2
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, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 13(D)
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-4882
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
-----------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C>
COLORADO 84-0581776
- -------------------------------- ---------------------------------
STATE (OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
<TABLE>
<CAPTION>
<S><C>
633 17TH STREET, SUITE 1600, DENVER, COLORADO 80202
- -----------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
</TABLE>
<TABLE>
<CAPTION>
<S><C>
(303) 292-1111
- ---------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
</TABLE>
(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.
<TABLE>
<CAPTION>
<S> <C> <C>
YES NO X
-
</TABLE>
NUMBER OF SHARES OF COMMON STOCK, NO PAR VALUE OUTSTANDING AT SEPTEMBER 30,
1997:
<TABLE>
<CAPTION>
<S><C>
8,878,000
</TABLE>
(This form 10-Q includes 16 pages)
<PAGE>
INDEX
<TABLE>
<CAPTION>
<S> <C>
PAGE
----
PART I - FINANCIAL STATEMENTS
Item 1 - Financial Statements
Consolidated Balance Sheets at September 30, 1997 and 3
December 31, 1996
Consolidated Statements of Operations for the 4
three and nine months ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows for the 5
three and nine months ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 6 - Exhibits and Reports on Form 8-K 15
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
September 30, December 31,
1997 1996
--------------- --------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 302 $ 1,870
Accounts receivable, net of allowance for doubtful
accounts of $627 and $690 1,968 5,609
Work in progress (unbilled revenue) 2,984 2,785
Other current assets 732 530
---------------
Total current assets 5,986 10,794
Software, net of accumulated amortization of
$44,483 and $42,837 9,881 9,604
Property and Equipment, net of accumulated depreciation
and amortization of $5,559 and $5,218 551 823
Other Assets 1,371 1,487
$ 17,789 $ 22,708
=============== ==============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to bank $ 300 $ --
Accounts payable 826 1,389
Accrued salaries and fringe benefits 784 1,070
Accrued lease obligations 52 260
Deferred maintenance and other revenue 1,916 2,421
Accrued Royalties 733 731
Accrual for costs to complete a contract 59 200
Accrued taxes 86 282
Accrued litigation liabilities (Note 6) -- 1,574
Other current liabilities 575 597
--------------- --------------
Total current liabilities 5,331 8,524
Accrued Lease Obligations 67 79
Long-Term Obligations 557 568
Senior Secured Notes Payable 6,500 6,500
Redeemable Preferred Stock
Series A Convertible Preferred Stock, $5 par value;
1,200,000 shares authorized, 800,000 shares issued and
outstanding 4,000 4,000
Commitments and Contingencies (Notes 5 and 6)
Stockholders' Equity
Common stock, no par value; $.10 stated value;
25,000,000 shares authorized, 8,878,000
shares issued and outstanding 888 884
Paid-in capital 49,489 49,474
Accumulated deficit (48,486) (46,736)
Cumulative foreign currency translation adjustment (557) (585)
Total stockholders' equity 1,334 3,037
--------------- --------------
$ 17,789 $ 22,708
=============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1997 1996 1997 1996
-------------------- ------------------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE
Consulting and training $ 1,461 $ 3,300 $ 5,139 $ 8,883
Licenses 364 766 1,576 2,000
Maintenance 671 746 2,221 2,244
Other 28 76 156 207
2,524 4,888 9,092 13,334
-------------------- ------------------- -------- --------
COSTS AND EXPENSES
Costs of consulting and training 1,815 2,075 4,922 5,798
Costs of licenses including software amortization of
$549, $500, $1,664 and $1,500 366 803 1,680 2,107
Costs of maintenance 346 278 788 1,564
Costs of other revenue 53 45 92 124
Selling, general and administrative 995 1,426 3,111 5,158
Recovery of accounts receivables (Note 8) -- (1,568) -- (1,568)
Software research and development 100 99 300 254
3,675 3,158 10,893 13,437
-------------------- ------------------- -------- --------
INCOME (LOSS) FROM OPERATIONS (1,151) 1,730 (1,801) (103)
OTHER INCOME (EXPENSE)
Loss contingency (expense) reversal (Note 6) -- -- 414 (900)
Interest expense, net (101) (100) (351) (287)
Foreign exchange gains (losses) 5 (64) 8 (72)
-------------------- ------------------- -------- --------
Income (Loss) Before Income Taxes (1,247) 1,566 (1,730) (1,362)
Provision For Income Taxes -- 10 20 30
-------------------- ------------------- -------- --------
Income (Loss) from Continuing Operations (1,247) 1,556 (1,750) (1,392)
Discontinued operation (Note 7)
