SCIENTIFIC SOFTWARE INTERCOMP INC, 10-Q, 1996-11-19

SCIENTIFIC SOFTWARE INTERCOMP INC
10-Q, 1996-11-19
PREPACKAGED SOFTWARE

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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED

SEPTEMBER 30, 1996

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 13(D)
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _____ TO _____

COMMISSION FILE NUMBER 0-4882

SCIENTIFIC SOFTWARE-INTERCOMP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

COLORADO 84-0581776
- - --------------------------------------------------------------------
STATE (OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)

1801 CALIFORNIA STREET, DENVER, COLORADO 80202
- - ------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)

(303) 292-1111
- - ------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)

(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED FROM LAST
REPORT).

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

YES X NO
-

NUMBER OF SHARES OF COMMON STOCK, NO PAR VALUE OUTSTANDING AT OCTOBER 31,
1996:

8,840,000
---------

(This form 10-Q includes 22 pages)

<PAGE>
INDEX

<TABLE>
<CAPTION>
<S> <C>
PAGE
----
PART I - FINANCIAL STATEMENTS

Item 1 - Financial Statements

Consolidated Balance Sheet at September 30, 1996 3

Consolidated Statements of Operations for the Three 4
and Nine Months ended September 30, 1996

Consolidated Statement of Cash Flows for the 5
Nine Months ended September 30, 1996

Notes to Consolidated Financial Statements 6

Management's Discussion and Analysis of Financial Condition 11
and Results of Operations

PART II. OTHER INFORMATION

Item 1 - Legal Proceedings 19

Item 6 - Exhibits and Reports on Form 8-K 21
</TABLE>

<PAGE>

SCIENTIFIC SOFTWARE-INTERCOMP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

September 30,
1996
---------------
ASSETS
<S> <C>
Current Assets
Cash and cash equivalents $ 2,383
Accounts receivable, net of allowance for doubtful
accounts of $1,891. . . . . . . . . . . . . . . . . . . . 3,693
Work in progress 3,818
Other current assets 360
Total current assets . . . . . . . . . . . . . . . . . . 10,254

Software, net of accumulated amortization and write-down of
$28,500 9,551

Property and Equipment, net of accumulated depreciation
and amortization of $6,308 911

Other Assets 1,465
$ 22,181
===============

LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable to bank $ 750
Accounts payable 1,415
Accrued salaries and fringe benefits 783
Accrued lease obligations 193
Deferred maintenance and other revenue 2,055
Other current liabilities 3,104
Total current liabilities. . . . . . . . . . . . . . . . 8,300
---------------
Accrued Lease Obligations 235
Long-Term Obligations 250
Senior Secured Notes Payable 6,500
Total long-term liabilities. . . . . . . . . . . . . . . 6,985
---------------

Redeemable Preferred Stock
Series A Convertible Preferred Stock, $5 par value;
1,200,000 shares authorized, 800,000 shares issued and
outstanding. . . . . . . . . . . . . . . . . . . . . . . . 4,000
---------------

Stockholders' Equity
Common stock, no par value; $.10 stated value;
25,000,000 shares authorized, 8,827,000
shares issued and outstanding. . . . . . . . . . . . . . 883
Paid-in capital 50,351
Accumulated deficit (47,718)
Cumulative foreign currency translation adjustment (620)
---------------
Total stockholders' equity . . . . . . . . . . . . . . . 2,896
$ 22,181
===============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements

<PAGE>

SCIENTIFIC SOFTWARE-INTERCOMP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Three Months Ended
September 30, 1996
--------------------
<S> <C>
REVENUE
Consulting and training $ 3,300
Licenses and maintenance 1,512
Other 76
4,888
--------------------

COSTS AND EXPENSES
Costs of consulting and training 2,075
Costs of licenses and maintenance, including software amortization of $500 and $1,500
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,081
Costs of other revenue 45
Selling, general and administrative 1,426
Recovery of accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,568)
Software research and development 99
3,158
--------------------

INCOME (LOSS) FROM OPERATIONS 1,730

OTHER EXPENSE
Loss contingency expense -
Interest expense, net (100)
Foreign exchange losses (64)
--------------------

Income (Loss) Before Income Taxes 1,566

Provision For Income Taxes 10
--------------------

Income (Loss) from Continuing Operations 1,556

Discontinued operation (Note 6)
Loss from operations of Kinesix division (757)
Loss on disposal of Kinesix division (478)
--------------------

NET INCOME (LOSS) $ 321
====================

Weighted Average Number of Common and
Common Equivalent Shares Outstanding 8,707
====================

Income (Loss) Per Common Share:
Continuing operations $ 0.18
Discontinued operation (0.14)
Net Income (Loss) $ 0.04
====================

