UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Act of 1934 for fiscal year ended
December 31, 1996
[ ] Transitional Report Pursuant to Section 13 or 15 (d) of the
Securities Act of 1934
Commission File Number 0-4882
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
(Exact name of Registrant as specified in its charter)
Colorado 84-0581776
State (or other (IRS Employer
jurisdiction of
incorporation or Identification
organization) No.)
1801 California Street, Denver, Colorado
80202
(Address of principal executive offices
including zip code)
(303) 292-1111
(Registrant's telephone number including
area code)
Securities registered pursuant to Section None 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Common Stock, no par value
Name of each exchange on which registered: None
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
of information statements incorporated by reference in Part III of
this Form 10-K or any amendment of this Form 10-K. [X]
The approximate market value of stock held by non-affiliates is
$4,043,000 based upon 6,573,000 shares held by such persons and the
close price of $0.62 on March 31, 1997. The number of shares
outstanding of the Registrant's no par value common stock at March 31,
1997 was 8,840,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's definitive proxy statement to be
filed pursuant to Regulation 14A in connection with the annual meeting
of shareholders:
Part III, Items 10, 11, 12 and 13 of this report.
INDEX
Page
PART I 4
ITEM 1. BUSINESS 4
THE COMPANY 4
General 4
History 5
Strategy 6
PRODUCTS, SERVICES AND CUSTOMERS 7
CAP Products, Services and Customers 7
Pipeline and Facilities Products, Services and Customers 9
Research and Development 10
MARKETING, SALES AND CUSTOMER SUPPORT 10
Marketing Strategy 10
Sales Staff, Locations and Customer Support 10
BACKLOG 11
COMPETITION 11
GEOGRAPHIC AND BUSINESS LINE DATA 12
Geographic Revenue Data 12
Business Line Data 12
PROPRIETARY RIGHTS 13
EMPLOYEES 13
MANAGEMENT 14
Directors and Executive Officers 14
ITEM 2. PROPERTIES 16
ITEM 3. LEGAL PROCEEDINGS 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
PART II 18
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S 18
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 21
CONDITION AND RESULTS OF OPERATIONS
General 21
FINANCIAL POSITION 21
Overall Financial Position 21
Bank Credit Agreements 22
Results of Operations 23
Revenue 23
Foreign Revenue 24
Backlog 24
Costs of Consulting and Training and Costs of Licenses and
Maintenance 24
Selling, General and Administrative Expenses 24
Recovery of Accounts Receivable 24
Software Research and Development 24
Settlement of Class Action 25
Interest Income (Expense) 26
Foreign Exchange Losses 26
Disposal of Kinesix Division 26
STATEMENT OF CASH FLOWS 26
FORWARD-LOOKING INFORMATION 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
PART IV 52
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 52
PART I
BASIS OF PRESENTATION
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 and
discussions with the Staff are continuing. 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-K. When comments made by the
SEC have been satisfactorily resolved, the Company will amend this
Form 10-K to include comparative data for prior periods.
ITEM 1. BUSINESS
THE COMPANY
General
Scientific Software-Intercomp, Inc. (the "Company") develops and
markets sophisticated software for the development and production and
pipeline and surface facilities areas of the worldwide oil and gas
industry and provides associated interdisciplinary technical support
services, consulting and training.
The Company's Exploration and Production Division markets computer-
aided production ("CAP") software which provides oil and gas industry
professionals with a comprehensive set of powerful cost-effective
tools to describe, simulate and predict oil and gas production from
reservoirs under alternative simulated development plans. These
predictions are used to determine optimal development plans for
maximizing recoverable reserves, thereby reducing oil and gas finding
costs per equivalent barrel. The Division's consulting services
include integrated field development studies, 4-D seismic reservoir
management, reserves audits, certifications and valuations, reservoir
simulation, enhanced oil recovery and well performance studies and
regional stratigraphic and petrophysical evaluations.
The Company's Pipeline and Facilities Division markets software for
the simulation and monitoring of oil and gas pipelines, as well as
software for various related applications including engineering
design, leak detection, optimization of transportation efficiency and
pipeline dispatcher training. The Division's consulting services
include implementation of real time system projects, leak sensitivity
analysis and design studies, operator training and product training
courses, real time system tuning and optimization and expert witness
testimony.
Consulting services are the single largest element of the Company's
business, comprising 68% of the Company's total revenues in 1996. In
the Exploration and Production segment, consultants typically use the
Company's products to carry out their project work. Consulting
services in the E&P segment totaled 71% of total E&P revenues in 1996.
In the Pipeline and Facilities division, consulting services and sales
of software are quite tightly linked. Consulting services in that
division may include the integration of the Company's off-the-shelf
software and sometimes may involve various degrees of customization;
consulting and training revenues totaled 57% of the revenues of the
Pipeline and Facilities division in 1996.
Since its formation in 1968, the Company believes that it has
established a reputation for technical excellence of its software
products and consulting services in reservoir description, simulation
and monitoring. In the late 1980s, the Company recognized the need to
provide an integrated system of CAP products that could be more
broadly utilized by the oil and gas industry. Also, the availability
of increasingly powerful and affordable computers enables the
Company's CAP software products to operate on UNIX-based workstations
and personal computers, and more recently on DOS/Windows-based
personal computers, with capabilities historically available only on
mainframe computers. The Company has developed Petroleum WorkBench,
an integrated software system that allows effective access to five of
the Company's high technology stand-alone CAP products. It is
expected that future versions of Petroleum WorkBench will increase the
technical breadth of this software package. These developments have
had the effect of significantly expanding the market for the Company's
CAP software products from its historical market of research experts
and technical specialists using mainframe computers to include non-
expert industry professionals, such as petroleum engineers and
geologists, using workstations or personal computers. These
developments have also increased the functionality and ease of use of
the Company's CAP products to the oil and gas industry by lowering
hardware costs and reducing the need to utilize these experts in order
to take advantage of the Company's technology.
The Company's objective is to be a leading provider of high
technology computing solutions and quality consulting services in each
of its industry areas. The Company's long range goal is to offer a
fully integrated set of software products that will permit non-expert
professionals to describe, simulate, monitor and manage the complete
range of reservoir development and production activities and oil and
gas transmission and storage activities of oil and gas fields from
personal computers.
The Company's executive offices are located at 1801 California
Street, Suite 295, Denver, Colorado 80202 and its telephone number is
(303) 292-1111.
History
The Company, a Colorado corporation, was formed in 1968 and, since
that time, has developed and marketed sophisticated applications
software together with computer-related consulting services,
principally for reservoir description and reservoir and pipeline
simulation. These technologically complex products have been, and
continue to be, sold primarily to major multinational and large
independent oil companies for use by research experts and technical
specialists. The Company believes that it has established a
reputation for technical excellence of its software products and
consulting services in reservoir description, simulation and
monitoring.
In June 1983, the Company acquired Intercomp Resource Development
and Engineering, Inc. ("IRDE"), which had developed additional
software products for reservoir simulation. In January 1984, the
Company acquired CRC Bethany International, Inc. ("CRC"), a wholly
owned subsidiary of Crutcher Resources Corporation. The acquisition
of CRC provided the Company with software systems that modeled real-
time data collected and stored by Supervisory Control and Data
Acquisition ("SCADA") systems installed on oil and gas pipelines.
Several trends, including lower oil and gas prices, have driven the
oil and gas industry to reduce the risk and cost, and to increase the
effectiveness, of development and production activities. This has led
many energy companies to reduce budgets, including a decline in the
employment of research and technical experts in the various petroleum
industry disciplines, in favor of non-expert industry professionals.
The Company recognized the need to provide an integrated system of CAP
products for use by these non-experts. By 1991, the Company had
developed Petroleum WorkBench which provides the industry with broader
access to sophisticated engineering solutions. Management believes
that these developments, coupled with the availability of increasingly
powerful and affordable workstations and personal computers, has
opened a significant market for Petroleum WorkBench.
Strategy
Recent Strategy Developments. During the period of December 1995
and January 1996, the Company determined that the cumulative effects
of the releases of Windows 95, and Windows NT and new more powerful
pentium-based PC's had significantly changed the broad market for
corporate computing systems and software. During 1995, the Company
successfully released the Windows version of the WorkBench product,
constituting a major breakthrough for the Company. The reaction from
the marketplace was very positive and the Company made a decision to
fundamentally change its emphasis to the personal computer market,
instead of the previous strategy of providing products for all
segments of computer hardware mainframe, minicomputer, and personal
computer markets. This decision was also encouraged by positive
reaction from clients in the second half of 1995 to "WB Serve," a
personal computer application that allows for transfer of
computationally intensive operations to servers and minicomputers.
It then became apparent to the Company that the access point of
software users would be based on desktop 32 bit technology. While
extremely large and complex software such as that of the Company
previously could not have operated on other than mainframe or
minicomputer machines, the personal computers which have become
available along with the continued enhancements of Distributed
Computer Environments (DCE) makes it today possible to operate the
software from a desktop PC.
With the acceptance of the Company's Windows interface, which
encompasses core software products plus graphical and interactive
features of a Windows environment, the Company identified that the
personal computer market would not only be another market for the
Company's products--it would be the primary market. Accordingly, the
Company decided to focus its future market and development activities
on this new primary market. The Windows enhancement of the WorkBench
software required little change to the code of the application
software.
In January 1996, Mr. George Steel, the new chief executive officer,
took a strategic view of the situation in which the Company now found
itself. He felt that the creeping environmental changes had reached a
point that required rapid action and in fact presented the Company
with a significant opportunity in the market place.
This recognition resulted in changes in management strategy to focus
primarily on the personal computer market in the future. Essentially,
this focus leads to a different kind of software environment than
before, in which most of the Company's software would be marketed as
part of an integrated product, which includes significant non-
technical software. Mr. Steel also introduced several other
management strategies. Previously, the Company had been striving to
achieve aggressive revenue targets, much of which entailed making new
sales to new customers, many in widely dispersed international markets
and in marketplaces with widely diverging computing platform
environments. Mr. Steel's strategy was for the Company to focus on
high quality performance in serving existing customers on Windows/PC
platforms and thus to make acceptable profits. The consolidated
effect was to decrease the levels of revenue targeted and strived for.
Mr. Steel believed that these significant changes in strategy were
necessary to enable acceptable profitability performance and an
adequate rate of return in future periods. Cost reductions were
necessary, primarily staff reductions and reductions in the total of
planned development expenditures in comparison to expenditure levels
in 1995 and prior years. Rapid change was necessary and these
strategies led to a narrowing of the computer platforms on which the
Company's WorkBench product would be offered.
The Company's strategy is to provide complete, high technology,
computing solutions and other services for the development and
production of oil and gas reservoirs and the pipeline transportation
of oil and gas. The following sections discuss in detail how the
Company is executing this overall strategy.
