<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 13(D)
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------- --------
COMMISSION FILE NUMBER 0-4882
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COLORADO 84-0581776
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STATE (OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1801 CALIFORNIA STREET, DENVER, COLORADO 80202
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(303) 292-1111
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(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED FROM LAST
REPORT).
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--------- ---------
NUMBER OF SHARES OF COMMON STOCK, NO PAR VALUE OUTSTANDING AT OCTOBER 31, 1995:
8,255,709
---------
(THIS FORM 10-Q INCLUDES 16 PAGES)
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 1995 AND 3
DECEMBER 31, 1994
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE 4
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE 5
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION 15
</TABLE>
2
<PAGE> 3
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
--------------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 284 $ 588
Accounts receivable, net of allowance for doubtful
accounts of $2,649 and $2,825 . . . . . . . . . . . . . . . . . 10,664 10,199
Work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . 5,343 4,975
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . 782 1,055
--------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 17,073 16,817
--------------- -------------
Software, net of accumulated amortization of
$29,646 and $25,524 . . . . . . . . . . . . . . . . . . . . . . . . 27,666 27,384
--------------- -------------
Property and Equipment, net of accumulated depreciation
and amortization of $6,260 and $5,589 . . . . . . . . . . . . . . . 1,580 1,917
--------------- -------------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,214 2,214
--------------- -------------
$ 48,533 $ 48,332
=============== =============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable and current portion of long-term obligations . . . . . $ 399 $ 286
Note payable to bank . . . . . . . . . . . . . . . . . . . . . . . . 2,400 1,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 3,122 2,703
Accrued salaries and fringe benefits . . . . . . . . . . . . . . . . 989 1,387
Accrued lease obligations . . . . . . . . . . . . . . . . . . . . . 219 570
Deferred maintenance and other revenue . . . . . . . . . . . . . . . 3,275 2,266
Other current liabilities . . . . . . . . . . . . . . . . . . . . . 1,402 1,472
--------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 11,806 9,684
--------------- -------------
Accrued Lease Obligations . . . . . . . . . . . . . . . . . . . . . . . . 579 720
--------------- -------------
Long-Term Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 346 331
Convertible Debentures . . . . . . . . . . . . . . . . . . . . . . . . . 1,660 1,750
Redeemable Preferred Stock
Series A Convertible Preferred Stock, $5 par value;
1,200,000 shares authorized, 800,000 shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 4,000
--------------- -------------
Stockholders' Equity
Common stock, no par value; $.10 stated value;
25,000,000 shares authorized, 8,255,000 and
8,056,000 shares issued and outstanding . . . . . . . . . . . . . . 825 806
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 48,782 48,233
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . (18,963) (16,635)
Cumulative foreign currency translation adjustment . . . . . . . . . (502) (557)
--------------- -------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . 30,142 31,847
--------------- -------------
$ 48,533 $ 48,332
=============== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE
Consulting and training . . . . . . . . . . . $ 3,599 $ 4,403 $ 11,077 $ 11,524
Licenses and maintenance . . . . . . . . . . . 1,528 2,943 6,049 9,292
Other . . . . . . . . . . . . . . . . . . . . 297 68 517 242
---------- ---------- ---------- ----------
5,424 7,414 17,643 21,058
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Costs of consulting and training . . . . . . . 3,300 2,776 8,828 7,638
Costs of licenses and maintenance,
including software amortization of
$1,375, $1,200, $4,125 and $3,600 . . . . 1,853 1,809 5,186 5,071
Contract cost accruals (reversals) . . . . . . --- --- --- (4)
Costs of other revenue . . . . . . . . . . . . 178 41 311 145
Selling, general and administrative . . . . . 1,259 2,006 4,858 5,601
Software research and development . . . . . . 150 93 450 407
---------- ---------- ---------- ----------
6,740 6,725 19,633 18,858
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS (1,316) 689 (1,990) 2,200
Other Income (Expense)
