<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
MARCH 31, 1996
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
------------------------------- -------------------
STATE (OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1801 CALIFORNIA STREET, DENVER, COLORADO 80202
-----------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(303) 292-1111
---------------------------------------------------
(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 APRIL 30, 1996:
8,633,325
---------------
(This form 10-Q includes 13 pages)
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1996
AND DECEMBER 31, 1995 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1995 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1995 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION 13
</TABLE>
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<PAGE> 3
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ................................................... $ 342 $ 419
Accounts receivable, net of allowance for doubtful
accounts of $3,558 and $3,811 ............................................. 5,497 6,614
Work in progress ............................................................ 3,464 3,008
Other current assets ........................................................ 405 423
-------- --------
Total current assets .................................................... 9,708 10,464
-------- --------
Software, net of accumulated amortization and write-down of
$31,024 and $30,924 ......................................................... 10,190 10,190
Property and Equipment, net of accumulated depreciation
and amortization of $6,397 and $6,223 ....................................... 1,238 1,416
Other Assets .................................................................. 1,815 1,842
-------- --------
22,951 23,912
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable and current portion of long-term obligations ................... 495 382
Note payable to bank ........................................................ 2,870 2,870
Accounts payable ............................................................ 3,155 3,375
Accrued salaries and fringe benefits ........................................ 1,259 1,157
Accrued lease obligations ................................................... 331 375
Deferred maintenance and other revenue ...................................... 2,911 2,712
Other current liabilities ................................................... 2,360 2,684
-------- --------
Total current liabilities ................................................ 13,381 13,555
Accrued Lease Obligations ..................................................... 287 333
Long-Term Obligations ......................................................... 275 284
Convertible Debentures ........................................................ 1,600 1,630
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, 8,290,000 and
8,256,000 shares issued and outstanding ..................................... 829 825
Paid-in capital ............................................................. 48,944 48,850
Accumulated deficit ......................................................... (45,769) (44,970)
Cumulative foreign currency translation adjustment .......................... (596) (595)
-------- --------
Total stockholders' equity .............................................. 3,408 4,110
-------- --------
$ 22,951 $ 23,912
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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<PAGE> 4
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------
1996 1995
------- -------
<S> <C> <C>
REVENUE
Consulting and training ........................ $ 2,977 $ 3,895
Licenses and maintenance ....................... 1,808 2,795
Other .......................................... 107 164
------- -------
4,892 6,854
------- -------
COSTS AND EXPENSES
Costs of consulting and training ............... 2,518 2,879
Costs of licenses and maintenance,
including software amortization of
$500 and $1,375 .............................. 1,950 1,897
Contract cost accruals (reversals) ............. (9) --
Costs of other revenue ......................... 64 64
Selling, general and administrative ............ 1,022 1,770
Software research and development .............. 70 77
------- -------
5,615 6,687
------- -------
INCOME FROM OPERATIONS ........................... (723) 167
Other Income (Expense)
Interest income (expense) ...................... (63) (50)
Foreign exchange gains (losses) ................ (3) (4)
------- -------
Income Before Income Taxes ....................... (789) 113
Provision For Income Taxes ....................... 10 50
------- -------
NET INCOME (LOSS) ................................ (799) 63
======= =======
Weighted Average Number of Common and
Common Equivalent Shares Outstanding ........... 8,185 8,606
======= =======
Income (Loss)Per Common and Common
Equivalent Share ............................... (.10) .01
======= =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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<PAGE> 5
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................. $ (799) $ 63
------- -------
Adjustments:
Depreciation and amortization ....................................... 644 1,626
Provision for losses on accounts receivable ......................... (253) 69
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable
and work in progress ............................................. 914 (360)
Increase in other assets ............................................ 45 311
(Decrease) in accounts payable and
accrued expenses ................................................. (442) (861)
(Decrease) in accrued lease obligations ............................. (90) (311)
Increase (decrease) in deferred revenue ............................. 199 (275)
------- -------
Total adjustments ................................................ 1,017 199
------- -------
Net cash provided by operating activities ........................ 218 262
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized software costs ............................................. (500) (1,445)
Purchases of equipment ................................................. 4 (200)
------- -------
Net cash (utilized in) investing activities ....................... (496) (1,645)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Sales of common stock .................................................. 98 201
Bank borrowings ........................................................ -- 1,150
Proceeds from (repayments of) other obligations ........................ 104 (65)
------- -------
Net cash provided by financing activities ......................... 202 1,286
------- -------
Effect of exchange rates on cash .......................................... (1) 4
------- -------
Net (decrease) in cash and cash equivalents ............................... (77) (93)
Cash and cash equivalents at beginning of period .......................... 419 588
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ 342 495
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest, net of amounts capitalized ................................... 70 57
Income taxes ........................................................... -- --
</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, 1995 is excerpted from the audited financial
statements for the year then ended. The consolidated financial statements for
the interim periods ended March 31, 1996 and 1995 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
months ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996.