Loss from operation of Kinesix Division -- (757) -- (757)
Loss from disposal of Kinesix Division -- (478) -- (478)
-------------------- ------------------- -------- --------
NET INCOME (LOSS) $ (1,247) $ 321 $(1,750) $(2,748)
==================== =================== ======== ========
Weighted Average Number of Common and
Common Equivalent Shares Outstanding 8,878 8,707 8,878 8,456
==================== =================== ======== ========
Income (Loss) Per Common and
Common Equivalent Share:
Continuing operations $ (.14) $ 0.18 $ (.20) $ (0.16)
Discontinued operation (0.14) (0.16)
--------------------
Net Loss $ (.14) $ 0.04 $ (.20) $ (0.32)
==================== =================== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
September 30, 1997 September 30 , 1996
-------------------- ----------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss from continuing operations $ (1,750) $ (2,748)
Adjustments:
Depreciation and amortization 2,062 1,909
Net provision recovery on accounts receivable (1) (1,108)
Loss contingency (reversal)(Note 6) (414) 900
Changes in operating assets and liabilities:
Decrease in accounts receivable
and work in progress 3,443 3,320
Decrease (Increase) in other assets (86) 470
Decrease in accounts payable and
accrued expenses (2,377) (1,195)
Decrease in accrued lease obligations (220) (280)
Decrease in deferred revenue (505) (474)
-------------------- ----------------------
Net cash provided by continuing operations 152 794
Net cash utilized in discontinued operations -- (28)
--------------------
Net cash provided by operating activities 152 766
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized software costs (1,941) (1,500)
Purchases of equipment (126) (27)
-------------------- ----------------------
Net cash utilized in investing activities (2,067) (1,527)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of stock 19 --
Bank line of credit borrowings 300 750
Bank line of credit borrowings (repayments) -- (2,870)
Proceeds from Senior Secured Notes -- 5,000
Repayments of other obligations -- (130)
-------------------- ----------------------
Net cash provided by financing activities 319 2,750
Effect of exchange rates gain (loss) on cash 28 (25)
-------------------- ----------------------
Net decrease in cash and cash equivalents (1,568) 1,964
-------------------- ----------------------
Cash and cash equivalents at beginning of period 1,870 419
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 302 $ 2,383
==================== ======================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest, net of amount capitalized $ 291 $ 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 has
responded to those comments. Resolution of some of the comments is expected
to result in certain revisions of those Forms and of the financial statements
therein, which may also result in certain corresponding revisions to this Form
10-Q. Accordingly, when the comments made by the SEC have been satisfactorily
resolved, the Company will amend those earlier Forms and if necessary this
Form 10-Q. The consolidated financial statements for the interim periods ended
September 30, 1997 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. Operating results for the
three and nine month periods ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1997.
Except for historical information contained herein, the statements in
this report are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecasted results. Those risks and uncertainties include,
among others, the financial strength and competitive pricing environment of
the oil and gas service industry, product demand, market acceptance and new
product development. Those and other risks are described in the Company's
filings with the Securities and Exchange Commission.
The Notes to Consolidated Financial Statements included in the Company's
Form 10K for year ended December 31, 1996 should be read in conjunction with
these interim consolidated financial statements.
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:
<TABLE>
<CAPTION>
Additional Paid-
Common Stock in Capital Total
------------------ ----------- ------
(In thousands)
<S> <C> <C> <C>
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>
Non-cash activities which occurred during the nine months ended September
30, 1997 resulted in an increase in common stock and additional paid-in
capital of $0.018 million comprised of the following:
<TABLE>
<CAPTION>
Additional Paid-
Common Stock in Capital Total
----------------------------- ----------- ------
(In thousands)(In thousands)
<S> <C> <C> <C>
Pension Plan Funding $ 4 $ 14 $ 18
</TABLE>
NOTE 3 - BANK CREDIT AGREEMENT
UNITED STATES LINES OF CREDIT.
