our web site: www.simulations-plus.com.
AUDIT COMMITTEE FINANCIAL EXPERT
--------------------------------
Under the new rules of the SEC brought about by the Sarbanes-Oxley Act,
companies are required to disclose whether their audit committees have an "audit
committee financial expert" as defined in Item 401(h) of Regulation S-B under
the Exchange Act and whether that expert is "independent" as that term is used
in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. The Board of
Directors has determined that although two members of the current audit
committee are "independent" and have ability to understand financial reporting,
they may not fully meet the description of "financial experts" as defined in the
Regulation. The Board of Directors is evaluating qualified candidates to expand
the board at this time.
20
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") requires the Company's directors and executive officers and beneficial
holders of more than 10% of the Company's Common Stock to file with the
Commission initial reports of ownership and reports of changes in ownership of
the Company's equity securities. As of the date of this Report, the Company
believes that all reports needed to be filed have been filed in a timely manner
for the fiscal year ended August 31, 2004.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation paid
or accrued for the fiscal year ended August 2004 and 2003 by the Company to or
for the benefit of the Company's President, Chief Financial Officer, and Vice
President, Sales and Marketing (the "Named Executive Officers"). No other
executive officers of the Company received total annual compensation for the
fiscal year ended August 31, 2004 and 2003 that exceeded $100,000.
Fiscal Accrued 401(k) Long-Term
Name and Principal Position Year Salary Bonus (2) Salary (1) Match Compensation (3)
----------------------------- -------- ----------- ---------- ------------ -------- ----------------
Walter S. Woltosz 2004 $165,000 $38,813 - - -
President and Chief 2003 $165,000 $73,538 $190,583 - -
Executive Officer 2002 $150,000 $27,028 $3,500 - -
Ronald F. Creeley 2004 $100,000 $6,596 - $3,679 -
Vice President, Sales 2003 $100,000 $4,700 $35,519 $2,944 -
and Marketing 2002 $97,000 - $20,980 $2,359 -
Momoko A. Beran 2004 $100,000 $10,010 - $3,667 -
Chief Financial Officer 2003 $ 87,500 $3,130 $47,413 $3,208 -
2002 *** *** *** *** -
(1) Amount represents deferred salary from previous years paid during the
year.
(2) Amount represents bonus earned during the applicable year.
(3) Does not include perquisites, which do not exceed 10% of annual salary
*** Total compensation less than $100,000.
21
EMPLOYMENT AND OTHER COMPENSATION AGREEMENTS
The Board of Directors renewed an employment agreement with Walter Woltosz
commencing September 1, 2002 for three years. The agreement provided for an
annual salary of $165,000. Pursuant to such agreement, Mr. Woltosz was entitled
to such health insurance and other benefits that are not inconsistent with that
which we customarily provide to our other management employees and to
reimbursement of customary, ordinary and necessary business expenses incurred in
connection with the rendering of services to the Company. The agreement also
provides that we may terminate the agreement upon 30 days written notice if
termination is without cause and that our 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 we may terminate the agreement
for cause (as defined) and that our 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.
As part of the agreement with the original underwriter and as partial
compensation for the sale of Words+ to Simulations Plus in 1996, commencing with
our 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 our net annual income before taxes. The
net income before tax for FY04 was $776,255, thus we accrued bonuses in the
total amount of $77,626 - $38,813 for Walter Woltosz and $38,813 for Virginia
Woltosz. These bonuses are due and payable within 10 days after the filing of
this annual report.
DIRECTOR COMPENSATION
In accordance with the Company's bylaws, outside directors receive compensation
of $2,500 per year plus $500 per meeting. In addition, each outside director
receives options for 500 shares per year at the fair value of the shares on the
date of grant.
OPTION GRANTS/EXERCISES
OPTION GRANTS IN FY04
---------------------
The following table discloses information about option grants to the Named
Executive Officers during the year ended August 31, 2004, including hypothetical
gains or "option spreads" for the options at the end of their respective
ten-year terms, as calculated in accordance with the rules of the SEC. Each gain
is based on an arbitrarily assumed annualized rate of compound appreciation of
the market price at the date of the grant of 2% and 5% from the date the option
was granted to the end of the option term. Actual gains, if any, on option
exercises are dependent on the future performance of our common stock, overall
market conditions and continued employment.
--------------------------- --------------- -------------- ------------- ------------- -------------------------------
Percent of Potential Realizable Value at
No. of Total Assumed Annual Rated of Stock
Securities Options Price Appreciation for Option
Underlying Granted to Exercise Term (4)
Options Employees in Price Per Expiration ---------------- --------------
Name Granted (1) FY04 Share (3) Date 2% 5%
--------------------------- --------------- -------------- ------------- ------------- ---------------- --------------
Jeffrey Dahlen 50,000 67% $ 4.60 4/16/2014 $ 44,871 $ 126,805
--------------------------- --------------- -------------- ------------- ------------- ---------------- --------------
22
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table discloses certain information regarding the options held at
August 31, 2004 by the Chief Executive Officer and each other named executive
officer.
------------------------------- -------------- ----------- -------------------------------- -----------------------------
Shares Value
Acquired on Realized Number of Options at Value of Options at
Exercise (2) August 31, 2004 August 31, 2004 (1)
------------------------------- -------------- ----------- ------------------ ------------- --------------- -------------
Exercisable Unexercisable Exercisable Unexercisable
------------------------------- -------------- ----------- ------------------ ------------- --------------- -------------
Walter S. Woltosz - - 15,000 10,000 $26,400* $17,600*
------------------------------- -------------- ----------- ------------------ ------------- --------------- -------------
Virginia E. Woltosz - - 15,000 10,000 $26,400* $17,600*
------------------------------- -------------- ----------- ------------------ ------------- --------------- -------------
Momoko Beran - - 172,200 27,000 $232,613 $37,350
------------------------------- -------------- ----------- ------------------ ------------- --------------- -------------
Ronald F. Creeley - - 173,000 27,000 $228,750 $34,950
------------------------------- -------------- ----------- ------------------ ------------- --------------- -------------
Dr. David Z. D'Argenio - - 3,153 450 $4,015 $492
------------------------------- -------------- ----------- ------------------ ------------- --------------- -------------
Dr. Richard R. Weiss - - 3,153 450 $4,015 $492
------------------------------- -------------- ----------- ------------------ ------------- --------------- -------------
Jeffrey Dahlen - - 0 50,000 - -
------------------------------- -------------- ----------- ------------------ ------------- --------------- -------------
(1) Based on a per share price of $3.30 at August 31, 2004 less
applicable option exercise prices.