Interest income (expense) . . . . . . . . . . (51) (8) (171) (337)
Foreign exchange gains (losses) . . . . . . . 14 (13) (17) (56)
---------- ---------- ---------- ----------
Income Before Income Taxes . . . . . . . . . . . . (1,353) 668 2,178 1,807
Provision For Income Taxes . . . . . . . . . . . . 50 25 150 260
---------- ---------- ---------- ----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . $ (1,403) $ 643 $ (2,328) $ 1,547
========== ========== ========== ==========
Weighted Average Number of Common and
Common Equivalent Shares Outstanding . . . . . 8,191 8,338 8,152 6,666
========== ========== ========== ==========
Income (Loss)Per Common and Common
Equivalent Share . . . . . . . . . . . . . . . $ (0.17) $ 0.08 $ (0.29) 0.23
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------
1995 1994
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,328) $ 1,547
------------- -------------
Adjustments:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 4,703 4,140
Contract cost accruals (reversals) . . . . . . . . . . . . . . . . . - (4)
Provision for losses on accounts receivable . . . . . . . . . . . (176) 45
Changes in operating assets and liabilities:
Decrease in accounts receivable
and work in progress . . . . . . . . . . . . . . . . . . . . . . . (657) (3,390)
Increase (decrease) in other assets . . . . . . . . . . . . . . . . 273 (197)
Decrease in accounts payable and
accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . (49) (2,067)
Decrease in accrued lease obligations . . . . . . . . . . . . . . . (492) (374)
Increase in deferred revenue . . . . . . . . . . . . . . . . . . . . 1,009 247
------------- -------------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . 4,611 (1,600)
------------- -------------
Net cash provided by operating activities . . . . . . . . . . . . 2,283 (53)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized software costs . . . . . . . . . . . . . . . . . . . . . (4,404) (4,017)
Purchases of equipment . . . . . . . . . . . . . . . . . . . . . . . (334) (768)
------------- -------------
Net cash (utilized in) investing activities . . . . . . . . . . . (4,738) (4,785)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sales of common stock . . . . . . . . . . . . . . . . . . . . . . . . 568 10,710
Bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400 104
Repayments of bank borrowings . . . . . . . . . . . . . . . . . . . . - (5,132)
Proceeds from (repayments of) other obligations . . . . . . . . . . . 128 (347)
------------- -------------
Net cash provided by financing activities . . . . . . . . . . . . 2,096 5,335
------------- -------------
Effect of exchange rates on cash . . . . . . . . . . . . . . . . . . . . 55 119
------------- -------------
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . (304) 616
Cash and cash equivalents at beginning of period . . . . . . . . . . . . 588 139
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . 284 $ 755
============= ===============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest, net of amounts capitalized . . . . . . . . . . . . . . . . $ 348 $ 356
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 378
Exchange of convertible debenture for common stock . . . . . . . . . . . - 1,750
Prior year compensation, services, and expenses paid in stock . . . . . . - 343
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - UNAUDITED INTERIM INFORMATION
This report includes the consolidated financial statements of Scientific
Software-Intercomp, Inc., and its wholly-owned subsidiaries. The consolidated
balance sheet as of December 31, 1994, is excerpted from the unaudited
financial statements for the year then ended. The consolidated financial
statements for the interim periods ended September 30, 1995 and 1994, reflect
all normal recurring adjustments which, in the opinion of the Company, are
necessary for a fair statement of the results of operations, financial
position, and cash flows, as of the dates and for the periods presented.
Operating results for the three and nine months ended September 30, 1995, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1995.
The Notes to Consolidated Financial Statements included in the Company's 1994
Annual Report on Form 10-K should be read in conjunction with these
consolidated financial statements.
NOTE 2 - BANK CREDIT AGREEMENT
Effective October 15, 1995, the Company renewed its primary bank line of credit
to March 31, 1996, which includes a loan agreement with the bank that provides
for a revolving credit facility pursuant to which the Company may utilize up to
$5.13 million for: (a) short-term borrowings for working capital purposes, and
(b) the issuance of letters of credit for bid guarantees, performance bonds,
and advance payment guarantees. The facility was reduced from $6.0 million.