Effective April 16, 1997 the Company and Bank One agreed to extend the
revolving credit facility through October 15, 1997. The revolving credit
facility was decreased from $1.5 million to $.9 million. 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.
On October 30, 1997, the Company and Bank One agreed to change the terms
of the agreement effective April 16, 1997 to:
1. Extend the maturity date to November 30, 1997,
2. Change the interest rate from the bank's prime rate of interest to the
bank's prime rate of interest plus one (1) percentage point, and
3. Limit the principal amount of the line of the revolving credit facility
to $650,000.
The credit facility is supported by a $.9 million guarantee from EximBank
which expires on November 30, 1997. The Company pays EximBank a fee equal to
1.5% of the guarantee and is required to purchase credit insurance for foreign
receivables at a cost of $0.38 per hundred dollars of the amount of the
insured receivables. The credit facility with a bank line of $650,000 is
expected to be extended to March 1998.
As of September 30, 1997 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:
<TABLE>
<CAPTION>
Revolving credit facility limit (limited by
insurance coverage and amounts of
qualified receivables) $900,000
==========
<S> <C>
Borrowing base $ 900,000
Amounts outstanding:
Short-term cash borrowings (300,000)
Letters of credit (369,622)
----------
Credit available $ 230,378
</TABLE>
At September 30, 1997, the Company was in violation of one of the
covenants on its notes payable to Bank One, Lindner and Renaissance. All
three parties have waived these violations as of September 30, 1997. The
Company has deferred its October 31, 1997 interest payment for the Lindner
Dividend Fund and the Renaissance Capital Partners II, Ltd.
NOTE 4 - INCOME TAXES
The Company's income tax expense is primarily due to foreign taxes
withheld at the source on sales in certain foreign countries. Consequently,
these taxes cause the Company's effective tax rate to vary from the Federal
statutory rate. The Company incurred a current tax provision from foreign
taxes and for that portion of the U.S. profit reported for this period that
cannot be offset by the Company's loss carry forward.
NOTE 5 - COMMITMENTS
The Company entered into a five (5) year office lease for its office at
633 17th Street, Suite 1600, Denver, Colorado. The lease, which commenced on
June 1, 1997 and expires on December 31, 2002, is for approximately 10,329
square feet. The lease is cancellable at the end of three (3) years. A
termination fee is required which is equal to three (3) months of the then
current base rate plus three (3) months of the estimated payment of operating
expenses, plus the unamortized portion of the landlord's costs with interest
thereon at the rate of 9.5% per annum.
NOTE 6 - CONTINGENCIES
To the knowledge of management, there are no 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.
The settlement of the Wolf v. SSI et al class action suit was given final
court approval on May 23, 1997 and claims have been administered. Following
is a summary of that action:
Marshall Wolf, on his behalf and on behalf of all others similarly
-------------------------------------------------------------------------
situated vs. E. A. Breitenbach, R. J. Hottovy, Jimmy L. Duckworth, and
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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 sought
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 20, 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 previously reached agreement for
settlement of the claim involving the payment of $1.1 million 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 $900K. Subsequently, the settlement agreement was modified to eliminate
the warrants and to provide for an additional $525K in cash, to be supplied
by the Company. The Company concluded that the foregoing settlement was 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 $900K 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. On May 23, 1997, the final approval of the fairness of the
settlement was granted by the Court. The Company paid $525K in cash and
reversed a net $315K of the loss contingency reserve of $900K after applying
additional incurred legal costs.
The arbitration between Kinesix, a Division of Scientific
Software-Intercomp, Inc. and Kinesix (Europe) Ltd., an English Company, was
settled in February 1997. Following is a summary of that action:
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 $296K 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 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 asserted damages that exceed $1 million without substantiation.
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 $674K.