(2) The value realized represents the difference between the
aggregate closing price of the shares on the date of exercise
less the aggregate exercise price paid.
* Granted at $1.54, 110% of market price of the issue date
OPTION PLANS
In September 1996, the Board of Directors adopted and the shareholders approved
the 1996 Stock Option Plan (the "Option Plan") under which a total of 250,000
shares of common stock had been reserved for issuance. In March 1999, the
shareholders approved an increase in the number of shares that may be granted
under the Option Plan to 500,000. In February 2000, the shareholders approved an
increase in the number of shares that may be granted under the Option Plan to
1,000,000. Furthermore, in December 2000, the shareholders approved an increase
in number of shares that may be granted under the Option Plan to 1,250,000. The
Option Plan terminates in 2006, subject to earlier termination by the Board of
Directors.
DIRECTORS AND OFFICERS INSURANCE
At this time, we do not carry Directors and Officers insurance; however, we may
obtain such insurance in the future if such insurance can be purchased on
reasonable terms to us.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of August 31, 2004 by (i) each person who is
known to own beneficially more than 5% of the outstanding shares of our Common
Stock, (ii) each of our directors and executive officers, and (iii) all
directors and executive officers of the Company as a group:
23
AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER (1)(2) BENEFICIAL OWNERSHIP OF CLASS
------------------------------------------ -------------------- --------
Walter S. and Virginia E. Woltosz (3) 2,071,000 52.48%
Momoko Beran (4) 173,500 4.40%
Ronald F. Creeley (5) 174,000 4.41%
Dr. David Z. D'Argenio (6) 4,153 *
Dr. Richard R. Weiss (7) 4,153 *
Jeffrey A. Dahlen (8) 0 *
All directors and officers as a group 2,426,806 61.50%
* Less than 1%
(1) Such persons have sole voting and investment power with respect to all
Shares of Common Stock shown as being beneficially owned by them, subject
to community property laws, where applicable, and the information contained
in the footnotes to this table.
(2) The address of each director and executive officer named is c/o the
Company, 1220 W. Avenue J, Lancaster, California 93534.
(3) Own an aggregate of 2,031,000 plus 30,000 shares of common stock underlying
an option exercisable within the next 60 days of the date of this Annual
Report. Does not include additional stock options for 20,000 shares, which
are not exercisable within the next 60 days of the date of this Annual
Report.
(4) Owns 1,300 shares of common stock acquired from the exercise of options
granted under the 1996 Stock Option plan, plus 172,200 shares of common
stock underlying an option exercisable within the next 60 days of the date
of this Annual Report. Does not include stock options for 27,000 shares,
which are not exercisable within the next 60 days of the date of this
Annual Report.
(5) Owns 1,000 shares of common stock, plus 173,000 shares of common stock
underlying an option exercisable within the next 60 days of the date of
this Annual Report. Does not include stock options for 27,000 shares, which
are not exercisable within the next 60 days of the date of this Annual
Report.
(6) Owns 1,000 shares of common stock, plus 3,153 shares of common stock
underlying an option exercisable within the next 60 days of the date of
this Annual Report. Does not include stock options for 450 shares, which
are not exercisable within the next 60 days of the date of this Annual
Report.
(7) Owns 1,000 shares of common stock, plus 3,153 shares of common stock
underlying an option exercisable within the next 60 days of the date of
this Annual Report. Does not include stock options for 450 shares, which
are not exercisable within the next 60 days of the date of this Annual
Report.
(8) 50,000 shares of common stock options were granted. None of these options
are exercisable within the next 60 days of the date of this Annual Report.
24
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of August 31, 2004, included in accrued bonuses to officers was $77,626,
which represented 10% of the Company's net income before bonuses and taxes given
to the Company's President, Walter Woltosz and Corporate Secretary, Virginia
Woltosz as the annual bonuses.
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. Woltosz + Virginia E. Woltosz (2) +
10.13 Software Acquisition Agreement by and Between the Registrant
and Michael B. Bolger (1)
10.14 Sublease Agreement dated May 7, 1993 by and between the
Registrant and Westholme Partners (along with Consent to
Sublease and master lease agreement) (1)
10.15 Lease Agreements dated August 22, 1996 by and between Words+,
Inc. and Abbey-Sierra LLC (1)
10.16 Form of 10% Amended and Restated Promissory Note issued in
connection with the Registrant's Private Placement (2)
10.17 Form of Subscription Agreement relative to the Registrant's
Private Placement (1)
10.18 Form of Lock-Up Agreement with Bridge Lenders (2)
10.19 Form of Indemnification Agreement (1)
10.20 Form of Lock-Up Agreement with the Woltosz' (2)
10.21 Letter of Intent by and between the Registrant and Therapeutic
Systems Research Laboratories (1)
10.22 Form of Representative's Warrant to be issued by the
Registrant in favor of the Representative (2)
25
10.23 Form of Warrant issued to Bridge Lenders (2)
10.24 License Agreement by and between the Registrant and
Therapeutic Systems Research Laboratories (3)
10.25 Grant Award Letter from National Science Foundation (4)
10.26 Distribution Agreement with Teijin Systems Technology LTD. (4)
10.27 Lease Agreements by and between Simulations Plus, Inc. and
Martin Properties, Inc. (4)
10.28 Software OEM Agreement for Assistive Market Developer by and
between Words+, Inc. and Digital Equipment Corporation. (4)
10.29 Purchase Agreement by and between Words+, Inc. and Epson
America, Inc. (4)
10.30 License Agreement with Absorption Systems, LP. (5)
10.31 Service contract with The Kriegsman Group. (5)
10.32 Letter of Engagement with Banchik & Associates. (5)
10.33 Letter of Intent for Cooperative Alliance with Absorption
Systems, LP. (5)
10.34 OEM/Remarketing Agreement between Words+, Inc. and Eloquent
Technology, Inc. (6)