Borrowings and outstanding letters of credit are collateralized by
substantially all the Company's assets, excluding those of the Company's
Canadian subsidiary. The maximum amount of cash borrowings and letters of
credit that may be outstanding at any time is determined by a borrowing base
formula related to available collateral. The credit facility consists of a
foreign portion under which up to $4.5 million cash borrowings and letters of
credit may be outstanding if sufficient collateral of foreign accounts
receivable is available and a domestic portion under which up to $633,000 of
letters of credit only may be outstanding if sufficient collateral of domestic
accounts receivable is available.
The foreign portion of the credit facility is supported by a $4.5 million
guarantee by the Export-Import Bank of the United States. In addition, the
Company's primary bank has requested the Export-Import Bank to extend
expiration of the guarantee to June 15, 1996 in anticipation of extending the
revolving credit facility to a longer maturity after the bank has additional
time to assess the Company's future performance.
As of September 30, 1995, the borrowing base, amounts of short-term cash
borrowings and letters of credit outstanding, and credit available under the
revolving credit facility were as follows:
6
<PAGE> 7
<TABLE>
<S> <C>
(In thousands)
Revolving credit facility limit . . . . . . . . . . . . . . . $ 5,133
=========
Borrowing base (limited by insurance coverage and amount of
qualified receivables) . . . . . . . . . . . . . . . . . . . $ 3,900
Amounts outstanding:
Short-term cash borrowings . . . . . . . . . . . . . . . $ 2,400
Letters of credit . . . . . . . . . . . . . . . . . . . 955
---------
$ 3,355
=========
Credit available as of September 30, 1995 . . . . . . . . . . $ 505
=========
</TABLE>
Interest rates applicable to short-term cash borrowings under the foreign
portion of the credit facility are equal to the bank's prime rate of interest
plus 1.5% Interest rates applicable to short-term cash borrowings related to
the bank's payment, if any, under letters of credit issued under the domestic
portion of the credit facility are equal to the bank's prime rate of interest
plus 2.5%. At September 30, 1995, interest rates applicable to short-term cash
borrowings were 10.25% and 11.25% for the foreign and domestic portions of the
line of credit, respectively. The Company pays 2% annually for outstanding
letters of credit. The agreement requires that the Company meet certain
requirements regarding operating results and financial condition, and prohibits
the Company from paying dividends without the bank's prior written consent.
The Company pays to the Export-Import Bank an annual fee of $67,500, equal to
1.5% of the amount of the guarantee. In addition, the Company is required to
purchase credit insurance for foreign receivables only at a cost of 0.44% of
the amount of the insured receivables.
In January 1995, the Company's United Kingdom subsidiary obtained a bank line
of credit of $300,000 for working capital financing of its projects. This line
of credit is collateralized by a letter of credit for $300,000, which was
issued by the Company's primary bank pursuant to the revolving credit facility
described above. Interest related to borrowings on the United Kingdom line of
credit is charged at a rate per annum equal to the bank's prime rate of
interest plus 1.75%. At September 30, 1995, the United Kingdom subsidiary had
approximately $166,000 outstanding under the line of credit.
The Company's Canadian subsidiary has a bank line of credit of approximately
$150,000 for working capital financing of its projects. At September 30, 1995,
the Canadian subsidiary had no outstanding borrowings under this arrangement.
Interest related to borrowings on the Canadian line of credit is charged at a
rate per annum equal to the bank's prime rate of interest plus 1.25%.
NOTE 3 - CONTINGENCIES
Other assets at September 30, 1995 and December 31, 1994 includes $470,000
related to a claim for costs incurred pursuant to a gas pipeline project in
India. Depending on the amount collected on a claim by the primary contractor
against the ultimate customer, the Company could receive up to $1.4 million.
7
<PAGE> 8
The Company's long-term services contracts generally include provisions for
penalty charges for delay in the completion of contracts. In the first quarter
of 1995, the Company did not complete a contract on a timely basis that could
have resulted in significant penalties if the Company was determined to be at
fault. Management believes failure to complete the project timely is due to
the customer and that no penalties will be incurred. During the third quarter
of 1995, the Company resolved the issue with the customer with no penalties
being assessed and received full payment on the project.