Nine Months Ended
September 30, 1996
--------------------
<S> <C>

REVENUE
Consulting and training $ 8,883
Licenses and maintenance 4,244
Other 207
13,334
--------------------

COSTS AND EXPENSES
Costs of consulting and training 5,798
Costs of licenses and maintenance, including software amortization of $500 and $1,500
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,671
Costs of other revenue 124
Selling, general and administrative 5,158
Recovery of accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,568)
Software research and development 254
13,437
--------------------

INCOME (LOSS) FROM OPERATIONS (103)

OTHER EXPENSE
Loss contingency expense (900)
Interest expense, net (287)
Foreign exchange losses (72)
--------------------

Income (Loss) Before Income Taxes (1,362)

Provision For Income Taxes 30
--------------------

Income (Loss) from Continuing Operations (1,392)

Discontinued operation (Note 6)
Loss from operations of Kinesix division (878)
Loss on disposal of Kinesix division (478)
--------------------

NET INCOME (LOSS) $ (2,748)
====================

Weighted Average Number of Common and
Common Equivalent Shares Outstanding 8,456
====================

Income (Loss) Per Common Share:
Continuing operations $ (0.16)
Discontinued operation (0.16)
Net Income (Loss) $ (0.32)
====================

</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

<PAGE>

SCIENTIFIC SOFTWARE-INTERCOMP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)

Nine Months Ended
September 30, 1996
--------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,748)
--------------------
Adjustments:
Depreciation and amortization 1,909
Provision for losses on accounts receivable . . (1,108)
Loss contingency. . . . . . . . . . . . . . . . 900
Changes in operating assets and liabilities:
Decrease in accounts receivable
and work in progress. . . . . . . . . . . . . 3,320
Decrease in other assets. . . . . . . . . . . . 470
Decrease in accounts payable and
accrued expenses . . . . . . . . . . . . . . . (1,195)
Decrease in accrued lease obligations . . . . . (280)
Decrease in deferred revenue. . . . . . . . . . (474)
Net cash provided by continued operations . . 794
Net cash utilized in discontinued operations. (28)
--------------------
Net cash provided by operating activities . . 766
--------------------

CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized software costs (1,500)
Purchases of equipment. . . . . . . . . . . . . . (27)
Net cash utilized in investing activities . . (1,527)
--------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Bank line of credit borrowings 750
Bank line of credit (repayments). . . . . . . . . (2,870)
Proceeds from Senior Secured Notes. . . . . . . . 5,000
Proceeds from (repayments of) other obligations . (130)
Net cash provided by financing activities . . 2,750
--------------------

Effect of exchange rates on cash (25)
--------------------
Net increase in cash and cash equivalents 1,964
Cash and cash equivalents at beginning of period 419
--------------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,383
====================

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 388

</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

<PAGE>
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - UNAUDITED INTERIM INFORMATION

This report includes the consolidated financial statements of Scientific
Software-Intercomp, Inc., (the Company) and its wholly-owned subsidiaries.
The Company has received an extensive comments letter from the Staff of the
Securities and Exchange Commission ("SEC") on its Form 10-K for the year ended
December 31, 1995 and its Forms 10-Q for the quarters ended March 31, 1996 and
June 30, 1996 and the financial statements included therein. The Company is
preparing its response to those comments. Resolution of some of the comments
may result in certain revisions of those Forms and of the financial statements
therein, which would cause comparative information that would be presented in
this report to require revision. Accordingly, the Company has not included
any comparative financial information in this Form 10-Q. When comments made
by the SEC have been satisfactorily resolved, the Company will amend this Form
10-Q to include comparative data for prior periods. The consolidated
financial statements for the interim periods ended September 30, 1996 reflect
all adjustments (which consist solely of normal recurring adjustments) which,
in the opinion of the Company, are necessary to fairly present the results of
operations, financial position, and cash flows, as of the dates and for the
periods presented. Such adjustments were solely of a normal recurring nature.
Operating results for the three month and nine month periods ended September
30, 1996 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1996.

Except for historical information contained herein, the statements in
this report are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecasted results. Those risks and uncertainties include,
among others, the financial strength and competitive pricing environment of
the oil and gas service industry, product demand, market acceptance and new
product development. Those and other risks are described in the Company's
filings with the SEC.