10.35 Lease Option Agreement by and between Simulations Plus, Inc.
and Martin Properties, Inc. (8)
10.36 Auto Rental Lease Agreement by and between Simulations Plus,
Inc. and Walter and Virginia Woltosz (8)
10.37 Registration Statement - 1,250,000 shares of the Company's
1966 Stock Options. (9)
10.38 Employment Agreement by and between the Company and Walter S.
Woltosz (10)
10.39 An addendum to Lease Agreement (11)
10.40 Business Lending Agreement with Wells Fargo Bank (11)
10.41 Technology Transfer Agreement with Sam Communications, LLC.
(12)
23.1 Consent of Singer, Lewak, Greenbaum and Goldstein, LLP (13)
31.1 Section 302 - Certification of Chief Executive Officer. (13)
31.2 Section 302 - Certification of Chief Financial Officer. (13)
32.1 Section 906 - Certification of Chief Executive Officer. (13)
32.1 Section 906 - Certification of Chief Financial Officer. (13)
-----------------------------------------------------------------------
(1) Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration No. 333-6680) filed on
March 25, 1997 (the "Registration Statement").
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to
the Registration Statement filed on May 27, 1997.
(3) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 1997.
(4) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 1998.
(5) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 1999.
(6) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 2000.
(7) Incorporated by reference to the Company's Form 8-K filed on
March 1, 2001.
26
(8) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 2001.
(9) Incorporated by reference to the Company's Registration
Statement on Form S-8 (Registration No. 333-91592) filed on
June 28, 2002 (the "Registration Statement").
(10) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 2002.
(11) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 2003.
(12) Incorporated by reference to the Company's Form 8-K filed on
December 29, 2003.
(13) Filed herewith.
(b) Reports on Form 8-K
On June 23, 2004, Simulations Plus, Inc., a California corporation issued a
press release announcing preliminary revenues and estimated earnings for the
fiscal quarter ending May 31, 2004 and the first nine months of the fiscal year.
On July 2, 2004, Simulations Plus, Inc., a California corporation issued a press
release announcing that it has restructured its Words+ subsidiary.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The Company incurred the following fees to Singer Lewak Greenbaum & Goldstein,
LLP for services rendered during the fiscal year ended August 31, 2004 and 2003:
Fee Category FY04 Fees (1) FY03 Fees
------------ ------------- ---------
Audit fees $ 62,514 $ 48,173
Audit-related fees - -
Tax fees 9,474 5,000
All other fees - -
--------------------------------------
Total fees $ 71,988 $ 53,173
--------------------------------------
(1) Includes fees billed and estimated adjustments by Singer Lewak
Greenbaum & Goldstein, LLP in FY04 for the FY03 audit and FY04
quarterly reviews, and tax returns.
AUDIT FEES - Consists of fees incurred for professional services
rendered for the audit of Simulations Plus, Inc.'s consolidated
financial statements and for reviews of the interim consolidated
financial statements included in our quarterly reports on Form 10-QSB
and consents for filings with the SEC.
AUDIT-RELATED FEES - Consists of fees billed for professional services
that are reasonably related to the performance of the audit or review
of Simulations Plus, Inc.'s consolidated financial statements, but are
not reported under "Audit fees." No such fees were incurred during the
past two years.
TAX FEES - Consists of fees billed for professional services relating
to tax compliance, tax reporting, and tax advice.
ALL OTHER FEES - Consists of fees billed for all other services.
27
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Lancaster, State of California, on
November 29, 2004.
SIMULATIONS PLUS, INC.
By /s/ MOMOKO A. BERAN
---------------------------
Momoko A. Beran
Chief Financial Officer
In accordance with Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
indicated on November 29, 2004.
SIGNATURE TITLE
/s/ WALTER S. WOLTOSZ
------------------------------------ Chairman of the Board of Directors
Walter S. Woltosz and Chief Executive Officer
/s/ VIRGINIA E. WOLTOSZ
------------------------------------
Virginia E. Woltosz Secretary and Director of the Company
/s/ DR. DAVID Z. D'ARGENIO
------------------------------------
Dr. David Z. D'Argenio Director and Consultant to the Company
------------------------------------
Dr. Richard R. Weiss Director
/s/ MOMOKO A. BERAN
------------------------------------
Momoko A. Beran Chief Financial Officer of the Company
28
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONTENTS
August 31, 2004
--------------------------------------------------------------------------------
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
INDEPENDENT AUDITOR'S REPORT F-3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet F-4 - F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Shareholders' Equity F-7
Consolidated Statements of Cash Flows F-8 - F-9
Notes to Consolidated Financial Statements F-10 - F-25
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Simulations Plus, Inc.
Lancaster, California
We have audited the accompanying consolidated balance sheet of
Simulations Plus, Inc. (a California corporation) and Subsidiary as of August
31, 2004 and the related consolidated statements of operations, shareholders'
equity and cash flows for the year then ended. The consolidated financial
statements for the year ended August 31, 2003 were audited by other auditors
whose report expressed an unqualified opinion. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards established by
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Simulations Plus, Inc. and Subsidiary as of August 31, 2004, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants
Encino, California
October 29, 2004
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Simulations Plus, Inc.