Except for historical information contained herein, the statements in this
report are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-
looking statements involve known and unknown risks and uncertainties which may
cause the Company's actual results in future periods to differ materially from
forecasted results. Those risks and uncertainties include, among others, the
financial strength and competitive pricing environment of the oil and gas
service industry, product demand, market acceptance and new product
development. Those and other risks are described in the Company's filings with
the Securities and Exchange Commission.
The Notes to Consolidated Financial Statements included in the Company's
1995 Annual Report on Form 10-K should be read in conjunction with these
consolidated financial statements.
NOTE 2 - BANK CREDIT AGREEMENT.
PRIMARY BANK LINE OF CREDIT, OCTOBER 15, 1995 - MARCH 31, 1996.
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 Company did not increase
its borrowing in 1996.
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 foreign portion of the credit facility is supported by a $4.5 million
guarantee by the Export-Import Bank of the United States (EximBank).
As of March 31, 1996 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:
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<PAGE> 7
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Revolving credit facility limit (limited by insurance
coverage and amounts of qualified receivables) .................... $5,133
======
Amounts outstanding:
Short-term cash borrowings ...................................... $2,870
Letters of credit ............................................... 633
------
$3,503
======
</TABLE>
The Company at December 31, 1995 was in violation of certain covenants on
the note which restricted its borrowing capacity. The bank has waived the
violations. Under the terms of the recently completed financing, in April 1996
the Company paid off the existing short term cash borrowing with the proceeds
of the financing. (See Management's Discussion and Analysis of Financial
Condition and Results of Operations.)
PRIMARY BANK LINE OF CREDIT, APRIL 1, 1996 - APRIL 15, 1997.
Effective April 1, 1996 the Company completed with its primary lender a
$1.5 million revolving credit facility that is available through April 15,
1997. The collateral for the line is the Company's accounts receivable from
non-U.S. domiciled customers to the extent necessary to support the line. All
receivables not necessary for the line and substantially all other assets
except those of the Canadian subsidiary will be collateral for the Lindner and
Renaissance senior secured notes. (See Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
The new credit facility is supported by a $1.5 million guarantee from
EximBank. The Company will pay 7% interest on the first $300,000 borrowed
under the line and the prime interest rate on the balance. The Company will
pay EximBank a fee equal to 1.5% of the guarantee and be required to purchase
credit insurance for foreign receivables in the amount guaranteed by EximBank.
UNITED KINGDOM LINE OF CREDIT.
In January 1995 the Company's United Kingdom subsidiary obtained a bank
line of credit of $300,000 for working capital financing for 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 March 31, 1996 the United Kingdom subsidiary had
approximately $300,000 outstanding under the line of credit.
CANADIAN 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 March
31, 1996 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
To the knowledge of management, the only claims pending or threatened
against the Company or any of its subsidiaries which individually or
collectively could have a material adverse effect upon the Company or its
financial condition are the following:
Marshall Wolf, on his behalf and on behalf of all others similarly situated
vs. E. A. Breitenbach, R. J. Hottovy, Jimmy L. Duckworth, and Scientific
Software-Intercomp, Inc. On October 5, 1995, a claim was filed in the United
States District Court for the District of Colorado alleging that the
Defendants, who include the President and Chief Executive Officer of the
Company, its Chief Financial Officer and a former
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<PAGE> 8
Executive Vice President, violated Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10(b)-5 promulgated thereunder in issuing financial reports
for the first three quarters of the Company's 1994 fiscal year which failed to
comply with generally accepted accounting principles with respect to revenues
recognized from the Company's contracts with value added resellers. 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 Company
during the period from May 30, 1994 through July 10, 1995, with certain
exclusions. It is the opinion of the Company and its counsel that the claim is
without merit and it is the intention of the Company and the other Defendants
to vigorously defend the claim.
Arbitration Number 70T 181 0038 96 D; Kinesix, a division of Scientific
Software-Intercomp, Inc. and Kinesix (Europe) Ltd., an English Company -
Houston, Texas. The Company, through Kinesix, a division of the Company,
entered into a Territory Distributor Agreement with Kinesix (Europe) Ltd.