Integration of High Technology Products. Since its formation, the
Company has developed a series of software products designed to
describe, simulate and monitor oil and gas reservoirs, and to simulate
and monitor oil and gas pipelines and surface facilities. These
products cover nearly all technologies needed to simulate, study,
optimally develop and monitor oil and gas reservoirs and oil and gas
pipelines. These products also include nearly all facets of
technology necessary for field management and field monitoring in the
oil and gas industry. The Company has begun integrating these
products, which increases the functionality and ease of use of the
high technology solutions provided by the Company's products.
The initial integrated product, Petroleum WorkBench, includes five
of the Company's major stand-alone CAP products. It is the Company's
intention to continue integrating its stand-alone products until the
full breadth of the Company's technology is included within one
integrated, easily accessible product, that will allow a single non-
expert professional to work in multiple disciplines, using the same
database and applications software.
Expansion of Marketing Efforts and Customer Base. The Company
believes that by continuing the integration and accessibility of its
software, the market for its CAP software and related consulting
services can be expanded to increase sales to non-expert industry
professionals. The Company intends to intensify its marketing efforts
to this larger market, in addition to continuing to market its
products to its established customer base of expert users, generally
employed by major multinational and large independent oil companies.
Complete Range of Services. The Company believes that offering a
complete range of consulting and training services is a critical
component of its business. It intends to continue enhancing and
expanding the range of consulting services to meet the growing
requirements of its customers. The Company also believes that
providing sophisticated and comprehensive consulting services promotes
and advances acceptance and awareness of its products.
Technical Leadership. The Company intends to continue developing
new software products and enhancing existing software products, both
internally and through jointly-funded development efforts, to respond
to developments by competitors and changes in technology. The Company
also intends to continue to attract and retain highly-skilled
professionals in computer software programming and various petroleum
industry disciplines in order to provide for the development and
enhancement of its products and services. Finally, the Company
intends to continue to evaluate, and, if attractive, acquire or
license products and technologies which it believes are important to
achieving its strategy.
PRODUCTS, SERVICES AND CUSTOMERS
CAP Products, Services and Customers
The Company's CAP products and related consulting services address
the development and production areas of reservoir description and
simulation. The Company's reservoir description products provide for
the analysis of well logs and core, the use of 3-D seismic data,
analysis of pressure and performance of wells and mapping and analysis
of the basic geology and reservoir rock parameters. Reservoir
description data is then input into mathematical reservoir simulators
offered by the Company to predict future production performance under
various simulated development scenarios after matching historical
performance. Use of reservoir simulation provides more accurate
forecasts of oil and gas recovery and assists in the determination of
how reservoirs should be optimally developed. The primary CAP
products being marketed by the Company are:
LOGCALC (well log analysis). Used to calculate rock and fluid
properties around a wellbore from well logs in order to determine the
presence and quantities of hydrocarbons.
INTERPRET/2 (well test analysis). Used to analyze pressure and flow
tests of a well to predict reservoir flow capability and other
formation parameters such as the location of barriers in the
reservoir.
WPM (well productivity model). Used to analyze and simulate the
productivity of a well under various alternative completion practices,
such as hydraulic fracturing and artificial lift, so that the optimum
economics for the well can be achieved.
PVT (pressure-volume-temperature correlations for hydrocarbon
fluids). Used to analyze laboratory tests of oil and gas samples
gathered from a reservoir to determine the accuracy of the data and to
construct equations for use of the data.
SimBest II (reservoir simulator for oil, water and gas). Used to
model the behavior of an oil and gas reservoir in order to predict the
results of various types of reservoir development options, such as in-
fill drilling, water floods and gas injection, in order to determine
the optimal development plan for the reservoir. The simulator
calculates the flow of oil, water and gas in three dimensions through
a complex reservoir, including the flow through the wellbores to the
surface.
COMP III, COMP 4 (compositional reservoir simulators for oil, water
and gas). Used when the complex fluid behavior in the reservoir
requires that oil and gas be defined more precisely by their molecular
components such as methane, ethane and propane. These simulators are
most often used to simulate and determine the optimum development of
gas reservoirs and oil reservoirs undergoing high pressure gas
injection.
THERM (thermal reservoir simulator). Used when modeling thermal
enhanced oil recovery processes such as steam injection and in-situ
combustion. This is the most complex simulator because it also
includes mathematical simulation of such thermodynamic factors as
combustion reaction kinetics. This simulator is used to predict
optimum recovery using thermal enhanced recovery processes for
reservoir development.
SimEase (interactive pre/post processor for the Company's reservoir
simulators). Used to prepare data easily for input to the Company's
reservoir simulators and to view the results in color.
AHM (adaptive history matching system for use with reservoir
simulators). Used to help match a reservoir's historical production
of oil, gas and water. A final calibrated (history matched) model can
then be used to simulate future production under various hypothetical
operating scenarios. This software includes such displays as color 3-D
and 4-D (showing the passage of time) maps and simulated color
visualizations of fluids flowing through the reservoir.
PETROLEUM WORKBENCH (an integrated set of high technology products
for reservoir management). This integrated set of products is used to
perform reservoir description, simulation and monitoring on a
workstation or personal computer. Either an expert or non-expert
professional can use this integrated set of products to select optimum
reservoir development plans using the highest technology more quickly
and efficiently than with non-integrated and individually designed
products. The current version of Petroleum WorkBench includes
Logcalc, Interpret/2, SimBest II, parts of SimEase and PDA (the
Company's production data analysis system), plus various display
capabilities including mapping and cross-sections. The Company's
strategy for development of Petroleum WorkBench includes making the
Company's technology accessible to a much larger market of
professionals. Petroleum WorkBench is also a first step toward the
future integration of the Company's other products to encompass all
technologies necessary to develop and manage oil and gas fields.
Petroleum WorkBench was originally developed for the UNIX operating
system because of the size and complexity of the code, the graphics
and the need for networking with other desktop computers. These
capabilities are now available on the existing DOS/Windows operating
systems.
In addition, the Company has a number of other CAP products PROBE
(probability analysis for geoscientists), PERMPROBE (statistical
reservoir permeability analysis), GEOPROBE (statistical reservoir
geology analysis), EORPM (enhanced oil recovery prediction models),
CHEMFLOOD (chemical flooding reservoir simulator), N-Hance (enhanced
recovery reservoir simulator), OMEGA (gas storage reservoir
simulator), OMNET (reservoir simulator for multiple gas storage
reservoirs and pipelines), MATBAL (material balance reservoir
simulator), VFLOW (wellbore vertical flow simulator), IPS (investment
planning system), and GUESS (general uncertainty economic simulator).
The Company also provides consulting and training, on the use and
actual application of the Company's products and technology to a
client's reservoir management needs. The Company provides consulting
services in the areas of geophysics, 4D seismic, geology,
petrophysics, reservoir engineering and production and completion
engineering. The Company has designed cost-effective exploitation
methods, production and injection operations, and enhanced oil
recovery schemes. The Company also has performed reserve evaluations
and special simulation techniques for artificial lift, horizontal
drilling and massive hydraulic fracturing. In addition, the Company
has designed development plans of an entire oil field, including the
operation and monitoring of well and reservoir performance.
Pipeline and Facilities Products, Services and Customers
The Company's software and related services for the pipeline and
surface facilities area simulate and monitor oil and gas pipelines and
surface facilities, such as compressor stations, tank farms and
pumping stations, for applications including engineering design, leak
detection, real time modelling, optimization of transportation
efficiency and pipeline operator training. The systems are used in
either "real time" or "off-line" mode. In the real time mode, data is
continuously collected by a SCADA system from various points along a
pipeline, or from surface facilities, and used by the software for
simulation and monitoring purposes. In the off-line mode, real-time
data is not used and is replaced by user-provided data for engineering
or training purposes. The Company's historical focus in this area has
been on providing simulation and monitoring software to operators of
large and complex pipelines and surface facilities. The current focus
of the Company in this area is to develop and market a standardized
and modular system that is cost-effective for smaller pipeline systems
and also capable of providing solutions for larger pipeline systems.
The primary software products being marketed by the Company in this
area include:
TGNET (transient gas pipeline network simulator). Used off-line by
pipeline engineers to study portions of gas pipeline networks in order
to simulate the design and operation of the pipeline system.
TLNET (transient liquid pipeline network simulator). Like TGNET,
used off-line for liquid pipeline design and operations studies.
MNET (multiphase pipeline network steady state simulator). Like
TGNET, used off-line for pipeline design and operations studies for
the simultaneous flow of oil, gas and/or water.
INTERACT (interactive pipeline network simulators). Used by
pipeline engineers to plan future flows and to train pipeline
dispatchers. INTERACT is comprised of two separate software products
for gas and liquid.
PIPELINE MONITOR I and II (leak detection and pipeline management
software for intermediate complexity pipeline networks). Real time
system used continuously by the pipeline operating staff to detect
leaks and to manage pipeline operations. Versions are available for
both oil and gas pipelines.
ON-LINE SYSTEM (pipeline leak detection and management software). A
series of software modules that can be integrated to provide leak
detection plus additional options such as product batch tracking in
liquid systems and compressor utilization for complex gas pipeline
networks. The software operates continuously in real time, often with
full backup computers, to manage complex pipeline operations.
The Company also provides consulting and training, as required by
customers who use the technology and/or the products. Training is
provided for both the use of the Company's software and to train
dispatchers to handle pipeline operational problems such as leaks and
product batch tracking. A typical consulting project would be to
configure the software system to accurately simulate the customer's
actual pipeline and facilities, ensure that the data accurately
describes the field operations and then install and test the data
running in configuration with the Company's product at the customer's
site.
Research and Development
The Company is committed to the continued enhancement of its
petroleum industry software and to the development of software and
services having new or related applications. The Company's objective
is to develop products that are considered to be high quality and
technically advanced that will meet the needs of the company's
customers and enable them to grow and develop their reserves more cost
effectively.
In the CAP area, enhancement of Petroleum WorkBench will continue
with the addition of a geostatistics module, conversion to an open
architecture and updates to other modules. Development and upgrade of
black oil, compositional and thermal simulators will be ongoing.
In the pipeline and facilities area, new versions of all off-line PC
products were released in 1996 to run under Windows 95 or Windows NT.
Additional enhancements, including graphical network configuration,
are also expected for stand-alone PC products in 1997.
During the year ended December 31, 1996, the Company spent $2.9
million for development of new products and the improvement and
enhancement of existing products.
MARKETING, SALES AND CUSTOMER SUPPORT
Marketing Strategy
The Company's marketing strategy is to create customer awareness of
existing and new products and to publicize its technical expertise
through participation at technical meetings and conferences,
publication of scientific papers, presentation of technical proposals
to existing and potential customers, and sponsorship of product focus
groups. The Company continually surveys the market and analyzes the
products and services offered by the Company and its competitors in
order to identify new developments, market trends and changing
preferences and requirements of the market place. The Company will
develop marketing plans specifically tailored for its products that
identify the appropriate distribution channels to reach the target
market or market segment and will permit the effective promotion of
the products. The Company supports its customers by providing
complete consulting, technical and training services by experts in
computer systems and the various technical applications disciplines
for all product areas.