Lancaster, California
We have audited the accompanying consolidated statement of operations,
shareholders' equity and cash flows of Simulations Plus, Inc. (a California
corporation) and subsidiaries for the year ended August 31, 2003. 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 audit.
We conducted our audit in accordance with the standards of the Public Accounting
Oversight Board (United States). 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 audit provided a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Simulations Plus, Inc. and subsidiaries for the year ended August 31, 2003, in
conformity with U.S. generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
October 17, 2003
F-3
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEEET
August 31, 2004
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (note 3) $ 734,266
Accounts receivable, net of allowance for doubtful accounts
of $16,774 and present value discount of $32,362 (note 4) 1,705,033
Inventory 358,590
Prepaid expenses and other current assets 116,044
Deferred tax 186,000
-----------
Total current assets 3,099,933
CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $1,975,985 576,480
PROPERTY AND EQUIPMENT, net (note 5) 66,366
DEFERRED TAX 1,210,000
OTHER ASSETS 11,150
-----------
TOTAL ASSETS $4,963,929
===========
The accompanying notes are an integral part of these financial statements.
F-4
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEEET
August 31, 2004
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 152,886
Accrued payroll and other expenses 218,706
Accrued bonuses to officers 77,626
Accrued income taxes 1,600
Accrued warranty and service costs 32,496
Current portion of deferred revenue 11,416
------------
Total current liabilities 494,730
Deferred revenue 19,985
Other long-term liabilities 3,263
------------
Total liabilities 517,978
------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $0.001 par value
10,000,000 shares authorized
no shares issued and outstanding --
Common stock, $0.001 par value
20,000,000 shares authorized
3,564,443 shares issued and outstanding 3,565
Additional paid-in capital 4,990,122
Accumulated deficit (547,736)
------------
Total shareholders' equity 4,445,951
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,963,929
============
The accompanying notes are an integral part of these financial statements.
F-5
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended August 31,
--------------------------------------------------------------------------------
2004 2003
------------ ------------
NET SALES $ 5,206,674 $ 5,484,720
COST OF SALES 1,557,122 1,537,844
------------ ------------
GROSS PROFIT 3,649,552 3,946,876
------------ ------------
OPERATING EXPENSES
Selling, general, and administrative 2,508,305 2,301,800
Research and development 515,016 379,632
------------ ------------
Total operating expenses 3,023,321 2,681,432
------------ ------------
INCOME FROM OPERATIONS 626,231 1,265,444
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 73,323 233
Interest expense (925) (5,359)
Loss on sale of assets -- (2,311)
------------ ------------
Total other income (expense) 72,398 (7,437)
------------ ------------
INCOME BEFORE BENEFIT FROM INCOME TAXES 698,629 1,258,007
BENEFIT FROM INCOME TAXES
Benefit from (provision for) income tax 137,856 (43,057)
Release of valuation allowance -- 1,291,110
------------ ------------
Total benefit from income taxes 137,856 1,248,053
------------ ------------
NET INCOME $ 836,485 $ 2,506,060
============ ============
BASIC EARNINGS PER SHARE $ 0.24 $ 0.73
============ ============
Diluted earnings per share $ 0.21 $ 0.67
============ ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC 3,495,148 3,410,144
============ ============
DILUTED 3,895,114 3,740,439
============ ============
The accompanying notes are an integral part of these financial statements.
F-6
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended August 31,
---------------------------------------------------------------------------------------------------------
Common Stock Additional
---------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
BALANCE, AUGUST
31, 2002 3,408,331 $ 3,409 $ 4,654,756 $(3,890,281) $ 767,884
SHARES ISSUED UPON
EXERCISE OF STOCK
OPTIONS 3,916 4 5,149 -- 5,153
NET INCOME -- -- -- 2,506,060 2,506,060
------------ ------------ ------------ ------------ ------------
BALANCE, AUGUST
31, 2003 3,412,247 3,413 4,659,905 (1,384,221) 3,279,097
SHARES ISSUED UPON
PURCHASING
SAY-IT! SAM PRODUCT 35,000 35 162,715 -- 162,750
SHARES ISSUED UPON
EXERCISE OF STOCK
OPTIONS 117,196 117 167,502 -- 167,619
NET INCOME -- -- -- 836,485 836,485
------------ ------------ ------------ ------------ ------------
BALANCE, AUGUST
31, 2004 3,564,443 $ 3,565 $ 4,990,122 $ (547,736) $ 4,445,951
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-7
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended August 31,
-------------------------------------------------------------------------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 836,485 $ 2,506,060
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization of property and
equipment 42,607 33,374
Amortization of capitalized software development
costs 181,371 162,221
Loss on sale of assets -- 2,311
(Increase) decrease in
Accounts receivable (11,690) (765,106)
Inventory (151,951) 39,544
Deferred tax (104,890) (1,291,110)
Other assets (50,291) (27,040)
Increase (decrease) in
Accounts payable (22,122) 29,311
Accrued payroll and other expenses (20,345) (272,437)
Accrued bonuses to officers (55,912) 79,480
Accrued income taxes (40,966) 42,566
Accrued warranty and service costs (12,234) 13,734
Deferred revenue (15,016) (11,059)
------------ ------------
Net cash provided by operating activities 575,046 541,849
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (44,062) (77,294)
Proceeds from sale of assets -- 1,559
Capitalized computer software development costs (221,177) (235,370)
------------ ------------
Net cash used in investing activities (265,239) (311,105)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capitalized lease obligations (3,893) (11,236)
Proceeds from the exercise of stock options 167,619 5,153
------------ ------------
Net cash provided by (used in)
financing activities 163,726 (6,083)
------------ ------------
The accompanying notes are an integral part of these financial statements.
