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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
(AS AMENDED MAY 24, 1996)
[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Act
of 1934 for fiscal year ended
December 31, 1995
[ ] Transitional Report Pursuant to Section 13 or 15 (d) of the Securities
Act of 1934
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 incorporation (IRS Employer
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)
<TABLE>
<S> <C>
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Common Stock, no par value
Name of each exchange on which registered: None
</TABLE>
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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment of
this Form 10-K. [X]
The approximate market value of stock held by non-affiliates is $15,793,412
based upon 5,743,059 shares held by such persons and the close price of $2.75
on March 31, 1996. The number of shares outstanding of the Registrant's no par
value common stock at March 31, 1996 was 8,290,827.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's definitive proxy statement to be filed
pursuant to Regulation 14A in connection with the annual meeting of
shareholders:
Part III, Items 10, 11, 12 and 13 of this report.
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PART I
ITEM 1. BUSINESS
THE COMPANY
GENERAL
Scientific Software-Intercomp, Inc. (the "Company") develops and markets
sophisticated software for the development and production and pipeline and
surface facilities areas of the worldwide oil and gas industry and for
graphical user interface applications. The Company's computer-aided production
("CAP") software provides oil and gas industry professionals with a
comprehensive set of powerful, cost-effective tools that describe, simulate and
predict oil and gas production from reservoirs under alternative simulated
development plans. These predictions are used to determine optimal development
plans for maximizing recoverable reserves, thereby reducing oil and gas finding
costs per equivalent barrel. The Company's pipeline and surface facilities
software simulates and monitors oil and gas pipelines and surface facilities
for various uses including engineering design, leak detection, optimization of
transportation efficiency and pipeline dispatcher training. Its graphical user
interface ("GUI") software, Sammi, facilitates the creation of customized
graphical interfaces and the display of large quantities of static and real
time data from multiple sources primarily for the oil and gas, aerospace,
process control and manufacturing industries. The Company provides consulting
and technical support services in each of these areas.
Since its formation in 1968, the Company believes that it has established a
reputation for technical excellence of its software products and consulting
services in reservoir description, simulation and monitoring. In the late
1980s, the Company recognized the need to provide an integrated system of CAP
products that could be more broadly utilized by the oil and gas industry.
Also, the availability of increasingly powerful and affordable computers
enables the Company's CAP software products to operate on UNIX-based
workstations and personal computers, and more recently on DOS/Windows-based
personal computers, with capabilities historically available only on mainframe
computers. The Company has developed Petroleum WorkBench, an integrated
software system that allows effective access to five of the Company's high
technology stand-alone CAP products. It is expected that future versions of
Petroleum WorkBench will increase the technical breadth of this software
package. These developments have had the effect of significantly expanding the
market for the Company's CAP software products from its historical market of
research experts and technical specialists using mainframe computers to include
non-expert industry professionals, such as petroleum engineers and geologists,
using workstations or personal computers. These developments have also
increased the functionality and ease of use of the Company's CAP products to
the oil and gas industry by lowering hardware costs and reducing the need to
utilize these experts in order to take advantage of the Company's technology.
The Company's objective is to be a leading provider of high technology
computing solutions and quality consulting services in each of its industry
areas. The Company's long range goal is to offer a fully integrated set of
software products that will permit non-expert professionals to describe,
simulate, monitor and manage the complete range of reservoir development and
production activities and oil and gas transmission and storage activities of
oil and gas fields from personal computers. The Company believes that its
current products encompass nearly all technologies necessary to accomplish its
objective of integrated computer-aided field management capabilities.
The Company's executive offices are located at 1801 California Street,
Suite 295, Denver, Colorado 80202 and its telephone number is (303) 292-1111.
COMPLETION OF PUBLIC OFFERING OF COMMON STOCK
On June 30, 1994, the Company sold 2.0 million newly issued shares of
common stock in a public offering from which the Company received net proceeds
of $8.1 million, net of related costs of
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approximately $270,000. The Company used the proceeds from the public offering
to repay its bank indebtedness of $5.1 million, to reduce accounts payable, and
to increase working capital.
In July 1994 the underwriters of the public offering exercised an
overallotment option, resulting in the sale by the Company of 383,000
additional newly issued shares of common stock, from which the Company received
net proceeds of approximately $1.6 million.
Simultaneously with completion of the public offering, Renaissance Capital
Partners II, Ltd. ("Renaissance") converted $1.75 million in principal amount
of convertible debentures (see Note 3 to Consolidated Financial Statements)
into 653,846 shares of common stock, which Renaissance sold in the public
offering. As a result of the Renaissance conversion, the Company reduced
paid-in capital by $119,000 for unamortized debt issuance costs related to the
converted debentures.
HISTORY
The Company, a Colorado corporation, was formed in 1968 and, since that
time, has developed and marketed sophisticated applications software together
with computer-related consulting services, principally for reservoir
description and reservoir and pipeline simulation. These technologically
complex products have been, and continue to be, sold primarily to major
multinational and large independent oil companies for use by research experts
and technical specialists. The Company believes that it has established a
reputation for technical excellence of its software products and consulting
services in reservoir description, simulation and monitoring.
In June 1983, the Company acquired Intercomp Resource Development and
Engineering, Inc. ("IRDE"), which had developed additional software products
for reservoir simulation. In January 1984, the Company acquired CRC Bethany
International, Inc. ("CRC"), a wholly owned subsidiary of Crutcher Resources
Corporation. The acquisition of CRC provided the Company with software systems
that modeled real-time data collected and stored by Supervisory Control and
Data Acquisition ("SCADA") systems installed on oil and gas pipelines.
Several trends, including lower oil and gas prices, are driving the oil and
gas industry to reduce the risk and cost, and to increase the effectiveness, of
development and production activities. This has led many energy companies to
reduce budgets, including a decline in the employment of research and technical
experts in the various petroleum industry disciplines, in favor of non-expert
industry professionals. The Company recognized the need to provide an
integrated system of CAP products for use by these non-experts. By 1991, the
Company had developed Petroleum WorkBench which provides the industry with
broader access to sophisticated engineering solutions. Management believes
that these developments, coupled with the availability of increasingly powerful
and affordable workstations and personal computers, has opened a significant
market for Petroleum WorkBench.
STRATEGY
The Company's strategy is to provide complete, high technology, computing
solutions and other services for the development and production of oil and gas
reservoirs and the pipeline transportation of oil and gas. The Company
executes this strategy in the following ways:
INTEGRATION OF HIGH TECHNOLOGY PRODUCTS. Since its formation, the Company
has developed a series of software products designed to describe, simulate and
monitor oil and gas reservoirs, simulate and monitor oil and gas pipelines and
surface facilities, and develop graphical user interfaces. These products
cover nearly all technologies needed to simulate, study, optimally develop and
monitor oil and gas reservoirs and oil and gas pipelines. These products also
include nearly all facets of technology necessary for field management and
field monitoring in the oil and gas industry. The Company has begun
integrating these products, which increase the functionality and ease of use of
the high technology solutions provided by the Company's products.
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The initial integrated product, Petroleum WorkBench, includes five of the
Company's major stand-alone CAP products. It is the Company's intention to
continue integrating its products until the full breadth of the Company's
technology is included within one integrated, easily accessible product that
will allow a single non-expert professional to work in multiple disciplines,
using the same database and applications software.
EXPANSION OF MARKETING EFFORTS AND CUSTOMER BASE. The Company believes
that, by continuing the integration and accessibility of its software, the
market for its CAP software and related consulting services can be expanded to
increase sales to non-expert industry professionals. The Company intends to
intensify its marketing efforts to this larger market, in addition to
continuing to market its products to its established customer base of expert
users generally employed by major multinational and large independent oil
companies.
The Company also intends to expand its customer base in the pipeline and
surface facilities market through the testing and possible introduction in 1996
of a new leak detection product for smaller pipelines. Finally, the Company
intends to intensify its marketing efforts for Sammi to customers outside the
oil and gas industry.
COMPLETE RANGE OF SERVICES. The Company believes that offering a complete
range of consulting and training services is a critical component of its
business and it intends to continue enhancing and expanding the range of
consulting services to meet the growing requirements of its customers. The
Company also believes that providing sophisticated and comprehensive consulting
services promotes and advances acceptance and awareness of its products.
TECHNICAL LEADERSHIP. The Company intends to continue developing new
software products and enhancing existing software products, both internally and
through jointly-funded development efforts, to respond to developments by
competitors and changes in technology. The Company also intends to continue to
attract and retain highly-skilled professionals in computer software
programming and various petroleum industry disciplines in order to provide for
the development and enhancement of its products and services. Finally, the
Company intends to continue to evaluate, and, if attractive, acquire or license
products and technologies which it believes are important to achieving its
strategy.
PRODUCTS, SERVICES AND CUSTOMERS
CAP PRODUCTS, SERVICES AND CUSTOMERS
The Company's CAP products and related consulting services address the
development and production areas of reservoir description and simulation. The
Company's reservoir description products provide for the analysis of well logs
and core, the use of 3-D seismic data, analysis of pressure and performance of
wells and mapping and analysis of the basic geology and reservoir rock
parameters. Reservoir description data is then input into mathematical
reservoir simulators offered by the Company to predict future production
performance under various simulated development scenarios after matching
historical performance. Use of reservoir simulation provides more accurate
forecasts of oil and gas recovery and assists in the determination of how
reservoirs should be optimally developed. The primary CAP products being
marketed by the Company are:
LOGCALC (well log analysis). Used to calculate rock and fluid properties
around a wellbore from well logs in order to determine the presence and
quantities of hydrocarbons.
INTERPRET/2 (well test analysis). Used to analyze pressure and flow tests
of a well to predict reservoir flow capability and other formation parameters
such as the location of barriers in the reservoir.
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WPM (well productivity model). Used to analyze and simulate the
productivity of a well under various alternative completion practices, such as
hydraulic fracturing and artificial lift, so that the optimum economics for the
well can be achieved.
PVT (pressure-volume-temperature correlations for hydrocarbon fluids).
Used to analyze laboratory tests of oil and gas samples gathered from a
reservoir to determine the accuracy of the data and to construct equations for
use of the data.
SimBest II (reservoir simulator for oil, water and gas). Used to model the
behavior of an oil and gas reservoir in order to predict the results of various
types of reservoir development options, such as in-fill drilling, water floods
and gas injection, in order to determine the optimal development plan for the
reservoir. The simulator calculates the flow of oil, water and gas in three
dimensions through a complex reservoir, including the flow through the
wellbores to the surface.
COMP III, COMP 4 (compositional reservoir simulators for oil, water and
gas). Used when the complex fluid behavior in the reservoir requires that oil
and gas be defined more precisely by their molecular components such as
methane, ethane and propane. These simulators are most often used to simulate
and determine the optimum development of gas reservoirs and oil reservoirs
undergoing high pressure gas injection.
THERM (thermal reservoir simulator). Used when modeling thermal enhanced
oil recovery processes such as steam injection and in-situ combustion. This is
the most complex simulator because it also includes mathematical simulation of
such thermodynamic factors as combustion reaction kinetics. This simulator is
used to predict optimum recovery using thermal enhanced recovery processes for
reservoir development.
SimEase (interactive pre/post processor for the Company's reservoir
simulators). Used to prepare data easily for input to the Company's reservoir
simulators and to view the results in color. This software includes such
displays as color 3-D and 4-D (showing the passage of time) maps and simulated
color visualizations of fluids flowing through the reservoir.
AHM (adaptive history matching system for use with reservoir simulators).
Used to help match a reservoir's historical production of oil, gas and water.
A final calibrated (history matched) model can then be used to simulate future
production under various hypothetical operating scenarios.
PETROLEUM WORKBENCH (an integrated set of high technology products for
reservoir management). This integrated set of products is used to perform
reservoir description, simulation and monitoring on a workstation or personal
computer. Either an expert or non-expert professional can use this integrated
set of products to select optimum reservoir development plans using the highest
technology more quickly and efficiently than with non-integrated and
individually designed products. The current version of Petroleum WorkBench
includes Logcalc, Interpret/2, SimBest II, parts of SimEase and PDA (the
Company's production data analysis system), plus various display capabilities
including mapping and cross-sections. The Company's strategy for development
of Petroleum WorkBench includes making the Company's technology accessible to a
much larger market of non-expert professionals. Petroleum WorkBench is also a
first step toward the future integration of the Company's other products to
encompass all technologies necessary to develop and manage oil and gas fields.
Petroleum WorkBench was originally developed for the UNIX operating system
because of the size and complexity of the code, the graphics and the need for
networking with other desktop computers. These capabilities are now available
on the existing DOS/Windows operating systems, and Petroleum WorkBench is now
available on these operating systems.
In addition, the Company has a number of other CAP products including PDA
(production data analysis), PROBE (probability analysis for geoscientists),
PERMPROBE (statistical reservoir permeability analysis), GEOPROBE (statistical
reservoir
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geology analysis), EORPM (enhanced oil recovery prediction models), CHEMFLOOD
(chemical flooding reservoir simulator), N-Hance (enhanced recovery reservoir
simulator), OMEGA (gas storage reservoir simulator), OMNET (reservoir simulator
for multiple gas storage reservoirs and pipelines), MATBAL (material balance
reservoir simulator), VFLOW (wellbore vertical flow simulator), IPS (investment
planning system), and GUESS (general uncertainty economic simulator).
The Company also provides consulting, including training, on the use and
actual application of the Company's products and technology to a client's
reservoir management problems. The Company provides consulting services in the
areas of geophysics, geology, petrophysics, reservoir engineering and
production and completion engineering. The Company has designed cost-effective
exploitation methods, production and injection operations, and enhanced oil
recovery schemes. The Company also has performed reserve evaluations and
special simulation techniques for artificial lift, horizontal drilling and
massive hydraulic fracturing. In addition, the Company has designed
development plans of an entire oil field, including the operation and
monitoring of well and reservoir performance.
Customers include major international oil companies such as Amoco, British
Petroleum, Mobil Oil, Phillips Petroleum, Royal Dutch Shell, Texaco and Unocal;
independent oil and gas companies such as Amerada Hess, Meridian Oil and
Pennzoil; and domestic and foreign governmental agencies and
government-sponsored companies such as the United States Department of Energy
and PEMEX.
PIPELINE AND SURFACE FACILITIES PRODUCTS, SERVICES AND CUSTOMERS
The Company's software and related services for the pipeline and surface
facilities area simulate and monitor oil and gas pipelines and surface
facilities, such as compressor stations, tank farms and pumping stations, for
uses including engineering design, leak detection, optimization of
transportation efficiency and pipeline dispatcher training. The systems are
used in either an "on-line" or "off-line" mode. In the on-line mode, data is
continuously collected by a SCADA system from various points along a pipeline,
or from surface facilities, and used by the software for simulation and
monitoring purposes. In the off-line mode, real-time data is not used and is
replaced by user-provided data for engineering or training purposes. The
Company's historical focus in this area has been on providing simulation and
monitoring software to operators of large and complex pipelines and surface
facilities. The current focus of the Company in this area is to develop and
market a standardized and modular system that is cost-effective for smaller
pipeline systems and to expand the types of facilities that utilize these
products. The primary software products being marketed by the Company in this
area include:
TGNET (transient gas pipeline network simulator). Used off-line by
pipeline engineers to study portions of gas pipeline networks in order to
simulate the design and operation of the pipeline system.
TLNET (transient liquid pipeline network simulator). Like TGNET, used
off-line for liquid pipeline design and operations studies.
MNET (multiphase pipeline network steady state simulator). Like TGNET,
used off-line for pipeline design and operations studies for the simultaneous
flow of oil, gas and/or water.
INTERACT (interactive pipeline network simulators). Used by pipeline
engineers to plan future flows and to train pipeline dispatchers. INTERACT is
comprised of three separate software products for gas, liquid and multiphase
pipeline flow and can be operated either on-line using real-time data or
off-line using historical pipeline operating data.
PIPELINE MONITOR (leak detection system for intermediate complexity
pipeline networks). Used continuously by the pipeline operating staff to
detect leaks and to manage pipeline operations with versions available for both
oil and gas pipelines.
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ON-LINE SYSTEM (pipeline leak detection and operating efficiency software
modules). A series of software modules that can be integrated to provide leak
detection plus additional options such as product batch tracking in liquid
systems and compressor utilization for complex gas pipeline networks. The
software operates continuously, often with full backup computers, to manage
pipeline operations.
In addition to the products described above, the Company has various
specialty software products such as HOT (simulation of heated pipelines) and
DYNAFLEX (pipeline stress analysis).
The Company has also developed a prototype system for low cost leak
detection that can be easily installed on a single pipe. Offline testing with
real data has been successful and field testing is expected in the first half
of 1996. If successful, this system will address the much larger market of all
pipeline segments.
The Company also provides consulting, including training, as required by
customers who use the technology and/or the products. Training is provided for
both the use of the Company's software and to train dispatchers to handle
pipeline operational problems such as leaks and product batch tracking. A
typical consulting project would be to configure the customer's actual pipeline
and surface facilities field data that describes the pipeline network, ensure
that the data accurately describes the field operations and then install and
test the data running in configuration with the Company's product at the
customer's site.
Customers in this area include companies such as Tenneco Gas, Brooklyn
Union Gas, Alyeska Pipeline, Pacific Gas & Electric and Statoil; SCADA vendors
such as Valmet Automation and Asea Brown Boveri (ABB); and domestic and foreign
governmental agencies and government-sponsored companies such as the United
States Department of Transportation and Saudi ARAMCO.
GRAPHICAL USER INTERFACE PRODUCTS, SERVICES AND CUSTOMERS
The Company's graphical user interface ("GUI") software product, Sammi,
facilitates the creation of customized graphical interfaces and displays large
quantities of static and real-time data from multiple sources. Sammi permits
the creation of these customized graphical interfaces without the need for
extensive software code development. The base technology for Sammi was
originally designed to provide for the development of real-time pipeline
displays but was found to have major applications in other markets such as
process control, transportation, aerospace and manufacturing. The Company's
main products in this area are:
Sammi (a GUI software toolkit). Used to develop color display screens and
to connect the graphical image on the screen with a static or real-time data
stream. In operational mode, Sammi processes and displays the data as
requested by the operator.
SDK (Sammi development kit). An open version of Sammi that enables users
to input graphical applications from other tool kits and to develop their own
graphic applications.
GUI consulting is focused primarily on building graphical display items to
meet customer needs for specific applications and in assisting the customer in
using the Company's GUI products. The Company also provides training schools
in the use of its products.
Sammi is used in the aerospace, process control, manufacturing, and
transportation industries and is suitable for other applications requiring
graphical display of large quantities of mission-critical real-time or
database-resident information. Kinesix' major customers include NASA sites
(Johnson Space Center, Goddard, and Marshall), the U.S. Air Force, Loral,
Siemens, ABB, IBM, Hughes, Arco, Bristol Babcock and Harris.
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RESEARCH AND DEVELOPMENT
The Company is committed to the continued enhancement of its petroleum
industry and GUI software and to the development of software and services
having new or related applications. The Company's objective is to develop
products that are considered to be high quality and technically advanced and
that are capable of dominating their major market areas.
In the CAP area, enhancement of Petroleum WorkBench will continue over the
next year with addition of the Well Productivity Model, further optimization of
the work flow and updates to the other modules. Major development in black
oil, compositional and thermal simulation will result in new simulators to be
released late in 1996. Enhancements are also expected for most other CAP
stand-alone products.
In the pipeline and surface facilities area, new versions of all off-line
products are expected to be released in 1996 with easier-to-use graphical
interfaces. The Company has developed a prototype system for low cost leak
detection that will be field-tested during 1996 and, if successful, released
late in the year. Additional enhancements are also expected to all the other
stand-alone products in this area.
In the GUI area, Kinesix announced its release of Sammi 4.0 in 1995. Plans
for 1996 include Microsoft Windows (NT and Win95) versions of Sammi.
During the years ended December 31, 1995, 1994 and 1993, the Company spent
$6.6 million, $6.4 million and $5.5 million, respectively, for development of
new products and the improvement and enhancement of existing products. The
number of employees and consultants engaged on a full or part time basis in
software development was 85 in 1995, 62 in 1994, and 75 in 1993.