Sales Staff, Locations and Customer Support
The Company sells its products, consulting and other services on a
worldwide basis primarily through its worldwide direct sales force.
Since sales of the Company's products require technical interaction
with customers, members of the sales force generally are technically
qualified as well as having significant sales and marketing
experience. In addition, sales and marketing personnel are actively
supported by technical personnel and senior management of the Company.
Sales personnel are located in each of the Company's offices in
Denver, Houston, Calgary, London, and Beijing, People's Republic of
China. Local sales agents are utilized principally in countries in
which local representation is necessary or appropriate. The Company
markets certain of its products through resellers and local agents in
certain foreign countries.
The Company provides installation and product training, on-site
consulting and 24-hour telephone availability of systems and technical
experts as part of its customer support services.
BACKLOG
The Company's backlog at December 31, 1996, was $6.7 million, of
which 95% is expected to be earned by December 31, 1997.
COMPETITION
The market for most of the products and services offered by the
Company is highly competitive, although the number of competitors
generally is limited. The principal competitive factors faced by the
Company are product functionality and performance, product price in
relation to performance, consulting and customer support services.
Management also believes that the Company competes effectively due to
its broad product line, large customer base and reputation for quality
products and expert services. However, sales of the Company's
products and services would be adversely affected should competitors
introduce new products with better functionality, performance, price
or other competitive characteristics.
The principal competitors in the licensing and sale of development
and production software are GeoQuest, a division of Schlumberger;
Halliburton Company, and a number of smaller competitors.
The competition in the licensing and sale of pipeline and surface
facilities software is fragmented with individual companies often
marketing only one or two products. Significant competitors in
software licensing and supply of related services of real time,
on-line products in the leak detection and real-time modeling areas
are Stoner and Associates and Lic Consult.
GEOGRAPHIC AND BUSINESS LINE DATA
Geographic Revenue Data
The following table sets forth the Company's consolidated revenues
by geographic area for 1996:
<TABLE><CAPTION><BTB>
1996
(In thousands)
<S> <C>
United States $4,239
Foreign:
Far East 3,849
Middle East 912
Canada 880
Europe 3,548
Central and South 2,861
America
Africa 2,318
Other 397
Total Foreign 14,765
Total Revenue $19,004
</TABLE>
Revenue derived from foreign sources amounted to $14,765,000 (78% of
total revenue). Foreign revenue is subject to a number of factors
such as political instability, changes in protective tariffs, tax
policies, and export-import controls. See Note 7 to Consolidated
Financial Statements for information on foreign and domestic
operations and the Company's United States export revenue.
Much of the Company's business is conducted with large, established
U.S. and foreign companies (sometimes acting as government
contractors), governments and national petroleum companies of foreign
governments. Qualifying foreign receivables are insured, subject to a
deductible loss amount, under an insurance policy with the Foreign
Credit Insurance Association, an agency of the United States Export-
Import Bank. The Company performs credit evaluations when considered
necessary and generally does not require collateral.
Business Line Data
The following table sets forth the percentage of total revenue
contributed by each of the Company's classes of products and services
for 1996:
<TABLE><CAPTION><BTB>
1996
<S> <C>
Exploration and Production
Consulting and training 55%
Licenses 10%
Maintenance 12%
Other 1%
Total 78%
Pipeline and surface
facilities
Consulting and training 13%
Licenses 5%
Maintenance 4%
Other *%
Total 22%
Other *%
Total 100%
*Less than 1%.
</TABLE>
During 1996, there was no single customer that accounted for 10% or
more of the Company's revenue and the loss of which would have a
material adverse effect on the Company's business.
PROPRIETARY RIGHTS
The Company has protected its proprietary computer software by
restricting access to the underlying source code through technical
means and by requiring its customers to enter into licensing
arrangements that are protective of the Company's intellectual
property rights in such software. For enforcement of its rights in
the software, the Company relies upon laws relating to trade secrets
and the misappropriation of confidential business information, as well
as unfair competition laws, which are generally recognized in both
state and international judicial proceedings. Additionally, the
Company obtains federal and international protection of its computer
software through federal copyright and the international copyright
protection afforded by the Berne Convention with reciprocal copyright
protection in over 75 countries. To date, the Company has not sought
to patent any of its computer software. While the Company does not
rule out obtaining patent protection for computer software at some
future time, the present procedure for obtaining patent protection
would require the Company to secure a patent in the United States and
all foreign countries where the software might be utilized, even
though the patentability of software in some foreign countries remains
questionable and in the process of patenting the software in the
United States the Company would be required to fully disclose the
source code to the public through its patent application.
In addition, the Company requires all employees and consultants who
have access to its proprietary information and software to execute
confidentiality agreements.
EMPLOYEES
As of December 31, 1996, the Company employed 99 persons full-time
in all locations. The Company also engages technical consultants as
required to complete project work.
MANAGEMENT
Directors and Executive Officers
The following table sets forth the names, ages and positions of the
executive officers and the members of the Board of Directors of the
Company as of December 31, 1996. All directors are elected for a term
of one year and serve until their successors are elected and
qualified.
<TABLE><CAPTION><BTB>
Name Age Position
<S> <C> <C>
George Steel 51 Chairman of the Board of Directors,
Chief Executive
Officer, President
Keith J. Baedor 46 Vice President-Pipeline & Facilities
Division
Barbara J. Cavallo 51 Financial Controller
Edward F. Frazier 51 Corporate Secretary, Vice President
Robert G. Parish, 55 Executive Vice President-
Ph.D. Exploration and Production Consulting
J. Marc Sofia 37 Vice President-Software Business Unit
William B. Nichols, 68 Director
Ph.D.
Edward O. Price, Jr. 67 Director
</TABLE>
There are no family relationships among any of the executive officers
or directors of the Company.
Mr. Steel joined the Company in January, 1996, and was elected
President, Chief Operating Officer and member of the Board of
Directors, effective January 15, 1996. He was elected Chairman of the
Board of Directors in May, 1996. He has extensive technical and
managerial experience in the international petroleum industry. He
served as General Manager of Snyder Oil Company's affiliate, Command
Petroleum, in the Bay of Bengal, India. Prior to that, he served as
Vice President of Snyder's Julesburg Rocky Mountain Business Unit.
Mr. Steel joined Geophysical Services, Inc. (GSI), the geophysical
subsidiary of Texas Instruments, in 1969. In 1992, after GSI had
become part of Halliburton Company, he was appointed President of
their geophysical subsidiary, Halliburton Geophysical Services (HGS).
He has a B.S. degree in Natural Science from St. Andrews in Scotland
and holds membership in the Society of Exploration Geophysicists,
American Association of Petroleum Geologists, Society of Petroleum
Engineers, the American Society for Quality Control and the British
Deming Association.
Mr. Baedor graduated from California Polytechnic, Pomona in 1973
with a BSEE in Digital Design. Mr. Baedor is Division Vice President
for the Pipeline & Facilities Division, having joined the Company in
1994 as Division Vice President for Sales and Marketing. Previous to
joining the Company, Mr. Baedor served as Director, Engineering
Systems at Baker Hughes Company. He has 24 years experience,
domestically and internationally, in engineering, project management,
sales and marketing in the oil and gas industry. Mr. Baedor was also
employed with Texas Instruments, The Foxboro Company, Litton
Industries and Fluor - Daniel - Williams. Mr. Baedor is a Senior
Member, Instrument Society of America (ISA).
Ms. Cavallo is a Certified Public Accountant in Texas and has over
eighteen years financial management experience in the oil service
industry. She joined the Company in October 1994 and is currently
responsible for the consolidation of financial information for each of
the operating divisions and the Company in total. Prior to joining
SSI, Ms. Cavallo was associated with Highland Resources, Western
Oceanic, Inc., and Oceaneering International, Inc., all in Houston.
She received her Bachelor of Science degree in Accounting from
Illinois State University in 1967 and holds memberships in the
National Certified Public Accountants Association, Texas Certified
Public Accountants Association, Treasury Management Association,
Houston Chapter of Texas CPAs, and the American Women's Certified
Public Accountants Association.
Mr. Frazier joined the Company in September, 1981, and was elected
Corporate Secretary in May, 1996. He has worldwide responsibilities
for the Company's human resource programs and has extensive managerial
experience in all aspects of compensation, employee benefits and
pension plans for employees in the United States, Canada and the
United Kingdom. Prior to joining SSI, Mr. Frazier served with Coopers
& Lybrand for ten years in Florida and Colorado in human resource
management positions. He was associated with the Small Business
Administration in Florida from 1967-1972, where he was involved in
training and management development programs. Mr. Frazier has a B.S.
degree in Business Administration from Florida Atlantic University.
He is a member of the Society for Human Resource Management and is
active in community and civic organizations.
Dr. Parish joined the Company in April, 1982 as Vice President of
Technical Products in Europe and is currently Managing Director of SSI
UK, Ltd., the Company's United Kingdom subsidiary. He is responsible
for the Exploration and Production Consulting division. He served as
Division Vice President, Exploration and Production Products, from
March, 1987 to October, 1990. From February, 1985 to March, 1987, he
was Managing Director of the Company's U.K. subsidiary. Dr. Parish
has over twenty years experience in mathematical modeling and software
engineering. He graduated from London University with a B.Sc. with
honors in mathematics in 1963, and from North Carolina State
University with a Ph.D. in statistics in 1969.
Mr. Sofia joined the Company in October 1985 as a senior engineer.
He was promoted to manager in 1992 and to Vice President of the
Software Business Unit in May 1996. Mr. Sofia heads a team of
professionals involved in WorkBench development, customer support,
simulation development and sales. Mr. Sofia joined Petro-Canada in
September 1982 where he was involved in project engineering, well test
interpretation and reservoir/development engineering activities. He
received a Bachelor's degree in Mechanical Engineering from McGill
University in Montreal in 1982.
Dr. Nichols was employed by Hercules Incorporated in research and
development for thirty-five years until his retirement in 1989. For
the last ten years he held various managerial positions. He received
his B.S. degree from Massachusetts Institute of Technology in 1950,
and M.S. and Ph.D. degrees from California Institute of Technology in
1954 and 1957, respectively, all in chemical engineering.
Mr. Price was employed by Chevron Oil Company and Saudi Aramco for
over thirty-seven years until his retirement in 1990. For the last
eleven years he held various executive positions with Saudi Aramco in
Dhahran, Saudi Arabia, including Vice President of Petroleum
Engineering and Vice President of Exploration and Production. Prior
to that time he held various management positions in Chevron's
operations in the U.S., Australia and Iran. He is currently a private
investor and consultant and is a director of First National Bank,
Mexia, Texas; Paragon Wireline Services; Advanced Reservoir
Technologies and Middle East Services. He received B.S. degrees in
both petroleum engineering and geological engineering from Texas A&M
University in 1951 and completed course work for an M.S. degree from
the same school in 1953.