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. The award in favor of KEL was settled in February 1997 for
$575K. The Company recognized an expense for the amount of the $674K award,
which had been included in the loss from operation of the discontinued Kinesix
Division for the year ended December 31, 1996, and included a liability of
$674K in the balance sheet as part of other current liabilities. The Company
recorded a credit to expense of $99K in first quarter 1997, representing the
difference between $575K and the previously accrued amount of $674K.
Securities and Exchange Commissions Investigation. On September 11,
-----------------------------------------------------
1997, the Company resolved the investigation by the Securities and Exchange
Commission ("SEC") of the Company's disclosures and financial statements for
the years ended December 31, 1993, 1994 and 1995. Without admitting or
denying any of the allegations of the SEC, the Company settled the matter by
consenting to the entry of a permanent injunction prohibiting future
violations by the Company of Section 17(a) of the Securities Act of 1933, and
Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange
Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder and
to an order to restate the Company's financial statements for the years ended
December 31, 1993, 1994 and 1995. The SEC Staff has advised the Company that,
with the entry of the permanent injunction, the investigation in this matter
as to the Company has been concluded.
OTHER ITEMS
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 September 30, 1997 have not been subsequently
completed by the scheduled date. Management believes that the delays were not
caused by the Company and that no significant penalties will be incurred.
NOTE 7 - 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
$410K including cash of $376K which was received by the Company in October
1996, a note receivable for $32K, and the purchaser's assumption of
liabilities totaling $59K. 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
$478K, which includes estimated losses to be incurred by the Kinesix Division
from the measurement date to the date of disposal of $66K. From the
measurement date to the balance sheet date of September 30, 1996, the Company
incurred a net loss of $66K 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 $878K, including recognition of an expense of $674K
related to an award against the Company by the American Arbitration
Association, which is discussed in Note 6.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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
responding to those comments. Resolution of some of the comments is expected
to result in certain revisions of those Forms and of the financial statements
therein, which may also result in certain corresponding revisions of this Form
10Q. Accordingly, when comments made by the SEC have been satisfactorily
resolved, the Company will amend those earlier Forms and if necessary this
Form 10-Q. The consolidated financial statements for the interim periods
ended September 30, 1997 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. Operating results
for the three and nine month periods ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
RESULTS OF OPERATIONS
Third quarter 1997 total revenue decreased 48% to $2,524 million compared
to $4,888 million in 1996. Net loss was $1,247 million, or $ .14 per share in
the third quarter of 1997, compared to income of $321 million, or $ .04 per
share in the third quarter of 1996.
Comparative revenues by business unit are set forth in the following
table:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
Pct. Pct.
1997 1996 Chg. 1997 1996 Chg.
------------------- ------------------ ----- ------ ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
E&P Consulting $ 1,196 $ 2,524 53% $4,288 $ 6,330 32%
E&P Technology 910 1,239 27% 3,198 3,504 9%
Pipeline Simulation 418 1,125 63% 1,606 3,500 54%
$ 2,524 $ 4,888 48% $9,092 $13,334 32%
=================== ================== ===== ====== ======= =====
</TABLE>
The Exploration and Production (E & P) Consulting Division revenues
decreased by 38% for the three months and 25% for the nine months ended
September 30, 1997 compared to the same periods in 1996 after taking into
account the $600,000 revenue recognized in 1996 related to the collection of a
foreign receivable for work performed in 1995. The revenue decrease was
attributable to a reduction in the number of billable personnel caused by
personnel attrition and a reduction in backlog caused by a lack of sales.
Exploration and Production (E&P) Technology Division third quarter and
year-to-date 1997 revenues decreased due to lower sales of new products. A
significant new release and upgrade to the Petroleum WorkBench will be
delivered to the market during the fourth quarter of 1997.
Pipeline Simulation Division third quarter and the first nine months of
1997 revenue decreased due to reduced backlog caused by a lack of sales.
Backlog at September 30, 1997 was $4.8 million, slightly down from the
backlog at June 30, 1997 of $ 5.1 million.
The Company has continued its initiatives to improve business performance
and its image in the market place through improved service to customers,
improved quality of software and consulting products and projects.
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 in 1997.