MARKETING, SALES AND CUSTOMER SUPPORT
MARKETING STRATEGY
The Company's marketing strategy is to create customer awareness of
existing and new products and to publicize its technical expertise through
participation at technical meetings and conferences, publication of scientific
papers, presentation of technical proposals to existing and potential
customers, and sponsorship of product focus groups. The Company also
continually surveys the market and analyzes the products and services offered
by the Company and its competitors in order to identify new developments,
market trends and changing preferences and requirements of the market place.
The Company will develop marketing plans specifically tailored for its products
that identify the appropriate distribution channels to reach the target market
or market segment and will permit the effective promotion of the products. The
Company supports its customers by providing complete consulting, technical and
training services by experts in computer systems and the various technical
applications disciplines for all product areas.
SALES STAFF, LOCATIONS AND CUSTOMER SUPPORT
The Company sells its products, consulting and other services on a
worldwide basis primarily through its 18-member worldwide direct sales force.
Since sales of the Company's products require technical interaction with
customers, members of the sales force generally are technically qualified as
well as having significant sales and marketing experience. In addition, sales
and marketing personnel are actively supported by technical personnel and
senior management of the Company.
Sales personnel are located in each of the Company's offices in Denver,
Houston, Calgary and London. Smaller sales offices are located in Atlanta,
Georgia; Dallas, Texas; northern California; and in Kuala Lumpur and Abu Dhabi.
Local sales agents are utilized principally in third world countries if
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local representation is necessary or appropriate. The Company markets certain
of its products through resellers and local agents in certain foreign
countries.
The Company provides installation and product training, on-site consulting
and 24-hour telephone availability of systems and technical experts as part of
its customer support services.
BACKLOG
The Company's backlog at December 31, 1995 and 1994, was $9.5 million and
$8.8 million, respectively. During 1995, the Company reported in its Form 10-Q
a backlog of $17.1 million and $17.2 million as of June 30, 1995 and September
30, 1995, respectively. As of December 31, 1995 the Company's provided a
reserve to the accounts receivable for a very large foreign consulting project.
The approximately $6.0 million in backlog on this project was also removed
effective December 31, 1995.
COMPETITION
The market for most of the products and services offered by the Company is
highly competitive, although the number of competitors generally is limited.
Certain of the Company's competitors have substantially greater marketing and
financial resources than the Company, although management believes the
Company's senior management and technical staff compare favorably with those of
its competitors.
The principal competitive factors faced by the Company are product
functionality and performance, product price in relation to performance and
consulting and customer support services. Management also believes that the
Company competes effectively due to its broad product line, large customer base
and reputation for quality products and expert services. However, sales of the
Company's products and services would be adversely affected should competitors
introduce new products with better functionality, performance, price or other
competitive characteristics.
The principal competitors in the licensing and sale of development and
production software are GeoQuest, a division of Schlumberger, which markets a
black oil and compositional simulator, and Integrated Technologies, a division
of Western Atlas International, which markets a line of reservoir simulators.
The competition in the licensing and sale of pipeline and surface
facilities software is fragmented with individual companies often marketing
only one or two products. Significant competitors in software licensing and
supply of related services of real time, on-line products in the leak detection
and real-time modeling areas are Stoner and Associates and Lic Consult.
In the GUI market, the principal competitor is V.I. Corporation which
markets a series of products which, taken as a whole, compete with Sammi. The
Company also competes with S.L. Corporation and various small companies that
market products having portions of the functionality of Sammi.
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GEOGRAPHIC AND BUSINESS LINE DATA
GEOGRAPHIC REVENUE DATA
The following table sets forth the Company's revenue by geographic area for
1995, 1994 and 1993:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
United States $ 8,201 $ 9,695 $11,773
Foreign:
------- ------- -------
Far East . . . . . . . . . . . . . 4,201 4,362 2,597
Middle East . . . . . . . . . . . 1,280 1,624 2,028
Canada . . . . . . . . . . . . . . 948 966 1,474
Europe . . . . . . . . . . . . . . 5,405 4,220 7,152
Central and South America . . . . 2,353 3,614 3,262
Africa . . . . . . . . . . . . . . 1,755 3,428 2,028
------- ------- -------
Total Foreign . . . . . . . . . . . . . 15,942 18,214 18,541
------- ------- -------
$24,143 $27,909 $30,314
======= ======= =======
</TABLE>
Revenue derived from foreign sources amounted to $15.9 million (66% of
total revenue), $18.2 million (65% of total revenue) and $18.5 million (61% of
total revenue), in 1995, 1994, and 1993, respectively. The significant levels
of foreign revenue resulted from continued unfavorable economic conditions in
the domestic petroleum industry and continued penetration of new international
markets as a result of strategic marketing efforts in these areas. Foreign
revenue is subject to a number of factors such as political instability,
changes in protective tariffs, tax policies, and export-import controls. See
Note 7 to Consolidated Financial Statements for the Company's United States
export revenue and selected financial data of foreign subsidiaries.
Much of the Company's business is conducted with large, established U.S.
and foreign companies (sometimes acting as government contractors), governments
and national petroleum companies of foreign governments. Qualifying foreign
receivables are insured, subject to a deductible loss amount, under an
insurance policy with the Foreign Credit Insurance Association, an agency of
the United States Export-Import Bank. The Company performs credit evaluations
when considered necessary and generally does not require collateral.
BUSINESS LINE DATA
The following table sets forth the percentage of total revenue contributed
by each of the Company's classes of products and services for 1995, 1994 and
1993:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Development and production
Consulting and training . . . . . . . 45% 39% 39%
Licenses and maintenance . . . . . . . 26% 22% 19%
Other . . . . . . . . . . . . . . . . 2% 1% 1%
---- ---- ----
Total . . . . . . . . . . . . . . 73% 62% 59%
---- ---- ----
Pipeline and surface facilities
Consulting and training . . . . . . . 11% 10% 14%
Licenses and maintenance . . . . . . . 7% 15% 12%
Other . . . . . . . . . . . . . . . . *% *% 1%
---- ---- ----
Total . . . . . . . . . . . . . . 18% 25% 27%
---- ---- ----
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Graphical user interface
Consulting and training . . . . . . . 4% 5% 5%
Licenses and maintenance . . . . . . . 5% 7% 9%
Other . . . . . . . . . . . . . . . . *% *% *%
---- ---- ----
Total . . . . . . . . . . . . . . 9% 12% 14%
---- ---- ----
Other . . . . . . . . . . . . . . . . *% 1% *%
---- ---- ----
Total . . . . . . . . . . . . . . 100% 100% 100%
==== ==== ====
</TABLE>
* Less than 1%.
During 1995, approximately 440 customers utilized the Company's software
products and related services, the loss of any one of which would not have a
material adverse effect on the Company's business. During 1995, 1994, and
1993, the Company generated $360,000, $1.2 million, and $2.0 million, which
were 1%, 4%, and 6%, respectively, of its total revenue from contracts to
perform reservoir engineering, geological studies, and petrophysical analysis
at the Naval Petroleum Reserves in California.
PROPRIETARY RIGHTS
The Company has protected its proprietary computer software by restricting
access to the underlying source code through technical means and by requiring
its customers to enter into licensing arrangements that are protective of the
Company's intellectual property rights in such software. For enforcement of
its rights in the software, the Company relies upon laws relating to trade
secrets and the misappropriation of confidential business information, as well
as unfair competition laws, which are generally recognized in both state and
international judicial proceedings. Additionally, the Company obtains federal
and international protection of its computer software through federal copyright
and the international copyright protection afforded by the Berne Convention
with reciprocal copyright protection in over 75 countries. To date, the
Company has not sought to patent any of its computer software. While the
Company does not rule out obtaining patent protection for computer software at
some future time, the present procedure for obtaining patent protection would
require the Company to secure a patent in the United States and all foreign
countries where the software might be utilized, even though the patentability
of software in some foreign countries remains questionable and in the process
of patenting the software in the United States the Company would be required to
fully disclose the source code to the public through its patent application.
In addition, the Company requires all employees and consultants who have
access to its proprietary information and software to execute confidentiality
agreements.
EMPLOYEES
As of March 31, 1996, the Company employed 147 persons full-time in all
locations, plus several part-time technical consultants as required to complete
project work.
11
<PAGE> 12
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the
executive officers and the members of the Board of Directors of the Company as
of March 31, 1996. All directors are elected for a term of one year and serve
until their successors are elected and qualified.
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
E. A. Breitenbach, Ph.D. 59 Chairman of the Board of Directors, Chief Executive Officer
George Steel 50 President, Chief Operating Officer, Director
Alain C. Gringarten, Ph.D. 50 Executive Vice President-WorkBench
Ronald J. Hottovy 49 Executive Vice President-Chief Financial Officer, Treasurer, Secretary
Robert G. Parish, Ph.D. 54 Executive Vice President-Pipeline and Facilities; Exploration and
Production Consulting
William B. Nichols, Ph.D. 67 Director
Edward O. Price, Jr. 66 Director
</TABLE>
There are no family relationships among any of the executive officers or
directors of the Company.
Dr. Breitenbach, one of the founders of the Company, served as its
President from 1968 to 1981 at which time he was elected Chairman of the Board
of Directors and Chief Executive Officer. Dr. Breitenbach has been a director
since 1968. From October, 1990, to January 15, 1996, Dr. Breitenbach assumed
the office of President in addition to continuing as Chairman and Chief
Executive Officer. His petroleum and computer experience is primarily in the
areas of reservoir simulation, well logging, and economic planning, and he has
published several technical papers on these subjects. He has taught at
Stanford University and at Colorado State University. Dr. Breitenbach received
his B.S., M.S., and Ph.D. degrees in petroleum engineering from Stanford
University. He served as 1994 President of the Society of Petroleum Engineers.
Mr. Steel joined the Company in January, 1996, and was elected President,
Chief Operating Officer and member of the Board of Directors, effective January
15, 1996. He has extensive technical and managerial experience in the
international petroleum industry. He served as General Manager of Snyder Oil
Company's affiliate, Command Petroleum, in the Bay of Bengal, India. Prior to
that, he served as Vice President of Snyder's Julesburg Rocky Mountain Business
Unit. Mr. Steel joined Geophysical Services, Inc. (GSI), the geophysical
subsidiary of Texas Instruments, in 1969. In 1992, after GSI had become part
of Halliburton Company, he was appointed President of their geophysical
subsidiary, Halliburton Geophysical Services (HGS). He has a B.S. degree in
Natural Science from St. Andrews in Scotland and holds membership in the
Society of Exploration Geophysicists, American Association of Petroleum
Geologists, Society of Petroleum Engineers, the American Society for Quality
Control and the British Deming Association.
Dr. Gringarten joined the Company in January, 1983 as Vice President of
Research and Development in Europe. He has served in several senior technical
and management positions with the Company before being appointed Senior Vice
President, Exploration and Production Products, in September, 1991. In 1994 he
was named Executive Vice President responsible for the WorkBench area and the
Company's other development and production software products. He has over 24
years experience in the oil industry, mainly with service companies, including
Schlumberger, primarily in the field of well test analysis. He has an
engineering degree from Ecole Centrale des Arts et
12
<PAGE> 13
Manufactures in France and received his M.Sc. and Ph.D. degrees in petroleum
engineering from Stanford University in 1969 and 1971, respectively.
Mr. Hottovy joined the Company in December, 1991, and effective January 1,
1994, was elected Chief Financial Officer, Treasurer, and Secretary. In 1994,
he was also named Executive Vice President. For the 11 years prior to joining
the Company, Mr. Hottovy held various positions with Gold King Consolidated,
Inc., a public oil, gas and mining company, including Chief Financial Officer
and President. From 1975 to 1980, Mr. Hottovy held various positions at
Coopers & Lybrand, most recently tax manager, specializing in international tax
and natural resource companies. From 1972 to 1975, Mr. Hottovy was employed by
Peat Marwick Mitchell & Co. Mr. Hottovy graduated from the University of
Nebraska in 1969 with a B.S. in economics and received an M.B.A. degree from
the University of Wyoming in 1972.
Dr. Parish joined the Company in April, 1982 as Vice President of Technical
Products in Europe and is currently Managing Director of SSI UK, Ltd., the
Company's United Kingdom subsidiary. He is responsible for the exploration and
production consulting and pipeline and facilities divisions. He served as
Division Vice President, Exploration and Production Products, from March, 1987
to October, 1990. Prior to that he was Managing Director of the Company's U.K.
subsidiary from February, 1985 to March, 1987. Dr. Parish has over twenty years
experience in mathematical modeling and software engineering. He graduated from
London University with a B.Sc. with honors in mathematics in 1963, and from
North Carolina State University with a Ph.D. in statistics in 1969.
Dr. Nichols was employed by Hercules Incorporated in research and
development for thirty-five years until his retirement in 1989. For the last
ten years he held various managerial positions. He received his B.S. degree
from Massachusetts Institute of Technology in 1950, and M.S. and Ph.D. degrees
from California Institute of Technology in 1954 and 1957, respectively, all in
chemical engineering.
Mr. Price was employed by Chevron Oil Company and Saudi Aramco for over
thirty-seven years until his retirement in 1990. For the last eleven years he
held various executive positions with Saudi Aramco in Dhahran, Saudi Arabia,
including Vice President of Petroleum Engineering and Vice President of
Exploration and Production. Prior to that time he held various management
positions in Chevron's operations in the U.S., Australia and Iran. He is
currently a private investor and consultant and is a director of First National
Bank, Mexia, Texas; Paragon Wireline Services; Advanced Reservoir Technologies
and Middle East Services. He received B.S. degrees in both petroleum
engineering and geological engineering from Texas A&M University in 1951 and
completed course work for an M.S. degree from the same school in 1953.
ITEM 2. PROPERTIES
All of the Company's operations are conducted in leased space as follows:
<TABLE>
<CAPTION>
Approximate Current
Location Lease Expiration Sq. Ft. Annual Rent
<S> <C> <C> <C>
Denver, Colorado May 1997 17,200 $466,000
Houston, Texas December 1997 20,000 451,000
Houston, Texas(1) December 1997 7,000 79,000
Calgary, Alberta, Canada September 2001 10,700 31,000
Egham, Surrey, England September 2008 10,500 276,000
</TABLE>
(1) Kinesix Division.
13
<PAGE> 14
In addition, the Company maintains small sales offices in Dallas, Texas;
and northern California for its Kinesix Division sales representatives.
Exploration and production sales offices are located in Dallas, Texas; Kuala
Lumpur; and Abu Dhabi.
ITEM 3. LEGAL PROCEEDINGS
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 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 (VARs). 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock was traded on the Nasdaq National Market
("Nasdaq") under the symbol "SSFT." On July 11, 1995, the Company's stock was
delisted from Nasdaq as the result of the Company's failure to remedy its
public filing deficiency, as explained in Item 7, "Overall Operating
14
<PAGE> 15
Results". At March 31, 1996, the Company had approximately 457 stockholders of
record. The following table sets forth, for the periods indicated, the high
and low last reported sale prices of the common stock as reported by Nasdaq.
The first quarter of 1996 and the third and fourth quarters of 1995 sale prices
were reported by the Trading Desk at Johnson Rice & Company, a market maker of
the Company stock.
<TABLE>
<CAPTION>
Quarter Ended Sale Prices
- --------------------------------- ------------------
High Low
---- ---
<S> <C> <C>
1996
First Quarter . . . . . . . $3.75 $2.38
1995
First Quarter . . . . . . . $6.63 $5.88
Second Quarter . . . . . . . 5.88 3.00
Third Quarter . . . . . . . 3.38 1.75
Fourth Quarter . . . . . . . 3.38 2.63
1994
First Quarter . . . . . . . $8.13 $4.50
Second Quarter . . . . . . . 6.00 4.00
Third Quarter . . . . . . . 7.13 4.13
Fourth Quarter . . . . . . . 7.25 4.88
1993
First Quarter . . . . . . . $4.13 $3.13
Second Quarter . . . . . . . 4.00 2.75
Third Quarter . . . . . . . 4.00 3.13
Fourth Quarter . . . . . . . 4.75 3.00
</TABLE>
The Company has not paid dividends on its common stock for several years
and does not intend to pay dividends on its common stock in the foreseeable
future. The payment of dividends on the Company's common stock is also
prohibited under the Company's current revolving credit facility.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth a summary of selected consolidated financial
data for the Company as of the dates and for the periods indicated. The
financial data is derived from the audited Consolidated Financial Statements of
the Company and Notes thereto. The data should be read in conjunction with
such financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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.
15
<PAGE> 16
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Consulting and training . . . . . . . . . $ 14,444 $ 15,038 $ 17,696 $ 16,523 $ 12,485
Licenses and maintenance . . . . . . . . . 9,061 12,431 12,111 12,410 11,849
Other . . . . . . . . . . . . . . . . . . 638 440 507 291 687
-------- -------- -------- -------- --------
Total revenue . . . . . . . . . . . . 24,143 27,909 30,314 29,224 25,021
Costs and expenses:
Costs of consulting and training . . . . . 12,565 11,274 12,464 12,042 8,006
Costs of licenses and maintenance . . . . 7,801 6,043 6,561 6,153 4,074
Selling, general and administrative . . . 9,122 13,702 7,313 8,182 7,963
Reduction in capitalized software costs . 17,917 --- --- --- ---
Other . . . . . . . . . . . . . . . . . . 1,223 1,053 1,084 938 2,970
-------- -------- -------- -------- --------
Total costs and expenses . . . . . . . 48,628 32,072 27,422 27,315 23,013
Income (loss) from operations . . . . . . . . . (24,485) (4,163) 2,892 1,909 2,008
Other (expense) . . . . . . . . . . . . . . . . (239) (467) (805) (251) (635)
-------- -------- -------- -------- --------
Net income (loss) before income taxes . . . . . (24,724) (4,630) 2,087 1,658 1,373
Provision for income taxes . . . . . . . . . . (200) (260) (375) (287) (299)
-------- -------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . . . . $(24,924) $ (4,890) $ 1,712 $ 1,371 $ 1,074
======== ======== ======== ======== ========
Net income (loss) per share . . . . . . . . . . $ (3.05) $ (0.75) $ 0.32 $ 0.27 $ 0.23
======== ======== ======== ======== ========
Net income per share (fully-diluted) . . . . . $ * $ * $ 0.31 $ * $ *
OTHER FINANCIAL DATA:
Revenue
Development and production
Consulting and training . . . . . . . $ 10,821 $ 10,992 $ 12,047 $ 10,646 $ 7,864
Licenses and maintenance . . . . . . . 6,292 6,218 5,712 5,824 6,011
Other . . . . . . . . . . . . . . . . 426 214 205 203 530
-------- -------- -------- -------- --------
Total . . . . . . . . . . . . . . 17,539 17,424 17,964 16,673 14,405
Pipeline and surface facilities
Consulting and training . . . . . . . 2,707 2,706 4,210 5,076 3,821
Licenses and maintenance . . . . . . . 1,720 4,268 3,696 3,601 4,058
Other . . . . . . . . . . . . . . . . 84 81 296 101 16
-------- -------- -------- -------- --------
Total. . . . . . . . . . . . . . . 4,511 7,055 8,202 8,778 7,895
Graphical user interface
Consulting and training . . . . . . . 987 1,340 1,439 801 800
Licenses and maintenance . . . . . . . 1,049 1,945 2,703 2,985 1,780
Other . . . . . . . . . . . . . . . . --- 4 12 4 ---
-------- -------- -------- -------- --------
Total. . . . . . . . . . . . . . . 2,036 3,289 4,154 3,790 2,580
Other income (expense). . . . . . . . . . . 57 141 (6) (17) 141
-------- -------- -------- -------- --------
Total . . . . . . . . . . . . . . $ 24,143 $ 27,909 $ 30,314 $ 29,224 $ 25,021
======== ======== ======== ======== ========
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA (CONTINUED):
Software research and development
Current expense . . . . . . . . . . . . . . $ 780 $ 793 $ 1,139 $ 1,080 $ 1,865
Capitalized costs(1) . . . . . . . . . . . . 5,850 5,599 4,440 5,844 7,236
Amortization expense(2) . . . . . . . . . . 5,400 4,589 4,144 3,628 2,910
Reduction in capitalized software costs(2) . (17,917) --- --- --- ---
BALANCE SHEET DATA:
Working capital (deficit) . . . . . . . . . . . . $ (3,091) $ 3,466 $ 4,363 $ 1,916 $(4,956)
Software, net . . . . . . . . . . . . . . . . . . 10,190 27,656 26,646 26,350 24,134
Total assets . . . . . . . . . . . . . . . . . . 23,912 44,544 45,903 42,881 39,415
Long-term debt, net of current portion . . . . . 2,225 2,813 10,030 8,827 2,490
Redeemable convertible preferred stock . . . . . 4,000 4,000 4,000 4,000 4,000
Stockholders' equity . . . . . . . . . . . . . . $ 4,110 $28,436 $20,539 $18,292 $15,816
</TABLE>
* The effects of exercise or conversion of options or convertible securities
are immaterial or antidilutive. See Note 1 of Notes to Consolidated
Financial Statements.