NOTE 2 - NON-CASH ITEMS

Non-cash activities which occurred during the nine months ended September
30, 1996 resulted in an increase in common stock and additional paid-in
capital of $1.4 million comprised of the following:

Additional Paid-in Capital
Common Stock Total
--------------- ------
<S> <C> <C> <C>
(In thousands)
Conversion of Renaissance Debt $ 28 $ 212 $ 240
Loss contingency 900 900
Purchases 8 180 188
Other 4 71 75
------
$ 40 $ 1,363 $1,403
=============== =========================== ======
</TABLE>

<PAGE>

NOTE 3 - BANK CREDIT AGREEMENT

UNITED STATES LINES OF CREDIT.

Effective April 1, 1996 the Company completed with Bank One a $1.5
million revolving credit facility that is available through April 15, 1997.
The collateral for the line is the Company's accounts receivable from non-U.S.
domiciled customers to the extent necessary to collateralize the line. All
receivables not necessary for the line and substantially all other assets
except those of the Canadian subsidiary are collateral for The Lindner
Dividend Fund ("Lindner") and Renaissance Capital Partners II, Ltd.
("Renaissance") senior secured notes.

The credit facility is supported by a $1.5 million guarantee from
EximBank. The Company will pay 1.25% less than the prime rate of interest on
the first $300,000 borrowed under the line and the prime interest rate on the
balance. The Company pays EximBank a fee equal to 1.5% of the guarantee and
is required to purchase credit insurance for foreign receivables.
As of September 30, 1996 the balances of the revolving credit facility,
amounts of short-term cash borrowings and letters of credit outstanding, and
credit available under the revolving credit facility were as follows:

(In thousands)
<S> <C>
Revolving credit facility limit (limited by
insurance coverage and amounts of
qualified receivables) $ 1,500
---------------

Amounts outstanding:
Short-term cash borrowings 750
Letters of credit 495
1,245
---------------
Credit available $ 255
===============
</TABLE>

Under the terms of the new bank credit agreement, in April 1996 the
Company repaid the $2.9 million balance then owed pursuant to the previous
line of credit, using proceeds from the Lindner and Renaissance Senior Secured
Notes. In October 1996, the Company repaid the amount outstanding pursuant to
the new bank credit agreement at September 30, 1996 of $750,000.

UNITED KINGDOM LINE OF CREDIT.

The term of a bank line of credit of the Company's United Kingdom
subsidiary ended in May 1996 and the outstanding balance of $300,000 was
repaid along with accrued interest.

CANADIAN LINE OF CREDIT.

The term of a bank line of credit of the Company's Canadian subsidiary
ended in May 1996. There were no outstanding borrowings under this facility.

<PAGE>

NOTE 4 - LINDNER AND RENAISSANCE FINANCING AGREEMENTS

In April and May 1996 the Company completed the following financing and
restructuring of convertible debentures:

- - - In April 1996 Lindner Funds, then a 14% shareholder in the Company,
invested $5 million in the Company in exchange for a senior secured note at 7%
payable in five years and non-detachable warrants to purchase 1.5 million
shares of the Company's common stock at an exercise price of $3.00 per share
for five years. Lindner Funds is currently a 19% shareholder of the Company.

- - - In April 1996 Renaissance Capital Partners II, Ltd. converted $250,000
of principal of its convertible debentures for 282,218 shares of the Company's
common stock and converted the balance of $1.5 million principal of its
convertible debentures into a senior secured note at 7% payable in five years
and a non-detachable stock purchase right to acquire 450,000 shares of the
Company's common stock at an exercise price of $3.00 per share for five years.
The terms of the secured note and non-detachable stock purchase right are
substantially the same as for those issued to Lindner Funds.

The Lindner and Renaissance transactions will be accounted for under
Accounting Principles Board (APB) Opinion Number 14 (accounting for
convertible debt and debt issued with stock purchase warrants) by accounting
for the notes and the non-detachable warrants as a single obligation with no
separate value assigned to the warrants.

The Company has completed the financing and restructuring of the
convertible debentures and the bank revolving line of credit described above.
The Company believes that, provided it resumes generating positive cash flow
from operations as a result of the cost and other measures discussed in
Management's Discussion and Analysis of Results of Operations and Financial
Position: (a) funds expected 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
short-term and long-term operating needs. There can be no assurances,
however, that the Company will generate sufficient positive cash flow from
operations to meet its future operating needs or be successful in obtaining
any required additional debt or equity financing.

NOTE 5 - INCOME TAXES

The Company's income tax expense is primarily due to foreign taxes
withheld at the source on sales in some foreign countries. Consequently,
these taxes cause the Company's effective tax rate to vary from the Federal
statutory rate and the Company incurred a current tax provision in spite of a
loss in the current period.