F-8
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended August 31,
--------------------------------------------------------------------------------
Net increase in cash and cash
equivalents $473,533 $224,661
Cash and cash equivalents, beginning of year 260,733 36,072
Cash and cash equivalents, end of year $734,266 $260,733
Supplemental disclosures of cash flow information
Interest paid $ 925 $ 5,359
Income taxes paid $ 1,600 $ 1,600
Supplemental schedule of non-cash transactions
1 During the first fiscal quarter of 2004, Minolta copier with a zero
book value was traded-in for a new Ricoh copier/printer. The
remaining obligation of $8,177 was assumed by the lessor of Ricoh
copier/printer in the exchange for a higher per print cost.
2 During the second fiscal quarter of 2004, the Company purchased all
of the rights, title, and interest in the Say-it! SAM Augmentative
communication device developed by SAM Communications, LLC, for 35,000
shares of Simulations Plus restricted common stock at $4.65 per
share, total of $162,750, equal to the closing price on the date when
the agreement was signed.
The accompanying notes are an integral part of these financial statements.
F-9
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINES OF BUSINESS
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").
Lines of Business
-----------------
The Company designs and develops pharmaceutical simulation software to
promote cost-effective solutions to a number of problems in
pharmaceutical research and in the education of pharmacy and medical
students. The Company also developed and sells interactive, educational
software programs that simulate science experiments conducted in high
school science classes. In addition, 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are
prepared in accordance with accounting principles generally accepted in
the United States of America. Preparing financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, and expenses. These estimates
and assumptions are affected by management's application of accounting
policies. Actual results could differ from those estimates. Critical
accounting policies for us include revenue recognition, accounting for
capitalized software development costs, and accounting for income
taxes.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
Simulations Plus, Inc. and its wholly owned subsidiary, Words+, Inc.
All significant intercompany accounts and transactions are eliminated
in consolidation.
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 (SOP) No.
97-2, "Software Revenue Recognition." Product revenue is recorded at
the time of shipment, net of estimated allowances and returns.
Post-contract customer support ("PCS") obligations are insignificant;
therefore, revenue for PCS is recognized at the time of shipment, and
the costs of providing such support services are accrued and amortized
over the obligation period.
F-10
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
-------------------------------
Ongoing improvements and upgrades of any significance are infrequent
and minimal in nature and timing. 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.
Generally, the Company enters into one-year license agreements with its
customers for the use of its software products. The Company recognizes
revenue on these contracts when all the criteria under SOP 97-2 are
met. From time to time, the Company enters into license agreements that
extend over a period greater than one-year. These contracts generally
provide for extended payment terms greater than one-year, but less than
the term of the contract.
The Company believes its history of collection with its existing
customers is sufficient to overcome the presumption that revenue should
be recognized in time with the expected cash collections, and has
therefore recognized the entire license fees, net of an applicable
discount, at the time of the software's release and acceptance by the
customer.
Comprehensive Income
--------------------
The Company utilizes Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments and unrealized gains and losses on
available-for-sale securities. Comprehensive income is not presented in
the Company's financial statements since the Company did not have any
of the items of comprehensive income in any period presented.
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.
Capitalized Computer Software Development Costs
-----------------------------------------------
Software development costs are capitalized in accordance with 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.
F-11
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capitalized Computer Software Development Costs (Continued)
-----------------------------------------------------------
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). Amortization
of software development costs amounted to $181,000 and $162,000 for the
years ended August 31, 2004 and 2003, respectively.
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.
Property and Equipment
----------------------
Property and equipment, including equipment under capital leases, are
recorded at cost, less accumulated depreciation and amortization.
Depreciation and amortization are provided using the straight-line
method over the estimated useful lives as follows:
Equipment 5 years
Computer equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Leasehold improvements 5 years
Maintenance and minor replacements are charged to expense as incurred.
Gains and losses on disposals are included in the results of
operations.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable, accrued
payroll and other expenses, accrued bonuses to officers, and accrued
warranty and service costs, the carrying amounts approximate fair value
due to their short maturities. The amounts shown for lease obligations
also approximate fair value because current interest rates offered to
the Company for leases of similar maturities are substantially the
same.
F-12
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising
-----------
The Company expenses advertising costs as incurred. Advertising costs
for the years ended August 31, 2004 and 2003 were $24,319 and $23,106,
respectively.
Shipping and Handling
---------------------
Shipping and handling costs are recorded as cost of sales, amounted to
$83,000 and $76,000 for the years ended August 31, 2004 and 2003,
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.
Income Taxes
------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns.
Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each
year-end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The
provision for income taxes represents the tax payable for the period
and the change during the period in deferred tax assets and
liabilities.
During the year ended August 31, 2003, we recognized significant income
tax benefit from the release of a previously recorded reserve for
deferred tax assets. An additional deferred income tax benefit of
$104,890 was recognized in the fiscal year 2004, resulting in the
deferred tax asset of $1,396,000 at August 31, 2004. The evaluation of
the deferred tax assets is based on our history of generating taxable
profits and our projections of future profits as well as expected
future tax rates to determine if the realization of the deferred tax
asset is more-likely-than-not. Significant judgment is required in
these evaluations, and differences in future results from our
estimates, could result in material differences in the realization of
these assets.
Earnings per Share
------------------
The Company reports earnings per share in accordance with SFAS No. 128,
"Loss per Share." Basic earnings per share is computed by dividing
income available to common shareholders by the weighted-average number
of common shares available. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is
increased to include the number of additional common shares that would
have been outstanding if the potential common shares had been issued
F-13
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per Share (Continued)
------------------------------
and if the additional common shares were dilutive. The components of
basic and diluted earnings per share for the years ended August 31,
2004 and 2003 were as follows:
2004 2003
------------- --------------
Numerator
Net income attributable to common
shareholders $ 836,485 $ 2,506,060
============== ===============
Denominator
Weighted-average number of common shares
outstanding during the year 3,495,148 3,410,144
Dilutive effect of stock options 399,966 330,295
-------------- ---------------
COMMON STOCK AND COMMON STOCK
EQUIVALENTS USED FOR DILUTED EARNINGS
PER SHARE 3,895,114 3,740,439
============== ===============
Stock Options and Warrants
--------------------------
The Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value
based method of accounting for stock-based compensation. However, SFAS
No. 123 allows an entity to continue to measure compensation cost
related to stock and stock options issued to employees using the
intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." Entities electing to remain with the accounting method of
APB 25 must make pro forma disclosures of net income and earnings per
share, as if the fair value method of accounting defined in SFAS No.