(1) The Company capitalizes qualifying costs incurred in developing and
enhancing its software products in accordance with FASB Statement 86. See
Note 1 of Notes to the Consolidated Financial Statements.
(2) Through 1995, the Company amortized the capitalized software development
costs of its stand-alone software products and related enhancements over a
13-year period and amortized capitalized software development costs of
Petroleum WorkBench and Sammi are capitalized over a seven-year period.
Effective December 31, 1995 the Company reduced the carrying costs of its
software assets by $17.9 million and effective in 1996 the net carrying
value of the software costs and all future capitalized software costs will
be amortized over a reduced life of five years. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Reduction of Capitalized Software Costs" and Note 1 of Notes to the
Consolidated Financial Statements.
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company develops and markets sophisticated software for the development
and production and pipeline and surface facilities areas of the worldwide oil
and gas industry and for graphical user interface applications.
The following discussion is management's assessment of the Company's
historical financial performance and condition. This discussion should be read
in conjunction with the Consolidated Financial Statements of the Company and
the related Notes thereto.
The Company recognizes software license revenue on delivery and recognizes
maintenance revenue on a straight-line basis over the term of the contract.
Certain combined software and service contracts are accounted for using the
percentage of completion method with contract revenue recognized based on: (a)
value-added output measures of progress for the software portion of the
contract after meeting certain specified contractual criteria, and having used
the installed software in completing specifications for the engineering
services on the project, which have been accepted by the client, and (b) input
measures of work performed on an hours-to-hours basis for the services portion
of the contract. Fixed-price contract revenue is recognized using the
percentage of completion method, calculated on the ratio of labor hours
incurred to total projected labor hours. Losses on contracts accounted for
using the percentage of completion method are recognized at the time they are
identified. See Note 1 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
OVERALL FINANCIAL POSITION. The liquidity and financial condition of the
Company declined during 1995. At December 31, 1995, the Company's working
capital ratio was 0.77 to 1, based on current assets of $10.5 million and
current liabilities of $13.6 million. The Company's working capital ratio at
December 31, 1994, was 1.4 to 1. Total stockholders' equity decreased to $4.1
million at December 31, 1995 from $28.4 million at December 31, 1994 due to
losses incurred in 1995 as well as a reduction in capitalized software costs.
See "Reduction in Capitalized Software Costs". Subsequent to year end the
Company has received commitments for the following funding and restructuring of
convertible debentures and bank revolving line of credit:
- Lindner Funds, a 14% shareholder in the Company, has agreed to
invest $5 million in the Company in exchange for a senior secured
note at 7% payable in five years and warrants to purchase 1.5
million shares of SSI no par value common stock at $3.00 per share
for five years.
- Renaissance Capital Partners II, Ltd. has agreed to convert
$250,000 of principal for 282,218 shares of the Company's no par
value common stock and convert the balance of $1,500,000 principal
into a senior secured note at 7% payable in five years on terms
substantially equal to the Lindner Funds senior secured note. The
Company will also issue warrants to purchase 450,000 shares of SSI
no par value common stock at $3.00 per share for five years.
18
<PAGE> 19
- The Company's primary bank and the Export-Import Bank of the
United States have committed to restructure and renew a bank line
of credit to April 15, 1997. Under the terms of the agreement,
the Company will pay off the existing $2,870,000 outstanding on
the Company's bank revolving line of credit and pay off the
balance owed, approximately U.S.$300,000, on the Company's United
Kingdom subsidiary bank line of credit. The Company's primary
bank will establish 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.
Also see Note 11 to Notes to Consolidated Financial Statements.
The implementation of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," on the proposed
transactions with Lindner Funds and Renaissance may give rise to a potential
material accounting expense to the Company as a result of the value of the
warrants. The Company may evaluate alternative structures to the transactions.
At December 31, 1994 and 1993, the Company had positive working capital of
$3.5 million and $4.4 million, respectively. During 1994 and 1993, the Company
undertook a series of steps to increase its financial flexibility and
liquidity. In September 1992, the Company issued a $2.5 million 7-year
convertible debenture to Renaissance Capital Partners II, Ltd. ("Renaissance")
and in September 1993 issued a $1.0 million 7-year convertible debenture to
Renaissance. See Note 3 of Notes to Consolidated Financial Statements. The
$5.0 million outstanding under the Company's revolving credit facility at
December 31, 1993 was classified as a long-term liability.
The Company's working capital and cash requirements will continue to be
influenced by the level of software research and development costs. During the
years ended December 31, 1995 and 1994, the level of software research and
development costs, in the aggregate, was $6.6 million and $6.4 million,
respectively. Although software research and development costs will continue,
management expects these costs to decrease as a percentage of revenue in the
future. In an effort to reduce the internal capital requirements for these
projects, the Company actively pursues opportunities to fund software research
and development costs through development projects with oil and gas industry
partners, government agencies and others. In this type of funded development
project, participating companies or other entities provide all or a portion of
the funds required to develop or enhance a software product in exchange for
access to the resulting software at discounted or nominal prices with the
Company retaining ownership and licensing rights to the product. In accordance
with generally accepted accounting principles, the Company generally records as
consulting revenue amounts received from these third parties and capitalizes
the qualifying portion of related costs incurred as software development costs
in accordance with FASB Statement 86.
The Company believes after the completion of the financing and
restructuring of the Convertible debentures and bank revolving line of credit
explained above 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.
PUBLIC OFFERING AND OTHER EQUITY TRANSACTIONS. On June 30, 1994, the Company
sold 2.0 million newly issued shares of common stock in a public offering from
which the Company received net proceeds of $8.1 million, net of related costs
of approximately $270,000. The Company used the proceeds from the public
offering to repay its bank indebtedness of $5.1 million, to reduce accounts
payable and to increase working capital.
19
<PAGE> 20
In July 1994, the underwriters of the public offering exercised an
overallotment option, resulting in the sale by the Company of 383,000
additional newly issued shares of common stock, from which the Company received
net proceeds of approximately $1.6 million.
Simultaneously with completion of the public offering, Renaissance Capital
Partners II, Ltd. ("Renaissance") converted $1.75 million in principal amount
of convertible debentures (see Notes 2 and 3 of Notes to Consolidated Financial
Statements) into 653,846 shares of common stock, which Renaissance sold in the
public offering. As a result of the Renaissance conversion, the Company
reduced paid-in capital by $119,000 for unamortized debt issuance costs related
to the converted debentures.
Also in 1995, the Company received net proceeds of approximately $1.0
million from the sale of newly issued common stock in connection with the
exercise of stock options.
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, the Company received a commitment from Renaissance Capital
Partners II, Ltd. where it will convert $250,000 of principal for 282,218
shares of the Company's no par value common stock and convert the balance of
$1,500,000 principal into a senior secured note on terms substantially equal to
the Lindner Funds senior secured note. See Note 11 to Notes to Consolidated
Financial Statements.
BANK REVOLVING CREDIT FACILITIES.
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 has not
borrowed any money under the line 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 December 31, 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>
<CAPTION>
(In thousands)
<S> <C>
Revolving credit facility limit $5,133
======
Borrowing base (limited by insurance coverage and
amount of qualified receivables) $4,353
Amounts outstanding:
Short-term cash borrowings $2,870
Letters of credit 688
------
$3,558
======
</TABLE>
20
<PAGE> 21
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 and, under the terms of the recently committed financing, the Company
will pay off the existing short term cash borrowing with the proceeds. See
Note 11 of Notes to Consolidated Financial Statements.
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 December 31, 1995, interest rates applicable to short-term cash
borrowings were 9.75% and 10.75% 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 EximBank an annual fee of 1.5% of the amount of the
guarantee. In addition, the Company is required to purchase credit insurance
for foreign receivables at a cost of 0.44% of the amount of the insured
receivables.
PRIMARY BANK LINE OF CREDIT, APRIL 1, 1996 - APRIL 15, 1997.
In April 1996 the Company received a commitment from its primary lender on
a $1.5 million revolving credit facility through April 15, 1997. The
collateral for the line will be the accounts receivable 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.
The new credit facility will be 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.
See Note 3 and Note 11 of Notes to Consolidated Financial Statements.
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 December 31, 1995 the United Kingdom subsidiary had
approximately $158,543 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
December 31, 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
1995 COMPARED TO 1994. The Company reported a loss before income taxes of
$24,724,000 in 1995. The Company reported a loss before income taxes of
$4,630,000 in 1994. Effective December 31, 1995, the Company reduced the
carrying value of its capitalized software costs by a one time charge of $17.9
million. See Reduction in Capitalized Software Costs.
21
<PAGE> 22
During 1995 and in January 1996 the Company established a policy that
required stringent review of accounts receivable over six months old. As a
result of this new policy, in the fourth quarter of 1995 the Company increased
its provision for doubtful accounts by $3,192,000 because of uncertainty about
collectibility of certain accounts receivable. Based upon most recent
available information, the Company has determined that the chance is remote
that it will be able to collect accounts receivable of $4,110,000.
Accordingly, in the December 31, 1995 balance sheet, the Company has written
off accounts receivable totaling $4,110,000 and removed that amount from its
allowance for bad debts account.
The Company also reviewed the status of various consulting and development
projects. As a consequence, the Company made a $400,000 provision for costs to
complete certain projects. The Company has also written off costs of
development and consulting projects it does not expect to be able to bill and
collect for $372,000. The Company also accrued various expense items in the
fourth quarter totaling $853,000.
Part of the Company's marketing strategy has been to establish strategic
alliances with quality VARs. VARs license the Company's software products for
remarketing and sublicensing to end users or to other VARs, either for use on a
specific project for a specific customer or for general marketing to the VARs'
current and future customers. The Company's VARs are generally substantial
companies with long operating histories. The software products licensed to
VARs are established, proven products that have long been widely accepted in
the marketplaces served by the Company.
In some cases, primarily to obtain preferential pricing, a VAR makes an
unconditional commitment to pay to the Company a fixed license fee for software
to be used on a specific project for a specific customer or an unconditional
commitment to pay to the Company a minimum fixed fee for the right of general
marketing to the VAR's current and future customers for a specified period,
usually one-year. In the case of general marketing rights, a VAR is required
to pay license fees as it has transactions with its customers. On the due date
or dates of a minimum fixed fee, which are payable either in installments or at
the end of the term of a VAR agreement, the VAR must pay to the Company the
amount, if any, required for total payments to equal the required minimum
fixed fee amount. General marketing VAR minimum fixed fees are not subject to
reduction based on the number of units marketed by a VAR and are not otherwise
contingent on whether a VAR is successful in marketing the Company's software
products or otherwise.
In accounting for a VAR agreement, the Company recognizes revenue at
inception of the contract only if collection is determined to be probable and
all other requirements for revenue recognition are met. These include: (a)
delivery of all software products on all platforms that a VAR has the right to
receive, (b) reviewing the VAR's credit status to determine whether the VAR has
the financial capability to make the required fixed minimum payments,
regardless of whether the VAR is successful in marketing the Company's software
products, (c) determining that the VAR is not new, undercapitalized, or in
financial difficulty, and (d) determining that the transaction is viable for
both parties.
In the fourth quarter of 1994, certain VARs of the Company's Pipeline and
Facilities Division did not pay fixed fees when due for certain software
licensed for use on specific projects for specific customers and also certain
minimum fixed fees for rights of general marketing.
In the fourth quarter of 1994 the Company increased its 1994 provision for
doubtful accounts by $5,854,000, of which $1,958,000 was related to the fixed
fee payments due from VARs. The Company has determined that the chance was
remote that it will be able to collect accounts receivable of $2,118,000, of
which $1,437,000 was related to fixed fee amounts from VARs. Accordingly, in
the December 31, 1994 balance sheet, the Company has written off accounts
receivable totaling $2,118,000.
22
<PAGE> 23
Effective with the fourth quarter of 1994 the Company is using
significantly more stringent qualitative and quantitative criteria and
guidelines in deciding if a VAR's fee should be considered a fixed fee that
enables revenue recognition at inception of the VAR arrangement if all other
revenue recognition requirements are met.
In connection with the non-payment by VARs of minimum fixed fees, which had
been recognized by the Company as revenue in 1994, the Company conducted in
1995 an investigation and discovered that certain persons in its Pipeline and
Facilities Division had indicated in writing to some of the VARs in connection
with thirteen contracts involving aggregate payments of $2,331,000 that payment
of the fixed fees would not be required under specified conditions, generally
related to whether the VARs were successful in sublicensing the software to
specific customers for use on specific projects or to other customers of the
VARs. Most of such written representations were signed by Division employees
who are no longer employed by and have no present association with the Company.
Upon learning of the foregoing written representations, and after
consultation with the Company's auditors, Hein + Associates, the Audit
Committee of the Board of Directors of the Company on April 27, 1995 appointed
a Special Committee, consisting of an outside Director, the Company's outside
principal legal counsel and its Chief Financial Officer, to investigate the
circumstances related to these representations and the related VAR agreements.
During the following two months the Committee interviewed thirty current and
former Company employees and extensively reviewed Company files. Hein +
Associates was kept informed throughout of the results of the investigation and
from time to time made suggestions to the Special Committee for particular
inquiries, which suggestions were followed.
In a May 30, 1995 report to the Audit Committee and the Board of Directors
the Special Committee concluded that the representations to the VARs were not
authorized by the Company and were not approved in advance by any of the
Company's executive officers, except for one situation described below, nor was
their existence known by any of the Company's accounting personnel. The
Committee concluded that the individuals who made the representations about
deferral of the obligations of VARs to pay license fees until resales occurred
believed that such resales were certain to occur on a timely basis (which in a
number of instances proved correct) and therefore believed that the
representations were not material. The Company, with the consultation and
approval of the Board of Directors, has established rigorous controls and
procedures to guard against similar unauthorized representations to the
Company's clients in the future and the Board of Directors has also determined
sanctions for those few individuals that the Company continues to employ who
had involvement with the unauthorized representations. These controls and
procedures, as well as the sanctions, were discussed with Hein + Associates
prior to their implementation, who agreed to their propriety.
Subsequent to the May 30, 1995 report, it was discovered that an Executive
Vice President and Director of the Company had been involved in a similar
representation to another VAR. The Special Committee supplemented its inquiry
to include that situation and concluded in a supplemental report to the Board
of Directors describing this situation that the Committee's previous
conclusions with respect to the non-involvement of any of the Company's other
executive officers and of its accounting personnel remained correct. The
Special Committee also concluded that there were no facts or circumstances that
suggested that there were any additional remaining similar representations to
VARs or others which had not been investigated. As a result of this situation,
on June 21, 1995, upon recommendation of the Chief Executive Officer of the
Company, the Board of Directors approved the immediate termination of such
Executive Vice President as an officer and employee of the Company.
The individuals who made the representations were not actually authorized
to do so by the Company. Also, legal counsel to the Company has advised that
there was no apparent authority basis for their representations. Almost all of
the related VAR agreements do not allow modifications to the payment
obligations of the VARs in the manner purported by the unauthorized
representations. The Company's legal counsel has advised it that the
representations are not enforceable, that they
23
<PAGE> 24
may be disavowed by the Company, and that the fixed fees required by the VAR
agreements are due and payable.
REVENUE
1995 COMPARED TO 1994. Total revenue decreased 14% to $24.1 million in
1995 from $27.9 million in 1994. The Company reported lower revenue from both
consulting and training and also licenses and maintenance.
Total revenue from development and production products and services
increased 1% to $17.5 million in 1995 from $17.4 million in 1994. Software
license and maintenance revenue increased 3% to $6.4 million in 1995 from $6.2
million in 1994. Total revenue from the Petroleum WorkBench increased 24% to
$4.5 million in 1995 from $3.7 million in 1994. Consulting and training
revenue decreased 2% to $10.8 million in 1995 from $11.0 million in 1994.
Total revenue from pipeline and surface facilities products and services
decreased 36% to $4.5 million in 1995 from $7.1 million in 1994. Consulting
and training revenue was $2.7 million in 1995 and in 1994. Software license
and maintenance revenue decreased 60% to $1.7 million from $4.3 million in 1994
due to a temporary general slowdown in the market, as well as a hesitancy of
buyers to purchase as SCADA vendors and software vendors transitioned their
products to the Windows operating system environment. The Company released its
Windows product in March, 1996.
Total revenue from graphical user interface ("GUI") products and services
decreased 38% to $2.0 million in 1995 from $3.3 million in 1994. Software
license and maintenance revenue decreased 46% to $1.1 million in 1995 from $2.0
million in 1994. As a result of the poor performance by this Division, the
Company changed the management of the Kinesix Division during May, 1995.
1994 COMPARED TO 1993. Total revenue decreased 8% to $27.9 million in 1994
from $30.3 million in 1993. The Company reported lower revenue from both
consulting and training and also licenses and maintenance, primarily because of
the write-down of the VAR agreements in 1994.
Total revenue from development and production products and services
decreased 3% to $17.4 million in 1994 from $18.0 million in 1993. However,
software license and maintenance revenue increased 11% to $6.2 million in 1994
from $5.7 million in 1993. Total revenue from the Petroleum WorkBench
increased 54% to $3.7 million in 1994 from $2.4 million in 1993. Consulting
and training revenue decreased 13% to $10.5 million in 1994 from $12.0 million
in 1993 because of the write-down of the VAR agreements and other receivables..
Total revenue from pipeline and surface facilities products and services
decreased 13% to $7.1 million in 1994 from $8.2 million in 1993. Consulting
and training revenue decreased 36% to $2.7 million in 1994 from $4.2 million in
1993. In 1993, the pipeline and surface facilities division had higher
consulting revenue due to continued work on the final stages of several of the
significant combined software and services contracts that were initiated in
1991. Software license and maintenance revenue increased 16% to $4.3 million
in 1994 from $3.7 million in 1993.
Total revenue from graphical user interface ("GUI") products and services
decreased 21% to $3.3 million in 1994 from $4.2 million in 1993. Software
license and maintenance revenue decreased 26% to $2.0 million in 1994 from $2.7
million in 1993. The decrease was attributable primarily to what the Company
believes is a temporary decline in the aerospace industry market and because of
a temporary reduction in sales personnel during a period of internal
reorganization of the Kinesix division's sales force.
24
<PAGE> 25
FOREIGN REVENUE
Revenue derived from foreign sources during 1995, 1994 and 1993 is set
forth below:
<TABLE>
<CAPTION>
Revenue From Percentage of
Year Foreign Sources Total Revenue
---- --------------- -------------
(In thousands)
<S> <C> <C>
1995 $15,942 66%
1994 18,214 65%
1993 18,541 61%
</TABLE>
Management believes that foreign revenue will continue to be an important
factor in the Company's business, primarily as a result of continued
penetration of international markets through the Company's strategic marketing
efforts. See "Business -- Geographic and Business Line Data" for information
regarding the particular geographic areas in which the Company generated
foreign source revenue during these periods.
COSTS OF CONSULTING AND COSTS OF LICENSES AND MAINTENANCE
1995 COMPARED TO 1994. Costs of consulting and training increased to $12.6
million in 1995 from $11.3 million in 1994. The increase resulted primarily
from the larger dollar value of consulting projects charged to bad debt
expenses in 1995. Costs of consulting and training were 87% of consulting and
training revenue in 1995 and 75% in 1994.