ITEM 2. PROPERTIES
All of the Company's operations are conducted in leased space as
follows:
<TABLE><CAPTION><BTB>
Approximate Current
Location Lease Expiration Sq. Ft. Annual
Rent
<S> <C> <C> <C>
Denver, Colorado May 1997 17,200 $466,000
Houston, Texas December 1997 20,000 451,000
Calgary, Alberta, September 2001 10,700 31,000
Canada
Egham, Surrey, England September 2008 10,500 276,000
</TABLE>
In addition, the Company maintains a small office in Beijing,
People's Republic of China.
The Company is presently negotiating a lease on new space for its
Denver, Colorado office.
ITEM 3. LEGAL PROCEEDINGS
To the knowledge of management, the only significant claims pending
or threatened against the Company or any of its subsidiaries:
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 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 $1,100,000 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. Subsequently, the
settlement agreement has been modified to eliminate the warrants and
to provide for an additional $525,000 in cash, which cash will be
provided 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 asserts damages that
exceed $1 million without substantiation. It was the opinion of the
Company and its counsel that KEL's claim was without merit.
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 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 year ended December 31, 1996 and included a liability for $674,000
in the balance sheet as part of other current liabilities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was traded on the Nasdaq National Market
("Nasdaq") under the symbol "SSFT." On July 11, 1995, the Company's
stock was delisted from Nasdaq as the result of the Company's failure
to remedy its public filing. At March 31, 1997, the Company had
approximately 463 stockholders of record. Following are high and low
prices of sales of the Company's common stock for the periods
indicated:
<TABLE><CAPTION>
Quarter Ended Sale Prices
<BTB> High Low
<S> <C> <C>
1997
First Quarter $ .85 $ .41
1996
First Quarter 3.75 2.38
Second Quarter 2.88 1.63
Third Quarter 1.88 .75
Fourth Quarter .94 .23
</TABLE>
The Company has not paid dividends on its common stock for several
years and does not intend to pay dividends on its common stock in the
foreseeable future. The payment of dividends on the Company's common
stock is also prohibited under the Company's current revolving credit
facility.
The Company has had, during the past year, only sporadic trading on
its common stock in the over-the-counter market. There is no
assurance that such trading will expand or even continue. The Company
will seek re-listing on a national exchange as the issues of the Class
Action and SEC inquiry are resolved.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE><CAPTION><BTB>
1996
(In thousands, except
per share data)
<S> <C>
Statement of Operations Data:
Revenue:
Consulting and training $ 12,863
Licenses 2,817
Maintenance 3,047
Other 277
Total revenue 19,004
Costs and expenses:
Costs of consulting and 8,414
training
Costs of licenses 2,394
Costs of maintenance 1,242
Selling, general and 6,604
administrative
Recovery of accounts (1,568)
receivable
Research and development 890
Other 190
Total costs and 18,166
expenses
Income from operations 838
Other (expense) (1,308)
Loss before income taxes (470)
Credit for income taxes 60
Loss from continuing (410)
operations
Discontinued operations
Loss from operations of (878)
Kinesix division(3)
Loss on disposal of (478)
Kinesix division(3)
Net loss $ (1,766)
Loss per share:
Continuing operations $ (0.05)
Discontinued operations (0.16)
Net loss $ (0.21)
Other Financial Data:
Revenue
E&P Consulting $ 9,766
WorkBench (E&P Products) 4,935
P&F Division 4,303
Total Revenue $ 19,004
Balance Sheet Data:
Working capital $ 2,270
Total assets 22,708
Long-term debt, net of 7,147
current portion
Redeemable convertible 4,000
preferred stock
Stockholders' equity $ 3,037
</TABLE>
(1) The above table sets forth a summary of selected consolidated
financial data for the Company as of December 31, 1996 and for the
year then ended. 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 and discussions with the Staff are continuing.
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-K. When comments
made by the SEC have been satisfactorily resolved, the Company will
amend this Form 10-K to include comparative data for prior periods.
The financial data is derived from the audited Consolidated Financial
Statements of the Company and Notes thereto. The data should be read
in conjunction with such financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
(2) 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.
(3) 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 10 to the
Consolidated Financial Statements.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company develops and markets sophisticated software for the
development and production and pipeline and surface facilities areas
of the worldwide oil and gas industry and for graphical user interface
applications.
The following discussion is management's assessment of the Company's
historical financial performance and condition. This discussion
should be read in conjunction with the Consolidated Financial
Statements of the Company and the related Notes thereto.
The Company recognizes software license revenue on delivery provided
that a legally-binding licensing agreement containing all material
terms has been executed, or there is other persuasive evidence of a
binding agreement, there are no remaining significant obligations and
that collection of the resulting receivable is probable. In a
contract where the remaining obligations are insignificant such as
installation, training and testing, the allocable revenue is deferred
and recognized upon completion of performance. The Company does not
recognize any software revenue until all significant vendor
obligations are met. Software maintenance revenue is recognized on a
straight-line basis over the term of the contract. Certain combined
software and service contracts are accounted for using the percentage
of completion method with contract revenue recognized based on: (a)
value-added output measures of progress for the software portion of
the contract after meeting certain specified contractual criteria, and
having used the installed software in completing specifications for
the engineering services on the project, which have been accepted by
the client, and (b) input measures of work performed on an hours-to-
hours basis for the services portion of the contract. Fixed-price
contract revenue is recognized using the percentage of completion
method, calculated on the ratio of labor hours incurred to total
projected labor hours. Losses on contracts accounted for using the
percentage of completion method are recognized at the time they are
identified. See Note 1 of Notes to Consolidated Financial Statements.
7.2 FINANCIAL POSITION
7.2.1 Overall Financial Position
At December 31, 1996, the Company's working capital ratio was 1.27
to 1, based on current assets of $10.8 million and current liabilities
of $8.5 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, then a 14% shareholder and currently a
19% shareholder of 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.
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.
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. In April 1997, the Company and Bank One agreed to extend the
credit facility, subject to Export-Import Bank approval. Because of
the Company's improved cash position and decreased need for credit,
the total amount of the credit facility was decreased from $1.5
million to $900,000 and the term of the facility was extended to
October 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 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.
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 it should continue generating
positive cash flow from operations as a result of the cost reductions
and other 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 short-term and long-term 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.
7.2.2 Bank Credit Agreements
7.2.2.1 United States Credit Agreements
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 December 31, 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:
<TABLE><CAPTION><BTB>
(In thousands)
<S> <C>
Revolving credit facility limit $1,500
Borrowing base (limited by insurance
coverage and $1,500
amount of qualified receivables
Amounts outstanding:
Short-term cash borrowings ---
Letters of credit (520)
(520)
Credit available $ 980
</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.
In April 1997, the Company and Bank One agreed to extend the credit
facility, subject to Export-Import Bank approval. Because of the
Company's improved cash position and decreased need for credit, the
total amount of the credit facility was decreased from $1.5 million to
$900,000 and the term of the facility was extended to October 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.
7.2.2.2 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.
7.2.2.3 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.
7.3 Results of Operations
7.3.1 Revenue
Following is a table of revenue for 1996 (in thousands):
<TABLE><CAPTION><BTB>
<S> <C>
E&P Consulting $ 9,766
Workbench (E&P Products) 4,935
P&F Division 4,303
Total Revenue $19,004
</TABLE>
Total revenue for 1996 was $19.0 million. Revenue in the Pipeline
and Facilities (P&F) Division was $4.3 million in 1996. Revenue in
the Exploration and Production (E&P) Consulting division was $9.8
million, which included revenue recognized of $2.0 million upon
collection of a foreign receivable for work performed in 1995 and a
payment for cancellation of a contract, all of which had not been
previously recognized as revenue. See Section 7.3.6. Revenue in The
Petroleum WorkBench division was $4.9 million.
The Company's number of days' sales outstanding in receivables and
work in progress has historically been high due to the nature and
terms of many of the contracts in which the Company has engaged, and
due to the slow-paying nature of several of the countries in which the
Company has historically done business. The Company is taking
measures to improve contractual terms and to improve business
processes to reduce the DSO (days sales outstanding) performance.
7.3.2 Foreign Revenue
Revenue derived from foreign sources during 1996 is set forth below:
<TABLE><CAPTION><BTB>
Revenue From Percentage of
Foreign Sources Total Percentage
(In thousands)
<S> <C>
$14,765 78%
</TABLE>
Management believes that foreign revenue will continue to be an
important factor in the Company's business, primarily as a result of
continued penetration of international markets through the Company's
strategic marketing efforts. See "Business - Geographic and Business
Line Data" for information regarding the particular geographic areas
in which the Company generated foreign source revenue during these
periods.
7.3.3 Backlog
Backlog at December 31, 1996 was $6.7 million, of which 95% is
expected to be earned by December 31, 1997.
7.3.4 Costs of Consulting and Training and Costs of Licenses and
Maintenance
In 1996, management took steps to reduce overhead, non-billable
staff personnel, and other costs, and to emphasize direct
accountability for profitability and cash performance at the division
management level.
Costs of consulting and training were $8.4 million in 1996, which
was 65% of consulting and training revenue. This includes costs of
approximately $700,000 related to revenue recognized upon collection
of the foreign receivable and payment for cancellation of a contract
referred to above.
Costs of maintenance were $1.2 million in 1996, which was 41% of
maintenance revenue.
7.3.5 Selling, General and Administrative Expenses
In 1996, management took steps to reduce overhead, personnel, and
other costs. The benefits from these measures resulted in lower costs
in the second half of 1996.
Selling, general and administrative expenses were $6.6 million in
1996. The expense for 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.
7.3.6 Recovery of Accounts Receivable
In 1996 the Company received payments totaling $3.6 million related
to a foreign consulting project. The payments included $1.6 million
related to an account receivable that had been reserved for at
December 31, 1995 pursuant to the Company's current practice of
generally increasing the allowance for doubtful accounts by the amount
of any accounts receivable that have aged more than six months. The
receipt of the $1.6 million has been reported as a reduction of
expenses in the statement of operations under the caption "recovery of
accounts receivable." The remaining amount of $2.0 million was
reported as revenue in 1996. See Section 7.3.1.
7.3.7 Software Research and Development
The following table summarizes total costs of development and
enhancement of the Company's software products for 1996. The
Company's software development and enhancement costs are accounted for
in accordance with FASB Statement No. 86.