123 had been applied. The Company has elected to account for its
stock-based compensation to employees under APB 25.
Estimates
---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Concentrations and Uncertainties
--------------------------------
International sales accounted for 31% and 16% of net sales for the
years ended August 31, 2004 and 2003, respectively. For Simulations
Plus, Inc., one customer accounted for 11% of net sales for the year
ended August 31, 2004, and two customers represented a total of 32% of
the net accounts receivable balance at August 31, 2004. For Words+,
Inc., one government agency accounted for 19% of net sales during the
F-14
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations and Uncertainties (Continued)
--------------------------------------------
fiscal year 2004, and two government agencies represented a total of
18% of the net accounts receivable balance at August 31, 2004.
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's subsidiary, Words+, Inc., purchases components for the
main computer products from a single Manufacture. Words+, Inc. 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 Pronouncements
-----------------------------------------
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." The provisions of this standard apply to disposal
activities initiated after December 31, 2002. The adoption of this
standard did not have a material impact on the financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," an amendment of
SFAS No. 123. SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. This statement is effective for financial
statements for fiscal years ending after December 15, 2002. SFAS No.
148 will not have any impact on the Company's financial statements as
management does not have any intention to change to the fair value
method.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN46)
"Consolidation of Variable Interest Entities, and Interpretation of ARB
51." This interpretation addresses consolidation by business
enterprises of certain variable interest entities (VIEs). The
Interpretation as amended is effective immediately for all enterprises
with interests in VIEs created after January 31, 2003. In December
2003, the FASB issued a revised version of FIN 46 (FIN 46R), which
clarified the provisions of FIN46 by addressing implementation issues.
FIN 46R must be applied to all entities subject to the Interpretation
as of the first interim quarter ending after March 15, 2004. The
adoption of this Interpretation did not impact the financial
statements.
F-15
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements (Continued)
-----------------------------------------------------
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies accounting and reporting for derivative
instruments and hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is
effective for derivative instruments and hedging activities entered
into or modified after June 30, 2003, except for certain forward
purchase and sale securities. For these forward purchase and sale
securities, SFAS No. 149 is effective for both new and existing
securities after June 30, 2003. Management does not expect adoption of
SFAS No. 149 to have a material impact on the Company's statements of
earnings, financial position, or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer
classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that
embody obligations for the issuer are required to be classified as
liabilities. SFAS No. 150 will be effective for financial instruments
entered into or modified after May 31, 2003 and otherwise will be
effective at the beginning of the first interim period beginning after
June 15, 2003.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act
introduced a prescription drug benefit under Medicare Part D and a
federal subsidy to sponsors of retirement health care plans that
provide a benefit that is at least actuarially equivalent to Medicare
Part D. In May 2004, the FASB issued FSP FAS 106-2, which provides
accounting guidance to sponsors of postretirement health care plans
that are impacted by the Act. The FSP is effective for interim or
annual periods beginning after June 15, 2004. Since the company does
not offer postretirement health care plans, the adoption of this Act
did not impact the financial statements.
NOTE 3 - 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. At August 31, 2004, the uninsured portions
aggregated to $562,000. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit
risk on cash and cash equivalents.
NOTE 4 - ACCOUNTS RECEIVABLE
The Company maintains an allowance for doubtful accounts for estimated
losses that may arise if any of its customers are unable to make
required payments. Management specifically analyzes the age of customer
balances, historical bad debt experience,
F-16
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
--------------------------------------------------------------------------------
NOTE 4 - ACCOUNTS RECEIVABLE (CONTINUED)
customer credit-worthiness, and changes in customer payments terms when
making estimates of the uncollectability of the Company's trade
accounts receivable balances. If the Company determines that the
financial conditions of any of its customers deteriorated, whether due
to customer specific or general economic issues, increase in the
allowance may be made. Accounts receivable are written off when all
collection attempts have failed.
The Company's long-term receivables are discounted at the present
value. The discount is amortized over the life of receivable and
recognized as interest income. As of August 31, 2004, the unamortized
discount amount on such receivable was $32,362. The discounted balance
of long-term receivables of $1,705,033 is due to be collected during
the year ending August 31, 2005.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at August 31, 2004 consisted of the following:
Equipment $ 149,553
Computer equipment 290,479
Furniture and fixtures 52,704
Leasehold improvements 38,215
------------
530,951
Less accumulated depreciation and amortization 464,585
------------
TOTAL $ 66,366
============
Depreciation and amortization expense was $42,607 and $33,374 for the
years ended August 31, 2004 and 2003, respectively.
NOTE 6 - LINE OF CREDIT
The Company has available an unsecured $500,000 revolving line of
credit from a bank with interest payable on a monthly basis at prime
(4.5% at August 31, 2004), plus 1.5%. The line is secured by the
Company's personal property, is personally guaranteed by the Company's
President, and expires in June 2005. As of August 31, 2004, the line of
credit was unused.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases certain facilities for its corporate and operations
offices under a non-cancelable operating lease agreement that expires
in September 2005. The Company also leases Ricoh copier/printer
equipment under non-cancelable operating lease arrangements that expire
through October 2006. Future minimum lease payments
F-17
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
--------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
under non-cancelable operating leases with remaining terms of one year
or more at August 31, 2004 were as follows:
Leases (Continued)
------------------
Year Ending Operating
August 31, Leases
----------- -------------
2005 $ 239,676
2006 28,632
2007 4,772
-------------
$ 273,080
Less current portion 239,676
-------------
LONG-TERM PORTION $ 33,404
=============
Rent expense was $206,192 and $198,048 for the years ended August 31,
2004 and 2003, respectively.