On October 5, 1995, a claim was filed against the Registrant entitled, Marshall
Wolf on his behalf and on behalf of all others similarly situated, Plaintiff
vs. E.A. Breitenbach, R.J. Hottovy, Jimmy L. Duckworth, and Scientific
Software- Intercomp, Inc., in the United States District Court for the District
of Colorado. The Complaint alleges that the Defendants, who include the
current President and Chief Executive Officer of the Registrant, its current
Chief Financial Officer and a former Executive Vice President, violated Section
10(b) of the Securities Exchange Act of 1934 and Rule 10(b)-5 promulgated
thereunder in issuing misleading public statements with respect to financial
results for the first three fiscal quarters of the Registrant's 1994 fiscal
year arising out of the Company's contracts with value added resellers and the
obligations of such customers to make payments under the contracts. The
Plaintiff seeks to have the court determine that the lawsuit constitutes a
proper class action on behalf of all persons who purchased stock of the
Registrant during the period from May 20, 1994 through July 10, 1995, with
certain exclusions. It is the position of the Company and the other Defendants
that no violation of securities laws or regulations occurred and that the
Complaint is without merit. Accordingly, it is the intention of the Company
and the other Defendants to vigorously defend the claims.
NOTE 4 - INCOME TAXES
The Company's income tax expense is primarily due to foreign taxes withheld at
the source on sales in some foreign countries. Consequently, these taxes cause
the Company's effective tax rate to vary from the Federal statutory rate and
the Company incurred a current tax provision in spite of a loss in the current
period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Overall Financial Position. At September 30, 1995, the Company's working
capital ratio was 1.4 to 1 based on current assets of $17 million and current
liabilities of $11.8 million. The Company's working capital ratio at December
31, 1994 was 1.7 to 1 based on current assets of $16.8 million and current
liabilities of $9.7 million. Total stockholders' equity was $30.1 million at
September 30, 1995 and $31.8 million at December 31, 1994.
8
<PAGE> 9
BANK REVOLVING CREDIT FACILITY
Effective October 15, 1995, the Company renewed its primary bank line of credit
to March 31, 1996, which includes a loan agreement with the bank that provides
for a revolving credit facility pursuant to which the Company may utilize up to
$5.13 million for: (a) short-term borrowings for working capital purposes, and
(b) the issuance of letters of credit for bid guarantees, performance bonds,
and advance payment guarantees. The facility was reduced from $6.0 million.
Borrowings and outstanding letters of credit are collateralized by
substantially all the Company's assets, excluding those of the Company's
Canadian subsidiary. The maximum amount of cash borrowings and letters of
credit that may be outstanding at any time is determined by a borrowing base
formula related to available collateral. The credit facility consists of a
foreign portion under which up to $4.5 million cash borrowings and letters of
credit may be outstanding if sufficient collateral of foreign accounts
receivable is available and a domestic portion under which up to $633,000 of
letters of credit only may be outstanding if sufficient collateral of domestic
accounts receivable is available.
The foreign portion of the credit facility is supported by a $4.5 million
guarantee by the Export-Import Bank of the United States. In addition, the
Company's primary bank has requested the Export-Import Bank to extend
expiration of the guarantee to June 15, 1996 in anticipation of extending the
revolving credit facility to a longer maturity after the bank has additional
time to assess the Company's future performance.