<TABLE><CAPTION><BTB>
(In thousands)
<S> <C>
Software expenditures:
Capitalized software costs $ 1,963
Costs charged to research and
development expense 890
Total software
expenditures $ 2,853
Software expenses charged to
earnings
Research and development $ 890
expense
Amortization of
capitalized software 1,911
Total software expenses
recognized $ 2,801
</TABLE>
The Company continues its commitment to the development and
enhancement of its software products. Management has reduced the
level of software development activities in comparison to expenditure
levels in 1995 and prior years 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.
7.3.8 Settlement of Class 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
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 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 $1,100,000 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. Subsequently, the
settlement agreement has been modified to eliminate the warrants and
to provide for an additional $525,000 in cash, which cash will be
provided 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.
7.3.9 Interest Income (Expense)
The following table summarizes the components of interest income
(expense) 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.
<TABLE><CAPTION><BTB>
(In
thousands)
<S> <C>
Interest income $ 34
Interest incurred (522)
Interest capitalized 165
Net interest (expense) $ (323)
</TABLE>
7.3.10 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 1996, the
Company reported a net foreign exchange loss of $85,000.
7.3.11 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 9.
7.4 STATEMENT OF CASH FLOWS
7.4.1 Cash Flows from Operating Activities
In 1996, net cash of $1.8 million was provided by operating
activities. The most significant individual reason was that in 1996
the Company received a cash payment of $3.6 million related to a
foreign consulting contract. See Section 7.3.6.
7.4.2 Cash Flows from Investing Activities
In 1996, net cash of $2.2 million was utilized in investing
activities. In 1996, the Company incurred total software development
and enhancement costs of $2.9 million, of which $2.0 million was
capitalized and $0.9 million was charged to expense as research and
development costs.
7.4.3 Cash Flows from Financing Activities
In 1996, net cash of $1.9 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 $3.1 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.
7.4.4 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.
7.5 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, (vi)
unfavorable outcomes to litigation to which the Company may become a
party.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT 29
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 30
CONSOLIDATED STATEMENT OF OPERATIONS FOR 31
THE YEAR ENDED DECEMBER 31, 1996
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 32
FOR THE YEAR ENDED DECEMBER 31, 1996
CONSOLIDATED STATEMENT OF CASH FLOWS FOR 33
THE YEAR ENDED DECEMBER 31, 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES 52
All other schedules have been omitted because they are not applicable
or the required information is shown in the consolidated financial
statements or the notes thereto.
Note:
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 and
discussions with the Staff are continuing. 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-K. When comments made by the
SEC have been satisfactorily resolved, the Company will amend this
Form 10-K to include comparative data for prior periods.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Scientific Software-Intercomp, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheet of
Scientific Software-Intercomp, Inc. and subsidiaries as of
December 31, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then
ended. Our audit also included the financial statement schedule as of
and for the year ended December 31, 1996 listed in the Index at Item
8. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Scientific Software-Intercomp, Inc. and subsidiaries as of
December 31, 1996, and the results of their operations and their cash
flows for the year then ended, in conformity with generally accepted
accounting principles. In our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
April 14, 1997
Denver, Colorado
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1,870
Accounts receivable, net of allowance
for doubtful accounts of $690 5,609
Work in progress (unbilled revenue) 2,785
Other current assets 530
Total current assets 10,794
Software, net of accumulated
amortization of $42,837 9,604
Property and Equipment, net of
accumulated depreciation and
amortization of $5,218 823
Other Assets 1,487
$ 22,708
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,389
Accrued salaries and fringe benefits 1,070
Accrued lease obligations 260
Deferred maintenance and other 2,421
revenue
Accrued royalties 731
Accrual for costs to complete a 200
contract
Accrued taxes 282
Accrued litigation liabilities 1,574
Other current liabilities 597
Total current liabilities 8,524
Accrued Lease Obligations 79
Long-Term Obligations 568
Senior Secured Notes Payable 6,500
Redeemable Preferred Stock
Series A Redeemable Convertible
Preferred Stock,
$5 par value; 1,200,000 shares
authorized, 800,000 shares issued
and outstanding 4,000
Commitments and Contingencies
Stockholders' Equity
Common stock, no par value; $.10
stated value;
25,000,000 authorized, 8,840,000
shares issued and outstanding 884
Paid-in capital 49,474
Accumulated deficit (46,736)
Cumulative foreign currency (585)
translation adjustment
Total stockholders' equity 3,037
$ 22,708
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Revenue
Consulting and training $ 12,863
Licenses 2,817
Maintenance 3,047
Other 277
19,004
Costs and Expenses
Costs of consulting and 8,414
training
Costs of licenses, including
software
amortization of $1,911 2,394
Costs of maintenance 1,242
Costs of other revenue 190
Selling, general, and 6,604
administrative
Recovery of accounts (1,568)
receivable
Software research and 890
development
18,166
Income from Operations 838
Other Income (Expense)
Class action settlement (900)
Interest income (expense) (323)
Foreign exchange gains (85)
(losses)
Loss Before Income Taxes (470)
Credit for Income Taxes 60
Loss from continuing (410)
operations
Discontinued operations:
Loss from operation of (878)
Kinesix division
Loss on sale of Kinesix (478)
division
Net loss $ (1,766)
Weighted Average Number of
Common
Shares Outstanding 8,556
Loss Per Share:
Continuing operations $ (0.05)
Discontinued operations (0.16)
Net loss $ (0.21)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
<S> <C> <C> <C> <C>
Balance, January 1,
1996 8,256 $ 825 $48,850 $(44,970)
Stock sold for cash 3 - 5 -
Conversion of convertible
debentures into
common stock 282 29 210 -
Compensation, services
and vendors 299 30 409 -
Foreign currency translation
adjustment - - - -
Net (loss) - - - (1,766)
Balance, December 31,
1996 8,840 $ 884 49,474 $(46,736)
</TABLE>
Continued below
<TABLE>
<CAPTION>
Cumulative
Translation Treasury Stock Stockholders'
Adjustment Shares Amount Equity
<S> <C> <C> <C> <C>
Balance, January 1, 1996 $(595) - $ - $ 4,110
Stock sold for cash - - - 5
Conversion of convertible
debentures into common
stock - - - 239
Compensation, services
and vendors - - - 439
Foreign currency translation
adjustment 10 - - 10
Net (loss) - - - (1,766)
Balance, December 31, 1996 $(585) - $ - $ 3,037
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Cash Flows from Operating
Activities
Net loss $(1,766)
Adjustments:
Depreciation and amortization 2,653
Provision for losses on accounts (1,057)
receivable
Stock issued for compensation 30
Class action settlement 900
Changes in operating assets and
liabilities:
Decrease in accounts
receivable and work in
progress 1,747
Decrease in other assets 245
Decrease in accounts payable and
accrued expenses (479)
Decrease in accrued lease
obligations (369)
Decrease in deferred revenue (51)
Net cash provided by continuing
operations 1,853
Net cash used in discontinued (28)
operations
Net cash provided by operating 1,825
activities
Cash Flows From Investing
Activities
Capitalized software costs (1,963)
Purchases of equipment (288)
Net cash utilized in investing (2,251)
activities
Cash Flows From Financing
Activities
Sale of Stock 5
Net borrowing activity on line of (2,870)
credit
Repayments of bank borrowings (262)
Proceeds from Senior Secured Notes 5,000
Net cash provided by financing 1,873
activities
Effect of exchange rates on cash 10
Net increase in cash and 1,457
equivalents
Cash and cash equivalents at 413
beginning of year
Cash and Cash Equivalents at End of $ 1,870
Year
Supplemental Cash Flow Information
Cash paid during the year for:
Interest, net of amounts $ 388
capitalized
Foreign taxes 79
Non-Cash Investing and Financing
Activities
Exchange of convertible debenture 250
for common stock
Conversion of accrued liabilities 400
to equity
</TABLE>
The accompanying notes are an integral part of the financial
statements.
SCIENTIFIC SOFTWARE-INTERCOMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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 and
discussions with the Staff are continuing. 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-K. When comments made by the
SEC have been satisfactorily resolved, the Company will amend this
Form 10-K to include comparative data for prior periods.
Business
Scientific Software-Intercomp, Inc. ("the Company") develops and
markets sophisticated software for the development and production and
pipeline and surface facilities areas of the worldwide oil and gas
industry. The Company also provides consulting and technical support
services in each of these areas.
Principles of Consolidation
The consolidated financial statements include the accounts of
Scientific Software-Intercomp, Inc. ("the Company") and its wholly-
owned subsidiaries after elimination of all significant intercompany
balances and transactions.
Revenue
The Company recognizes software license revenue on delivery provided
that a legally-binding licensing agreement containing all material
terms has been executed, or there is other persuasive evidence of a
binding agreement, there are no remaining significant obligations and
that collection of the resulting receivable is probable. In a
contract where the remaining obligations are insignificant such as
installation, training and testing, the allocable revenue is deferred
and recognized upon completion of performance. The Company does not
recognize any software revenue until all significant vendor
obligations are met. Software maintenance revenue is recognized on a
straight-line basis over the term of the contract.
Beginning in 1991 the Company entered into certain combined software
and service contracts pursuant to which the Company provides off-the-
shelf software, combined with pipeline engineering services, relating
to leak detection and operations analysis of pipeline networks. The
engineering services provided pursuant to these contracts include
analysis of the characteristics of the client's specific pipeline
network and entering these characteristics into the Company's
software. The Company also markets the off-the-shelf software for use
by clients, as is, without the services included in these contracts.
The Company measures progress-to-completion for combined software and
services contracts on a value added output basis for the off-the-shelf
software portion of the contracts when: (1) a license for the off-the-
shelf software has been executed that is enforceable for the customary
price of the Company's off-the-shelf software, (2) the off-the-shelf
software has been installed on the project computer, and (3) the
installed off-the-shelf software has been used for completing and
providing to the client specifications for the engineering services on
the project, which have been accepted by the client. The Company
measures progress-to-completion for the engineering services portion
of the contracts based on labor hours incurred. This accounting
policy for contract revenue does not apply if programming changes must
be made to the software. Contract costs are recognized based on the
percentage of completion applied to total estimated project costs,
resulting in a constant gross margin percentage over the term of the
contract.
Revenue earned in performance of time and material contracts is
recognized at contractual rates as labor hours and associated costs
are incurred. Fixed-price contract revenue is recognized using the
percentage of completion method, calculated based on the ratio of
labor hours incurred to total projected labor hours. Revenue accrued
under time and material contracts is classified as work in progress on
the Consolidated Balance Sheet if contractual milestones for billing
have not been reached. Such amounts are later billed in accordance
with applicable contract terms. The work in progress amounts at
December 31, 1996 are expected to be billed and collected by December
31, 1997. Anticipated losses on contracts accounted for using the
percentage of completion method are recognized at the time they are
identified. Costs incurred for specific anticipated contracts are
deferred when recoverability of the costs from the anticipated
contract is determined to be probable.
The Company's work-in-progress balance represents revenue earned and
recognized for which billing milestones have not yet been reached.