Employee Agreement
------------------
On September 1, 2002, the Company entered into an employment agreement
with its President/Chief Executive Officer that expires in August 2005.
The employment agreement provides for an annual salary of $165,000 and
an annual bonus equal to 5% of the Company's net income before taxes,
not to exceed $150,000. The agreement also provides that the Company
may terminate the agreement upon 30 days' written notice if termination
is without cause. The Company's only obligation would be to pay its
President the greater of a) 12 months salary or b) the remainder of the
term of the employment agreement from the date of notice of
termination.
License Agreement
-----------------
The Company entered into an agreement with Therapeutic Systems Research
Laboratory ("TSRL") to jointly develop a computer simulation of the
absorption of drug compounds in the gastrointestinal tract. Upon
execution of a definitive License Agreement, TSRL received an initial
payment of $75,000, and thereafter, the company is obligated to pay a
royalty of 20% of net sales of the absorption simulation. For the years
ended August 31, 2004 and 2003, the Company paid royalties of $188,779
and $178,900, respectively.
The Company's subsidiary, Words+, Inc., entered into royalty agreements
with several vendors to apply their software & technologies into the
finished goods to be sold. For the years ended August 31, 2004 and
2003, Words+ incurred such royalties of $74,575 and $33,450,
respectively.
F-18
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
--------------------------------------------------------------------------------
NOTE 8 - SHAREHOLDERS' EQUITY
Stock Option Plan
-----------------
In September 1996, the Board of Directors adopted and the shareholders
approved the 1996 Stock Option Plan (the "Option Plan") under which a
total of 250,000 shares of common stock had been reserved for issuance.
In March 1999, the shareholders approved an increase in the number of
shares that may be granted under the Option Plan to 500,000. In
February 2000, the shareholders approved an increase in the number of
shares that may be granted under the Option Plan to 1,000,000.
Furthermore, in December 2000, the shareholders approved an increase in
the number of shares that may be granted under the Option Plan to
1,250,000. The Option Plan terminates in 2006, subject to earlier
termination by the Board of Directors.
The following summarizes the stock option transactions:
Weighted-
Average
Exercise
Number Price
of Options Per Share
------------ -------------
Outstanding, August 31, 2002 1,154,478 $ 1.91
Granted (3,916) $ 1.32
Expired/canceled (30,000) $ 1.22
------------
Outstanding, August 31, 2003 1,120,562 $ 1.93
Granted 75,000 $ 4.60
Exercised (117,196) $ 1.44
Expired/canceled (25,650) $ 1.97
------------
OUTSTANDING, AUGUST 31, 2004 1,052,716 $ 2.17
============
EXERCISABLE, AUGUST 31, 2004 723,690 $ 2.05
============
The fair value of the options granted during the year ended August 31,
2004 is estimated at $163,000. The fair value of these options was
estimated at the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions for the year
ended August 31, 2004: dividend yield of 0%, expected volatility of
27%, risk-free interest rate of 3.36%, and expected life of ten years.
The weighted-average fair value of options granted during the year
ended August 31, 2004 was $4.60, and the weighted-average exercise
price was $4.60.
F-19
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
--------------------------------------------------------------------------------
NOTE 8 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plan (Continued)
-----------------------------
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which do not have vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
The weighted-average remaining contractual life of options outstanding
issued under the Plan was 5.9 years at August 31, 2004. The exercise
prices for the options outstanding at August 31, 2004 ranged from $1.05
to $4.60, and the information relating to these options is as follows:
Weighted- Weighted- Weighted-
Average Average Average
Remaining Exercise Exercise
Stock Stock Contractual Price Price
Exercise Options Options Life of Options of Options of Options
Price Outstanding Exercisable Outstanding Outstanding Exercisable
---------------- --------------- --------------- ---------------- --------------- ----------------
$ 1.05 - 2.00 582,636 401,910 5.9 years $ 1.46 $ 1.46
$ 2.01 - 3.00 366,100 292,800 5.4 years $ 2.65 $ 2.65
$ 3.01 - 4.60 103,980 28,980 7.9 years $ 4.50 $ 4.25
--------------- ---------------
1,120,562 632,539
=============== ===============
The Company has adopted only the disclosure provisions of SFAS No. 123.
It applies APB 25 and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options issued
to outside third parties.
If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for awards under this plan consistent
with the methodology prescribed by SFAS No. 123, the Company's net
income and earnings per share would be reduced to the pro forma amounts
indicated below for the years ended August 31, 2004 and 2003:
F-20
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
-------------------------------------------------------------------------------------------------------------
NOTE 8 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plan (Continued)
-----------------------------
2004 2003
------------- -------------
Net income
As reported $ 836,485 $ 2,506,060
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects - -
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects $ (218,645) $ (342,865)
Pro forma $ 617,840 $ 2,163,195
Basic earnings per common share
As reported $ 0.24 $ 0.73
Pro forma $ 0.18 $ 0.63
Diluted earnings per common share
As reported $ 0.21 $ 0.67
Pro forma $ 0.16 $ 0.58
Other Stock Options
-------------------
As of August 31, 2004, the Board of Directors holds options to purchase
7,206 shares of common stock at exercise prices ranging from $1.20 to
$5.25, which options were granted in prior years.