As of September 30, 1995, the borrowing base, amounts of short-term cash
borrowings and letters of credit outstanding, and credit available under the
revolving credit facility were as follows:
<TABLE>
<S> <C>
(In thousands)
Revolving credit facility limit . . . . . . . . . . . . $ 5,133
========
Borrowing base (limited by insurance coverage and amount
of qualified receivables) . . . . . . . . . . . . . . . $ 3,900
Amounts outstanding:
Short-term cash borrowings . . . . . . . . . . . . $ 2,400
Letters of credit . . . . . . . . . . . . . . . . . 955
--------
$ 3,355
========
Credit available as of September 30, 1995 . . . . . . . $ 505
========
</TABLE>
Interest rates applicable to short-term cash borrowings under the foreign
portion of the credit facility are equal to the bank's prime rate of interest
plus 1.5% Interest rates applicable to short-term cash borrowings related to
the bank's payment, if any, under letters of credit issued under the domestic
portion of the credit facility are equal to the bank's prime rate of interest
plus 2.5%. At September 30, 1995, interest rates applicable to short-term cash
borrowings were 10.25% and 11.25% for the foreign and domestic portions of the
line of credit, respectively. The Company pays 2% annually for outstanding
letters of credit. The agreement requires that the Company meet certain
requirements regarding operating results
9
<PAGE> 10
and financial condition, and prohibits the Company from paying dividends
without the bank's prior written consent.
The Company pays to the Export-Import Bank an annual fee of $67,500, equal to
1.5% of the amount of the guarantee. In addition, the Company is required to
purchase credit insurance for foreign receivables only at a cost of 0.44% of
the amount of the insured receivables.
In January 1995, the Company's United Kingdom subsidiary obtained a bank line
of credit of $300,000 for working capital financing of its projects. This line
of credit is collateralized by a letter of credit for $300,000, which was
issued by the Company's primary bank pursuant to the revolving credit facility
described above. Interest related to borrowings on the United Kingdom line of
credit is charged at a rate per annum equal to the bank's prime rate of
interest plus 1.75%. At September 30, 1995, the United Kingdom subsidiary had
approximately $166,000 outstanding under the line of credit.
The Company's Canadian subsidiary has a bank line of credit of approximately
$150,000 for working capital financing of its projects. At September 30, 1995,
the Canadian subsidiary had no outstanding borrowings under this arrangement.
Interest related to borrowings on the Canadian line of credit is charged at a
rate per annum equal to the bank's prime rate of interest plus 1.25%.
RESULTS OF OPERATIONS
OVERALL OPERATING RESULTS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
Total revenue decreased 27% to $5.4 million in the three months ended September
30, 1995, from $7.4 million in the three months ended September 30, 1994. The
decrease resulted primarily from lower licenses and maintenance revenue from in
the Pipeline and Facilities Division and the Kinesix Division. These decreases
were partially offset by an increase in development and production software
license and maintenance revenue, including a 10% increase in revenue from The
Petroleum WorkBench to $1.1 million in the third quarter of 1995 compared to
$1.0 million in the three months ended September 30,1994. Total consulting
revenue for the quarter decreased 20% to $3.5 million in the three months ended
September 30, 1995 from $4.4 million in the three months ended September 30,
1994.
Total revenue decreased in the third quarter as the result of writedown of
approximately $500,000 of previously recorded contracts, primarily the
writedown of $420,000 from the U.S. Government (USG) contract recorded in the
first quarter. Though that contract was signed with over $1.3 million in
potential revenue, due to USG budget constraints only $280,000 could be
recognized in the USG fiscal year ended September 30, 1995. In addition,
approximately $600,000 in signed contracts and purchase orders expected to be
recognized in the third quarter were moved to the fourth quarter because they
did not meet all the stringent new timing requirements adopted by the Company
this past June. All of these contracts will be booked in the fourth quarter.
As a result of the decrease in total revenue, during the three months ended
September 30, 1995, the Company's showed a loss before income taxes of ($1.4
million) in the three
10
<PAGE> 11
months ended September 30, 1995, as compared to a profit before tax $668,000 in
the three months ended September 30, 1994.
The Company's management has already taken a number of actions, including major
cost reductions and Division reorganizations, and it expects to return to
profitability in the near future.
The Company's backlog at September 30, 1995 was $17.2 million.
REVENUE
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
Total Revenue. Total revenue decreased 27% to $5.4 million in the three months
ended September 30, 1995, from $7.4 million in the three months ended September
30, 1994. The decrease resulted from a decrease in license and maintenance
revenue of 48% to $1.5 million in the three months ended September 30, 1995
from $2.9 million in the three months ended September 30, 1994. The reasons
for the decrease in licenses and maintenance revenue is discussed in the
preceding section "Overall Operating Results." Total consulting revenue for
the quarter decreased 20% to $3.5 million in the three months ended September
30, 1995 from $4.4 million in the three months ended September 30, 1994.