The revenue on these contracts is recognized using the percentage of
completion method, and related qualifying software development costs
are capitalized if the Company retains ownership and the right to
market the developed software. In accordance with FASB Statement 68,
the funded software development revenues does not recognize revenue
for funded development software projects where the Company had a
contractual obligation to refund all and/or part of the funding. For
such contracts the Company records receipt of funds by recognizing an
obligation to repay.
Part of the Company's marketing strategy has been to establish
strategic alliances with quality VARs. VARs license the Company's
software products for remarketing and sublicensing to end users or to
other VARs, either for use on a specific project for a specific
customer or for general marketing to the VARs' current and future
customers. The Company's VARs are generally substantial companies
with long operating histories. The software products licensed to VARs
are established, proven products that have been widely accepted in the
marketplaces served by the Company.
In some cases, primarily to obtain preferential pricing, a VAR
makes an unconditional commitment to pay to the Company a fixed
license fee for software to be used on a specific project for a
specific customer or an unconditional commitment to pay to the Company
a minimum fixed fee for the right of general marketing to the VAR's
current and future customers for a specified period, usually one-year.
In the case of general marketing rights, a VAR is required to pay
license fees as it has transactions with its customers. On the due
date or dates of a minimum fixed fee, which are payable either in
installments or at the end of the term, the VAR must pay to the
Company the amount, if any, required for total payments to equal the
required minimum fixed fee amount. General marketing VAR minimum
fixed fees are not subject to reduction based on the number of units
marketed by a VAR and are not otherwise contingent on whether the VAR
is successful in marketing the Company's software products or
otherwise.
In accounting for a VAR agreement, the Company recognizes revenue at
inception of the contract only if collection is determined to be
probable and all other requirements for revenue recognition are met.
These include: (a) delivery of all software products on all platforms
that a VAR has the right to receive, (b) reviewing the VAR's credit
status to determine whether the VAR has the financial capability to
make the required fixed minimum payments, regardless of whether the
VAR is successful in marketing the Company's software products, (c)
determining that the VAR is not new, undercapitalized, or in financial
difficulty, and (d) determining that the transaction is viable for
both parties.
Capitalized Software Costs
Capitalized software is stated at the lower of cost or net
realizable value. The Company capitalizes costs of purchased software
and qualifying internal costs of developing and enhancing its software
products after the determination of technological feasibility, in
accordance with paragraph 4 of FASB Statement No. 86. Development
costs incurred prior to the determination of technological feasibility
are expensed as research and development expense as incurred. At each
balance sheet date, the Company records a writedown for any software
products equal to the excess, if any, of unamortized cost over net
realizable value. Net realizable value is the estimated future gross
revenue for a product reduced by the estimated future costs of
completion and disposal, including the costs of performing maintenance
and customer support.
Amortization of capitalized software costs is determined each year
based on the greater of: (1) the amount computed using the ratio of
current year gross revenues to the sum of current and anticipated
future gross revenue for that product or (2) straight-line
amortization over 5 years.
Following is a summary of capitalization and amortization for the
Company's software products.
<TABLE>
<CAPTION>
Basis
Technology
Products WorkBench Total
(In thousands)
<S> <C> <C> <C>
Capitalized Software
Costs:
Balance, January 1, $ 29,968 $ 20,510 $ 50,478
1996
1996 additions 1,661 302 1,963
Balance, December 31,
1996 $ 31,629 $ 20,812 $ 52,441
Accumulated
Amortization:
Balance, January 1, $ 27,133 $ 13,793 $ 40,926
1996
1996 amortization
expense 620 1,291 1,911
Balance, December 31,
1996 $ 27,753 $ 15,084 $ 42,837
</TABLE>
The net carrying value of the software costs and all future
capitalized software costs are being amortized over a five-year
period, commencing January 1, 1996. Previously, Basic Technology
products were amortized using a 13-year life and Other Products were
amortized using a 7-year life.
The Company's working capital and cash requirements will continue to
be influenced by the level of software research and development costs.
During the year ended December 31, 1996, the level of software
research and development costs was $2.8 million. In an effort to
reduce internal capital requirements for software development
projects, the Company actively pursues opportunities to fund software
research and development costs through development projects with oil
and gas industry partners, government agencies and others. In this
type of funded development project, participating companies or other
entities provide all or a portion of the funds required to develop or
enhance a software product in exchange for access to the resulting
software at discounted or nominal prices with the Company retaining
ownership and licensing rights to the product. In accordance with
generally accepted accounting principles, the Company generally
records as consulting revenue amounts received from these third
parties and capitalizes the qualifying portion of related costs
incurred as software development costs in accordance with FASB
Statement 86.
The Company capitalized interest costs of $165,000 during the year
ended December 31, 1996, as part of the cost of software development
projects in progress.
Property and Equipment
Property and equipment are stated at cost, and depreciation and
amortization are provided on a straight-line basis over the estimated
useful lives of these assets. Maintenance and repairs are charged to
expense as incurred. The cost and accumulated depreciation and
amortization of property and equipment sold or otherwise disposed of
are retired from the accounts and the resulting gain or loss is
included in profit or loss in the period realized. Total depreciation
expense was $742,000, for the year ended December 31, 1996.
The Company assigns the following useful lives to Property and
Equipment :
Computer Software and Equipment: 3 to 5 years
Leasehold Improvements: The lesser of 7 to 10 years or
the remaining term of the lease.
Office Furniture and Equipment: 3 to 10 years
Following are the components of property and equipment:
<TABLE>
<CAPTION>
December 31,
1996
(In thousands)
<S> <C>
Properties and leasehold $ 450
improvements
Office furniture and equipment 828
Computer equipment 4,763
6,041
Less accumulated depreciation
and amortization 5,218
$ 823
</TABLE>
Foreign Currency Translation
Gains and losses from the effects of exchange rate fluctuations on
transactions denominated in foreign currencies are included in results
of operations. Assets and liabilities of the Company's foreign
subsidiaries are translated into U.S. dollars at period-end exchange
rates, and their revenue and expenses are translated at average
exchange rates for the period. Deferred taxes have not been allocated
to the cumulative foreign currency translation adjustment included in
stockholders' equity because there is no intent to repatriate earnings
of the foreign subsidiaries.
Income Taxes
The Company accounts for income taxes whereby deferred tax
liabilities or assets are provided in the financial statements by
applying the provisions of applicable tax laws to measure the deferred
tax consequences of temporary differences that will result in net
taxable or deductible amounts in future years as a result of events
recognized in the financial statements in the current or preceding
years. The types of differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to
significant portions of the temporary differences include: software
development expenditures capitalized for books and deducted currently
for taxes and related amortization, depreciation of property and
equipment, amortization of rental obligations, losses accrued for book
purposes, the recognition of software license revenues, and goodwill
determined for tax purposes that is not deductible. Investment tax
credits are recognized using the flow-through method.
Foreign subsidiaries are taxed according to applicable laws of the
countries in which they do business. The Company has not provided
U.S. income taxes that would be payable on remittance of the
cumulative undistributed earnings of foreign subsidiaries because such
earnings are intended to be reinvested for an indefinite period of
time. At December 31, 1996 the undistributed earnings of the foreign
subsidiaries were not significant.
Income Per Share
Primary income per common and common equivalent share is computed
based on the weighted average number of common and dilutive common
equivalent shares consisting of stock options and redeemable preferred
stock outstanding during each period. For 1996 no common stock
equivalents are included in the loss per share calculation as they
would be antidilutive. Fully diluted income per share assumes the
effects of conversion of all potentially dilutive securities,
including the convertible debentures (see Note 3 of Notes to
Consolidated Financial Statements). Fully diluted loss per share is
not presented for 1996 because the effects of assumed conversion would
be antidilutive.
Cash Equivalents
For purposes of the consolidated financial statements, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. On
occasion the Company will have balances in excess of the federally
insured amount.
Loan Origination Fees and Costs
Fees and direct costs incurred for the origination of loans are
deferred and the interest expense is amortized over the contractual
lives of the loans.
Disclosure of Fair Value of Financial Instruments
Carrying amounts of financial instruments including cash, cash
equivalents, accounts receivable, accounts payable and accrued
expenses, approximated fair value as of December 31, 1996 because of
their relatively short maturity.
Carrying amounts of debt issued approximated fair value because
interest rates on these instruments approximated market interest rates
as of December 31, 1996.
Use of Estimates
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Use of estimates is
significant with regard to capitalized software costs and the related
amortization. Actual results could differ from those estimates.
NOTE 2 - COMPLETION OF PUBLIC OFFERING OF COMMON STOCK
In 1994, the Company sold 2.4 million newly issued shares of common
stock in a public offering from which the Company received net
proceeds of $9.7 million, net of related costs of approximately
$270,000. The Company used the proceeds from the public offering to
repay its bank indebtedness of $5.1 million, to reduce accounts
payable, and to increase working capital.
NOTE 3 - BANKING ARRANGEMENTS, LONG-TERM OBLIGATIONS AND NOTE PAYABLE
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 for short-term borrowings for working capital purposes and the
issuance of letters of credit for bid guarantees, performance bonds,
and advance payment guarantees. 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 December 31, 1996, the borrowing base, amounts of short-term
cash borrowings and letters of credit outstanding, and credit
available under the revolving credit facility were as follows:
<TABLE>
<CAPTION>
(In
thousands)
<S> <C>
Revolving credit facility limit $1,500
Borrowing base (limited by
insurance coverage $1,500
and amount of qualified
receivables)
Amounts outstanding:
Short-term cash borrowings ---
Letters of credit (520)
Credit Available $ 980
</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 then outstanding pursuant to the new bank credit agreement
of $750,000.
Interest rates applicable to short-term cash borrowings under the
credit facility are equal to 7% on the first $300,000 borrowed and the
bank's prime rate of interest on any additional borrowings. Interest
rates applicable to short-term cash borrowings related to the bank's
payment, if any, under letters of credit issued under the domestic
portion of the credit facility are equal to the bank's prime rate of
interest plus 2.5%. At December 31, 1996 interest rates applicable to
short-term cash borrowings were 9.75% and 10.75% for the foreign and
domestic portions of the line of credit, respectively. The Company
pays 2% annually for outstanding letters of credit. The agreement
requires that the Company meet certain requirements regarding
operating results and financial condition and prohibits the Company
from paying dividends without the bank's prior written consent.
The Company pays to the EximBank an annual fee of 1.5% of the amount
of the guarantee. In addition, the Company is required to purchase
credit insurance for foreign receivables at a cost of 0.44% of the
amount of the insured receivables. The Company has not made a
determination on the filing of claims for insurance recoveries for
uncollected foreign accounts receivables.
In April 1997, the Company and Bank One agreed to extend the credit
facility, subject to Export-Import Bank approval. Because of the
Company's improved cash position and decreased need for credit, the
total amount of the credit facility was decreased from $1.5 million to
$900,000 in the Company's revolving credit facility and an extension
of the term of the facility to October 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.