("KEL"), an unaffiliated entity located in London, U.K. The Distributor
Agreement required under most circumstances a decision from the American
Arbitration Association ("AAA") before its termination could be effective. On
March 4, 1996 the Company commenced arbitration seeking declaration of
termination of the Distributor Agreement and money due the Company in excess of
$200,000. Thereafter, KEL in writing advised its customer base that it had
ceased to trade in Kinesix products. As a result of this action by KEL and
pursuant to the Distributor Agreement, the Company has declared the Distributor
Agreement terminated without the requirement of arbitration. In the interim,
on April 1, 1996 KEL filed an answer and counterclaim with the AAA and asserts
damages that exceed $1 million without substantiation. In the opinion of
management, KEL is asserting these claims in an attempt to avoid its
obligations to the Company and any damages KEL may have suffered are more than
offset by the money due the Company from KEL.
The Company has filed 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. No amount has been accrued related to the potential settlement.
In 1994 the Company settled a lawsuit against Central Hispano Banco (U.K.)
Limited (the "Bank") seeking a declaratory judgment on whether the Company was
liable on the Bank's claim of $473,000 representing unpaid rent under a
computer lease that was assigned to the Bank by the now bankrupt lessor. The
settlement, which is subject to court approval, did not result in a material
gain or loss.
The Company's long-term services contracts generally include provisions for
penalty charges for delay in the completion of contracts. Certain contracts in
progress at December 31, 1995 have not been subsequently completed by the
scheduled dates. Management believes that the delays were not caused by the
Company and that no significant penalties will be incurred.
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.
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<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
OVERALL FINANCIAL POSITION. At March 31, 1996, the Company's working capital
ratio was 0.73 to 1, based on current assets of $9.7 million and current
liabilities of $13.3 million. The Company's working capital ratio at December
31, 1995, was .77 to 1.
In April and May 1996 the Company completed the following financing and
restructuring of convertible debentures and bank revolving line of credit:
o In April 1996 Lindner Funds, a 14% shareholder in the Company, invested $5
million in the Company in exchange for a senior secured note at 7% payable
in five years and non-detachable warrants to purchase 1.5 million shares of
SSI no par value common stock at $3.00 per share for five years.
o In April 1996 Renaissance Capital Partners II, Ltd. converted $250,000 of
principal of its convertible debentures for 282,218 shares of the Company's
no par value common stock and convert the balance of $1,500,000 principal
of its convertible debentures into a senior secured note at 7% payable in
five years and a non-detachable stock purchase right to acquire 450,000
shares of SSI no par value common stock at $3.00 per share for five years.
The terms of the secured note and non-detachable stock purchase right are
substantially equal to those issued to Lindner Funds.
o Effective April 1, 1996 the Company's primary bank and the Export-Import
Bank of the United States restructured and renewed a bank line of credit to
April 15, 1997. Under the terms of the agreement, the Company paid off the
existing $2,870,000 outstanding on the Company's bank revolving line of
credit. The Company's primary bank established a revolving line of credit
pursuant to which the Company may utilize up to $1.5 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 Lindner and Renaissance transactions will be accounted for under APB 14
whereby the notes and the non-detachable warrants will be treated as a single
obligation and no separate value is assigned to the warrants.
The Company believes with the completion of the financing and restructuring
of the convertible debentures and bank revolving line of credit explained above
provided that the Company resumes generating cash flow from operations that (a)
amounts expected to continue to be available under the Company's revolving
credit facility and (b) internally generated funds should provide the Company
with sufficient liquidity and working capital to meet its anticipated operating
needs. There can be no assurance, however, that the Company will generate
sufficient cash flow from operations to meet its future operating needs or be
successful in obtaining any additional debt or equity financing.
o OTHER EQUITY TRANSACTIONS. In February 1996, the Company and Renaissance
agreed to change the conversion feature of the debentures so that the two
debentures which aggregate $1,750,000 in principal will be convertible at
$2.39 into 732,218 shares of the Company's no par common stock and made
other minor changes in the debentures. In April 1996 Renaissance Capital
Partners II, Ltd. converted $250,000 of principal of its convertible
debentures for 282,218 shares of the Company's no par value common stock
and converted the balance of $1,500,000 principal of its convertible
debentures into a senior secured note at 7% payable in five years and
non-detachable stock purchase rights to acquire 450,000 shares of SSI no
par value common stock at $3.00 per share for five years. The terms of the
secured note and non-detachable warrants are substantially equal to those
issued to Lindner Funds.