Development and Production Products and Services. Total revenue from
development and production products and services decreased 5% to $4.3 million
in the three months ended September 30, 1995, from $4.6 million in the three
months ended September 30, 1994. Consulting and training revenue in this area
decreased 4% to $2.8 million in the three months ended September 30, 1995, from
$3.0 million in the three months ended September 30, 1994. Development and
production software license and maintenance revenue decreased 15% to $1.3
million in the three months ended September 30, 1995, from $1.6 million in the
three months ended September 30, 1994. Total revenue from The Petroleum
WorkBench increased 10% to $1.1 million in the three months ended September 30,
1995, from $1.0 million in the three months ended September 30, 1994.
Pipeline and Surface Facilities Products and Services. Total revenue from
pipeline and surface facilities products and services decreased 76% to $465,000
in the three months ended September 30, 1995, from $2.0 million in the three
months ended September 30, 1994. Consulting and training revenue in this area
decreased 49% to $600,000 in the three months ended September 30, 1995, from
$1.2 million in the three months ended September 30, 1994. Pipeline and
surface facilities software license and maintenance revenue decreased 120% to
$(150,000) in 1995 from $800,000 in 1994. License and maintenance revenue
decreased due to delays in closing pipeline projects in the Pacific Rim areas
and the fact that Company had no revenue from new Value Added Resellers (VARs)
in the quarter ended September 30, 1995.
GUI Products and Services. Total revenue from graphical user interface ("GUI")
products and services decreased 30% to $600,000 in the three months ended
September 30, 1995, as compared to $900,000 in the three months ended September
30, 1994, as a result of a decrease to $345,000 in software license and
maintenance revenue in the three months ended September 30, 1995 from $600,000
in the three months ended September 30, 1994. As a result of the continued
poor performance by this Division, the Company changed the management of the
Kinesix Division and reduced staff during May 1995.
11
<PAGE> 12
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
Total Revenue. Total revenue decreased 16% to $17.6 million in the nine months
ended September 30, 1995, from $21.1 million in the nine months ended September
30, 1994. The decrease resulted primarily from a decrease in license and
maintenance revenue of 35% to $6.0 million in 1995 from $9.3 million in 1994.
The reason for the decrease in license and maintenance revenue is discussed in
the preceding section "Overall Operating Results." Consulting and training
revenue decreased 4% to $11.1 million in 1995 from $11.5 million in 1994.
Development and Production Products and Services. Total revenue from
development and production products and services increased 3% to $12.7 million
in the nine months ended September 30, 1995, from $12.3 million in the nine
months ended September 30, 1994. Consulting and training revenue in this area
increased 5% to $8.3 million in the in the nine months ended September 30,
1995, from $7.9 million in the nine months ended September 30, 1994.
Development and production software license and maintenance revenue decreased
3% to $4.1 million in the nine months ended September 30, 1995, from $4.3
million in the nine months ended September 30, 1994. Total revenue from The
Petroleum WorkBench increased 23% to $3.2 million in the nine months ended
September 30, 1995, from $2.6 million in the nine months ended September 30,
1994.
Pipeline and Surface Facilities Products and Services. Total revenue from
pipeline and surface facilities products and services decreased 46% to $3.3
million in the nine months ended September 30, 1995, from $6.1 million in the
nine months ended September 30, 1994. Consulting and training revenue in this
area decreased 20% to $2.0 million in the nine months ended September 30, 1995
from $2.5 million in the nine months ended September 30, 1994. Pipeline and
surface facilities software license and maintenance revenue decreased 66% to
$1.2 million in 1995 from $3.5 million in 1994. License and maintenance
revenue decreased due to delays in closing pipeline projects in the Pacific Rim
areas and the Company had no revenue from new Value Added Resellers in the
quarter ended September 30, 1995.