NOTE 6 - DISPOSAL OF KINESIX DIVISION

On October 9, 1996, the Company announced the execution of final
contracts for the previously announced sale of the net assets and business of
its graphical user interface segment, otherwise known as the Kinesix division,
to a group including the former President of the Kinesix division. The sale
of this segment of the Company's business was part of management strategy to
narrow the focus of the Company's activities to its primary market of the oil
and gas industry. The consideration to the Company in the transaction was
$410,000 including cash of $376,000 which was received by the Company in
October 1996, a note receivable for $32,000, and the purchaser's assumption of
liabilities totaling $59,000. The measurement date for accounting for the
disposal was August 26, 1996, the date on which management decided to sell the
Kinesix division and the disposal date was September 3, 1996, the effective
date of the transaction. The transaction resulted in a loss on disposal of
$478,000, which includes estimated losses to be incurred by the Kinesix
division from the measurement date to the date of disposal of $66,000. From
the measurement date to the balance sheet date of September 30, 1996, the
Company incurred a net loss of $66,000 in operating the Kinesix division,
which was charged to a reserve that was recorded in accounting for the loss on
disposal. Loss from operation of the discontinued segment from January 1,
1996 to the measurement date was $878,000, including recognition of an expense
of $674,000 related to an award against the Company by the American
Arbitration Association, which is discussed in Note 7.

NOTE 7 - CONTINGENCIES

To the knowledge of management, the only claims pending or threatened
against the Company or any of its subsidiaries which individually or
collectively could have a material adverse effect upon the Company or its
financial condition are the following:

Marshall Wolf, on his behalf and on behalf of all others similarly
situated vs. E. A. Breitenbach, R. J. Hottovy, Jimmy L. Duckworth, and
Scientific Software-Intercomp, Inc. On October 5, 1995, a claim was filed in
the United States District Court of the District of Colorado alleging that the
Defendants, who include the former President and Chief Executive Officer of
the Company, its former 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, and the
Company has not contested whether the claim constitutes a proper class action.

The Defendants and the Plaintiff have reached agreement for settlement of
the claim involving the payment of $1,100,000 in cash, to be provided by the
Company's liability insurer in a court-supervised escrow account, and the
Company's issuance of warrants to purchase common stock exercisable at the
market price of the stock at the time of completion of the settlement, with
the number of warrants to be such that their aggregate value is $900,000.
While it remained the position of the Company that the claim was without
merit, the Company concluded that the foregoing settlement is in its best
interests in view of the uncertainties of litigation, the substantial costs of
defending the claim and the material amount of management time which would be
required for such defense. The Company recorded a $900,000 loss contingency
in the second quarter of 1996 relating to the proposed agreement for
settlement of the Marshall Wolf claim in accordance with Question 1 of SAB
Topic 5:Y. The expense and total transaction has no adverse impact on total
stockholders' equity. Completion of the settlement is subject to final
approval of the fairness of the settlement by the Court, with such completion
anticipated to occur in April 1997.

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 for
receivables outstanding as of December 31, 1995 of $296,000 for which the
Company had fully provided. 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. It is the opinion of the Company and its counsel that KEL's
claim is without merit and the Company is vigorously defending the claim.

On October 1, 1996, a panel of the American Arbitration Association made
an award in favor of KEL against the Company in the aggregate amount of
$674,000. Such award was totally unanticipated by the Company and its
counsel. On October 21, 1996, the Company filed a petition in a Texas state
court seeking to have the award vacated on the grounds that the arbitrators
erroneously denied the Company's request for a postponement of the arbitration
hearing which prejudiced the Company in view of the claimant's failure to meet
its obligation to disclose material testimony to be given at the hearing and
that the arbitrators made a gross mistake of law in failing to apply a release
and waiver given by the claimant following its knowledge of the complained of
acts of the Company. A response to the petition has not yet been filed. The
Company and its counsel cannot predict the outcome of such a proceeding. The
Company has recognized an expense for the amount of the $674,000 award, which
has been included in the loss from operation of the discontinued Kinesix
division for the three and nine month periods ended September 30, 1996 and
included a liability for $674,000 in the balance sheet as part of other
current liabilities.

Claim related to Gas Pipeline Project. The Company has filed a claim
for costs incurred pursuant to a gas pipeline project in India. Depending on
the amount collected on a claim by the primary contractor against the ultimate
customer the Company could receive up to $1.4 million. No amount has been
accrued related to the potential settlement.

NOTE 8 - RECOVERY OF ACCOUNTS RECEIVABLE

On September 30, 1996, the Company received payment of $2.2 million
related to a foreign consulting project. The payment included $1.6 million
relating to an account receivable that had been reserved for at December 31,
1995 pursuant to the Company's current practice of increasing the allowance
for doubtful accounts by the amount of any accounts receivable that have aged
more than six months. The $1.6 million has been reported as a reduction of
bad debt expense in the statement of operations under the caption "recovery of
accounts receivable." The remaining amount collected of $600,000, also for
work that was performed in 1995, had not been previously recognized as
revenue. Accordingly, the Company recorded the receipt of the $600,000 as
consulting revenue in the three months ended September 30, 1996.

