19
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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)
Colorado 84-0581776
State (or other (IRS Employer
jurisdiction of Identification No.
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 No X
Number of Shares of Common Stock, No Par Value Outstanding at April 30, 1997:
8,840,000
INDEX
PAGE PART I - FINANCIAL STATEMENTS
Item 1 - Financial Statements
Consolidated Balance Sheets at March 31, 1997 and December 31,
1996 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE 4
three months ended March 31, 1997 and 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE 5
three months ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 13
Item 6 - Exhibits and Reports on Form 8-K 14
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited) (Audited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 1,734 $1,870
Accounts receivable, net of allowance for
doubtful 4,050 5,609
accounts of $579 and $690
Work in progress (unbilled revenue) 2,594 2,785
Other current assets 597 530
Total current assets 8,975 10,794
Software, net of accumulated amortization of
$43,386 and $42,837 9,669 9,604
Property and Equipment, net of accumulated
depreciation 734 823
and amortization of $5,308 and $5,218
Other Assets 1,633 1,487
$21,011 $22,708
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 914 $1,389
Accrued salaries and fringe benefits 1,016 1,070
Accrued lease obligations 174 260
Deferred maintenance and other revenue 2,177 2,421
Accrued Royalties 741 731
Accrual for costs to complete a contract 200 200
Accrued taxes 25 282
Accrued litigation liabilities (Note 6) 900 1,574
Other current liabilities 732 597
Total current liabilities 6,879 8,524
Accrued Lease Obligations 61 79
Long-term Obligations 564 568
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, 8,840,000
shares issued and outstanding 884 884
Paid-in capital 49,474 49,474
Accumulated deficit (46,727) (46,736)
Cumulative foreign currency translation (624) (585)
adjustment
Total stockholders' equity 3,007 3,037
$21,011 $22,708
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS (In thousands, except per share amounts)
Three months ended
March 31, March 31,
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue
Consulting and training $ 2,041 $ 2,849
Licenses 725 626
Maintenance 803 813
Other 65 82
3,634 4,370
Costs and Expenses
Costs of consulting and training 1,473 2,064
Costs of licenses
including software amortization of $549
and $500 626 685
Costs of maintenance 284 642
Costs of other revenue 23 50
Contract cost accruals (reversals) ---- (9)
Selling, general and administrative 1,123 1,465
Software research and development 118 70
3,647 4,967
Loss from Operations (13) (597)
Other Expense
Loss contingency (expense) reversal (Note 99 --
6)
Interest income (expense), net (120) (113)
Foreign exchange gains (losses) 53 (4)
Income (Loss) Before Income Taxes 19 (714)
Provision For Income Taxes 10 10
Income (Loss) from Continuing Operations 9 (724)
Discontinued operation (Note 7)
Loss from operation of Kinesix Division ---- (75)
Net Income (Loss) $ 9 $ (799)
Weighted Average Number of Common and
Common Equivalent Shares Outstanding 7,858 8,185
Income (Loss) Per Common and
Common Equivalent Share:
Continuing operations $ .00 $ (.09)
Discontinued operation ---- (.01)
Net Income (Loss) $ .00 $ (.10)
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<TABLE>
<CAPTION>
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three months ended
March 31,
1997 1996
(Unaudited (Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net Income (loss) from continuing operations $ 9 $ (724)
Adjustments:
Depreciation and amortization 688 672
Provision for losses on accounts receivable (76) (253)
Loss contingency (reversal)(Note 6) (99) --
Changes in operating assets and liabilities:
Decrease in accounts receivable
and work in progress 1,826 971
(Increase) Decrease in other assets (213) 45
Decrease in accounts payable and
accrued expenses (1,220) (556)
Decrease in accrued lease obligations (104) (148)
Increase (Decrease) in deferred revenue (244) 188
Net cash provided by continuing operations 567 195
Net cash utilized in discontinued operations ---- 34
Net cash provided by operating activities 567 229
Cash Flows From Investing Activities
Capitalized software costs (614) (500)
Purchases of equipment (50) (7)
Net cash utilized in investing activities (664) (507)
Cash Flows From Financing Activities
Sales of common stock ---- 98
Repayments of other obligations ---- 104
Net cash provided by financing activities ---- 202
Effect of exchange rates on cash (39) (1)
Net increase (decrease) in cash and cash (136) (77)
equivalents
Cash and cash equivalents at beginning of period 1,870 419
Cash and Cash Equivalents at End of Period $ 1,734 $ 342
Supplemental Cash Flow Information
Cash paid during the year for:
Interest, net of amount capitalized 117 70
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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
whollyowned 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 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 March 31, 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 month period ended March 31,
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 Security 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 - 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. Due
to the Company's improved cash position and decreased need for
credit, the revolving credit facility was decreased from $1.5
million to $900,000. 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 $900,000 guarantee
from EximBank. The credit facility is subject to extension of the
guarantee by EximBank. EximBank has agreed to extend its guarantee
to May 31, 1997, while it is processing the application for
extension of the guarantee to October 15, 1997. The interest rate
applicable to short term borrowings under this extended credit
arrangement will be equal to the bank's prime rate of interest.