Costs of licenses and maintenance increased to $7.8 million in 1995 from
$6.0 million in 1994, including software amortization of $5.4 million in 1995
from $4.6 million in 1994. Costs of licenses and maintenance were 86% of
license and maintenance revenue in 1995 and 48% in 1994. The increase was
mainly due to the expense of the write-offs and cost accruals.
1994 COMPARED TO 1993. Costs of consulting and training decreased to $11.3
million in 1994 from $12.5 million in 1993. The decrease resulted primarily
from the lower level of consulting activity in 1994. Costs of consulting and
training were 75% of consulting and training revenue in 1994 and 70% in 1993.
Costs of licenses and maintenance decreased to $6.0 million in 1994 from
$6.6 million in 1993, including software amortization of $4.6 million in 1994
and $4.1 million in 1993. Costs of licenses and maintenance were 48% of
license and maintenance revenue in 1994 and 54% in 1993.
CONTRACT COST ACCRUALS (REVERSALS)
Contract cost accruals and reversals are recognized on certain combined
software and service contracts as required based on the percentage of
completion applied to total estimated project costs in order to recognize a
constant gross margin over the term of such contracts. Contract cost
(reversals) of $60,000 in 1995, ($4,000) in 1994, and ($333,000) in 1993,
respectively, are included in costs and expenses in the statement of operations
and relate to the reversal of previous accruals to provide constant gross
margins over the terms of the contracts. Contract cost accruals result in the
recognition of a portion of contract costs as expenses before they are
incurred.
25
<PAGE> 26
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
1995 COMPARED TO 1994. Selling, general, and administrative expenses
decreased to $9.1 million in 1995 from $13.7 million in 1994. The decrease was
primarily attributable to the decrease in the allowance for doubtful accounts
of $3,192 in 1995 compared to $4,617 in 1994. Also, the Company increased its
sales and marketing activities, including increased costs for the purpose of
further market penetration of the WorkBench and the Company's other products.
1994 COMPARED TO 1993. Selling, general, and administrative expenses
increased to $13.7 million in 1994 from $7.3 million in 1993. The increase was
primarily attributable to the increase to the allowance for doubtful accounts
of $5,917,000. Also, the Company increased its sales and marketing activities,
including increased costs for the purpose of further market penetration of the
WorkBench and the Company's other products.
SOFTWARE RESEARCH AND DEVELOPMENT
Following is a summary of costs of development and enhancement of the
Company's software products for 1995, 1994, and 1993, the amounts capitalized
in accordance with FASB Statement No. 86, the amounts charged to research and
development expense, the amounts of capitalized costs amortized, and the total
amounts recognized as expense in the statements of operations.
<TABLE>
<CAPTION>
Total Total
Software Amount Amount Amount Charges to
Year Expenditures Capitalized Expensed Amortized Earnings(1)
---- ------------ ----------- -------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
1995 $6,630 $5,850 $ 780 $5,400 $24,097
1994 6,392 5,599 793 4,589 5,382
1993 5,579 4,440 1,139 4,144 5,283
</TABLE>
(1) Includes a one-time reduction in capitalized software costs of $17.9
million effective December 31, 1995.
The Company has continued its commitment to the development and enhancement
of its software products. Capitalized software costs increased in 1995 partly
as a result of acceleration of development activities for the WorkBench. These
activities were accelerated to enable providing an enhanced product to the
marketplace, which the Company believes will complement the increased sales and
marketing efforts.
The Company capitalizes qualifying costs incurred in developing and
enhancing its software products in accordance with FASB Statement 86 upon
determining technological feasibility with respect to the product or
enhancement. Through 1995, the Company amortized the capitalized software
development costs of its stand-alone software products and related enhancements
over a 13-year period and capitalized software development costs of Petroleum
WorkBench and Sammi were amortized over a seven-year period. Effective
December 31, 1995 the Company made a one-time reduction in the carrying costs
of its software assets of $17.9 million and effective in 1996 the net carrying
value of the software costs and all future capitalized software costs will be
amortized over a five-year period. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Reduction of Capitalized
Software Costs" and Note 1 of Notes to the Consolidated Financial Statements.
Capitalized software is stated at the lower of cost or net realizable
value. The Company capitalizes costs of purchased software and qualifying
internal costs of developing and enhancing its software products in accordance
with FASB Statement 86.
26
<PAGE> 27
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 has 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.
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 1995 the Company recognized a net foreign exchange gain of $114,000,
and in 1994 the Company recognized a net foreign exchange loss of $84,000,
primarily because of strengthening and weakening of the British pound against
the U.S. dollar. In 1992 the Company recognized net foreign exchange gains of
$116,000 principally as a result of the weakening of the British pound against
the U.S. dollar.
INTEREST INCOME (EXPENSE)
The following table summarizes the components of interest income (expense)
during 1995, 1994, and 1993. 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>
Interest
Interest Interest Interest Income
Year Income Incurred Capitalized (Expense)
---- ------ -------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C>
1995 $ 35 $ (497) $ 109 $ (353)
1994 21 (754) 350 (383)
1993 17 (966) 285 (664)
</TABLE>
27
<PAGE> 28
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.
28
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
REPORT OF EHRHARDT KEEFE STEINER & HOTTMAN PC 30
REPORT OF HEIN + ASSOCIATES LLP 31
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1995 AND 1994 32
CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995 33
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995 34
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 36
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES: II - VALUATION AND QUALIFYING ACCOUNTS 56
</TABLE>
All other schedules have been omitted because they are not applicable or the
required information is shown
29
<PAGE> 30
REPORT OF EHRHARDT KEEFE STEINER & HOTTMAN PC
The Board of Directors and Stockholders
Scientific Software-Intercomp, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Scientific
Software-Intercomp, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. Our audits also included the financial
statement schedules as of and for the years ended December 31, 1995 and 1994
listed in the Index at Item 8. These financial statements and schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Scientific
Software-Intercomp, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
April 12, 1996
Denver, Colorado
30
<PAGE> 31
REPORT OF HEIN + ASSOCIATES LLP
This report is a copy of a previously issued Hein + Associates LLP audit
report. Hein + Associates LLP resigned as Company auditors on June 30, 1995,
has not withdrawn its opinion for 1993, but has declined to reissue this
report. The 1993 financial statements included in this report are the same as
the audited financial statements previously filed in the Form 10-K for that
year. In the opinion of management, no events have occurred that would require
any change to the financial statements covered by the report.
Hein + Associates LLP declined to reissue its report initially unless it was
paid disputed audit fees for 1994 and subsequently reiterated its decline
without explanation.
The Board of Directors and Stockholders
Scientific Software-Intercomp, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Scientific
Software-Intercomp, Inc. and subsidiaries as of December 31, 1993, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. Our audit also included the financial statement
schedules as of and for the year ended December 31, 1993 listed in the Index at
Item 8. These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 financial position of Scientific
Software-Intercomp, Inc. and subsidiaries as of December 31, 1993, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ HEIN + ASSOCIATES
HEIN + ASSOCIATES
Certified Public Accountants
Denver, Colorado
March 21, 1994
31
<PAGE> 32
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 419 $ 588
Accounts receivable, net of allowance for doubtful accounts
of $38,111 and $4,617 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,614 6,145
Work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,008 4,973
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423 1,055
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,464 12,761
----------- -----------
Software, net of accumulated amortization and write-down of $30,924 and $25,524 . . 10,190 27,666
Property and Equipment, net of accumulated depreciation and amortization
of $6,223 and $5,589 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,416 1,917
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,842 2,210
----------- -----------
$ 23,912 $ 44,544
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable and current portion of long-term obligations . . . . . . . . . . $ 382 $ 286
Notes payable to bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,870 1,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,375 2,703
Accrued salaries and fringe benefits . . . . . . . . . . . . . . . . . . . . . 1,157 1,387
Accrued lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 375 570
Deferred maintenance and other revenue . . . . . . . . . . . . . . . . . . . . 2,712 2,010
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 2,684 1,339
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 13,555 9,295
Accrued Lease Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333 720
Long-Term Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284 343
Convertible Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,630 1,750
Redeemable Preferred Stock
Series A Redeemable Convertible Preferred Stock,
$5 par value; 1,200,000 shares authorized,
800,000 shares issued and outstanding . . . . . . . . . . . . . . . . . . . . 4,000 4,000
Commitments and Contingencies (Notes 8 and 9)
Stockholders' Equity
Common stock, no par value; $.10 stated value; 25,000,000
and 10,000,000 shares authorized, respectively; 8,256,000
and 8,064,000 shares issued and outstanding, respectively . . . . . . . . 825 806
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,850 48,233
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44,970) (20,046)
Cumulative foreign currency translation adjustment . . . . . . . . . . . . . . (595) (557)
----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 4,110 28,436
----------- -----------
$ 23,912 $ 44,544
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
32
<PAGE> 33
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For The Years Ended December 31,
------------------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Revenue
Consulting and training . . . . . . . . . . . . . . . . $ 14,444 $ 15,038 $ 17,696
Licenses and maintenance . . . . . . . . . . . . . . . . 9,061 12,431 12,111
Other . . . . . . . . . . . . . . . . . . . . . . . . . 638 440 507
---------- ---------- ----------
24,143 27,909 30,314
---------- ---------- ----------
Costs and Expenses
Costs of consulting and training . . . . . . . . . . . . 12,565 11,274 12,464
Costs of licenses and maintenance,
including software amortization of
$5,400, $4,589, and $4,144 . . . . . . . . . . . . . . 7,801 6,043 6,561
Contract cost accruals (reversals) . . . . . . . . . . . 60 (4) (333)
Costs of other revenue . . . . . . . . . . . . . . . . . 383 264 278
Selling, general, and administrative . . . . . . . . . 9,122 13,702 7,313
Software research and development . . . . . . . . . . . 780 793 1,139
Reduction in capitalized software costs . . . . . . . . 17,917 --- ---
---------- ---------- ----------
48,628 32,072 27,422
---------- ---------- ----------
Income (Loss) from Operations . . . . . . . . . . . . . . . . (24,485) (4,163) 2,892
Other Income (Expense):
Interest income (expense) . . . . . . . . . . . . . . . (353) (383) (664)
Foreign exchange gains (losses) . . . . . . . . . . . . 114 (84) (141)
---------- ---------- ----------
Income (Loss) Before Income Taxes . . . . . . . . . . . . . . (24,724) (4,630) 2,087
Provision For Income Taxes . . . . . . . . . . . . . . . . . 200 260 375
---------- ---------- ----------
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . $ (24,924) (4,890) $ 1,712
========== ========== ==========
Weighted Average Number of Common and
Common Equivalent Shares Outstanding:
Primary . . . . . . . . . . . . . . . . . . . . . . . . 8,178 6,468 5,354
========== ========== ==========
Fully diluted . . . . . . . . . . . . . . . . . . . . . 6,568
==========
Income (Loss) Per Common and
Common Equivalent Share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . $ (3.05) $ (0.75) $ 0.32
========== ========== ==========
Fully diluted . . . . . . . . . . . . . . . . . . . . . $ 0.31
==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
33
<PAGE> 34
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
-------------------------------------------------------------------------------------------------
Cumulative
Foreign
Common Stock currency Treasury Stock
------------------ Paid-in Accumulated Translation ------------------ Stockholders'
Shares Amount Capital Deficit Adjustment Shares Amount Equity
------ ------ ------- ----------- ----------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 . . 4,461 $ 446 $35,269 $(16,868) $ (555) --- $ --- $ 18,292
Stock sold for cash . . . . . 16 2 46 --- --- --- --- 48
Compensation, services, and
vendor payments . . . . . . 190 19 545 --- --- --- --- 564
Foreign currency translation
adjustment . . . . . . . . --- --- --- --- (77) --- --- (77)
Net income . . . . . . . . . --- --- --- 1,712 --- --- --- 1,712
------ ----- ------- -------- ------ ----- ----- --------
Balance, December 31, 1993. . 4,667 467 35,860 (15,156) (632) --- --- 20,539
Stock sold for cash . . . . . 2,667 267 10,471 --- --- --- --- 10,738
Compensation, services, and
vendor payments . . . . . . 654 65 1,566 --- --- --- --- 1,631
76 7 336 --- --- --- --- 343
Foreign currency translation
adjustment . . . . . . . . --- --- --- --- 75 --- --- 75
Net (loss) . . . . . . . . . --- --- --- (4,890) --- --- --- (4,890)
------ ----- ------- -------- ------ ----- ----- --------
Balance, December 31, 1994 . 8,064 806 48,233 (20,046) (557) --- --- 28,436
Stock sold for cash . . . . . 65 6 224 --- --- --- --- 230
Conversion of convertible
debentures into common
stock . . . . . . . . . . . --- --- --- --- --- --- --- ---
Compensation and services . . 127 13 393 --- --- --- --- 406
Foreign currency translation
adjustment . . . . . . . . --- --- --- --- (38) --- --- (38)
Net (loss) . . . . . . . . . --- --- --- (24,924) --- --- --- (24,924)
------ ----- ------- -------- ------ ----- ----- --------
Balance, December 31, 1995 . 8,256 $ 825 $48,850 $(44,970) $ (595) --- $ --- $ 4,110
====== ===== ======= ======== ====== ===== ===== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
34
<PAGE> 35
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Years Ended
---------------------------------------
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . $(24,924) $(4,890) $ 1,712
Adjustments: . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . 6,034 5,329 4,758
Reduction in capitalized software costs . . . . . . . 17,917 --- ---
Provision for losses on accounts receivable . . . . . 3,304 5,917 165
Compensation and services paid in stock . . . . . . . --- --- 27
Changes in operating assets and liabilities:
Accounts receivable
and work in progress . . . . . . . . . . . . . . (1,827) (2,439) (2,700)
Other assets . . . . . . . . . . . . . . . . . . . 1,000 (230) (441)
Accounts payable and
accrued expenses . . . . . . . . . . . . . . . . 2,214 (1,951) 44
Accrued lease obligations . . . . . . . . . . . . . (582) (241) (332)
Deferred revenue . . . . . . . . . . . . . . . . . 702 (546) 55
-------- ------- -------
Total adjustments . . . . . . . . . . . . . . . . . . 28,762 5,839 1,576
-------- ------- -------
Net cash provided by operating activities . . . . . . 3,838 949 3,288
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized software costs . . . . . . . . . . . . . . (5,850) (5,599) (4,400)
Purchases of equipment . . . . . . . . . . . . . . . . (134) (1,235) (619)
-------- ------- -------
Net cash utilized in investing activities . . . . . . (5,984) (6,834) (5,019)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Sales of stock . . . . . . . . . . . . . . . . . . . . 230 10,738 48
Bank borrowings . . . . . . . . . . . . . . . . . . . 2,029 1,104 531
Repayments of bank borrowings . . . . . . . . . . . . --- (5,132) (212)
Proceeds from issuance of convertible debentures . . . --- --- 921
Repayments of other obligations . . . . . . . . . . . (292) (397) (44)
-------- ------- -------
Net cash provided by financing activities . . . . . . 1,967 6,313 1,244
-------- ------- -------
Effect of exchange rates on cash . . . . . . . . . . . . 10 21 (31)
-------- ------- -------
Net increase (decrease) in cash and equivalents . . . . . (169) 449 (518)
Cash and cash equivalents at beginning of year . . . . . 588 139 657
-------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . $ 419 $ 588 $ 139
======== ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest, net of amounts capitalized . . . . . . . . . $ 388 $ 437 $ 681
Foreign taxes . . . . . . . . . . . . . . . . . . . . 238 166 264
Obligations incurred in purchases of equipment . . . . . --- --- 93
Exchange of convertible debenture for common stock --- 1,750 ---
Software and equipment purchased for stock . . . . . . . --- --- 48
Prior compensation and services paid in stock . . . . . . 406 343 449
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE> 36
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Scientific Software-Intercomp, Inc. ("the Company") develops and markets
sophisticated software for the development and production and pipeline and
surface facilities areas of the worldwide oil and gas industry and for graphic
user interface applications. The Company also provides consulting and
technical support services in each of these areas.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Scientific
Software-Intercomp, Inc. ("the Company") and its wholly-owned subsidiaries
after elimination of all significant intercompany balances and transactions.
LIQUIDITY
The liquidity and financial condition of the Company declined during 1995.
At December 31, 1995, the Company's working capital ratio was 0.77 to 1 based
on current assets of $10.5 million and current liabilities of $13.6 million.
The Company's working capital ratio at December 31, 1994 was 1.4 to 1. Total
stockholders' equity decreased to $4.1 million at December 31, 1995 from $28.4
million at December 31, 1994 due to losses incurred in 1995 as well as a
reduction in capitalized software costs. See "Reduction in Capitalized
Software Costs". Subsequent to year end the Company has received commitments
for the following funding and restructuring of convertible debentures and bank
revolving line of credit:
- Lindner Funds, a 14% shareholder in the Company, has agreed to
invest $5 million in the Company in exchange for a senior
secured note at 7% payable in five years and warrants to
purchase 1.5 million shares of SSI no par value common stock
at $3.00 per share for five years.
- Renaissance Capital Partners II, Ltd. has agreed to convert
$250,000 of principal for 282,218 shares of the Company's no
par value common stock and convert the balance of $1,500,000
principal into a senior secured note at 7% payable in five
years on terms substantially equal to the Lindner Funds senior
secured note. The Company will also issue warrants to
purchase 450,000 shares of SSI no par value common stock at
$3.00 per share for five years.
- The Company's primary bank and the Export-Import Bank of the
United States have committed to restructure and renew a bank
line of credit to April 15, 1997. Under the terms of the
agreement, the Company will pay off the existing $2,870,000
outstanding on the Company's bank revolving line of credit and
pay off the balance owed, approximately U.S.$300,000, on the
Company's United Kingdom subsidiary bank line of credit. The
Company's primary bank will establish 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.
Also see Note 11 to Notes to Consolidated Financial Statements.
36
<PAGE> 37
The implementation of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," on the proposed
transactions with Lindner Funds and Renaissance may give rise to a potential
material accounting expense to the Company as a result of the value of the
warrants. The Company may evaluate alternative structures to the transactions.
At December 31, 1994 and 1993, the Company had positive working capital of
$3.5 million and $4.4 million, respectively. During 1994 and 1993, the Company
undertook a series of steps to increase its financial flexibility and
liquidity. In September 1992, the Company issued a $2.5 million 7-year
convertible debenture to Renaissance Capital Partners II, Ltd. ("Renaissance")
and in September 1993 issued a $1.0 million 7-year convertible debenture to
Renaissance. See Note 3 of Notes to Consolidated Financial Statements. The
$5.0 million outstanding under the Company's revolving credit facility at
December 31, 1993 was classified as a long-term liability.
The Company's working capital and cash requirements will continue to be
influenced by the level of software research and development costs. During the
years ended December 31, 1995 and 1994, the level of software research and
development costs, in the aggregate, was $6.6 million and $6.4 million,
respectively. Although software research and development costs will continue,
management expects these costs to decrease as a percentage of revenue in the
future. In an effort to reduce the internal capital requirements for these
projects, the Company actively pursues opportunities to fund software research
and development costs through development projects with oil and gas industry
partners, government agencies and others. In this type of funded development
project, participating companies or other entities provide all or a portion of
the funds required to develop or enhance a software product in exchange for
access to the resulting software at discounted or nominal prices with the
Company retaining ownership and licensing rights to the product. In accordance
with generally accepted accounting principles, the Company generally records as
consulting revenue amounts received from these third parties and capitalizes
the qualifying portion of related costs incurred as software development costs
in accordance with FASB Statement 86.
The Company believes after the completion of the financing and
restructuring of the Convertible debentures and bank revolving line of credit
explained above 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.
REVENUE
The Company recognizes software license revenue on delivery and recognizes
software maintenance revenue on a straight-line basis over the term of the
contract.