Comparative percentage of costs to revenue by business line are set forth
in the following table:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
Net Change Net Change
1997 1996 1997 1996
------------------- ------------------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Cost of Consulting & Training 124% 63% (61%) 96% 65% (31%)
Cost of Licenses 101% 105% 4% 107% 105% (2%)
Cost of Maintenance 52% 37% (15%) 35% 70% 35%
</TABLE>
Costs of consulting and training as a percent of revenue increased in
1997 over 1996 due to lower revenue in relation to division fixed costs.
Costs of maintenance as a percentage of revenue increased for the three
months ended September 30, 1997 compared to the same period in 1996 due to
lower revenues, but were lower as percentage of revenue for the nine month
reporting period for 1997 compared to 1996 due to lower maintenance costs in
1997.
The Company incurred a loss from operations of $1.2 million in the third
quarter of 1997 compared to income from operations of $1.7 million in the
third quarter of 1996. Year-to-date operational losses for 1997 was $1.8
million compared to $0.1 million in 1996. The year-to-date net loss in 1997
of $1.8 million was a $1.0 million improvement over the reported $2.7 million
net loss in 1996.
Major initiatives of the Company include significant improvement in
customer and software support, and changes in cost categories are reflected in
the above analysis.
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 resulted in
lower costs in the three and nine month periods ended September 30, 1997.
Selling, General and Administrative expense decreased $0.4 million or
30%. to $1.0 million in the third quarter of 1997 from $1.4 million in the
third quarter of 1996.
Selling, General and Administrative expense decreased $2.0 million or
40%. to $3.1 million year-to-date in 1997 compared to $5.2 million in 1996.
SOFTWARE RESEARCH AND DEVELOPMENT
The Company's software development and enhancement costs are accounted
for in accordance with FASB Statement No. 86. The following table summarizes
total costs of development and enhancement of the Company's software products
for three and nine month periods ended September 30, 1997 and 1996
respectively.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------------------- ------------------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Software expenditures
Capitalized software costs $ 740 $ 500 $1,941 $1,500
Cost charged directly to operations 100 99 300 254
Total software expenditures $ 840 $ 599 $2,241 $1,754
=================== ================== ====== ======
Software expenses charged to earnings
Cost charged directly to operations $ 100 $ 99 $ 300 $ 254
Amortization of capitalized software 549 500 1,664 1,500
Total software expenses charged to earnings
$ 649 $ 599 $1,964 $1,754
=================== ================== ====== ======
</TABLE>
The Company continues its commitment to the development and enhancement
of its software products and expects significant product upgrades to be
released in 1997.
LOSS CONTINGENCY
The Company recorded a credit to expense of $414K in the first half of
1997 related to the settlements of the Kinesix Europe Arbitration Award and
the Wolf v. SSI class action lawsuit. In the first quarter of 1997 the
Company recorded a credit to expense of $99K pertaining to the settlement of
the Kinesix Europe Arbitration Award which represented the difference between
the previously accrued contingency amount of $674K and the actual settlement
amount of $575K. As a result of the settlement of the Wolf vs. SSI class
action lawsuit, the Company recorded a credit of $315K in the second quarter
1997 which represented the difference between the previously accrued
contingency amount of $900K and the actual settlement amount of $525K plus
additional legal costs.
INTEREST INCOME (EXPENSE)
The following table summarizes the components of interest income
(expense) during the three and nine month periods ended September 30, 1997 and
1996 respectively. 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1997 1996 1997 1996
-------------------- ------------------- ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Interest income $ 19 $ 7 $ 58 $ 20
Interest incurred (90) (133) (319) (388)
Interest capitalized (30) 25 (90) 80
Net interest expense $ (101) $ (101) $(351) $(288)
==================== =================== ====== ======
</TABLE>
FOREIGN EXCHANGE LOSSES
The Company is subject to risks associated with its various transactions
in foreign currencies, including the US Dollar, the British Pound and the
Canadian Dollar, but the Company currently does not believe they are material.
Going forward, the Company expects to protect itself against major changes in
currency exchange rates on significant consulting projects. During the three
months ended September 30, 1997, the Company reported a net foreign exchange
gain of $0.003 million compared to a net foreign exchange loss of $0.06
million for the three months ended September 30, 1996. For the nine months
ended September 30, 1997, the net foreign exchange gain was $0.04 million
compared to an exchange loss of $0.07 million in 1996.