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.
Renaissance Convertible Debentures
On September 30, 1992 the Company sold a $2.5 million 7-year
convertible debenture to Renaissance Capital Partners II, Ltd.
("Renaissance"). Proceeds from the sale of the convertible debenture
were used to reduce accounts payable. The debenture bears interest at
11% per annum and is convertible into common stock of the Company at a
conversion price of $2.50 per share. The conversion price is
adjustable if the Company issues significant additional amounts of
common stock for consideration less than the conversion price of $2.50
per share. Interest is payable monthly with principal payments of
$25,000 commencing October 1, 1995.
On September 15, 1993 the Company sold a $1.0 million 7-year
convertible debenture to Renaissance. Proceeds from the sale of the
debenture were used by the Company for general working capital
purposes. The debenture bears interest at 11% per annum, payable
monthly, and is convertible into common stock of the Company at a
conversion price of $3.25 per share. The conversion price is
adjustable if the Company issues significant additional amounts of
common stock for consideration less than the conversion price of $3.25
per share. The principal of the debenture is payable in 48 equal
monthly installments of $10,000 over a four-year period commencing
October 1, 1996 and ending September 1, 2000 and $520,000 on October
1, 2000. See Note 2 of Notes to Consolidated Financial Statements
regarding conversion of a portion of the debentures.
The financing agreement with Renaissance with respect to the
debentures requires that the Company satisfy certain financial
covenants regarding operating results and financial condition. The
Company is in compliance with all loan covenants at December 31, 1996.
Renaissance is also entitled to appoint an individual to participate
in an advisory capacity to the Company's Board of Directors as long as
$850,000 in principal amount of the debentures is outstanding.
Commencing on October 1, 1996, the Company has the right at any time
upon 90 days prior notice to call both debentures for redemption. A
call premium applies to such redemption equal to 15% of the amount
redeemed during the fourth year of the debentures, 10% during the
fifth year and 8% thereafter. During the initial three years of the
debentures, the debentures may be called for redemption at a premium
of 20% only if the common stock of the Company has been trading for at
least $7.50 per share for 14 trading days prior to the redemption
notice and if the Company has earned at least $.40 per share, in the
aggregate, for the last four consecutive quarters preceding the
notice.
Simultaneously with completion of the Company's 1994 public offering
of common stock (see Note 2 of Notes to Consolidated Financial
Statements), the Company agreed to change the conversion price of the
$2.5 million and $1.0 million convertible debentures to $2.67, the
average conversion price of both debentures. Renaissance then
converted $1.75 million in principal amount of the $2.5 million
convertible debentures into 653,846 shares of common stock, which
Renaissance sold in the public offering. The outstanding balance of
$1.75 million consists of a balance of $750,000 on the original $2.5
million debenture and the $1 million debenture all of which is
convertible at $2.67 per share. The Company reduced paid-in capital
by $119,000 for unamortized debt issuance costs related to the
converted debentures.
In February 1996, the Company and Renaissance agreed to change the
conversion feature of the debentures so that the two debentures which
aggregate $1,750,000 in principal will be convertible at $2.39 into
732,218 shares of the Company's no par common stock and made other
minor changes in the debentures.
In April 1996 Renaissance 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.
Lindner Financing
In April 1996 Lindner Funds, then a 14% shareholder in the Company
and now a 19% shareholder, 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.
Long-Term Obligations
The components of long-term obligations are as follows:
<TABLE>
<CAPTION>
December 31,
1996
(In thousands)
<S> <C>
Lease Obligations $ 339
Other 632
971
Less current portion 324
$ 647
</TABLE>
Scheduled maturities of the above long-term obligations are $291,000
in 1997, $31,000 in 1998, $17,000 in 1999, none in 2000, $6,500,000 in
2001, and $568,000 thereafter.
NOTE 4 - INCOME TAXES
The components of the provisions for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1996
(In thousands)
<S> <C>
Current:
U.S. Federal $ 12
Foreign 46
State 2
$ 60
</TABLE>
Following is a summary of United States and foreign pretax
accounting income (loss):
<TABLE>
<CAPTION>
Year Ended
December 31,
1996
(In thousands)
<S> <C>
United States $ (643)
Foreign 173
$ (470)
</TABLE>
Following is a reconciliation of expected income tax provisions
computed at the applicable US Federal statutory rate to the provisions
for income taxes included in the statements of operations:
<TABLE>
<CAPTION>
Year Ended
December 31,
1996
(In thousands)
<S> <C>
Taxes at U.S. Federal $ (160)
statutory rate
Federal alternative minimum 12
tax
State income taxes 2
Foreign withholding and other 46
foreign taxes
U.S. net operating loss carry
forward and 245
valuation allowances
Other, net (85)
$ 60
</TABLE>
The components of deferred taxes in the balance sheets, which were
fully eliminated by a valuation allowance, were as follows:
<TABLE>
<CAPTION>
December 31,
1996
(In thousands)
<S> <C>
Taxable temporary differences:
Capitalized software $(3,649)
(3,649)
Deductible temporary
differences:
Tax basis in excess of book
basis of property and 98
Allowance for doubtful 91
accounts
Rent expense 89
Contract expense accruals 59
Vacation pay and bonuses 202
Accrued contingent 567
liabilities
1,106
Carryovers:
Net operating losses 6,397
Research and other credits 3,704
10,101
Net deferred tax asset (7,558)
Valuation allowance (7,558)
$ 0
</TABLE>
At December 31, 1996 the Company had the following net operating
loss, tax credit, and capital loss carry forwards. Included in the
net operating loss and credit carry forwards are tax benefits from an
acquired company, which can be utilized to offset future taxable
income of that acquired company.
<TABLE>
<CAPTION>
Amount Expiration
(In thousands)
<S> <C> <C>
Net operating loss carry
forwards for U.S.
Federal income tax purposes $ 17,769 2000 to 2011
Net operating loss carry
forwards for US
Federal alternative minimum
income tax purposes 15,992 2000 to 2011
Research credit carry 3,262 1997 to 2011
forwards
Investment tax credit carry 352 1997 to 2000
Alternative minimum tax
credit carry forwards 70 2007 to 2011
</TABLE>
In addition, the Company has net operating loss carryforwards for
U.K. and Canadian income tax purposes of approximately $23.3 million
and $1.6 million, respectively.
NOTE 5 - CAPITAL STOCK
Redeemable Preferred Stock
In April 1990, Halliburton Company, a major oil and gas services
supplier, invested $3.0 million in a subordinated convertible
debenture of the Company and received non-exclusive rights to market
certain of the Company's new products and to incorporate them into
Halliburton's product line. During June 1990, following approval by
the Company's shareholders for the issuance of 600,000 shares of
Series A redeemable preferred stock, par value $5.00 per share, the
debenture was exchanged for 600,000 shares of Series A convertible
preferred stock. The preferred stock was convertible into 600,000
shares of common stock. In September 1990 Halliburton invested an
additional $1.0 million in a convertible debenture of the Company. In
August 1991 the Company's shareholders authorized an additional
600,000 shares of preferred stock and Halliburton exchanged the $1.0
million debenture for 200,000 shares of such stock which were
convertible into 200,000 shares of common stock. Redemption would
have been at the greater of $5.00 per common share equivalent or the
then market price for the common stock.
In the consolidated balance sheet the preferred stock has been
classified outside stockholders' equity in accordance with Rule 5-
02.28 of Regulation S-X, which requires that preferred stock for which
redemption may be required under any conditions beyond control of the
issuer be classified outside of permanent equity.
In 1994 the Company and Halliburton agreed to amend the conversion
and redemption provisions of the 800,000 shares of the Company's
preferred stock held by Halliburton. As amended, the preferred stock
is convertible into 300,000 shares of the Company's common stock
instead of 800,000 shares prior to the amendment. The Company
continues to have the right to redeem the preferred stock at any time
and also continues to be obligated to do so on the tenth anniversary
of the amendment if the preferred stock is still held by Halliburton.
The preferred stock continues to not be entitled to receive or accrue
dividends unless the Company pays dividends on its common stock, and,
as before the amendment, no interest accrues on the mandatory
redemption amount. Also, the joint venture of the Company and
Halliburton for the development and marketing of reservoir monitoring
technology and services was terminated and the Company received a non-
exclusive license for the use of certain reservoir monitoring
technology patents.
Stock Option Plans
The Board of Directors, at its discretion, may grant options to
purchase shares of the Company's common stock to key employees,
officers, and non-employee members of the Board of Directors. Prior
to 1984 the options were non-statutory and either vested over a three-
year period or were exercisable at any time for a five or ten-year
period after the date of grant or at the date of amendment of the
options. In 1984 the Company established an incentive stock option
plan for key employees, pursuant to which options to purchase up to
350,000 shares of common stock were reserved for grant.
In 1993 the Company adopted a stock option plan for non-employee
directors. Pursuant to the plan, each non-employee director is
granted an option to purchase 5,000 shares of common stock upon
initial election to the board. Exercise prices are set at the fair
market value of the common stock on the date of the grant. Upon re-
election to the Board, for each year to be served, each non-employee
director is granted an option to purchase 2,500 shares of common stock
at an exercise price set at the fair market value on the date of the
grant. Pursuant to this plan, 10,000 options to purchase shares at an
exercise price of $1.38 and 10,000 options to purchase shares at an
exercise price of $.50 were issued in 1996 and no options to purchase
shares were issued in 1995.
Following is a summary of stock option activity for:
<TABLE>
<CAPTION>
Option Price (equal to Market
Number Value at Date of Grant)
of Weighted
<BTB> Shares Per Share Average Total
<S> <C> <C> <C> <C>
Balance at December 31,
1995 655,125 $2.00 to $7.125 $4.31 $2,824,000
Grants 814,209 .50 to 2.875 1.47 1,204,000
Expirations (382,834) .50 to 7.125 4.08 (1,563,000)
Exercises (2,500) 2.25 2.25 (6,000)
Balance at December 31,
1996 1,084,000 .50 to 2.875 2.27 $2,459,000
Number of shares
exercisable:
December 31, 1996 480,000 1.91 to 6.375 3.17
</TABLE>
Exercise prices of substantially all outstanding non-statutory
options and all outstanding incentive stock options were set at the
fair market value of the stock at the date of grant. No accounting
recognition is given to options granted at exercise prices equal to
fair market value at date of grant until they are exercised at which
time the proceeds received by the Company are credited to common stock
and paid-in capital.
In February 1997 the Company entered into a stock option agreement
granting to its Chief Executive Officer the right to purchase 600,000
shares of the Company's common stock through February 10, 2002. The
exercise prices are 150,000 shares at $.50 per share, 150,000 shares
at $1.00 per share, 150,000 shares at $1.50 per share, and 150,000
shares at $2.00 per share. An option previously granted to the
Company's Chief Executive Officer to purchase 100,000 shares of the
Company's common stock at an exercise price of $2.875 per share was
cancelled.