GUI Products and Services. Total revenue from graphical user interface ("GUI")
products and services decreased 40% to $1.6 million in the nine months ended
September 30, 1995, from $2.6 million in the nine months ended September 30,
1994, as a result of a decrease to $735,000 in software license and maintenance
revenue in the nine months ended September 30, 1995 from $1.5 million in the
nine months ended September 30, 1994. As a result of the continued poor
performance by this Division, the Company changed the management of the Kinesix
Division and reduced staff during May 1995.
COSTS OF CONSULTING AND COSTS OF LICENSES AND MAINTENANCE
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
Direct costs of consulting and training (decreased) increased to $3.3 million
in the three months ended September 30, 1995, from $2.8 million in the three
months ended September 30, 1994. Direct costs of consulting and training were
92% of consulting and training revenue in the three months ended September 30,
1995, as compared to 64% in the three months ended September 30, 1994.
12
<PAGE> 13
The Company has already put in place a reorganization of the Development and
Production Consulting Division which is aimed at reducing the cost of
consulting revenue. Costs of licenses and maintenance were $1.9 million in the
three months ended September 30, 1995 compared to $1.8 million in the three
months ended September 30, 1994, in spite of increased software amortization of
$1.4 million in 1995 up from $1.2 million in 1994. Total costs of licenses and
maintenance were 121% of license and maintenance revenue in the three months
ended September 30, 1995, as compared to 62% in the three months ended
September 30, 1994. The higher cost percentages were the result of poor sales
performance in the recent quarter.
Because of the uncertainty about collectibility of certain fixed fee contracts
in the fourth quarter of 1994, the Company increased its reserve for doubtful
accounts by $2.4 million. The Company recovered bad debt expenses were reduced
by $13,500 in the current quarter for recoveries of items reserved in the
fourth quarter of 1994.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
Direct costs of consulting and training increased to $8.8 million in the nine
months ended September 30, 1995, from $7.6 million in the nine months ended
September 30, 1994. Direct costs of consulting and training were 80% of
consulting training revenue in the nine months ended September 30, 1995, as
compared to 66% in the nine months ended September 30, 1994.
Costs of licenses and maintenance were $5.2 million in the nine months ended
September 30, 1995, as compared to $5.1 million in the nine months ended
September 30, 1994, including software amortization of $4.1 million in 1995 and
$3.6 million in 1994. Total costs of licenses and maintenance were 86% of
license and maintenance revenue in the nine months ended September 30, 1995, as
compared to 55% in the nine months ended September 30, 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
Selling, general and administrative expenses were $1.3 million in the three
months ended September 30, 1995, and $2.0 million in the three months ended
September 30, 1994.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
Selling, general and administrative expenses were $4.8 million in the nine
months ended September 30, 1995, and $5.6 million in the nine months ended
September 30, 1994.
SOFTWARE RESEARCH AND DEVELOPMENT
The following table summarizes total costs of development and enhancement of
the Company's software products for the three and nine months ended September
30, 1995 and 1994, the portion of these costs capitalized in accordance with
FASB Statement No. 86, the portion charged to research and development expense,
the portion of capitalized costs amortized, and the total amounts expensed and
amortized.
13
<PAGE> 14
<TABLE>
<CAPTION>
Total Total
Software Amount Amount Amount Charges to
Expenditures Capitalized Expensed Amortized Earnings
------------ ----------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Three Months
Ended September 30,
1995 $ 1,625 $ 1,475 $ 150 $ 1,375 $ 1,525
1994 1,640 1,547 93 1,200 1,293
Nine Months
Ended September 30,
1995 4,854 4,404 450 4,125 4,575
1994 4,424 4,017 407 3,600 4,007
</TABLE>
The Company has continued its commitment to the development and enhancement of
its software products. Although software research and development costs will
continue, management expects such costs will decrease as a percentage of
revenue in the future. Management expects that the amount of future annual
capitalized software development costs will be less than future annual software
amortization expenses. Accordingly, the net capitalized cost of the Company's
software assets is anticipated to decline in future years.