Weighted average
Number of Options exercise price
----------------- --------------
Options outstanding 7,206 $ 2.34
Options exercisable 6,306 $ 2.36
NOTE 9 - INCOME TAXES
The components of the income tax provision for the years ended August
31, 2004 and 2003 were as follows:
2004 2003
------------- ------------
Current
Federal $ - $ -
State 32,966 (43,057)
------------- ------------
32,966 (43,057)
------------- ------------
F-21
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
-----------------------------------------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (CONTINUED)
Deferred
Federal 82,890 1,028,953
State 22,000 262,157
------------- ------------
104,890 1,291,110
------------- ------------
TOTAL $ 137,856 $ 1,248,053
============= ============
A reconciliation of the expected income tax (benefit) computed using
the federal statutory income tax rate to the Company's effective income
tax rate is as follows for the years ended August 31, 2004 and 2003:
2004 2003
-------------- --------------
Income tax computed at federal statutory tax rate 34.0% 34.0%
State taxes, net of federal benefit 5.5 5.9
Expired state net operating losses - -
Extraterritorial income exclusion (15.5) -
Research and development credit (14.9) (2.9)
Change in prior year estimated taxes (24.4) -
Change in valuation allowance - (137.5)
Other (4.5) 0.2
-------------- --------------
TOTAL (19.8)% (100.3)%
============== ==============
Significant components of the Company's deferred tax assets and
liabilities for income taxes for the years ended August 31, 2004 and
2003 are as follows:
2004 2003
-------------- --------------
Deferred tax assets
Accrued payroll and other expenses $ 198,800 $ 132,700
Accrued warranty and service costs 13,900 19,200
Net operating loss carryforward 1,525,700 1,386,500
Property and equipment - 910
-------------- --------------
Total deferred tax assets 1,738,400 1,539,310
Valuation allowance - -
-------------- --------------
1,738,400 1,539,310
-------------- --------------
F-22
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
--------------------------------------------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (CONTINUED)
Deferred tax liabilities
State taxes (95,400) (88,000)
Capitalized computer software development
costs (247,000) (160,200)
-------------- --------------
Total deferred tax liabilities (342,400) (248,200)
-------------- --------------
NET DEFERRED TAX ASSETS $ 1,396,000 $ 1,291,110
============== ==============
At August 31, 2004, the Company had federal and state net operating
loss carryforwards of approximately $2,686,300 and $1,170,700,
respectively, that expire through 2024. The Company also has tax
credit, totaling approximately $300,000 and $180,000 to offset future
Federal and State income taxes, respectively.
NOTE 10 - RELATED PARTY TRANSACTIONS
As of August 31, 2004, included in accrued bonuses to officers was
$38,813, which represented 5% of the Company's net income before
bonuses and taxes given to the Company's President, Walter Woltosz, as
an annual bonus.
As of August 31, 2004, included in accrued bonuses to officers was
$38,813, which represented 5% of the Company's net income before
bonuses and taxes given to the Corporate Secretary, Virginia Woltosz,
as an annual bonus.
NOTE 11 - LINES OF BUSINESS
For internal reporting purposes, management segregates the Company into
two divisions as follows for the years ended August 31, 2004 and 2003:
August 31, 2004
--------------------------------------------------------------------------
Simulations
Plus, Inc. Words+, Inc. Eliminations Total
--------------- --------------- --------------- ---------------
Net sales $ 2,856,004 $ 2,350,670 $ -- $ 5,206,674
Income (loss) from
operations $ 914,577 $ (288,346) $ -- $ 626,231
Identifiable assets $ 5,488,767 $ 1,192,894 $ (1,717,732) $ 4,963,929
Capital expenditures $ 3,447 $ 40,615 $ -- $ 44,062
Depreciation and
amortization $ 14,617 $ 27,990 $ -- $ 42,607
--------------- --------------- --------------- ---------------
F-23
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
--------------------------------------------------------------------------------------------------------------------
NOTE 11 - LINES OF BUSINESS (CONTINUED)
August 31, 2003
--------------------------------------------------------------------------
Simulations
Plus, Inc. Words+, Inc. Eliminations Total
--------------- --------------- --------------- ---------------
Net sales $ 3,106,165 $ 2,378,555 $ -- $ 5,484,720
Income (loss) from
operations $ 1,400,536 $ (135,092) $ -- $ 1,265,444
Identifiable assets $ 4,172,470 $ 836,568 $ (1,041,475) $ 3,967,563
Capital expenditures $ 30,914 $ 46,380 $ -- $ 77,294
Depreciation and
amortization $ 23,684 $ 9,690 $ -- $ 33,374
--------------- --------------- --------------- ---------------
Most corporate expenses, such as legal and accounting expenses and
public relations expenses, are included in Simulations Plus, Inc.
NOTE 12 - GEOGRAPHIC REPORTING
The Company allocates revenues to geographic areas based on the
locations of its customers. Geographical revenues were as follows for
the fiscal years ended August 31, 2004 and 2003:
August 31, 2004
--------------------------------------------------------------------------------
North South
(in `000) America Europe Asia Oceania America Total
---------- ---------- ---------- ---------- ---------- ----------
Simulations Plus, Inc. 1,493 582 781 -- -- 2,856
Words+, Inc. 2,104 177 45 19 6 2,351
---------- ---------- ---------- ---------- ---------- ----------
Total 3,597 759 826 19 6 5,207
========== ========== ========== ========== ========== ==========
August 31, 2003
--------------------------------------------------------------------------------
North South
(in `000) America Europe Asia Oceania America Total
---------- ---------- ---------- ---------- ---------- ----------
Simulations Plus, Inc. 1,618 1,087 401 -- -- 3,106
Words+, Inc. 2,062 200 98 14 5 2,379
---------- ---------- ---------- ---------- ---------- ----------
Total 3,680 1,287 499 14 5 5,485
========== ========== ========== ========== ========== ==========
F-24
SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2004
--------------------------------------------------------------------------------
NOTE 13 - EMPLOYEE BENEFIT PLAN
The Company maintains a 401(K) Plan for all eligible employees. The Company
makes matching contributions equal to the 100% of the employee's elective
deferral, not to exceed 4% of the total employee compensation. The Company can
also elect to make a profit-sharing contribution. Contributions by the Company
to this Plan amounted to $46,000 and $37,000 for the years ended August 31, 2004
and 2003, respectively.
F-25