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 0.44% of the amount
of the issued receivables.
As of March 31, 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>
<S> <C>
Revolving credit facility limit
(limited by insurance coverage
and amounts of qualified receivables) $900,000
Borrowing base $900,000
Amounts outstanding:
Short-term cash borrowings --
Letters of credit (456,000)
Credit available $444,000
</TABLE>
NOTE 3 - 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. 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 4 -COMMITMENTS
The Company is presently negotiating a lease on new space for its
Denver, Colorado office.
NOTE 5 - 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 previously 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
courtsupervised 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. Subsequently, the settlement agreement was modified to
eliminate the warrants and to provide for an additional
$525,000 in cash, which cash will be supplied by the Company.
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. Upon final approval of the
modified settlement, the Company will reduce its loss
contingency reserve by $375,000, representing the difference
between $525,000 and the previously accrued amount of $900,000.
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 May 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 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 $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. The award in favor of KEL was settled
in February 1997 for $575,000. The Company 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 year ended December 31, 1996, and included a
liability of $674,000 in the balance sheet as part of other
current liabilities. The
Company recorded a credit to expense of $99,000 in first quarter
1997, representing the difference between $575,000 and the
previously accrued amount of $674,000.
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 March
31, 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 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 5.
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
whollyowned 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 March 31,
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 month period ended
March 31, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997.
RESULTS OF OPERATIONS
First quarter, 1997 total revenue decreased 18% to $3.6
million compared to $4.4 million in 1996. Net income was $9,000, or
$.00 per share in the first quarter of 1997, compared to a loss of
$779,000, or $(.10) per share in the first quarter of 1996.
Comparative revenue by business unit are set forth in the following
table:
<TABLE>
<CAPTION>
First Quarter
1997 1996 Pct Change
(In Thousands)
<S> <C> <C> <C>
E & P Consulting $1,822 $1,987 (8%)
E & P Products 1,215 1,211 ----
P & F Division 597 1,172 (49%)
Total Revenue $ 3,634 $ 4,370 (18%)
</TABLE>
The Exploration and Production (E & P) Consulting Division
revenue decrease was attributable to a reduction in the number of
billable personnel and a reduction in backlog.
Exploration and Production (E & P) Products Division first
quarter 1997 revenue was at approximately the same level as first
quarter 1996 revenue. The E & P Products Division has focused on
improving quality performance in serving existing customers on the
Windows/PC platform and in 1997 has already released version
1.6.3 of the "WorkBench" product. The Company expects revenue
in this area to begin to increase as the Company continues to
improve its product and service quality to its customers.
Pipeline Division first quarter 1997 revenue decreased due to
the temporary suspension of a major Far East pipeline project
which has now been resumed, and reduced backlog due to severe
competitive price pressure.
Backlog at March 31, 1997 was $5.3 million, down from the
backlog at December 31, 1996 of $6.7 million.
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 the first
quarter of 1997.
Costs of consulting and training decreased to $1.4 million in
the first quarter of 1997 from $2.1 million in the first quarter of
1996. Costs of consulting and training were 72% of consulting and
training
revenue in the first quarters of both 1997 and 1996.
Costs of license revenue decreased to $626,000 (including
$549,000 of software amortization) in the first quarter of 1997
from $685,000 (including $500,000 of software amortization) in the
first quarter of 1996. Costs of license revenue were 86% of
license revenue in the first quarter of 1997 and 109% of license
revenue in the first quarter of 1996.
Costs of maintenance decreased to $284,000 in the first quarter
of 1997 from $642,000 in the first quarter of 1996. Costs of
maintenance were 35% of maintenance revenue in the first quarter of
1997 and 79% of maintenance revenue in the first quarter of 1996.