NOTE 9 - STOCK BASED COMPENSATION

The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123) as of January 1,
1996. SFAS No. 123 allows for the Company to account for its stock option
plans in accordance with Accounting Principles Board Opinion No. 25, under the
intrinsic value method. The Company issued 265,000 stock options to employees
during the nine months ended September 30, 1996, a portion of which were
issued to terminated officers in conjunction with their severance
arrangements.

The following table summarizes the difference between the fair value and
intrinsic value methods and the proforma net loss and loss per share amounts
for the three and nine months ended September 30, 1996 had the Company adopted
the fair value based method of accounting for stock-based compensation.

Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
(In thousands)

Difference between fair value $-0- $ 974
and intrinsic value methods
(additional compensation expense)
Net loss -0- (3,722)
Loss per share -0- (0.44)
</TABLE>

NOTE 10 - SUBSEQUENT EVENT

On November 14, 1996, the Company received the second payment of $1.5
million related to the termination of the foreign consulting contract
discussed in Note 8. The Company and the client both completed their
obligations satisfactorily during the fourth quarter of 1996, and the client
made the agreed-to payment of $1.5 million, which will be included in fourth
quarter 1996 consulting revenue.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

2.1 UNAUDITED INTERIM INFORMATION

This report includes the consolidated financial statements of Scientific
Software-Intercomp, Inc., and its wholly-owned subsidiaries. The Company has
received an extensive comments letter from the Staff of the Securities and
Exchange Commission ("SEC") on its Form 10-K for the year ended December 31,
1995 and its Forms 10-Q for the quarters ended March 31, 1996 and June 30,
1996 and the financial statements included therein. The Company is preparing
its response to those comments. Resolution of some of the comments may result
in certain revisions of those Forms and of the financial statements therein,
which would cause comparative information that would be presented in this
report to require revision. Accordingly, the Company has not included any
comparative financial information in this Form 10-Q. When comments made by
the SEC have been satisfactorily resolved, the Company will amend this Form
10-Q to include comparative data for prior periods.

2.2 LIQUIDITY AND CAPITAL RESOURCES

2.2.1 OVERALL FINANCIAL POSITION

At September 30, 1996, the Company's working capital ratio was 1.24 to 1,
based on current assets of $10.3 million and current liabilities of $8.3
million.

In April and May 1996 the Company completed the following financing and
restructuring of convertible debentures and bank revolving line of credit:
- - - In April 1996 Lindner Funds, a 14% shareholder in the Company, invested
$5 million in the Company in exchange for a senior secured note at 7% payable
in five years and non-detachable warrants to purchase 1.5 million shares of
the Company's common stock at an exercise price of $3.00 per share for five
years.

- - - Effective April 1, 1996 the Company's primary bank and the Export-Import
Bank of the United States restructured and renewed a bank line of credit to
April 15, 1997. The Company's primary bank established a revolving line of
credit pursuant to which the Company may utilize up to $1.5 million for (a)
short-term borrowings for working capital purposes and (b) the issuance of
letters of credit for bid guarantees, performance bonds and advance payment
guarantees. Under the terms of the new bank credit agreement, in April 1996
the Company repaid the $2.9 million balance then owed pursuant to the previous
line of credit, using proceeds from the Lindner and Renaissance Senior Secured
Notes.

The Lindner and Renaissance transactions will be accounted for under
Accounting Principles Board Opinion No. 14, Accounting for Convertible Debt
and Debt Issued with Stock Purchase Warrants, by accounting for the notes and
the non-detachable warrants as a single obligation with no separate value
assigned to the warrants.

2.2.2 BANK CREDIT AGREEMENTS

2.2.2.1 UNITED STATES CREDIT AGREEMENTS.

As of September 30, 1996 the balances of the revolving credit facility,
amounts of short-term cash borrowings and letters of credit outstanding, and
credit available under the revolving credit facility were as follows:

(In thousands)
<S> <C>
Revolving credit facility limit (limited by
insurance coverage and amounts
of qualified receivables) $ 1,500
---------------

Amounts outstanding:
Short-term cash borrowings 750
Letters of credit 495
1,245
---------------
Credit available $ 255
===============

</TABLE>

2.2.2.2 UNITED KINGDOM LINE OF CREDIT.

The term of a bank line of credit of the Company's United Kingdom
subsidiary ended in May 1996 and the outstanding balance of $300,000 was
repaid along with accrued interest.