37
<PAGE> 38
Beginning in 1991 the Company entered into certain combined software and
service contracts pursuant to which the Company provides off-the-shelf
software, combined with pipeline engineering services, relating to leak
detection and operations analysis of pipeline networks. The engineering
services provided pursuant to these contracts include analysis of the
characteristics of the client's specific pipeline network and entering these
characteristics into the Company's software. Programming changes to the
off-the-shelf software are not necessary for completion of the contract. The
Company also markets the off-the-shelf software for use by clients, as is,
without the services included in these contracts. The Company measures
progress-to-completion for combined software and services contracts on a value
added output basis for the off-the-shelf software portion of the contracts
when: (1) a license for the off-the-shelf software has been executed that is
enforceable for the customary price of the Company's off-the-shelf software,
(2) the off-the-shelf software has been installed on the project computer, and
(3) the installed off-the-shelf software has been used for completing and
providing to the client specifications for the engineering services on the
project, which have been accepted by the client. The Company measures
progress-to-completion for the engineering services portion of the contracts
based on labor hours incurred. Contract costs are recognized based on the
percentage of completion applied to total estimated project costs, resulting in
a constant gross margin percentage over the term of the contract. Net contract
cost (reversals) of $60,000, ($4,000) and ($333,000) are included in costs
and expenses in the statements of operations for 1995, 1994 and 1993,
respectively, related to the accrual and reversal of costs to provide the
constant gross margin over the term of each contract.
Revenue earned in performance of time and material contracts is recognized
at contractual rates as labor hours and associated costs are incurred.
Fixed-price contract revenue is recognized using the percentage of completion
method, calculated based on the ratio of labor hours incurred to total
projected labor hours. Revenue accrued under time and material contracts is
classified as work in progress on the Consolidated Balance Sheet if contractual
milestones for billing have not been reached. Such amounts are later billed in
accordance with applicable contract terms. The work in progress amounts at
December 31, 1995 are expected to be billed and collected by December 31, 1996.
Anticipated losses on contracts accounted for using the percentage of
completion method are recognized at the time they are identified. Costs
incurred for specific anticipated contracts are deferred when recoverability of
the costs from the anticipated contract is determined to be probable.
Work in progress at December 31, 1994 includes $301,000 related to fixed
price contracts for the development of software that is funded by others. The
revenue on these contracts is recognized using the percentage of completion
method, and related qualifying software development costs are capitalized if
the Company retains ownership and the right to market the developed software.
Part of the Company's marketing strategy has been to establish strategic
alliances with quality VARs. VARs license the Company's software products for
remarketing and sublicensing to end users or to other VARs, either for use on a
specific project for a specific customer or for general marketing to the VARs'
current and future customers. The Company's VARs are generally substantial
companies with long operating histories. The software products licensed to
VARs are established, proven products that have long been widely accepted in
the marketplaces served by the Company.
In some cases, primarily to obtain preferential pricing, a VAR makes an
unconditional commitment to pay to the Company a fixed license fee for software
to be used on a specific project for a specific customer or an unconditional
commitment to pay to the Company a minimum fixed fee for the right of general
marketing to the VAR's current and future customers for a specified period,
usually one-year. In the case of general marketing rights, a VAR is required
to pay license fees as it has transactions with its customers. On the due date
or dates of a minimum fixed fee, which are payable either in installments or at
the end of the term, the VAR must pay to the Company the amount, if any,
required for total payments to equal the required minimum fixed fee amount.
General marketing VAR minimum fixed fees are not subject to reduction based on
the number of units marketed by a VAR and are not otherwise contingent on
whether the VAR is successful in marketing the Company's software products or
otherwise.
38
<PAGE> 39
In accounting for a VAR agreement, the Company recognizes revenue at
inception of the contract only if collection is determined to be probable and
all other requirements for revenue recognition are met. These include: (a)
delivery of all software products on all platforms that a VAR has the right to
receive, (b) reviewing the VAR's credit status to determine whether the VAR
has the financial capability to make the required fixed minimum payments,
regardless of whether the VAR is successful in marketing the Company's software
products, (c) determining that the VAR is not new, undercapitalized, or in
financial difficulty, and (d) determining that the transaction is viable for
both parties.
In the fourth quarter of 1994 the Company increased its 1994 provision for
doubtful accounts by $5,854,000, of which $1,958,000 was related to the fixed
fee payments due from VARs. The Company has determined that the chance is
remote that it will be able to collect accounts receivable of $2,118,000, of
which $1,437,000 is related to fixed fee amounts from VARs. Accordingly, in
the December 31, 1994 balance sheet, the Company has written off accounts
receivable totaling $2,118,000.
Effective with the fourth quarter of 1994 the Company is using
significantly more stringent qualitative and quantitative criteria and
guidelines in deciding if a VAR's fee should be considered a fixed fee that
enables revenue recognition at inception of the VAR arrangement if all other
revenue recognition requirements are met.
CAPITALIZED SOFTWARE COSTS
Capitalized software is stated at the lower of cost or net realizable
value. The Company capitalizes costs of purchased software and qualifying
internal costs of developing and enhancing its software products in accordance
with FASB Statement 86.
Amortization of capitalized software costs is determined each year based on
the greater of: (1) the amount computed using the ratio of current year gross
revenues to the sum of current and anticipated future gross revenue for that
product or (2) straight-line amortization. Through 1995, the Company amortized
the capitalized software development costs of its stand-alone software products
and related enhancements over a 13-year period and capitalized software
development costs of Petroleum WorkBench and Sammi were capitalized over a
seven-year period.
In January, 1996 the Board of Directors of the Company appointed George
Steel as president to run the operations of the Company. In connection with
this management change the Company undertook a review of its policies regarding
capitalization of software development costs. The study determined that, in
order to survive into the future, existing products must be continually
developed much faster than they have in the past. As a result, the impairment
of the existing capitalized software became an important factor for the Company
to evaluate.
A special evaluation of the capitalized software development costs was
completed by the Company. This evaluation included an analysis of the future
revenue streams from the various software products. The revenue streams were
adjusted using historical variance factors from previous forecasts. The income
streams were also reduced to consider normal costs in developing, marketing and
providing maintenance on the products to give a reasonable return to the
Company on the software investment. As a result of this analysis, effective
December 31, 1995 the Company made a one-time reduction in the carrying costs
of its software assets of $17.9 million and effective in 1996 the net carrying
value of the software costs and all future capitalized software costs will be
amortized over a five-year period. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
39
<PAGE> 40
Following is a summary of capitalization and amortization for the Company's
software products.
<TABLE>
<CAPTION>
Basic
Technology
Products Other Products
(13 year life) (7 year life) Total
-------------- -------------- -----
(In thousands)
<S> <C> <C> <C>
Capitalized Software Costs:
Balance, December 31, 1993 $ 33,972 $ 13,776 $ 47,748
1994 additions . . . . . . . . . . 2,768 2,831 5,599
Allocations to WorkBench . . . . . (9,850) 9,850 ----
Retirements . . . . . . . . . . . (167) --- (167)
--------- --------- ---------
Balance, December 31, 1994 26,723 26,457 53,180
1995 additions . . . . . . . . . . 3,245 2,605 5,850
--------- --------- ---------
Balance, December 31, 1995 . . . . . . $ 29,968 $ 29,062 $ 59,030
========= ========= =========
Accumulated Amortization:
Balance, December 31, 1993 . . . . . . $ 16,410 $4,692 $ 21,102
1994 amortization expense . . . . 1,166 3,423 4,589
Retirements . . . . . . . . . . . (167) --- (167)
--------- --------- ---------
Balance, December 31, 1994 . . . . . . 17,409 8,115 25,524
1995 amortization expense . . . . 1,525 3,875 5,400
--------- --------- ---------
Balance, December 31, 1995 . . . . . . $ 18,934 $ 11,990 30,924
--------- --------- ---------
Software, net of accumulated of
Balance, December 31, 1995 . . . . . . . 28,106
Reduction of capitalized software costs . . 17,916(1)
---------
Software,
Balance, December 31, 1995 . . . . . . . $ 10,190(1)
=========
</TABLE>
(1) Effective December 31, 1995 the Company made a one-time reduction in
the carrying costs of its software assets of $17.9 million and effective in
1996 the net carrying value of the software costs and all future capitalized
software costs will be amortized over a five-year period.
Management believes that in evaluating its capitalized software as
discussed above it will continue to be competitive, thus enabling it to expend
the capital resources necessary on an annual basis. Management believes that a
one-time reduction in the capitalized software is necessary in order to
properly reflect the software as the Company goes forward to be competitive
with the marketplace and the technological changes that are occurring. The
Company believes it must continue to expend significant funds in the
capitalized software area in order to be competitive with its marketplace.
The Company capitalized interest costs of $109,000, $350,000 and $285,000
during the years ended December 31, 1995, 1994 and 1993, respectively, as part
of the cost of software development projects in progress.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation and
amortization are provided on a straight-line basis over the estimated useful
lives of these assets. Maintenance and repairs are charged to expense as
incurred. The cost and accumulated depreciation and amortization of property
and equipment sold or otherwise disposed of are retired from the accounts and
the resulting gain or loss is included in profit or loss in the period
realized. Total depreciation expense was $811,000, $740,000 and $614,000 for
the years ended December 31, 1995, 1994 and 1993, respectively.
40
<PAGE> 41
Following are the components of property and equipment:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
------- -------
(In thousands)
<S> <C> <C>
Properties and leasehold improvements . . . . . . . . . $ 429 $ 402
Office furniture and equipment . . . . . . . . . . . . 2,426 2,406
Computer equipment . . . . . . . . . . . . . . . . . . 4,784 4,698
------- -------
7,639 7,506
------- -------
Less accumulated depreciation and amortization . . . . $ 1,416 $ 1,917
======= =======
</TABLE>
FOREIGN CURRENCY TRANSLATION
Gains and losses from the effects of exchange rate fluctuations on
transactions denominated in foreign currencies are included in results of
operations. Assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at period-end exchange rates, and their revenue
and expenses are translated at average exchange rates for the period. Deferred
taxes have not been allocated to the cumulative foreign currency translation
adjustment included in stockholders' equity because there is no intent to
repatriate earnings of the foreign subsidiaries.
INCOME TAXES
The Company accounts for income taxes whereby deferred tax liabilities or
assets are provided in the financial statements by applying the provisions of
applicable tax laws to measure the deferred tax consequences of temporary
differences that will result in net taxable or deductible amounts in future
years as a result of events recognized in the financial statements in the
current or preceding years. The types of differences between the tax bases of
assets and liabilities and their financial reporting amounts that give rise to
significant portions of the temporary differences include: software
development expenditures capitalized for books and deducted currently for taxes
and related amortization, depreciation of property and equipment, amortization
of rental obligations, losses accrued for book purposes, the recognition of
software license revenues, and goodwill determined for tax purposes that is not
deductible. Investment tax credits are recognized using the flow-through
method.
Foreign subsidiaries are taxed according to applicable laws of the
countries in which they do business. The Company has not provided U.S. income
taxes that would be payable on remittance of the cumulative undistributed
earnings of foreign subsidiaries because such earnings are intended to be
reinvested for an indefinite period of time. At December 31, 1995 the
undistributed earnings of the foreign subsidiaries were not significant.
INCOME PER SHARE
Primary income per common and common equivalent share is computed based on
the weighted average number of common and dilutive common equivalent shares
consisting of stock options and redeemable preferred stock outstanding during
each period. For the years ended December 31, 1995 and 1994 no common stock
equivalents are included in the loss per share calculation as they would be
antidilutive. Fully diluted income per share assumes the effects of conversion
of all potentially dilutive securities, including the convertible debentures
(see Note 3 of Notes to Consolidated Financial Statements). Fully diluted loss
per share is not presented for 1995 and 1994 because the effects of assumed
conversion would be antidilutive.
41
<PAGE> 42
CASH EQUIVALENTS
For purposes of the consolidated financial statements, the Company
considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. On occasion the
Company will have balances in excess of the federally insured amount.
USE OF ESTIMATES
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that effect 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. Use of estimates is significant with regard to capitalized
software costs and the related amortization. Actual results could differ from
those estimates.
NOTE 2 - COMPLETION OF PUBLIC OFFERING OF COMMON STOCK
On June 30, 1994 the Company sold 2.0 million newly issued shares of common
stock in a public offering from which the Company received net proceeds of $8.1
million, net of related costs of approximately $270,000. The Company used the
proceeds from the public offering to repay its bank indebtedness of $5.1
million, to reduce accounts payable and to increase working capital.
In July 1994 the underwriters of the public offering exercised an
overallotment option, resulting in the sale by the Company of 383,000
additional newly issued shares of common stock, from which the Company received
net proceeds of approximately $1.6 million.
Simultaneously with completion of the public offering, Renaissance Capital
Partners II, Ltd. ("Renaissance") converted $1.75 million in principal amount
of convertible debentures (see Note 3 of Notes to Consolidated Financial
Statements) into shares of common stock which Renaissance sold in the public
offering. As a result of the Renaissance conversion, the Company reduced
paid-in capital by $119,000 for unamortized debt issuance costs related to the
converted debentures.
NOTE 3 - BANKING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND NOTE PAYABLE
BANKING ARRANGEMENTS
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 has not
borrowed any money under the line in 1996.
Borrowings and outstanding letters of credit are collateralized by
substantially all of 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 December 31, 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:
42
<PAGE> 43
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Revolving credit facility limit $5,133
======
Borrowing base (limited by insurance coverage and amount of
qualified receivables) $4,353
Amounts outstanding:
Short-term cash borrowings $2,870
Letters of credit 688
------
$3,558
======
</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 and under the terms of the recently committed financing the Company
will pay off the existing short term cash borrowing with the proceeds. See
Note 11 of Notes to Consolidated Financial Statements.
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 December 31, 1995 interest rates applicable to short-term cash
borrowings were 9.75% and 10.75% 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 EximBank an annual fee of 1.5% of the amount of the
guarantee. In addition, the Company is required to purchase credit insurance
for foreign receivables at a cost of 0.44% of the amount of the insured
receivables.
PRIMARY BANK LINE OF CREDIT, APRIL 1, 1996 - APRIL 15, 1997.
In April 1996 the Company received a commitment from its primary lender on
a $1.5 million revolving credit facility through April 15, 1997. The
collateral for the line will be the accounts receivable 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.
The new credit facility will be 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.
See Note 11 of Notes to Consolidated Financial Statements.
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 December 31, 1995 the United Kingdom subsidiary had
approximately $158,543 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
December 31, 1995 the Canadian subsidiary had no
43
<PAGE> 44
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%.
CONVERTIBLE DEBENTURES
On September 30, 1992 the Company sold a $2.5 million 7-year convertible
debenture to Renaissance Capital Partners II, Ltd. ("Renaissance"). Proceeds
from the sale of the convertible debenture were used to reduce accounts
payable. The debenture bears interest at 11% per annum and is convertible into
common stock of the Company at a conversion price of $2.50 per share. The
conversion price is adjustable if the Company issues significant additional
amounts of common stock for consideration less than the conversion price of
$2.50 per share. Interest is payable monthly with principal payments of
$25,000 commencing October 1, 1995.
On September 15, 1993 the Company sold a $1.0 million 7-year convertible
debenture to Renaissance. Proceeds from the sale of the debenture were used by
the Company for general working capital purposes. The debenture bears interest
at 11% per annum, payable monthly, and is convertible into common stock of the
Company at a conversion price of $3.25 per share. The conversion price is
adjustable if the Company issues significant additional amounts of common stock
for consideration less than the conversion price of $3.25 per share. The
principal of the debenture is payable in 48 equal monthly installments of
$10,000 over a four-year period commencing October 1, 1996 and ending September
1, 2000 and $520,000 on October 1, 2000. See Note 2 of Notes to Consolidated
Financial Statements regarding conversion of a portion of the debentures.
The financing agreement with Renaissance with respect to the debentures
requires that the Company satisfy certain financial covenants regarding
operating results and financial condition. As of December 31, 1994 and 1995
the Company was not in compliance with certain financial covenants.
Renaissance has agreed to waive the covenant violations through December 31,
1995. Renaissance is also entitled to appoint an individual to participate in
an advisory capacity to the Company's Board of Directors as long as $850,000 in
principal amount of the debentures is outstanding. Commencing on October 1,
1996, the Company has the right at any time upon 90 days prior notice to call
both debentures for redemption. A call premium applies to such redemption
equal to 15% of the amount redeemed during the fourth year of the debentures,
10% during the fifth year and 8% thereafter. During the initial three years
of the debentures, the debentures may be called for redemption at a premium of
20% only if the common stock of the Company has been trading for at least $7.50
per share for 14 trading days prior to the redemption notice and if the Company
has earned at least $.40 per share, in the aggregate, for the last four
consecutive quarters preceding the notice.
Simultaneously with completion of the Company's June 1994 public offering
of common stock (see Note 2 of Notes to Consolidated Financial Statements), the
Company agreed to change the conversion price of the $2.5 million and $1.0
million convertible debentures to $2.67, the average conversion price of both
debentures. Renaissance then converted $1.75 million in principal amount of
the $2.5 million convertible debentures into 653,846 shares of common stock,
which Renaissance sold in the public offering. The outstanding balance of
$1.75 million consists of a balance of $750,000 on the original $2.5 million
debenture and the $1 million debenture all of which is convertible at $2.67 per
share. The Company reduced paid-in capital by $119,000 for unamortized debt
issuance costs related to the converted debentures.
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 committed to convert $250,000 principal of its
convertible debentures into 282,218 shares of common stock and covert the
balance of $1,500,000 principal to a senior secured note on terms and
conditions substantially identical to the Lindner Funds senior secured note.
The Note will be secured by a first lien on all of the assets of the Company
exclusive of sufficient
44
<PAGE> 45
accounts receivable necessary to support a $1.5 million line of credit from its
primary bank, with a second lien on those receivables. Renaissance will share
the collateral position with Lindner Funds on a prorata basis.
The Company will also issue Renaissance warrants to purchase 450,000
shares of SSI no par value common stock at $3.00 per share for five years. With
the conversion of a portion of its convertible debenture into 282,218 shares of
common stock and the 450,000 warrants, Renaissance has the rights to acquire
732,218 shares, which is exactly the number currently available to Renaissance
under its convertible debentures.
The Company's Board of Directors has approved this transaction and it is
expected to close in the very near future. See Note 11 of Notes to
Consolidated Financial Statements.
Long-Term Obligations and Note Payable
The components of long-term obligations are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
------ ------
(In thousands)
<S> <C> <C>
Lease Obligations . . . . . . . . . . . . . . . . . $ 382 $ 286
Other . . . . . . . . . . . . . . . . . . . . . . . 284 343
------ ------
666 629
Less current portion . . . . . . . . . . . . . . . (382) (286)
------ ------
$ 284 $ 343
====== ======
</TABLE>
Scheduled maturities of the above long-term obligations are $382,000 in
1996, $58,000 in 1997, $24,000 in 1998, $26,000 in 1999, $9,000 in 2000 and
$167,000 thereafter. See Note 8 of Notes to Consolidated Financial Statements
for scheduled maturities of accrued lease obligations that have been recorded
as liabilities in the balance sheets, which are not included in these amounts.