Operations losses declined from a loss of $597,000 in the
first quarter of 1996 to a loss of $13,000 in the first quarter
of 1997. The overall improvement in results is attributable to
the steps management took in the second quarter of 1996 to reduce
overhead, nonbillable staff personnel, and other costs, and to
further emphasize direct accountability for profitability and cash
performance at the Division management level.
All Divisions except the E & P Consulting Division
reported reductions in operating costs in excess of 30% over prior
year. The E & P Consulting Division reported a 9% reduction.
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 months ended
March 31, 1997.
Selling, General and Administrative expense decreased $342,000
or 23%. to $1.1 million in the first quarter of 1997 from $1.5
million in the first quarter of 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 first quarter
ended March 31, 1997 and 1996 respectively.
<TABLE>
<CAPTION>
First Quarter
1997 1996
$K $K
<S> <C> <C>
Software expenditures
Capitalized software costs 614 500
Cost charged directly to 118 70
operations
Total software expenditures 732 570
Software expenses charged to
earnings
Cost charged directly to 118 70
operations
Amortization of 549 500
capitalized software
Total software expenses
charged to earnings 667 570
</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 $99,000 in the
first quarter of 1997 related to the settlement of the Kinesix
Europe Arbitration Award discussed in Note 5 of the Consolidated
Financial Statements. The expense reversal represented the
difference between the previously accrued contingency amount of
$674,000 and the actual settlement amount of $575,000.
Interest Income (Expense)
The following table summarizes the components of interest
income (expense) during first quarter ended March 31, 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>
First Quarter
1997 1996
(In thousands)
<S> <C> <C>
Interest income $ 27 $ 7
Interest incurred (117) (95)
Interest capitalized (30) (25)
Net interest expense $ (120) $ (113)
</TABLE>
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 March 31, 1997, the
Company reported a net foreign exchange gain of $53,000 compared
to a net foreign exchange loss of $4,000 for the three months
ended March 31, 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 6 of the Consolidated Financial Statements. The income
statement for the Kinesix Division for the period ending
March 31, 1996 is the following:
<TABLE>
<CAPTION>
(In
thousands)
<S> <C>
Revenue $ 522
Cost of Operations 597
Loss from Operations $ (75)
</TABLE>
FINANCIAL POSITION
The Company's working capital ratio at March 31, 1997 was 1.30
to 1.0, based on current assets of $9.0 million and current
liabilities of $6.9 million. The Company's working capital ratio at
December 31, 1996 was 1.27 to 1.0.
Cash provided from operations was $567,000 for the three
months ended March 31, 1997, compared to $229,000 for the year-ago
period. This improvement resulted principally from the effects
of cost reductions.
Cash used in investing activities increased $157,000 over the
first quarter of 1996 due to the increased costs for equipment and
mantime to increase product development activities in the E & P
Products and Pipeline Divisions. Total capitalized software for the
full year 1997 is projected to be approximately $2.5 million, which
the Company plans to fund from cash flows from operations.
In the first quarter of 1996, cash of $202,000 was provided by
financing activities from the sale of company stock of $98,000
and from repayments of other obligations of $104,000. In the
first quarter of 1997, no funds were received from financing
activities.
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 2 above. The Company believes that it will
continue generating positive cash flow from operations as a
result of the measures discussed in Management's Discussion and
Analysis of Results of Operations and Financial Position. The
Company believes that funds expected to be available under the
Company's revolving credit facility and internally generated funds
should provide the Company with sufficient liquidity and working
capital to meet its anticipated shortterm (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.
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.
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, 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 previously 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
courtsupervised 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. Subsequently, the settlement agreement was modified to
eliminate the warrants and to provide for an additional
$525,000 in cash, which cash will be supplied by the Company.
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. Upon final approval of the
modified settlement, the Company will reduce its loss
contingency reserve by $375,000, representing the difference
between $525,000 and the previously accrued amount of $900,000.
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 May 1997.
Claims 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.
Item 6. Exhibits and Reports on Form 8-K
a. EX-27- Financial Data Schedule.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
May 19, 1997 /s/ George Steel
Date George Steel, Chairman, President and Chief
Executive Officer
(a principal executive officer and director)
May 19, 1997 /s/ Barbara J. Cavallo
Date Barbara J. Cavallo, Financial
Controller
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