2.2.2.3 CANADIAN LINE OF CREDIT.

The term of a bank line of credit of the Company's Canadian subsidiary
ended in May 1996. There were no outstanding borrowings under this facility.

2.3 RESULTS OF OPERATIONS

2.3.1 REVENUE

Following is a table of revenue for the three and nine month periods
ended September 30, 1996:

Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
-------------------- -------------------
(In thousands)
<S> <C> <C>
E&P Consulting $ 2,524 $ 6,330
Workbench (E&P Products) 1,239 3,504
P&F Division 1,125 3,500
Total Revenue $ 4,888 $ 13,334
==================== ===================
</TABLE>

Total revenue for the three months ended September 30, 1996 was $4.9
million. Revenue in the Pipeline and Facilities (P&F) Division was $1.1
million in the three months ended September 30, 1996. Revenue in the
Exploration and Production (E&P) Consulting division was $2.5 million in the
three months ended September 30, 1996 which included revenue recognized of
$600,000 upon collection of a foreign receivable for work performed in 1995.
Revenue in The Petroleum WorkBench division was $1.2 million in the three
months ended September 30, 1996.

Revenue in the Pipeline and Facilities (P&F) Division was $3.5 million in
the nine months ended September 30, 1996. Revenue in the Exploration and
Production (E&P) Consulting division was $6.3 million in the nine months ended
September 30, 1996 which included revenue of $600,000 recognized upon
collection of a foreign receivable for work performed in 1995. Revenue in The
Petroleum WorkBench division was $3.5 million in the nine months ended
September 30, 1996.

2.3.2 BACKLOG

Backlog at September 30, 1996 was $7.1 million, down $600,000 million
from the backlog at the end of the 2nd quarter. Backlog was reduced in the
Exploration and Production products and services segment by $600,000.

2.3.3 COSTS OF CONSULTING AND TRAINING AND COSTS OF LICENSES AND
MAINTENANCE

In the second quarter of 1996, management took steps to reduce overhead,
non-billable staff personnel, and other costs, and to further emphasize direct
accountability for profitability and cash performance at the division
management level. The benefits from these measures have resulted in lower
expenses.

Costs of consulting and training were $2.1 million in the three months
ended September 30, 1996, which was 63% of consulting and training revenue.
This includes costs of approximately $400,000 related to revenue recognized
upon collection of the $600,000 foreign receivable referred to above.

Costs of licenses and maintenance were $1.1 million in the three months
ended September 30, 1996 including software amortization of $500,000. Total
costs of license and maintenance were 71% of license and maintenance revenue
in the three months ended September 30, 1996.

Costs of consulting and training were $5.8 million in the nine months
ended September 30, 1996, which was 65% of consulting and training revenue in
the nine months ended September 30, 1996. This includes costs of
approximately $400,000 related to revenue recognized upon collection of the
$600,000 foreign receivable referred to above.

Costs of licenses and maintenance were $3.7 million in the nine months
ended September 30, 1996 including software amortization of $1.5 million.
Total costs of license and maintenance were 86% of license and maintenance
revenue in the nine months ended September 30, 1996.

2.3.4 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

In the second quarter of 1996, management took steps to reduce overhead,
personnel, and other costs. The benefits from these measures have begun to
result in lower costs in the three months ended September 30, 1996.

Selling, general and administrative expenses were $1.4 million in the
three months ended September 30, 1996.

Selling, general and administrative expenses were $5.2 million in the
nine months ended September 30, 1996. The expense for the nine months ended
September 30, 1996 includes provisions for expenses of $600,000 related to
severance costs in the second quarter in accordance with EITF 94-3 from
personnel reductions, bad debts, and other nonrecurring expenses.

2.3.5 RECOVERY OF ACCOUNTS RECEIVABLE

On September 30, 1996, the Company received payment of $2.2 million
related to a foreign consulting project. The payment included $1.6 million
that related to an account receivable that had been reserved for at December
31, 1995 pursuant to the Company's current practice of increasing the
allowance for doubtful accounts by the amount of any accounts receivable that
have aged more than six months. The $1.6 million has been reported as a
reduction of bad debt expense in the statement of operations under the caption
"recovery of accounts receivable." The remaining amount collected of
$600,000, also for to work that was performed in 1995, had not been previously
recognized as revenue. Accordingly, the Company recorded the receipt of the
$600,000 as consulting revenue in the three months ended September 30, 1996.

2.3.6 SOFTWARE RESEARCH AND DEVELOPMENT

The following table summarizes total costs of development and enhancement
of the Company's software products for the three and nine months ended
September 30, 1996. The Company's software development and enhancement costs
are accounted for in accordance with FASB Statement No. 86.

Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------- -------------------
<S> <C> <C>
Software expenditures
Capitalized software costs $ 500 $ 1,500
Cost charged directly to operations 99 254
Total software expenditures $ 599 $ 1,754
=================== ===================

Software expenses charged to earnings
Cost charged directly to operations $ 99 $ 254
Amortization of capitalized software 500 1,500
Total software expenses charged to earnings $ 599 $ 1,754
=================== ===================

</TABLE>

The Company continues its commitment to the development and enhancement
of its software products. Management has reduced the level of software
development activities and is focusing primarily on adaptation of the
Company's software products to the personal computer market. It is
anticipated that the extent of software development and enhancement activity
for the foreseeable future will not result in significant increases in the
amount of capitalized software in the Company's balance sheet.

2.3.7 LOSS CONTINGENCY

See the section below under the heading "Disposal of Kinesix Division,"
which discusses an award against the Company by the American Arbitration
Association.

2.3.8 INTEREST INCOME (EXPENSE)

The following table summarizes the components of interest income
(expense) during the three and nine months ended September 30, 1996. The
capitalized interest was included as a component of the capitalized cost of
software development projects in progress in accordance with FASB Statement
No. 34.

Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1996 1996
-------------------- -------------------
(In thousands)
<S> <C> <C>
Interest income $ 7 $ 20
Interest incurred (133) (388)
Interest capitalized 25 80
Net interest expense $ (101) $ (288)
==================== ===================

</TABLE>

2.3.9 FOREIGN EXCHANGE LOSSES

The Company is subject to risks associated with its various transactions
in foreign currencies, primarily the British Pound and the Canadian Dollar,
but the Company currently does not believe they are material. The Company
continually monitors its risks and uses forward rates in the setting of
exchange rates in the costing and pricing for significant projects to minimize
risk. During the three months ended September 30, 1996, the Company reported
a net foreign exchange loss of $64,000. The Company reported a net foreign
exchange loss of $72,000 for the nine months ended September 30, 1996.

2.3.10 DISPOSAL OF KINESIX DIVISION

On October 9, 1996, the Company announced the execution of final
contracts for the previously announced sale of the net assets and business of
its graphical user interface segment, otherwise known as the Kinesix division,
to a group including the former President of the Kinesix division. The sale
of this segment of the Company's business was part of management strategy to
narrow the focus of the Company's activities to its primary market of the oil
and gas industry. The consideration to the Company in the transaction was
$410,000, including cash of $376,000 which was received by the Company in
October 1996, a note receivable for $32,000, and the purchaser's assumption of
liabilities totaling $59,000. The measurement date for accounting for the
disposal was August 26, 1996, the date on which management decided to sell the
Kinesix division and the disposal date was September 3, 1996, the effective
date of the transaction. The transaction resulted in a loss on disposal of
$478,000, which includes estimated losses to be incurred by the Kinesix
division from the measurement date to the date of disposal of $66,000. From
the measurement date to the balance sheet date of September 30, 1996, the
Company incurred a net loss of $66,000 in operating the Kinesix division,
which was charged to a reserve that was recorded in accounting for the loss on
disposal. Loss from operation of the discontinued segment from January 1,
1996 to the measurement date was $878,000, including recognition of an expense
of $674,000 related to an award against the Company by the American
Arbitration Association, which is discussed in Note 7.

2.4 STATEMENT OF CASH FLOWS

2.4.1 CASH FLOWS FROM OPERATING ACTIVITIES

In the first nine months of 1996, net cash of $766,000 was provided by
operating activities. The most significant individual reason was that on
September 30, the Company received a cash payment of $2.2 million related to a
foreign consulting contract.

2.4.2 CASH FLOWS FROM INVESTING ACTIVITIES

In the first nine months of 1996, net cash of $1.5 million was utilized
in investing activities. In the first nine months of 1996, the Company
incurred total software development and enhancement costs of $1.8 million, of
which $1.5 million was capitalized and $254,000 was charged to expense as
research and development costs.

2.4.3 CASH FLOWS FROM FINANCING ACTIVITIES

In the first nine months of 1996, net cash of $2.8 million was provided
by financing activities which consisted primarily of cash of $5.0 million
received from the Lindner Funds financing in April 1996, offset in part by the
use of part of such funds for full repayment of bank line of credit borrowings
outstanding of $2.9 million, followed by additional borrowings of $750,000
under the new bank line of credit. The $750,000 was repaid in October 1996.
The Company also used $1.8 million of the funds received in the Lindner Funds
financing to reduce accounts payable.

2.4.4 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.