NOTE 4 - INCOME TAXES
The components of the provisions for income taxes are as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------
1995 1994 1993
--------- ------- --------
(In thousands)
<S> <C> <C> <C>
Current:
U.S. Federal . . . . . . . . . . . . . $ --- $ --- $ 5
Foreign . . . . . . . . . . . . . . . 200 255 354
State . . . . . . . . . . . . . . . . --- 5 16
--------- ------- --------
$ 200 $ 260 $ 375
========= ======= ========
</TABLE>
Following is a summary of United States and foreign pretax accounting
income (loss):
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------
1995 1994 1993
--------- ------- --------
(In thousands)
<S> <C> <C> <C>
United States . . . . . . . . . . . . . . . $ (15,052) $(3,150) $ 1,375
Foreign . . . . . . . . . . . . . . . . . . (9,672) (1,480) 712
--------- ------- --------
$ (24,724) $(4,630) $ 2,087
========= ======= ========
</TABLE>
45
<PAGE> 46
Following is a reconciliation of expected income tax provisions computed at
the applicable US Federal statutory rate to the provisions for income taxes
included in the statements of operations:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------
1995 1994 1993
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Taxes at U.S. Federal statutory rate . . . . . . . . . . . . . . . $ (5,118) $ (1,071) $ 710
Federal alternative minimum tax . . . . . . . . . . . . . . . . . . --- --- 5
Foreign pretax (income) loss . . . . . . . . . . . . . . . . . . . --- (8) (242)
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . (753) (157) 16
Foreign withholding and other foreign taxes . . . . . . . . . . . . 200 255 354
U.S. net operating loss carry forward and valuation allowances . . 5,871 1,331 (569)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- (90) 101
---------- ---------- ----------
$ 200 $ 260 $ 375
========== ========== ==========
</TABLE>
The components of deferred taxes in the balance sheets, which were fully
eliminated by a valuation allowance, were as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1994
--------- ----------
(In thousands)
<S> <C> <C>
Taxable temporary differences:
Capitalized software . . . . . . . . . . . . . $ (3,770) $ (10,132)
--------- ----------
(3,770) (10,132)
--------- ----------
Deductible temporary differences:
Tax basis in excess of book basis of
property and quipment . . . . . . . . . . . . . 98 80
Allowance for doubtful accounts . . . . . . . 179 1,644
Rent expense . . . . . . . . . . . . . . . . . 134 328
Contract expense accruals . . . . . . . . . . 119 ---
Vacation pay and bonuses . . . . . . . . . . . 175 184
Other . . . . . . . . . . . . . . . . . . . . 35 33
--------- ----------
740 2,269
--------- ----------
Carryovers:
Net operating losses . . . . . . . . . . . . . 7,503 6,815
Research and other credits . . . . . . . . . . 3,344 2,917
--------- ----------
10,847 9,732
--------- ----------
Net deferred tax asset . . . . . . . . . . . . . . 7,817 1,869
Valuation allowance . . . . . . . . . . . . . . . . (7,817) (1,869)
--------- ----------
$ --- $ ---
========= ==========
</TABLE>
At December 31, 1995 the Company had the following net operating loss, tax
credit, and capital loss carry forwards. Included in the net operating loss
and credit carry forwards are tax benefits from an acquired company, which can
be utilized to offset future taxable income of that acquired company.
<TABLE>
<CAPTION>
Amount Expiration
-------------- ----------
(In thousands)
<S> <C> <C>
Net operating loss carry forwards for U.S.
Federal income tax purposes . . . . . . . . . . . $ 19,000 2000 to 2009
Net operating loss carry forwards for US
Federal alternative minimum income
tax purposes . . . . . . . . . . . . . . . . . . 16,700 2000 to 2009
Research credit carry forwards . . . . . . . . . . 2,300 1996 to 2009
Investment tax credit carry forwards . . . . . . . 600 1995 to 2000
Alternative minimum tax credit carry forwards . . . 56 2007 to 2009
</TABLE>
46
<PAGE> 47
In addition, the Company has net operating loss carryforwards for U.K. and
Canadian income tax purposes of approximately $12.0 million and $500,000,
respectively.
NOTE 5 - CAPITAL STOCK
REDEEMABLE PREFERRED STOCK
In April 1990, Halliburton Company, a major oil and gas services supplier,
invested $3.0 million in a subordinated convertible debenture of the Company
and received non-exclusive rights to market certain of the Company's new
products and to incorporate them into Halliburton's product line. During June
1990, following approval by the Company's shareholders for the issuance of
600,000 shares of Series A redeemable preferred stock, par value $5.00 per
share, the debenture was exchanged for 600,000 shares of Series A convertible
preferred stock. The preferred stock was convertible into 600,000 shares of
common stock. In September 1990 Halliburton invested an additional $1.0
million in a convertible debenture of the Company. In August 1991 the
Company's shareholders authorized an additional 600,000 shares of preferred
stock and Halliburton exchanged the $1.0 million debenture for 200,000 shares
of such stock which were convertible into 200,000 shares of common stock.
Redemption would have been at the greater of $5.00 per common share equivalent
or the then market price for the common stock.
In the consolidated balance sheet the preferred stock has been classified
outside stockholders' equity in accordance with Rule 5-02.28 of Regulation S-X,
which requires that preferred stock for which redemption may be required under
any conditions beyond control of the issuer be classified outside of permanent
equity.
In 1994 the Company and Halliburton agreed to amend the conversion and
redemption provisions of the 800,000 shares of the Company's preferred stock
held by Halliburton. As amended, the preferred stock is convertible into
300,000 shares of the Company's common stock instead of 800,000 shares prior to
the amendment. The Company continues to have the right to redeem the preferred
stock at any time and also continues to be obligated to do so on the tenth
anniversary of the amendment if the preferred stock is still held by
Halliburton. The preferred stock continues to not be entitled to receive or
accrue dividends unless the Company pays dividends on its common stock, and, as
before the amendment, no interest accrues on the mandatory redemption amount.
Also, the joint venture of the Company and Halliburton for the development and
marketing of reservoir monitoring technology and services was terminated and
the Company received a non-exclusive license for the use of certain reservoir
monitoring technology patents.
STOCK OPTION PLANS
The Board of Directors, at its discretion, may grant options to purchase
shares of the Company's common stock to key employees, officers, and
non-employee members of the Board of Directors. Prior to 1984 the options were
non-statutory and either vested over a three-year period or were exercisable at
any time for a five or ten-year period after the date of grant or at the date
of amendment of the options. In 1984 the Company established an incentive
stock option plan for key employees, pursuant to which options to purchase up
to 350,000 shares of common stock were reserved for grant.
In 1993 the Company adopted a stock option plan for non-employee directors.
Pursuant to the plan, each non-employee director is granted an option to
purchase 5,000 shares of common stock upon initial election to the board.
Exercise prices are set at the fair market value of the common stock on the
date of the grant. Upon re-election to the Board, for each year to be served,
each non-employee director is granted an option to purchase 2,500 shares of
common stock at an exercise price set at the fair market value on the date of
the grant. Pursuant to this plan, no options to purchase shares were issued in
1995 and options to
47
<PAGE> 48
purchase 12,500 shares at an exercise price of $4.50 per share were issued in
1994.
Following is a summary of stock option activity for the three years ended
December 31, 1995:
<TABLE>
<CAPTION>
Option Price (equal to Market
Value at Date of Grant)
Number ------------------------------------
of Shares Per Share Total
--------- --------------- ----------
<S> <C> <C> <C>
Balance at January 1, 1993 854,388 $2.00 to 4.88 $3,548,000
Grants . . . . . . . . . . . . . . . 219,500 3.50 to 3.75 819,000
Cancellations . . . . . . . . . . . (32,500) 2.00 to 4.88 (128,000)
Exercises . . . . . . . . . . . . . (12,000) 2.00 to 3.75 (35,000)
--------- ----------
Balance at December 31, 1993 1,029,388 2.00 to 4.88 4,204,000
Grants . . . . . . . . . . . . . . . 105,000 4.50 to 7.13 601,000
Cancellations . . . . . . . . . . . (50,109) 3.13 to 4.88 (206,000)
Exercises . . . . . . . . . . . . . (285,017) 2.00 to 4.88 (1,067,000)
--------- ----------
Balance at December 31, 1994 799,262 3,532,000
Grants . . . . . . . . . . . . . . . 95,000 2.25 to 5.00 236,000
Expirations . . . . . . . . . . . . (175,387) 2.00 to 6.38 (721,000)
Exercises . . . . . . . . . . . . . (63,750) 2.00 to 4.88 (223,000)
--------- ----------
Balance at December 31, 1995 . . . . . . 655,125 $2,824,000
========= ==========
Number of shares exercisable:
December 31, 1995 . . . . . . . . . . . . 545,000
=========
December 31, 1994 . . . . . . . . . . . . 661,000
=========
</TABLE>
Exercise prices of substantially all outstanding non-statutory options and
all outstanding incentive stock options were set at the fair market value of
the stock at the date of grant. No accounting recognition is given to options
granted at exercise prices equal to fair market value at date of grant until
they are exercised at which time the proceeds received by the Company are
credited to common stock and paid-in capital.
NEW ACCOUNTING STANDARD
The Company accounts for its stock option plans in accordance with
Accounting Principles Board Opinion No. 25, under the intrinsic value method in
which no compensation cost has been recognized for stock option awards. Had
compensation cost for the stock options been determined consistent with
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), the Company's pro forma net loss and
loss per share for 1995 would have been ($25.2 million) and ($3.08),
respectively. Because the SFAS No. 123 method of accounting has not been
applied to options granted prior to January 1, 1995 the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
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.
STOCK PURCHASE PLANS
The Company has a stock purchase plan, which was adopted in 1991, under
which employees and consultants to the Company can elect to receive shares of
common stock as payment for compensation, services and expenses. Pursuant to
the plan, the Company issued 249,953 and 100,000 shares in 1994 and 1993,
respectively. The Company did not issue any shares in 1995. The
48
<PAGE> 49
Company also has a noncontributory employee stock purchase plan for employees
to purchase common stock through payroll deductions.
NOTE 6 - RETIREMENT AND COMPENSATION PLANS
The Company maintains a qualified target benefit retirement plan that
covers substantially all of its U.S. employees. Company contributions are
based on percentages of employee compensation and are allocated to individual
accounts for each employee. Employees may voluntarily supplement the Company's
contribution to their accounts in amounts up to 10% of salary. Amounts charged
to expense for Company contributions were $146,000, $221,000 and $228,000 in
1995, 1994 and 1993, respectively. At December 31, 1995 and 1994, the Company
owed contributions to the plan of $177,000 and $300,000, respectively, which
are included in accrued salaries and benefits and were paid subsequent to each
year end.
The Company also has a non-contributory employee stock ownership plan that
covers substantially all of its U.S. employees. Company contributions are
determined by the Board of Directors and can be made in stock or cash. In 1994
the Company accrued a $165,000 contribution, which was paid in 1994 with
approximately 39,000 shares of common stock. In 1995 the Company accrued a
$125,000 contribution, which was paid in 1996 with approximately 55,000 shares
of common stock.
The Company has similar retirement benefit plans, including employee stock
ownership programs, covering employees of its foreign subsidiaries. Amounts
charged to expense for these plans were $229,000, $226,000 and $213,000 in
1995, 1994 and 1993, respectively.
NOTE 7 - INFORMATION ABOUT OPERATIONS
Foreign Operations and Export Revenue
Following is financial information for the Company's foreign subsidiaries.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1995 1994 1993
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . $ 10,745 $ 10,798 $ 11,244
======== ======== ========
Income (loss) from operations . . . . . $ (2,868) $ (1,480) $ 712
======== ======== ========
Identifiable assets . . . . . . . . . . $ 9,294 $ 8,134 $ 7,461
======== ======== ========
</TABLE>
U.S. export revenues by geographic area were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1995 1994 1993
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Far East . . . . . . . . . . . . . . . $ 1,631 $ 3,052 $ 2,175
Middle East . . . . . . . . . . . . . . 47 524 224
Europe . . . . . . . . . . . . . . . . 1,191 345 1,235
Central and South America . . . . . . . 2,297 3,534 3,262
Canada . . . . . . . . . . . . . . . . 63 111 352
Other . . . . . . . . . . . . . . . . . 33 --- 16
-------- -------- --------
$ 5,262 $ 7,566 $ 7,264
======== ======== ========
</TABLE>
49
<PAGE> 50
INDUSTRY SEGMENT INFORMATION
The Company operates in two significant industry segments. The Company's
principal operations are in the oil and gas software and services industry.
The other segment is the Company's Kinesix Division, which markets Sammi, a
graphic user interface for use in various industries, including the aerospace,
process control and manufacturing industries.
Following is industry segment information for 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Oil and Gas
Software Graphic
and User Corporate
Services Interface Headquarters Consolidated
----------- --------- ------------ -------------
(In thousands)
<S> <C> <C> <C> <C>
Year Ended December 31, 1995:
Revenue . . . . . . . . . . . . . $ 22,107 $ 2,036 $ 24,143
======== ======= ========
Income from operations . . . . . . $(19,279) $(5,206) $(24,485)
======== ======= ========
Depreciation and amortization . . $ 5,046 $ 1,225 $ 6,271
======== ======= ========
Capital expenditures, including
capitalization software costs . . . $ 5,168 $ 1,117 $ 6,285
======== ======= ========
Identifiable assets . . . . . . . $ 20,058 $ 2,658 $ 1,196 $ 23,912
======== ======= ======== ========
Year Ended December 31, 1994:
Revenue . . . . . . . . . . . . . $ 24,620 $ 3,289 $ 27,909
======== ======= ========
Income from operations . . . . . . $ (3,955) $ (208) $ (4,163)
======== ======= ========
Depreciation and amortization . . $ 4,232 $ 1,097 $ 5,329
======== ======= ========
Capital expenditures, including
capitalization software costs . . . $ 4,731 $ 1,661 $ 6,392
======== ======= ========
Identifiable assets . . . . . . . $ 36,712 $ 6,632 $ 1,200 $ 44,544
======== ======= ======== ========
Year Ended December 31, 1993:
Revenues . . . . . . . . . . . . . $ 26,160 $ 4,154 $ 30,314
======== ======= ========
Income from operations . . . . . . $ 2,244 $ 648 $ 2,892
======== ======= ========
Depreciation and amortization . . $ 3,935 $ 823 $ 4,758
======== ======= ========
Capital expenditures, including
capitalization software costs . . . $ 4,275 $ 1,304 $ 5,579
======== ======= ======== ========
Identifiable assets . . . . . . . $ 39,097 $ 5,642 $ 1,164 $ 45,903
======== ======= ======== ========
</TABLE>
CONCENTRATIONS OF CREDIT RISK
Most of the Company's clients are large, established U.S. and foreign
companies (sometimes acting as government contractors), governments, and
national oil and gas companies of foreign governments. Qualifying foreign
receivables are insured, subject to a deductible loss amount, under an
insurance policy with the Foreign Credit Insurance Association, an agency of
the United States Export-Import Bank. The Company performs credit evaluations
of its customers' financial condition when considered necessary and generally
does not require collateral.
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<PAGE> 51
At December 31, 1995 and 1994, accounts receivable, net of doubtful
accounts and work in progress, related to the following customer groups:
<TABLE>
<CAPTION>
United States Foreign Total
------------- -------- --------
(In thousands)
<S> <C> <C> <C>
December 31, 1995:
Companies . . . . . . . . . . . . . . . . . . $ 1,943 $ 5,842 $ 7,785
Governments and national
petroleum companies . . . . . . . . . . . . . 168 1,606 1,774
Government contractors . . . . . . . . . . . . 63 --- 63
-------- -------- --------
$ 2,174 $ 7,448 $ 9,622
======== ======== ========
December 31, 1994:
Companies . . . . . . . . . . . . . . . . . . $ 1,930 $ 5,258 $ 7,188
Governments and national
petroleum companies . . . . . . . . . . . . . 71 3,395 3,466
Government contractors . . . . . . . . . . . . 462 2 464
-------- -------- --------
$ 2,463 $ 8,655 $ 11,118
======== ======== ========
</TABLE>
NOTE 8 - LEASE COMMITMENTS
At December 31, 1995 the Company's minimum rental commitments under
operating leases for office space and equipment were as follows:
<TABLE>
<CAPTION>
Year Amount
---------------- --------------
(In thousands)
<S> <C>
1996 $1,380
1997 1,076
1998 345
1999 307
2000 298
Thereafter 988
</TABLE>
Total rent expense amounted to $1.4 million in each of 1995, 1994 and
1993.
The above minimum rental commitments include certain amounts that have been
recorded in the balance sheet as long-term accrued lease obligations of
$333,000 and $720,000 at December 31, 1995 and 1994, respectively, and
short-term accrued lease obligations of $375,000 and $570,000 at December 31,
1995 and 1994, respectively. When these amounts are paid, they will be
recorded as a reduction of the accrued lease obligations liability and will not
result in expense in the Statement of Operations. The accrued lease
obligations relate to differences in the timing of reportable rental expense
for accounting purposes and the timing of cash receipts and disbursements in
connection with several office lease transactions. The accrued lease
obligations will be retired as follows: $403,000 in 1996, $287,000 in 1997,
$32,000 in 1998 and $8,000 in 1999. These amounts include approximately
$21,000 in interest expense that will be recognized representing the total
discount to present value of accrued lease obligations.
NOTE 9 - CLAIMS AND 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:
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<PAGE> 52
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 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.
Other assets at 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. The full amount of
$470,000 has been written off as of December 31, 1995.
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 10 - FOURTH QUARTER ADJUSTMENTS
In January 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 costs, bad debt
reserves and expense accruals. As a result of this review, the Company made
the following fourth quarter adjustments:
52
<PAGE> 53
<TABLE>
<CAPTION>
In Thousands
------------
<S> <C>
Reduction of capitalized software costs $ (17,917)
Increase in bad debt reserve provision (3,192)
Expense accruals and other adjustments (1,625)
---------
Total fourth quarter adjustments $ (22,734)
=========
</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 has 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.
INCREASE IN BAD DEBT RESERVE PROVISION
During 1995 and in January 1996 the Company established a policy that
required stringent review of accounts receivable over six months old. As a
result of this new policy, in the fourth quarter of 1995 the Company increased
its 1995 provision for doubtful accounts by $3,192,000, The Company has
determined that the chance is remote that it will be able to collect accounts
receivable of $4,110,412. In the December 31, 1995 balance sheet the Company
has written off this accounts receivable balance. The provision for doubtful
accounts of $3,192,000 almost entirely consists of transactions recognized in
1995 including $1,561,000 from a foreign consulting project and $487,000 from a
software sale on which the payments have been significantly delayed.
EXPENSE ACCRUALS AND OTHER ADJUSTMENTS
The Company also reviewed the status of various consulting and software
development projects. As a consequence, the Company made a $400,000 provision
for costs to complete certain projects. The Company has also written off costs
of development and consulting projects it does not expect to be able to bill
and collect for $372,000. The Company also accrued various expense items in
the fourth quarter totaling $853,000.
53
<PAGE> 54
NOTE 11 - SUBSEQUENT EVENTS
The Company is in the final stages of completing a financing and a
restructuring of its bank line. The following summarizes the various
transactions involved in the financing and loan restructuring.
LINDNER FUNDS INVESTMENT
The Company has received a commitment from Lindner Funds, the Company's
largest shareholder, to invest $5 million in the Company. The Company will
issue Lindner a senior secured note payable in five years bearing an interest
rate of 7% requiring semi-annual interest payments. The Note will be secured
by a first lien on all of the assets of the Company exclusive of sufficient
accounts receivable necessary to support a $1.5 million line of credit from its
primary bank, with a second lien for Lindner Funds on those receivables. The
collateralized assets will be shared with Renaissance Capital Partners II, Ltd.
on a prorated basis.
The Company will also issue to the Lindner Funds warrants to purchase 1.5
million shares of SSI no par value common stock at $3.00 per share for five
years.
The Company's Board of Directors has approved this transaction and it is
expected to close in the very near future.
The Company will use the proceeds to pay off the existing $2,870,000
outstanding on the Company's Bank Revolving Line of Credit, pay off the balance
owed on the Company's United Kingdom subsidiary bank line of credit, purchase
some necessary computer equipment and for general working capital needs.
The implementation of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," on the proposed
transactions with Lindner Funds and Renaissance may give rise to a potential
material accounting expense to the Company as a result of the value of the
warrants. The Company may evaluate alternative structures to the transactions.
RESTRUCTURING OF CONVERTIBLE DEBENTURES
Renaissance Capital Partners II, Ltd.( Renaissance) has committed to
convert $250,000 principal of its convertible debentures into 282,218 shares of
common stock and convert the balance of $1,500,000 principal into a senior
secured note on terms and conditions substantially identical to the Lindner
Funds senior secured note explained above. The Note will be secured by a first
lien on all of the assets of the Company exclusive of sufficient accounts
receivable necessary to support a $1.5 million line of credit from its primary
bank, with a second lien on those receivables. Renaissance will share the
collateral position with Lindner Funds on a prorata basis.
The Company will also issue to Renaissance warrants to purchase 450,000
shares of SSI no par value common stock at $3.00 per share for five years.
With the conversion of a portion of its convertible debenture into 282,218
shares of common stock and the 450,000 warrants, Renaissance has the rights to
acquire 732,218 shares, which is exactly the number currently available to
Renaissance under its convertible debentures.
The Company's Board of Directors has approved this transaction and it is
expected to close in the very near future.