DISPOSAL OF KINESIX DIVISION
On October 9, 1996, the Company sold the net assets and business of its
graphical user interface segment, otherwise known as Kinesix Division to a
group including the former President of the Kinesix Division. The details of
the disposal are discussed in Note 7 of the Consolidated Financial Statements
included in this Form 10-Q. The income statement for the Kinesix Division for
the period ending June 30, 1996 is the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1996 1996
-------------------- ------------------
(In thousands)
<S> <C> <C>
Revenue $ 531 $ 1,053
Cost of Operations 591 1,188
-------------------- ------------------
Loss from Operations $ (60) $ (135)
==================== ==================
</TABLE>
FINANCIAL POSITION
The Company's working capital ratio at September 30, 1997 was 1.12 to
1.0, based on current assets of $6.0 million and current liabilities of $5.3
million. The Company's working capital ratio at December 31, 1996 was 1.27 to
1.0.
Cash provided from operations was $0.1 million for the nine months ended
September 30, 1997, compared to $0.8 million for the year-ago period. The
decline in cash provided from operations is principally due to lower sales
volumes and from the collection of $2.2 million from a previously written off
foreign receivable collected in 1996.
Cash used in investing activities increased $0.5 million over the
year-ago period due to the increased costs of mantime to increase product
development activities in the E&P Technology Division. Total capitalized
software for the full year 1997 is projected to be approximately $2.5 million.
In the first nine months of 1996, cash of $2.8 million was provided by
financing activities from the issuance of Senior Secured Notes to the Lindner
Funds less repayment of bank debt of $2.9 million and from repayments of other
obligations of $0.1 million. In the first nine months of 1997, the Company
borrowed $0.3 million against the revolving credit facility.
CASH FLOW FROM OPERATIONS
The Company has completed the financing and restructuring of the
convertible debentures discussed in Note 3 to Consolidated Financial
Statements included in the Company's Form 10-K for the year ended December 31,
1996 and the bank revolving line of credit described in Note 3 above. The
Company believes that it will have negative cash flow from operations in the
fourth quarter. The Company believes that funds expected to be available
under the Company's revolving credit facility and internally generated funds
may provide the Company with sufficient liquidity and working capital to meet
its anticipated short-term (less than one year) and long-term (more than one
year) operating needs. Should this not be possible, funding would be sought
from alternative sources and/or Company costs would be reduced. 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.
In announcing on November 4, 1997 its loss for the third quarter, the
Company indicated that the results have seriously impacted the Company and
that the disappointing results were continuing. The Company previously
announced on September 15, 1997 that it had engaged Simmons & Co., a
Houston-based investment banking firm specializing in the oil field services
sector, to advise it on options for fulfilling additional capital
requirements, including joint ventures and mergers.
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.
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, (vi) outcomes of litigation that the Company may become a party to.
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
To the knowledge of management, there are no 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. See Note 6.
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 11, 1997 announcing
the resolution of the investigation by the Securities and Exchange Commission
of the Company's disclosures and financial statements for the years ended
December 31, 1993, 1994 and 1995.
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.
<TABLE>
<CAPTION>
<S> <C>
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
November 14, 1997 /s/ George Steel
- ---------------------------------------------- -------------------------------------------------------------
Date George Steel, Chairman, President and Chief Executive Officer
(principal executive officer and director)
November 14, 1997 /s/ Barbara J. Cavallo
- ---------------------------------------------- -------------------------------------------------------------
Date Barbara J. Cavallo, Financial Controller
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 302
<SECURITIES> 0
<RECEIVABLES> 2595
<ALLOWANCES> 627
<INVENTORY> 0
<CURRENT-ASSETS> 5986
<PP&E> 6110
<DEPRECIATION> 5559
<TOTAL-ASSETS> 17789
<CURRENT-LIABILITIES> 5331
<BONDS> 0
0
4000
<COMMON> 888
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 17789
<SALES> 2524
<TOTAL-REVENUES> 2524
<CGS> 3675
<TOTAL-COSTS> 3675
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101
<INCOME-PRETAX> (1247)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1247)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1247)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> 0
</TABLE>