<PAGE>

2.5 FORWARD-LOOKING INFORMATION

From time to time, the Company or its representatives have made or may
make forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but not limited to, press releases, oral
statements made with the approval of an authorized executive officer or in
various filings made by the Company with the Securities and Exchange
Commission. Words or phrases "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project or projected", or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the Reform
Act"). The Company wishes to ensure that such statements are accompanied by
meaningful cautionary statements, so as to maximize to the fullest extent
possible the protections of the safe harbor established in the Reform Act.
Accordingly, such statements are qualified in their entirety by reference to
and are accompanied by the following discussion of certain important factors
that could cause actual results to differ materially from such forward-looking
statements.

Investors should also be aware of factors that could have a negative
impact on the Company's prospects and the consistency of progress in the areas
of revenue generation, profitability, liquidity, and generation of capital
resources. These include: (i) technological and market conditions in the oil
and gas industry and software industry, (ii) possible inability of the Company
to attract investors for its equity securities or otherwise raise adequate
funds from any source, (iii) increased governmental regulation, (iv)
unexpected increases in competition, (v) possible inability to retain key
employees.

The risks identified here are not all inclusive. Furthermore, reference
is also made to other sections of this report that include additional factors
that could adversely impact the Company's business and financial performance.
Moreover, the Company operates in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and it is not possible
for Management to predict all of such risk factors, nor can it assess the
impact of all such risk factors on the Company's business or the extent to
which any factor or combination of factors may cause actual results to differ
materially from those contained in any forward-looking statements.
Accordingly, forward-looking statements should not be relied upon as a
prediction of actual results.

<PAGE>
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. EX-27- Financial Data Schedule.
b. Reports on Form 8-K.
1. The Company filed a report on Form 8-K on September 18, 1996 announcing
the signing of a Letter of Intent with Smedvig a.s. (Oslo, Norway) for the
acquisition of substantially all of the assets of the Company by Smedvig.

2. The Company filed a report on Form 8-K on October 18, 1996 announcing
the following:
a) Sale of Kinesix Division
On October 9, 1996, the Company announced the Closing of the previously
announced sale of the Kinesix division to a group including the former
President of the Kinesix division, Mike Teague. Year-to-date (September)
revenue for the Kinesix division was approximately $1.3 million, and
year-to-date net loss was approximately $400,000. The consideration for the
purchase of the assets was $376,000 plus assumption of liabilities.

b) American Arbitration Association Award Against the Company

On October 9, the Company announced that pursuant to Note (3) advised in
the Company's 2nd Quarter (June 30, 1996) 10Q filing concerning the unrelated
English company Kinesix (Europe), the American Arbitration Association has
awarded against Kinesix (SSI) for a sum of $674,000. The Company intends to
vigorously appeal the award.

c) Collection of Previously Written-off Receivables

On October 9, 1996, the Company announced that it received payment for
receivables that had been previously written off. The Company had previously
agreed, under the terms of the Letter of Intent signed on September 10, 1996
with Smedvig a.s. (Oslo, Norway) for the acquisition of substantially all of
the assets of the Company by Smedvig, that these receivables would be retained
for the benefit of the shareholders of the Company.

d) Termination of Letter of Intent and Negotiations for the Acquisition
of SSI by Smedvig a.s. of Oslo, Norway

On October 14, 1996, the Company announced that Smedvig a.s. (Oslo, Norway)
had terminated negotiations for its purchase of substantially all of the
assets of the Company. On September 10, 1996, the Company and Smedvig signed
a non-binding letter of intent for such purchase.

<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

SCIENTIFIC SOFTWARE-INTERCOMP, INC.

<S> <C>

November 19, 1996 /s/ George Steel
- - ----------------- --------------------------------------------------------------
Date George Steel, Chairman, President and Chief Executive Officer
(a principal executive officer and director)

November 19, 1996 /s/ Barbara J. Cavallo
- - ----------------- --------------------------------------------------------------
Date Barbara J. Cavallo, Financial Controller
</TABLE>

<S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,383
<SECURITIES> 0
<RECEIVABLES> 5,584
<ALLOWANCES> 1,891
<INVENTORY> 0
<CURRENT-ASSETS> 360
<PP&E> 7,219
<DEPRECIATION> 6,308
<TOTAL-ASSETS> 22,181
<CURRENT-LIABILITIES> 8,300
<BONDS> 0
<COMMON> 883
4,000
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,181
<SALES> 13,334
<TOTAL-REVENUES> 13,334
<CGS> 0
<TOTAL-COSTS> 13,437
<OTHER-EXPENSES> 900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 287
<INCOME-PRETAX> (1,362)
<INCOME-TAX> 30
<INCOME-CONTINUING> (1,392)
<DISCONTINUED> 1,356
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,748)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> 0

</TABLE>