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<PAGE> 10
RESULTS OF OPERATIONS
OVERALL OPERATING RESULTS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Total revenue decreased 29% to $4.9 million in the first quarter of 1995
from $6.8 million in the first quarter of 1995. The Company reported lower
revenue from consulting and training and also licenses and maintenance.
Total consulting revenue decreased 24% to $3.0 million in the first quarter
of 1996 from $3.9 million in the first quarter of 1995, primarily as a result
of decreased activity on large foreign development and production consulting
contracts. Total licenses and maintenance revenue decreased 35% to $1.8
million in the first quarter of 1996 from $2.8 million in the first quarter of
1995 because of decreased revenue in the pipeline and surface facilities and
graphical user interface divisions, which are discussed below.
Income from operations decreased to a $723,000 loss in the first quarter of
1996 from $167,000 in the first quarter of 1995.
The Company's backlog at March 31, 1996 was $10.2 million.
REVENUE
DEVELOPMENT AND PRODUCTION PRODUCTS AND SERVICES. Total revenue from
development and production products and services, which includes The Petroleum
WorkBench(TM) software product, decreased 28% to $3.2 million in the first
quarter of 1996 from $4.5 million in the first quarter of 1995. Software
license and maintenance revenue decreased 30% to $1.0 million in the first
quarter of 1996 from $1.5 million in the first quarter of 1995. Consulting
revenue decreased 28% to $2.1 million in the first quarter of 1996 from $2.9
million in the first quarter of 1995. The decrease was attributable to
decreased activity on a large foreign consulting contract.
PIPELINE AND SURFACE FACILITIES PRODUCTS AND SERVICES. Total revenue from
pipeline and surface facilities products and services decreased 33% to $1.2
million in the first quarter of 1996 from $1.8 million in the first quarter of
1995. Consulting revenue increased to $750,000 in the first quarter of 1996
from $700,000 in the first quarter of 1995. Software license and maintenance
revenue decreased to $400,000 in the first quarter of 1996 from $1.1 million in
the first quarter of 1995. The revenue for the first quarter of 1995 included
a one time sale of $700,000.
GUI PRODUCTS AND SERVICES. Total revenue from graphical user interface ("GUI")
products and services decreased 17% to $500,000 in the first quarter of 1996
from $600,000 in the first quarter of 1995. Software license and maintenance
revenue increased to $370,000 in the first quarter of 1996 from $200,000 in the
first quarter of 1995. Consulting and training revenue decreased to $100,000
in the first quarter of 1996 from $300,000 in the first quarter of 1995.
COSTS OF CONSULTING AND COSTS OF LICENSES AND MAINTENANCE
Costs of consulting decreased to $2.5 million in the first quarter of 1996
from $2.9 million in the first quarter of 1995. The decrease was attributable
to the lower consulting revenue discussed above.
Costs of licenses and maintenance were $1.9 million in both the first
quarter of 1996 and in the first quarter of 1995.
The Company's bad debt expenses were reduced by $25,500 in the current
quarter as a result of recovery of previously written off accounts receivable.
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<PAGE> 11
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In the first quarter of 1996, selling, general and administrative expenses
were $1.0 million from $1.7 million in the first quarter of 1995 due to
reduction in selling expenses due to lower revenues.
SOFTWARE RESEARCH AND DEVELOPMENT
Following is a summary of costs of development and enhancement of the
Company's software products for the three months ended March 31, 1996 and 1995,
the amounts capitalized in accordance with FASB Statement No. 86, the amounts
charged to research and development expense, the portion of capitalized costs
amortized and the total amounts expensed and amortized.
<TABLE>
<CAPTION>
Quarter Total Total
Ended Software Amount Amount Amount Charges to
March 31, Expenditures Capitalized Expensed Amortized Earnings
--------- ------------ ----------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
1996 $ 570 $ 500 $ 70 $ 500 $ 570
1995 1,532 1,455 77 1,375 1,452
</TABLE>
REDUCTION OF CAPITALIZED SOFTWARE COSTS
Early in 1996, the Company appointed George Steel as president and chief
operating officer. Following this change, Mr. Steel and management undertook a
review of the Company's policies regarding capitalized software development
costs. The Company concluded that it had not been realizing an adequate return
on its capitalized software development costs; that the rate of technological
change applicable to the Company's software products was accelerating; and that
accordingly the value of its capitalized software was impaired. As a result
the Company made a one-time reduction of the carrying value of capitalized
software costs by $17,917,000 effective December 31, 1995.