RESTRUCTURING OF BANK REVOLVING LINE OF CREDIT
The Company has received commitments from its primary bank and the
Export-Import Bank of the United States to restructure and renew its primary
bank line of credit to April 15, 1997. Under the terms of the agreement, the
Company will pay off the existing $2,870,000 outstanding on the Company's bank
revolving line of credit and pay off the balance owed on the Company's United
54
<PAGE> 55
Kingdom subsidiary bank line of credit. The bank will establish a revolving
credit facility 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 Company's Board of Directors has approved this transaction and it is
expected to close in the very near future.
55
<PAGE> 56
FINANCIAL STATEMENT SCHEDULES
SCHEDULE II
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
VALUATION RESERVES
<TABLE>
<CAPTION>
Deductions
(Write-offs
Additions of
Balance at Charged to Previously Balance at
Beginning Costs and Reserved End of
of Period Expenses Amounts) Period
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Years Ended December 31,
1995 $4,617,000 $3,304,000 $(4,110,000) $3,811,000
========== ========== =========== ==========
1994 $ 831,000 $5,917,000 $(2,131,000) $4,617,000
========== ========== =========== ==========
1993 $ 682,000 $ 165,000 $ (16,000) $ 831,000
========== ========== =========== ==========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 24, 1993 the Board of Directors of the Company approved the
engagement of Hein + Associates LLP, Denver, Colorado, to audit and report on
the Company's financial statements for the year ended December 31, 1993. On
August 5, 1993 the Company received the resignation of Ernst & Young, Denver,
Colorado, as the Company's previous auditors.
No consultation occurred between the Company and Hein + Associates during
the fiscal years ended December 31, 1992 and 1991 and any subsequent interim
period prior to Hein + Associates' appointment regarding the application of
accounting principles, the type of opinion, or other information considered by
the Company in reaching a decision as to an accounting, auditing or financial
reporting issue.
In the fourth quarter of 1994, certain VARs of the Company's Pipeline and
Facilities Division did not pay fixed fees when due for certain software
licensed for use on specific projects for specific customers and also certain
minimum fixed fees for rights of general marketing.
In connection with the non-payment by VARs of minimum fixed fees, which had
been recognized by the Company as revenue in 1994, the Company conducted in
1995 an investigation and discovered that certain persons in its Pipeline and
Facilities Division had indicated in writing to some of the VARs in connection
with thirteen contracts involving aggregate payments of $2,331,000 that payment
of the fixed fees would not be required under specified conditions, generally
related to whether the VARs were successful in sublicensing the software to
specific customers for use on specific projects or to other customers of the
VARs. Most of such written representations were signed by Division employees
who are no longer employed by and have no present association with the Company.
Upon learning of the foregoing written representations, and after
consultation with the Company's auditors, Hein + Associates, the Audit
Committee of the Board of Directors of the Company on April 27, 1995 appointed
a Special Committee consisting of an outside Director, the Company's outside
principal legal counsel and its Chief Financial Officer to investigate the
circumstances related to these representations and the related VAR agreements.
During the following two months the Committee interviewed thirty current and
former Company employees and extensively reviewed
56
<PAGE> 57
Company files. Hein + Associates was kept informed throughout of the results
of the investigation and from time to time made suggestions to the Special
Committee for particular inquiries, which suggestions were followed.
In a May 30, 1995 report to the Audit Committee and the Board of Directors
the Special Committee concluded that the representations to the VARs were not
authorized by the Company and were not approved in advance by any of the
Company's executive officers, except for one situation described below, nor was
their existence known by any of the Company's accounting personnel. The
Committee concluded that the individuals who made the representations about
deferral of the obligations of VARs to pay license fees until resales occurred
believed that such resales were certain to occur on a timely basis (which in a
number of instances proved correct) and therefore believed that the
representations were not material. The Company, with the consultation and
approval of the Board of Directors, has established rigorous controls and
procedures to guard against similar unauthorized representations to the
Company's clients in the future and the Board of Directors has also determined
sanctions for those few individuals that the Company continues to employ who
had involvement with the unauthorized representations. These controls and
procedures, as well as the sanctions, were discussed with Hein + Associates
prior to their implementation, who agreed to their propriety.
Subsequent to the May 30, 1995 report, it was discovered that an Executive
Vice President and Director of the Company had been involved in a similar
representation to another VAR. The Special Committee supplemented its inquiry
to include that situation and concluded in a supplemental report to the Board
of Directors describing this situation that the Committee's previous
conclusions with respect to the non-involvement of any of the Company's other
executive officers and of its accounting personnel remained correct. The
Special Committee also concluded that there were no facts or circumstances that
suggested that there were any additional remaining similar representations to
VARs or others which had not been investigated. As a result of this situation,
on June 21, 1995, upon recommendation of the Chief Executive Officer of the
Company, the Board of Directors approved the immediate termination of such
Executive Vice President as an officer and employee of the Company.
On June 30, 1995, the Company was advised by Hein + Associates that it was
resigning as the Company's auditor for its 1994 financial statements although
it was not withdrawing its audit opinion with respect to the Company's 1993
financial statements. Hein + Associates had not previously discussed the
possibility of resignation during the two month special inquiry period. Hein +
Associates did not provide the Company with any specific reason or reasons for
its resignation other than to indicate that it was due to a number of factors.
Hein + Associates has however agreed with the Company that such resignation was
not due to any disagreement with the Company over accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
Hein + Associates did not furnish any reason to the Company at the time of
its June 30 resignation or in the July 3 meeting, or with the July 6
communication, for its resignation and declined repeated requests from the
Company and others during the following two weeks for an explanation. On July
19, 1995 Hein + Associates furnished the Company with a letter advising it that
it had resigned because of a "risk of management misrepresentations" in the
financial statements. This was the first time any such allegation had been
made throughout the entire investigating period.
The July 19, 1995 letter of Hein + Associates also indicated that the
timing of adjustments related to the side letters was not resolved at the time
of its resignation. The Company was however led to believe through its daily
contacts with Hein + Associates that they had in fact reached agreement on the
accounting for the transactions involving the side letters, including the fact
that in mid-June Hein + Associates had approved a final draft of the financial
statements for filing with the SEC, which was then not filed only when the
additional side letter problem involving the Company's former Executive Vice
President was discovered and required analysis.
On September 22, 1995, the Board of Directors of the Company approved the
selection of Ehrhardt Keefe Steiner & Hottman PC as its auditors.
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<PAGE> 58
PART III
Items 10, 11, 12 and 13 of Part III (except for information required with
respect to executive officers of the Company which is set forth under Item 1,
Part I of this report) have been omitted from this report. The Company will
file with the Securities and Exchange Commission, not later than 120 days after
the close of its fiscal year ended December 31, 1995, a definitive proxy
statement pursuant to Regulation 14A, which involves the election of directors.
The Information required by Items 10, 11, 12, and 13 of this report will appear
in the definitive proxy statement and is incorporated by reference thereto into
Part III of this report.
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<PAGE> 59
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) 1. Financial Statements. The following financial statements are filed
as a part of this Form 10-K:
The Index to Consolidated Financial Statements is set out in
Item 8 herein.
2. Financial Statement Schedules. The following financial statement
schedules are filed as a part of this Form 10-K:
The Index to Consolidated Financial Statements is set out in
Item 8 herein.
3. Exhibits
1.1 Form of Underwriting Agreement for public offering of
common stock completed June 30, 1994 (filed as Exhibit 1.1
to the Company's Form S-1 dated May 9, 1994 and
incorporated herein by reference).
3.1 Articles of Incorporation of the Company dated February 8,
1968, (filed as Exhibit 3.1 to the Company's Report on Form
10-K for the year ended December 31, 1984, and incorporated
herein by reference).
3.2 Articles of Amendment to the Articles of Incorporation of
the Company dated May 28, 1982 (filed as Exhibit 3.2 to the
Company's Report on Form 10-K for the year ended December
31, 1984, and incorporated herein by reference).
3.3 Articles of Amendment to the Articles of Incorporation of
the Company dated June 7, 1984 (filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-3, Registration
No. 2-95792, and incorporated herein by reference).
3.4 Certificate of Correction to the Articles of Amendment to
the Articles of Incorporation of the Company dated October
23, 1985 (filed as Exhibit 3.4 to the Company's Report on
Form 10- K for the year ended December 31, 1985, and
incorporated herein by reference).
3.5 Articles of Amendment to Articles of Incorporation of the
Company dated August 9, 1991 (filed as Exhibit 3.1 to the
Company's Report on Form 8-K dated August 27, 1991, and
incorporated herein by reference).
3.6 Articles of Amendment to Articles of Incorporation of the
Company dated June 21, 1990 (filed as Exhibit 2.1 to the
Company's Report on Form 10-Q for the quarter ended June
30, 1990, and incorporated herein by reference).
3.7 Bylaws of the Company (filed as Exhibit 3.5 to the
Company's Report on Form 10-K for the year ended December
31, 1989, and incorporated herein by reference).
3.8 Amendment to the Bylaws of the Company (filed as Exhibit
3.1 to the Company's Report on Form 10-Q for the quarter
ended June 30, 1990, and incorporated herein by reference).
3.9 Articles of Amendment to Articles of Incorporation of the
Company dated August 9, 1991 (filed as Exhibit 3.1 on Form
8-K dated August 27, 1991, and incorporated herein by
reference).
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<PAGE> 60
3.10 Articles of Amendment to Articles of Incorporation of the
Company dated December 14, 1994 increasing the number of
shares of authorized stock (filed as Exhibit 3.10 to the
Company's Report on Form 10-K/A for the year ended December
31, 1994, and incorporated herein by reference).
4.1 Agreement for Purchase and Sale of Debenture dated
September 24, 1990, by and between Halliburton Company and
Scientific Software-Intercomp, Inc. (filed as Exhibit 4.6
to the Company's Report on Form 10-K for the year ended
December 31, 1990, and incorporated herein by reference).
4.2 Convertible Subordinated Debenture dated September 24,
1990, between Halliburton Company and Scientific
Software-Intercomp, Inc. (filed as Exhibit 4.7 to the
Company's report on Form 10-K for the year ended December
31, 1990, and incorporated herein by reference).
4.3 Convertible Debenture Loan Agreement for $2,500,000 dated
September 30, 1992 between Renaissance Capital Partners II,
Ltd. and Scientific Software-Intercomp, Inc. (filed as
Exhibit 4.1 to the Company's Form 8-K dated October 19,
1992 and incorporated herein by reference).
4.4 First Amendment to the Convertible Debenture Loan Agreement
for an additional $1,000,000, dated September 15, 1993,
between Renaissance Capital Partners II, Ltd. and
Scientific Software-Intercomp, Inc. (filed as Exhibit 4.1
to the Company's Form 8-K dated October 19, 1992 and
incorporated herein by reference).
4.5 Form of Stockholder Lock-up Agreement (filed as Exhibit 4.5
to the Company's Form S-1 dated May 9, 1994 and
incorporated herein by reference).
4.6 Letter Agreement Dated May 5, 1994 between Renaissance
Capital Partners II, Ltd. and Scientific
Software-Intercomp, Inc., regarding conversion of
debentures (filed as Exhibit 4.6 to the Company's Form S-1
dated May 9, 1994 and incorporated herein by reference).
5.1 Opinion of Cohen Brame & Smith Professional Corporation
(filed as Exhibit 5.1 to the Company's Amendment No. 1
dated June 3, 1994 to Form S-1 dated May 9, 1994 and
incorporated herein by reference).
10.1 Partnership Agreement dated October 28, 1983 (Microcomp)
(filed as Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1983, and
incorporated herein by reference).
10.2 Incentive Stock Option Plan dated February 22, 1984 (filed
as Exhibit 10.1 to the Company's Registration Statement on
Form S-3, Registration No. 2-95792, and incorporated herein
by reference).
10.3 Form of Stock Option Agreement for stock options issued
under the informal Non-Qualified Stock Option Plan (filed
as Exhibit 4.6 to the Company's Form S-1 dated May 9, 1994
and incorporated herein by reference).
10.4 HBJ Subcontract for Supply between Spie-Capag S.A. and
Scientific Software-Intercomp, Inc. dated January 16, 1987
(filed as Exhibit 10.26 to the Company's Report on Form
10-K for the year ended December 31, 1986, and incorporated
herein by reference).
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<PAGE> 61
10.5 HBJ Subcontract Work Agreement between Spie-Capag S.A. and
Scientific Software-Intercomp, Inc. dated January 16, 1987
(filed as Exhibit 10.27 to the Company's Report on Form
10-K for the year ended December 31, 1986, and incorporated
herein by reference).
10.6 Bonus Plan dated June 22, 1990, between the registrant and
E. A. Breitenbach, (filed as Exhibit 10.9 to the Company's
Report on Form 10-K for the year ended December 31, 1990,
and incorporated herein by reference).
10.7 Operating Agreement dated April 26, 1990, by and between
Halliburton Company and Scientific Software-Intercomp, Inc.
(filed as Exhibit 10.11 to the Company's Report on Form
10-K for the year ended December 31, 1989, and incorporated
herein by reference).
10.8 Agreement dated July 16, 1991, between Spie-Capag, S.A. and
Scientific Software-Intercomp, Inc. (filed as Exhibit 10.13
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992, and incorporated herein by
reference).
10.9 Stock Purchase Plan dated June 1991, for 100,000 shares of
common stock, no par value (filed with the Company's
Registration Statement on Form S-8, Registration No.
3-41463, and incorporated herein by reference).
10.10 Stock Purchase Plan as amended in September 1991, to
increase the number of shares of common stock, no par
value, to 350,000 (filed with the Company's Registration
Statement on Form S- 8, Registration No. 3-41463, and
incorporated herein by reference).
10.11 Promissory Note and security agreement by and between
Scientific Software-Intercomp, Inc., and E. A. Breitenbach
dated June 13, 1991 (filed as Exhibit 4.12 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1990, and incorporated herein by reference).
10.12 Letter Agreement between Renaissance Capital Partners II,
Ltd. and Scientific Software- Intercomp, Inc., regarding a
$500,000 standby line of credit dated November 3, 1993
(filed as Exhibit 10.13 to the Company's Report on Form
10-K for the year ended December 31, 1993, and incorporated
herein by reference).
10.13 Employees Stock Ownership Plan and Trust as restated on
January 1, 1989 (filed as Exhibit 10.28 to the Company's
Form S-1 dated May 9, 1994 and incorporated herein by
reference).
10.14 Target Benefit Plan as restated on January 1, 1989 (filed
as Exhibit 10.29 to the Company's Form S-1 dated May 9,
1994 and incorporated herein by reference).
10.15 First Interstate Bank of Denver, N.A. Defined Contribution
Master Plan and Trust Agreement (filed as Exhibit 10.30 to
the Company's Form S-1 dated May 9, 1994 and incorporated
herein by reference).
10.16 Adoption Agreement #001 Nonstandardized Code Section 401(K)
Profit Sharing Plan dated July 1, 1990 (filed as Exhibit
10.31 to the Company's Form S-1 dated May 9, 1994 and
incorporated herein by reference).
61
<PAGE> 62
10.17 Commission Plan for Jim Duckworth for 1995 dated March 23,
1994 (filed as Exhibit 10.32 to the Company's Form S-1
dated May 9, 1994 and incorporated herein by reference).
10.18 Scientific Software-Intercomp, Inc. Deferred Compensation
Plan (filed as Exhibit 10.33 to the Company's Form S-1
dated May 9, 1994 and incorporated herein by reference).
10.19 Letter Agreement between Hong Kong Bank of Canada and
Intercomp Resource Development and Engineering Ltd. dated
August 3, 1993, regarding certain revolving operating loans
to Intercomp Resource Development and Engineering Ltd.
(filed as Exhibit 10.34 to the Company's Form S-1 dated May
9, 1994 and incorporated herein by reference).
10.20 Stock Appreciation Rights Plan (filed as Exhibit 10.35 to
the Company's Form S-1 dated May 9, 1994 and incorporated
herein by reference).
10.21 Letter of Intent between Halliburton Company and Scientific
Software-Intercomp, Inc. dated April 22, 1994 (filed as
Exhibit 10.36 to the Company's Amendment to Form S-1 dated
June 3, 1994 and incorporated herein by reference).
10.22 Business Loan Agreement for $6.5 million dated September
20, 1994, between Bank One, Boulder, N.A. and Scientific
Software-Intercomp, Inc., including Working Capital
Guarantee Agreement dated September 29, 1994, between Bank
One, Boulder, N.A. and Export-Import Bank of the United
States referred to as "Exhibit B" (filed as Exhibit 10.37
to the Company's Report on Form 10-K for the year ended
December 31, 1994, and incorporated herein by reference).
10.23 Promissory Note of Scientific Software-Intercomp, Inc. to
Bank One, Boulder, N.A. for $5,000,000, dated September 20,
1994 (filed as Exhibit 10.38 to the Company's Report on
Form 10-K for the year ended December 31, 1984, and
incorporated herein by reference).
10.24 Promissory Note of Scientific Software-Intercomp, Inc. to
Bank One, Boulder, N.A. for $1,500,000, dated September 20,
1994 (filed as Exhibit 10.39 to the Company's Report on
Form 10-K for the year ended December 31, 1984, and
incorporated herein by reference).
10.25 Letter Agreement between Scientific Software-Intercomp
(U.K.) Limited and Lloyds Bank Commercial Service dated
December 30, 1994 (filed as Exhibit 10.40 to the Company's
Report on Form 10-K for the year ended December 31, 1984,
and incorporated herein by reference).
10.26 Change in Terms Agreement between Scientific
Software-Intercomp, Inc. to Bank One, Boulder, N.A., dated
May 30, 1995, extending maturity to July 15, 1995 relating
to original Business Loan Agreement in the amount of $6.5
million, dated September 20, 1994 (filed as Exhibit 10.41
to the Company's Report on Form 10-K for the year ended
December 31, 1984, and incorporated herein by reference).
10.27 Change in Terms Agreement between Scientific
Software-Intercomp, Inc. to Bank One, Boulder, N.A., dated
July 15, 1995, extending maturity to August 15, 1995
relating to original Business Loan Agreement in the amount
of $6.5 million, dated September 20, 1994 (filed as Exhibit
10.42 to the Company's Report on Form 10-K for the year
ended December 31, 1984, and incorporated herein by
reference).
62
<PAGE> 63
10.28 Change in Terms Agreement between Scientific
Software-Intercomp, Inc. to Bank One, Boulder, N.A., dated
August 15, 1995, extending maturity to September 15, 1995
relating to original Business Loan Agreement in the amount
of $6.5 million, dated September 20, 1994(filed as Exhibit
10.43 to the Company's Report on Form 10-K for the year
ended December 31, 1984, and incorporated herein by
reference).
10.29 Change in Terms Agreement between Scientific
Software-Intercomp, Inc. to Bank One, Boulder, N.A., dated
September 15, 1995, extending maturity to September 30,
1995 relating to original Business Loan Agreement in the
amount of $6.5 million, dated September 20, 1994 (filed as
Exhibit 10.44 to the Company's Report on Form 10-K for the
year ended December 31, 1984, and incorporated herein by
reference).
10.30 Change in Terms Agreement between Scientific
Software-Intercomp, Inc. to Bank One, Boulder, N.A., dated
September 30, 1995, extending maturity to October 15, 1995
relating to original Business Loan Agreement in the amount
of $6.5 million, dated September 20, 1994 (filed as Exhibit
10.45 to the Company's Report on Form 10-K for the year
ended December 31, 1984, and incorporated herein by
reference).
10.31 Business Loan Agreement for $5.13 million dated October 15,
1995, renewing maturity to March 30, 1996, between Bank
One, Boulder, N.A. and Scientific Software-Intercomp, Inc.,
including Working Capital Guarantee Agreement dated
September 21, 1995, between Bank One, Boulder, N.A. and
Export-Import Bank of the United States referred to as
"Exhibit B" (filed as Exhibit 10.46 to the Company's Report
on Form 10-K for the year ended December 31, 1984, and
incorporated herein by reference).