FOREIGN EXCHANGE GAINS (LOSSES)
The Company's foreign exchange gains and losses relate principally to the
effects of fluctuations in the exchange rate of the British pound on
transactions of the Company's subsidiary in the United Kingdom that are
denominated in other currencies.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
During the three months ended September 30, 1995 and 1994, the Company reported
a net foreign exchange gain of $14,000 and a loss of $(13,000), respectively,
principally as a result of the strengthening of the British pound against the
U.S. dollar.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
During the nine months ended September 30, 1995 and 1994, the Company reported
net foreign exchange losses of $17,000 and $56,000, respectively, principally
as a result of the strengthening of the British pound against the U.S. dollar.
INTEREST INCOME (EXPENSE)
The following table summarizes the components of interest income (expense)
during the three and nine months ended September 30, 1995 and 1994. The
capitalized interest was included as a component of the capitalized cost of
software development projects in progress in accordance with FASB Statement No.
34.
14
<PAGE> 15
<TABLE>
<CAPTION>
Interest
Interest Interest Interest Income
Income Incurred Capitalized (Expense)
------ -------- ----------- ---------
(In thousands)
<S> <C> <C> <C>
Three Months
Ended September 30,
1995 $ 10 $ (111) $ 100 $ (1)
1994 14 (112) 90 (8)
Nine Months
Ended September 30,
1995 27 (348) 200 (121)
1994 19 (630) 274 (337)
</TABLE>
INFLATION
The Company's results of operations have not been affected by inflation and
management does not expect inflation to have a significant effect on its
operations in the future.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27 Financial Data Schedule
b. Reports on Form 8-K.
1) The Company filed a Form 8-K on July 7, 1995, reporting that it had
received notice of the resignation of the accounting firm of Hein +
Associates LLP as its independent accountants.
2) The Company filed a Form 8-K, Amendment No. 1, on August 1, 1995,
attaching the former accountant's letter addressed to the Commission
indicating its response to the statements made by the Company to Item
4 of its Report on Form 8-K dated June 30, 1995 and filed on or about
July 8, 1995.
3) The Company filed a Form 8-K, Amendment No. 2, on August 14, 1995,
attaching the Company's response to its former accountant's letter
addressed to the Commission indicating its response to the statements
made by the Company to Item 4 of its Report on Form 8-K dated June 30,
1995 and filed on or about July 8, 1995.
4) The Company filed a Form 8-K on September 22, 1995 announcing the
engagement of Ehrhardt Keefe Steiner & Hottman PC as its accountants.
5) The Company filed a Form 8-K on October 18,1995 with the S.E.C.
explaining that a lawsuit had been filed on behalf of one shareholder
who was attempting to gain class action status for a claim against the
Company for some of the reporting issues that had happened in 1994 and
1995.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
November 17, 1995 /s/ E.A. BREITENBACH
- --------------------- ----------------------------------------
Date E. A. Breitenbach, Chairman of the
Board of Directors, Chief Executive
Officer, President and Chief Operating
Officer (a principal executive officer
and director)
November 17, 1995 /s/ R.J. HOTTOVY
- --------------------- ----------------------------------------
Date R.J. Hottovy, Secretary, Treasurer,
Chief Financial Officer, and
Principal Accounting Officer
16
<PAGE> 17
EXHIBIT INDEX
Exhibit
Number Exhibit Description Page
- ------- ------------------- ----
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 284
<SECURITIES> 0
<RECEIVABLES> 13,313
<ALLOWANCES> 2,649
<INVENTORY> 0
<CURRENT-ASSETS> 17,073
<PP&E> 7,840
<DEPRECIATION> 6,260
<TOTAL-ASSETS> 48,533
<CURRENT-LIABILITIES> 11,806
<BONDS> 0
<COMMON> 825
4,000
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 48,533
<SALES> 17,643
<TOTAL-REVENUES> 17,643
<CGS> 0
<TOTAL-COSTS> 19,633
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (171)
<INCOME-PRETAX> (2,178)
<INCOME-TAX> 150
<INCOME-CONTINUING> (2,328)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,328)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> 0
</TABLE>