The $17,917,000 capitalized software development cost reduction was
determined by an evaluation of each of the Company's principal software
products. The evaluation included a projection of the future revenue streams
from the products with those projected revenue streams adjusted using
historical variance factors derived from previous forecasts. The revenue
streams were also reduced to reflect normal costs of developing, maintaining
and marketing software in order to project a reasonable return to the Company
on its software investment.
In addition to the one-time reduction of capitalized software development
costs, the Company has reduced the estimated lives of its capitalized software
from 7-13 years to a new life, beginning in 1996, of 5 years. Such reduced
life reflects anticipated continued increased technological change along with
an anticipated continued requirement of the Company to expend significant funds
for software development in order to remain competitive in its marketplace.
Management has also developed a new policy to limit future capitalization
of software development costs. It is anticipated that annual amounts of
software capitalization will represent a substantially lower percentage of
total research and development costs and will approximately equal the annual
amortization of capitalized software costs of approximately $2 million per
year.
In addition, the Company combined four small cost pools into one pool for
related products to more correctly follow the future marketing and development
strategy for the products.
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<PAGE> 12
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.
In the first quarters of 1996 and 1995, the Company recognized net foreign
exchange losses of $3,000 and $4,000, respectively, primarily as a result of
strengthening of the British pound in relation to the U.S. dollar.
INTEREST INCOME (EXPENSE)
The following table summarizes the components of interest income (expense)
during the three months ended March 31, 1996 and 1995. The interest
capitalized was included as a component of the capitalized cost of software
development projects in progress in accordance with FASB Statement No. 34.
<TABLE>
<CAPTION>
Quarter Interest
Ended Interest Interest Interest Income
March 31, Income Incurred Capitalized (Expense)
--------- ------ -------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C>
1996 $ 7 $ (95) $ 25 $ (63)
1995 7 (107) 50 (50)
</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.
NEW ACCOUNTING STANDARD
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123) as of January 1,
1996. SFAS No. 123 allows for the Company to account for its stock option
plans in accordance with Accounting Principles Board Opinion No. 25, under the
intrinsic value method in which no compensation cost is recognized for stock
option awards to employees. Had compensation cost for the stock options been
determined consistent with the Company's pro forma net loss and loss per share
for the period ended March 31, 1996 would have been ($1.1 million) and ($0.13),
respectively.
SFAS No. 123 also applies to transactions in which an entity issues its
equity instruments to acquire goods or services from nonemployees.
Accordingly, the implementation of SFAS No. 123 may have a material effect on
the Company's financial statements and the pro forma disclosures in the notes
thereto in future periods.
-12-
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. 27 Financial Data Schedule
b. Reports on Form 8-K.
The Company filed a Form 8-K on January 15, 1996, announcing the
appointment of George Steel as its President and Chief Operating
Officer.
The Company filed a Form 8-K on May 3, 1996 to give notice of the
completion of a financing transaction with the conversion of the
Renaissance Capital Partners II, Ltd. debentures for shares.
The Company filed a Form 8-K on May 14, 1996 announcing the
resignation of E. A. Breitenbach, Chairman and Chief Executive
Officer, and Ronald J. Hottovy, Chief Financial Officer, and the
appointment of George Steel as Chairman, President and Chief Executive
Officer, all of which are effective May 15, 1996.
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.
May 14, 1996 /s/ E. A. Breitenbach
Date --------------------------------------------
E. A. Breitenbach, Chairman of the Board of
Directors, Chief Executive Officer(a
principal executive officer and director)
May 14, 1996 /s/ George Steel
Date --------------------------------------------
George Steel, President and Chief Operating
Officer (a principal executive
officer and director)
May 14, 1996 /s/ R. J. Hottovy
Date --------------------------------------------
R. J. Hottovy, Secretary, Treasurer, Chief
Financial Officer, and Principal
Accounting Officer
-13-
<PAGE> 14
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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 342
<SECURITIES> 0
<RECEIVABLES> 9,055
<ALLOWANCES> 3,558
<INVENTORY> 0
<CURRENT-ASSETS> 9,708
<PP&E> 7,635
<DEPRECIATION> 6,397
<TOTAL-ASSETS> 22,951
<CURRENT-LIABILITIES> 13,381
<BONDS> 0
<COMMON> 829
4,000
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,951
<SALES> 4,892
<TOTAL-REVENUES> 4,892
<CGS> 0
<TOTAL-COSTS> 5,615
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (63)
<INCOME-PRETAX> (789)
<INCOME-TAX> 10
<INCOME-CONTINUING> (799)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (799)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> 0
</TABLE>