10.32 Change in Terms Agreement between Scientific
Software-Intercomp, Inc. to Bank One, Boulder, N.A., dated
November 15, 1995, in the amount of $500,000.00 relating
to original Business Loan Agreement in the amount of $5.13
million, dated October 15, 1995 (filed as Exhibit 10.47 to
the Company's Report on Form 10-K for the year ended
December 31, 1984, and incorporated herein by reference).
10.33 Letter of Commitment From Lindner Funds dated March 29, 1996
evidencing the commitment to provide the Company with a loan
of $5 million (filed as Exhibit 10.33 to the Company's
Report on Form 10-K for the year ended December 31, 1995,
and incorporated herein by reference).
10.34 Letter of Commitment From Renaissance Capital Group, Inc.
dated April 4, 1996 to restructure its convertible
debentures (filed as Exhibit 10.34 to the Company's Report
on Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference).
10.35 Letter of Commitment From Bank One dated April 8, 1996 to
restructure and extend a revolving line of credit in the
amount of $1.5 million through April 15, 1997 (filed as
Exhibit 10.35 to the Company's Report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by
reference).
21 Subsidiaries of the Company
23.1 Consent of Ehrhardt Keefe Steiner & Hottman PC
23.2 Consent of Hein + Associates LLP
27 Financial Data Schedule
63
<PAGE> 64
b) Reports on Form 8-K
July 11, 1995. Reporting resignation of the accounting
firm of Hein + Associates LLP as independent accountants
for the Registrant.
August 1, 1995. Amendment No. 1 to Form 8-K filed on July
11, 1995 attaching former accountant's letter indicating
its response to the statements made by the Registrant to
Item 4 of its Report on Form 8-K dated June 30, 1995 and
filed on or about July 8, 1995.
August 14, 1995. Amendment No. 2 to Form 8-K filed on July
11, 1995 attaching the Company's response to its former
accountant's letter indicating its response to the
statements made by the Registrant to Item 4 of its Report
on Form 8-K dated June 30, 1995 and filed on or about July
8, 1995.
September 22, 1995. Announcement of appointment of
Ehrhardt Keefe Steiner & Hottman PC as Registrant's new
auditors.
October 13, 1995. Reporting claim which was filed against
Registrant seeking 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.
January 15, 1996. Announcing George Steel as President,
Chief Operating Officer and Director of the Registrant.
64
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: May 28, 1996
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
May 28, 1996 /s/ George Steel
------------------------------
George Steel, President, Chief
Operating Officer, Director
(a principal executive officer
and director)
65
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Description No.
- ------- ------------------- ----
<S> <C> <C>
1.1 Form of Underwriting Agreement for public offering of common stock
completed June 30, 1994 (filed as Exhibit 1.1 to the Company's Form
S-1 dated May 9, 1994 and incorporated herein by reference).
3.1 Articles of Incorporation of the Company dated February 8, 1968,
(filed as Exhibit 3.1 to the Company's Report on Form 10-K for the
year ended December 31, 1984, and incorporated herein by
reference).
3.2 Articles of Amendment to the Articles of Incorporation of the
Company dated May 28, 1982 (filed as Exhibit 3.2 to the Company's
Report on Form 10-K for the year ended December 31, 1984, and
incorporated herein by reference).
3.3 Articles of Amendment to the Articles of Incorporation of the
Company dated June 7, 1984 (filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-3, Registration No. 2-95792, and
incorporated herein by reference).
3.4 Certificate of Correction to the Articles of Amendment to the
Articles of Incorporation of the Company dated October 23, 1985
(filed as Exhibit 3.4 to the Company's Report on Form 10-K for the
year ended December 31, 1985, and incorporated herein by
reference).
3.5 Articles of Amendment to Articles of Incorporation of the Company
dated August 9, 1991 (filed as Exhibit 3.1 to the Company's Report
on Form 8-K dated August 27, 1991, and incorporated herein by
reference).
3.6 Articles of Amendment to Articles of Incorporation of the Company
dated June 21, 1990 (filed as Exhibit 2.1 to the Company's Report
on Form 10-Q for the quarter ended June 30, 1990, and incorporated
herein by reference).
3.7 Bylaws of the Company (filed as Exhibit 3.5 to the Company's Report
on Form 10-K for the year ended December 31, 1989, and incorporated
herein by reference).
3.8 Amendment to the Bylaws of the Company (filed as Exhibit 3.1 to the
Company's Report on Form 10-Q for the quarter ended June 30, 1990,
and incorporated herein by reference).
3.9 Articles of Amendment to Articles of Incorporation of the Company
dated August 9, 1991 (filed as Exhibit 3.1 on Form 8-K dated August
27, 1991, and incorporated herein by reference).
3.10 Articles of Amendment to Articles of Incorporation of the Company
dated December 14, 1994 increasing the number of shares of
authorized stock (filed as Exhibit 3.10 to the Company's Report on
Form 10- K/A for the year ended December 31, 1994, and incorporated
herein by reference).
4.1 Agreement for Purchase and Sale of Debenture dated September 24,
1990, by and between Halliburton Company and Scientific
Software-Intercomp, Inc. (filed as Exhibit 4.6 to the Company's
Report on Form 10-K for the year ended December 31, 1990, and
incorporated herein by reference).
</TABLE>
<PAGE> 67
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Description No.
- ------- ------------------- ----
<S> <C> <C>
4.2 Convertible Subordinated Debenture dated September 24, 1990,
between Halliburton Company and Scientific Software-Intercomp, Inc.
(filed as Exhibit 4.7 to the Company's report on Form 10-K for the
year ended December 31, 1990, and incorporated herein by
reference).
4.3 Convertible Debenture Loan Agreement for $2,500,000 dated September
30, 1992 between Renaissance Capital Partners II, Ltd. and
Scientific Software-Intercomp, Inc. (filed as Exhibit 4.1 to the
Company's Form 8-K dated October 19, 1992 and incorporated herein
by reference).
4.4 First Amendment to the Convertible Debenture Loan Agreement for an
additional $1,000,000, dated September 15, 1993, between
Renaissance Capital Partners II, Ltd. and Scientific
Software-Intercomp, Inc. (filed as Exhibit 4.1 to the Company's
Form 8-K dated October 19, 1992 and incorporated herein by
reference).
4.5 Form of Stockholder Lock-up Agreement (filed as Exhibit 4.5 to the
Company's Form S-1 dated May 9, 1994 and incorporated herein by
reference).
4.6 Letter Agreement Dated May 5, 1994 between Renaissance Capital
Partners II, Ltd. and Scientific Software-Intercomp, Inc.,
regarding conversion of debentures (filed as Exhibit 4.6 to the
Company's Form S-1 dated May 9, 1994 and incorporated herein by
reference).
5.1 Opinion of Cohen Brame & Smith Professional Corporation (filed as
Exhibit 5.1 to the Company's Amendment No. 1 dated June 3, 1994 to
Form S-1 dated May 9, 1994 and incorporated herein by reference).
10.1 Partnership Agreement dated October 28, 1983 (Microcomp) (filed as
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1983, and incorporated herein by
reference).
10.2 Incentive Stock Option Plan dated February 22, 1984 (filed as
Exhibit 10.1 to the Company's Registration Statement on Form S-3,
Registration No. 2-95792, and incorporated herein by reference).
10.3 Form of Stock Option Agreement for stock options issued under the
informal Non-Qualified Stock Option Plan (filed as Exhibit 4.6 to
the Company's Form S-1 dated May 9, 1994 and incorporated herein by
reference).
10.4 HBJ Subcontract for Supply between Spie-Capag S.A. and Scientific
Software-Intercomp, Inc. dated January 16, 1987 (filed as Exhibit
10.26 to the Company's Report on Form 10-K for the year ended
December 31, 1986, and incorporated herein by reference).
10.5 HBJ Subcontract Work Agreement between Spie-Capag S.A. and
Scientific Software-Intercomp, Inc. dated January 16, 1987 (filed
as Exhibit 10.27 to the Company's Report on Form 10-K for the year
ended December 31, 1986, and incorporated herein by reference).
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Description No.
- ------- ------------------- ----
<S> <C> <C>
10.6 Bonus Plan dated June 22, 1990, between the registrant and E. A.
Breitenbach, (filed as Exhibit 10.9 to the Company's Report on
Form 10-K for the year ended December 31, 1990, and incorporated
herein by reference).
10.7 Operating Agreement dated April 26, 1990, by and between
Halliburton Company and Scientific Software- Intercomp, Inc. (filed
as Exhibit 10.11 to the Company's Report on Form 10-K for the year
ended December 31, 1989, and incorporated herein by reference).
10.8 Agreement dated July 16, 1991, between Spie-Capag, S.A. and
Scientific Software-Intercomp, Inc. (filed as Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1992, and incorporated herein by reference).
10.9 Stock Purchase Plan dated June 1991, for 100,000 shares of common
stock, no par value (filed with the Company's Registration
Statement on Form S-8, Registration No. 3-41463, and incorporated
herein by reference).
10.10 Stock Purchase Plan as amended in September 1991, to increase the
number of shares of common stock, no par value, to 350,000 (filed
with the Company's Registration Statement on Form S-8, Registration
No. 3-41463, and incorporated herein by reference).
10.11 Promissory Note and security agreement by and between Scientific
Software-Intercomp, Inc., and E. A. Breitenbach dated June 13,
1991 (filed as Exhibit 4.12 to the Company's Annual Report on Form
10-K for the year ended December 31, 1990, and incorporated herein
by reference).
10.12 Letter Agreement between Renaissance Capital Partners II, Ltd. and
Scientific Software-Intercomp, Inc., regarding a $500,000 standby
line of credit dated November 3, 1993 (filed as Exhibit 10.13 to
the Company's Report on Form 10-K for the year ended December 31,
1993, and incorporated herein by reference).
10.13 Employees Stock Ownership Plan and Trust as restated on January 1,
1989 (filed as Exhibit 10.28 to the Company's Form S-1 dated May 9,
1994 and incorporated herein by reference).
10.14 Target Benefit Plan as restated on January 1, 1989 (filed as
Exhibit 10.29 to the Company's Form S-1 dated May 9, 1994 and
incorporated herein by reference).
10.15 First Interstate Bank of Denver, N.A. Defined Contribution Master
Plan and Trust Agreement (filed as Exhibit 10.30 to the Company's
Form S-1 dated May 9, 1994 and incorporated herein by reference).
10.16 Adoption Agreement #001 Nonstandardized Code Section 401(K) Profit
Sharing Plan dated July 1, 1990 (filed as Exhibit 10.31 to the
Company's Form S-1 dated May 9, 1994 and incorporated herein by
reference).
10.17 Commission Plan for Jim Duckworth for 1995 dated March 23, 1994
(filed as Exhibit 10.32 to the Company's Form S-1 dated May 9, 1994
and incorporated herein by reference).
10.18 Scientific Software-Intercomp, Inc. Deferred Compensation Plan
(filed as Exhibit 10.33 to the Company's Form S-1 dated May 9, 1994
and incorporated herein by reference).
</TABLE>
<PAGE> 69
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Description No.
- ------- ------------------- ----
<S> <C> <C>
10.19 Letter Agreement between Hong Kong Bank of Canada and Intercomp
Resource Development and Engineering Ltd. dated August 3, 1993,
regarding certain revolving operating loans to Intercomp Resource
Development and Engineering Ltd. (filed as Exhibit 10.34 to the
Company's Form S-1 dated May 9, 1994 and incorporated herein by
reference).
10.20 Stock Appreciation Rights Plan (filed as Exhibit 10.35 to the
Company's Form S-1 dated May 9, 1994 and incorporated herein by
reference).
10.21 Letter of Intent between Halliburton Company and Scientific
Software-Intercomp, Inc. dated April 22, 1994 (filed as Exhibit
10.36 to the Company's Amendment to Form S-1 dated June 3, 1994 and
incorporated herein by reference).
10.22 Business Loan Agreement for $6.5 million dated September 20, 1994,
between Bank One, Boulder, N.A. and Scientific Software-Intercomp,
Inc., including Working Capital Guarantee Agreement dated September
29, 1994, between Bank One, Boulder, N.A. and Export-Import Bank of
the United States referred to as "Exhibit B" (filed as Exhibit
10.37 to the Company's Report on Form 10-K for the year ended
December 31, 1994, and incorporated herein by reference).
10.23 Promissory Note of Scientific Software-Intercomp, Inc. to Bank One,
Boulder, N.A. for $5,000,000, dated September 20, 1994 (filed as
Exhibit 10.38 to the Company's Report on Form 10-K for the year
ended December 31, 1984, and incorporated herein by reference).
10.24 Promissory Note of Scientific Software-Intercomp, Inc. to Bank One,
Boulder, N.A. for $1,500,000, dated September 20, 1994 (filed as
Exhibit 10.39 to the Company's Report on Form 10-K for the year
ended December 31, 1984, and incorporated herein by reference).
10.25 Letter Agreement between Scientific Software-Intercomp (U.K.)
Limited and Lloyds Bank Commercial Service dated December 30, 1994
(filed as Exhibit 10.40 to the Company's Report on Form 10-K for
the year ended December 31, 1984, and incorporated herein by
reference).
10.26 Change in Terms Agreement between Scientific Software-Intercomp,
Inc. to Bank One, Boulder, N.A., dated May 30, 1995, extending
maturity to July 15, 1995 relating to original Business Loan
Agreement in the amount of $6.5 million, dated September 20, 1994
(filed as Exhibit 10.41 to the Company's Report on Form 10-K for
the year ended December 31, 1984, and incorporated herein by
reference).
10.27 Change in Terms Agreement between Scientific Software-Intercomp,
Inc. to Bank One, Boulder, N.A., dated July 15, 1995, extending
maturity to August 15, 1995 relating to original Business Loan
Agreement in the amount of $6.5 million, dated September 20, 1994
(filed as Exhibit 10.42 to the Company's Report on Form 10-K for
the year ended December 31, 1984, and incorporated herein by
reference).
10.28 Change in Terms Agreement between Scientific Software-Intercomp,
Inc. to Bank One, Boulder, N.A., dated August 15, 1995, extending
maturity to September 15, 1995 relating to original Business Loan
Agreement in the amount of $6.5 million, dated September 20,
1994(filed as Exhibit 10.43 to the Company's Report on Form 10-K
for the year ended December 31, 1984, and incorporated herein by
reference).
</TABLE>
<PAGE> 70
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Description No.
- ------- ------------------- ----
<S> <C> <C>
10.29 Change in Terms Agreement between Scientific Software-Intercomp,
Inc. to Bank One, Boulder, N.A., dated September 15, 1995,
extending maturity to September 30, 1995 relating to original
Business Loan Agreement in the amount of $6.5 million, dated
September 20, 1994 (filed as Exhibit 10.44 to the Company's Report
on Form 10-K for the year ended December 31, 1984, and incorporated
herein by reference).
10.30 Change in Terms Agreement between Scientific Software-Intercomp,
Inc. to Bank One, Boulder, N.A., dated September 30, 1995,
extending maturity to October 15, 1995 relating to original
Business Loan Agreement in the amount of $6.5 million, dated
September 20, 1994 (filed as Exhibit 10.45 to the Company's Report
on Form 10-K for the year ended December 31, 1984, and incorporated
herein by reference).
10.31 Business Loan Agreement for $5.13 million dated October 15, 1995,
renewing maturity to March 30, 1996, between Bank One, Boulder,
N.A. and Scientific Software-Intercomp, Inc., including Working
Capital Guarantee Agreement dated September 21, 1995, between Bank
One, Boulder, N.A. and Export- Import Bank of the United States
referred to as "Exhibit B" (filed as Exhibit 10.46 to the Company's
Report on Form 10-K for the year ended December 31, 1984, and
incorporated herein by reference).
10.32 Change in Terms Agreement between Scientific Software-Intercomp,
Inc. to Bank One, Boulder, N.A., dated November 15, 1995, in the
amount of $500,000.00 relating to original Business Loan Agreement
in the amount of $5.13 million, dated October 15, 1995 (filed as
Exhibit 10.47 to the Company's Report on Form 10-K for the year
ended December 31, 1984, and incorporated herein by reference).
10.33 Letter of Commitment From Lindner Funds dated March 29, 1996
evidencing the commitment to provide the Company with a loan of $5
million (filed as Exhibit 10.33 to the Company's Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by
reference).
10.34 Letter of Commitment From Renaissance Capital Group,
Inc. dated April 4, 1996 to restructure its convertible debentures
(filed as Exhibit 10.34 to the Company's Report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference).
10.35 Letter of Commitment From Bank One dated April 8, 1996
to restructure and extend a revolving line of credit in the amount
of $1.5 million through April 15, 1997 (filed as Exhibit 10.35 to
the Company's Report on Form 10-K for the year ended December 31,
1995, and incorporated herein by reference).
21 Subsidiaries of the Company
23.1 Consent of Ehrhardt Keefe Steiner & Hottman PC
23.2 Consent of Hein + Associates LLP
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE
REGISTRANT
The registrant owns all of the outstanding capital stock of the following
corporations:
<TABLE>
<CAPTION>
CORPORATION STATE OR PROVINCE OF INCORPORATION
<S> <C>
Intercomp Resource Development & Province of Alberta, Canada
Engineering, (Canada) Ltd.
In-Situ Research and Engineering Ltd. Province of Alberta, Canada
Microcomp Management Ltd. Province of Alberta, Canada
IRAD Development Ltd. Province of Alberta, Canada
247011 Alberta Limited Province of Alberta, Canada
Scientific Software-Intercomp (U.K.) Limited United Kingdom
Scientific Software Texas, Inc. Texas
Facilities Warehousing, Inc. Delaware
SSI Bethany, Inc. Texas
Kinesix SARL France
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Scientific Software-Intercomp, Inc. and Subsidiaries
Denver, Colorado
We consent to the incorporation by reference in the Registration Statements
(Form S-8 File No. 33-19509) pertaining to the Incentive Stock Option
Plan/Non-Qualified Stock Option Plan/United Kingdom Stock Option Plan of
Scientific Software-Intercomp, Inc. and (Form S-8 File No. 33-41463)
pertaining to the Stock Purchase Plan of Scientific Software-Intercomp, Inc. of
our report dated April 12, 1996, with respect to the consolidated financial
statements and schedules of Scientific Software-Intercomp, Inc. included in the
amended Annual Report (Form 10-K) for the year ended December 31, 1995.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
Certified Public Accountants
Denver, Colorado
April 12, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
This report is a copy of a previously issued Hein + Associates LLP audit
report. Hein + Associates LLP resigned as Company auditors on June 30, 1995,
has not withdrawn its opinion for 1993, but has declined to reissue this
report. The 1993 financial statements included in this report are the same as
the audited financial statements previously filed in the Form 10-K for that
year. In the opinion of management, no events have occurred that would require
any change to the financial statements covered by the report.
Hein + Associates LLP declined to reissue its report initially unless it was
paid disputed audit fees for 1994 and subsequently reiterated its decline
without explanation.
We consent to the incorporation by reference in the Registration Statements
(Form S-8 File No. 33-19509) pertaining to the Incentive Stock Option
Plan/Non-Qualified Stock Option Plan/United Kingdom Stock Option Plan of
Scientific Software-Intercomp, Inc. and (Form S-8 File No. 33-41463)
pertaining to the Stock Purchase Plan of Scientific Software-Intercomp, Inc. of
our report dated March 21, 1994, with respect to the consolidated financial
statements and schedules of Scientific Software-Intercomp, Inc. included in the
amended Annual Report (Form 10-K) for the year ended December 31, 1993.
/s/ Hein + Associates
Hein + Associates
Certified Public Accountants
Denver, Colorado
June 27, 1994
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 419
<SECURITIES> 0
<RECEIVABLES> 10,425
<ALLOWANCES> 3,811
<INVENTORY> 0
<CURRENT-ASSETS> 10,464
<PP&E> 7,639
<DEPRECIATION> 6,223
<TOTAL-ASSETS> 23,912
<CURRENT-LIABILITIES> 13,555
<BONDS> 0
<COMMON> 825
4,000
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 23,912
<SALES> 24,143
<TOTAL-REVENUES> 24,143
<CGS> 0
<TOTAL-COSTS> 48,628
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (353)
<INCOME-PRETAX> (24,724)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,924)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,924)
<EPS-PRIMARY> (3.05)
<EPS-DILUTED> 0
</TABLE>