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 814,209 stock options to employees during 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 year ending December 31, 1996 had the Company
adopted the fair value based method of accounting for stock-based
compensation.
<TABLE><CAPTION>
Year Ended
December 31,
1996
(In
thousands)
<S> <C>
Difference between fair value $ 974
and intrinsic value methods
(additional compensation
expense)
Net loss (2,740)
Loss per share (.32)
</TABLE>
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1996: dividend yield
of 0.0% expected average annual volatility of 117%; average annual
risk-free interest rate of 5.4%; and expected lives of five to ten
years.
Because the SFAS No. 123 method of accounting has not been applied
to options granted prior to January 1, 1996 the resulting pro forma
compensation cost may not be representative of that to be expected in
future years. The impact on future years is not known nor reasonably
estimable.
SFAS No. 123 also applies to transactions in which an entity issues
its equity instruments to acquire goods or services from nonemployees.
Accordingly, the implementation of SFAS No. 123 may have a material
effect on the Company's financial statements and the pro forma
disclosures in the notes thereto in future periods.
Stock Purchase Plans
The Company has a stock purchase plan, which was adopted in 1991,
under which employees and consultants to the Company can elect to
receive shares of common stock as payment for compensation, services
and expenses. Pursuant to the plan, the Company issued 582 shares in
1996. The Company also has a noncontributory employee stock purchase
plan for employees to purchase common stock through payroll
deductions.
NOTE 6 - RETIREMENT AND COMPENSATION PLANS
The Company maintains a qualified target benefit retirement plan
that covers substantially all of its U.S. employees. Company
contributions are based on percentages of employee compensation and
are allocated to individual accounts for each employee. Employees may
voluntarily supplement the Company's contribution to their accounts in
amounts up to 10% of salary. Amounts charged to expense for Company
contributions were $182,000 in 1996, of which $116,000 is included in
accrued salaries and benefits at December 31, 1996 and was paid
subsequent to December 31, 1996.
The Company also has a non-contributory employee stock ownership
plan that covers substantially all of its U.S. employees. Company
contributions are determined by the Board of Directors and can be made
in stock or cash. The Board of Directors determined that no
contribution would be made for 1996.
The Company has similar retirement benefit plans, including employee
stock ownership programs, covering employees of its foreign
subsidiaries. The amount charged to expense for these plans was
$148,000 in 1996, of which $42,000 is included in accrued salaries and
benefits at December 31, 1996.
During 1996 the Company took action to reduce costs by reduction of
staff by terminating 10 employees in the WorkBench and General and
Administrative areas. The Company accrued termination benefits
totaling $101,000, all of which was paid in 1996. Of the total charge
to expense, $28,000 is included in cost of licenses and cost of
maintenance and $73,000 is included in general and administrative
expense.
NOTE 7 - INFORMATION ABOUT OPERATIONS
Foreign and Domestic Operations and United States Export Revenue
Following is financial information about the Company's foreign and
domestic operations and United States export sales.
<TABLE><CAPTION>
Year Ended December 31, 1996
(In Thousands)
Consolidated
U.S. U.K. Canada Total
<S> <C> <C> <C> <C>
Revenue $9,636 $ 7,418 $ 1,950 $19,004
Income (loss) from (643) 473 (470) (410)
operations
Identifiable assets 19,435 2,164 1,109 22,708
</TABLE>
U.S. export revenues by geographic area were as follows:
<TABLE><CAPTION>
Year Ended
December 31,
1996
(In thousands)
<S> <C>
Far East $ 1,512
Central and South 2,848
America
Europe 909
Canada & Other 206
$ 5,475
</TABLE>
During the year ended December 31, 1996, the Company derived $2.3
million, or 12%, of its consolidated revenue from National Nigerian
Petroleum Corporation. During 1996, there was no single customer that
accounted for 10% or more of the Company's revenue and the loss of
which would have a material adverse effect on the Company's business.
Concentrations of Credit Risk
Most of the Company's clients are large, established U.S. and
foreign companies (sometimes acting as government contractors),
governments, and national oil and gas companies of foreign
governments. Qualifying foreign receivables are insured, subject to a
deductible loss amount, under an insurance policy with the Foreign
Credit Insurance Association, an agency of the United States Export-
Import Bank. The Company performs credit evaluations of its
customers' financial condition when considered necessary and generally
does not require collateral.
At December 31, 1996, accounts receivable, net of doubtful accounts
and work in progress, related to the following customer groups:
<TABLE><CAPTION>
United
States Foreign Total
(In thousands)
<S> <C> <C> <C>
December 31, 1996:
Companies $5,028 $ 2,076 $ 7,104
Governments and
national 432 742 1,174
petroleum companies
Government 54 62 116
contractors
$5,514 $ 2,880 $ 8,394
</TABLE>
NOTE 8 - LEASE COMMITMENTS
At December 31, 1996 the Company's minimum rental commitments under
operating leases for office space and equipment were as follows:
<TABLE><CAPTION>
Year Amount
(In
thousands)
<S> <C>
1997 $1,000
1998 345
1999 307
2000 298
2001 291
Thereafter 704
</TABLE>
Total rent expense amounted to $1.4 million in 1996.
The above minimum rental commitments include certain amounts that
have been recorded in the balance sheet as long-term accrued lease
obligations of $79,000 at December 31, 1996, and short-term accrued
lease obligations of $259,000 at December 31, 1996. When these
amounts are paid, they will be recorded as a reduction of the accrued
lease obligations liability and will not result in expense in the
Statement of Operations. The accrued lease obligations relate to
differences in the timing of reportable rental expense for accounting
purposes and the timing of cash receipts and disbursements in
connection with several office lease transactions. The accrued lease
obligations will be retired as follows: $260,000 in 1997, $32,000 in
1998 and $8,000 in 1999. These amounts include approximately $73,000
in interest expense that will be recognized representing the total
discount to present value of accrued lease obligations.
NOTE 9 - CLAIMS AND CONTINGENCIES
To the knowledge of management, the only claims pending or
threatened against the Company or any of its subsidiaries which
individually or collectively could have a material adverse effect upon
the Company or its financial condition are the following:
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 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 $1,100,000 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. Subsequently, the
settlement agreement was modified to eliminate the warrants and to
provide for an additional $525,000 in cash, which cash will be
provided 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 asserts damages that
exceed $1 million without substantiation. It was the opinion of the
Company and its counsel that KEL's claim was without merit.
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 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 year ended December 31, 1996 and included a liability for $674,000
in the balance sheet as part of other current liabilities.
The Company's long-term services contracts generally include
provisions for penalty charges for delay in the completion of
contracts. Certain contracts in progress at December 31, 1996 have
not been subsequently completed by the scheduled dates. Management
believes that the delays were not caused by the Company and that no
significant penalties will be incurred.
As of December 31, 1996, the Company had no recorded insurance
recoveries for uncollected foreign accounts receivables.
NOTE 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 9.
FINANCIAL STATEMENT SCHEDULES
<TABLE><CAPTION>
SCHEDULE II
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
VALUATION RESERVES
Deductions
Additions (Write-offs of
Balance at Charged to Previously Balance at
Beginning Costs and Reserved End of
of Period Expenses Amounts) Period
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts:
Year Ended December
31, 1996 $3,811,000 $(1,057,000) $(2,064,000) $690,000
</TABLE>
Note:
The net credit to bad debt expense of $1,057,000 consists of expense
charges of $541,000 reduced by credits to bad debt expense for
recovery of accounts previously reserved of $1,598,000.
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
a) 1. Financial Statements. The following financial statements
are filed as a part of this
Form 10-K:
The Index to Consolidated Financial Statements is set out
in Item 8 herein.
2. Financial Statement Schedules. The following financial
statement schedules are filed
as a part of this Form 10-K:
The Index to Consolidated Financial Statements is set out
in Item 8 herein.
3. Exhibits
3.1 Articles of Incorporation of the Company dated
February 8, 1968, (filed as
Exhibit 3.1 to the Company's Report on Form 10-K for
the year ended
December 31, 1984, and incorporated herein by
reference).
3.2 Articles of Amendment to the Articles of
Incorporation of the Company dated
May 28, 1982 (filed as Exhibit 3.2 to the Company's
Report on Form 10-K for
the year ended December 31, 1984, and incorporated
herein by reference).
3.3 Articles of Amendment to the Articles of
Incorporation of the Company dated
June 7, 1984 (filed as Exhibit 3.1 to the Company's
Registration Statement on
Form S-3, Registration No. 2-95792, and incorporated
herein by reference).
3.4 Certificate of Correction to the Articles of
Amendment to the Articles of
Incorporation of the Company dated October 23, 1985
(filed as Exhibit 3.4 to
the Company's Report on Form 10-K for the year ended
December 31, 1985,
and incorporated herein by reference).
3.5 Articles of Amendment to Articles of Incorporation of
the Company dated
August 9, 1991 (filed as Exhibit 3.1 to the Company's
Report on Form 8-K
dated August 27, 1991, and incorporated herein by
reference).
3.6 Articles of Amendment to Articles of Incorporation of
the Company dated
June 21, 1990 (filed as Exhibit 2.1 to the Company's
Report on Form 10-Q
for the quarter ended June 30, 1990, and incorporated
herein by reference).
3.7 Bylaws of the Company (filed as Exhibit 3.5 to the
Company's Report on
Form 10-K for the year ended December 31, 1989, and
incorporated herein
by reference).
3.8 Amendment to the Bylaws of the Company (filed as
Exhibit 3.1 to the
Company's Report on Form 10-Q for the quarter ended
June 30, 1990, and
incorporated herein by reference).
3.9 Articles of Amendment to Articles of Incorporation of
the Company dated
August 9, 1991 (filed as Exhibit 3.1 on Form 8-K
dated August 27, 1991, and
incorporated herein by reference).
3.1 Articles of Amendment to Articles of Incorporation of
0 the Company dated
December 14, 1994 increasing the number of shares of
authorized stock (filed
as Exhibit 3.10 to the Company's Report on Form 10-
K/A for the year ended
December 31, 1994, and incorporated herein by
reference).
4.1 Convertible Debenture Loan Agreement for $2,500,000
dated September 30,
1992 between Renaissance Capital Partners II, Ltd.
and Scientific Software-
Intercomp, Inc. (filed as Exhibit 4.1 to the
Company's Form 8-K dated
October 19, 1992 and incorporated herein by
reference).
4.2 First Amendment to the Convertible Debenture Loan
Agreement for an
additional $1,000,000, dated September 15, 1993,
between Renaissance
Capital Partners II, Ltd. and Scientific Software-
Intercomp, Inc. (filed as
Exhibit 4.1 to the Company's Form 8-K dated October
19, 1992 and
incorporated herein by reference).
4.3 Form of Stockholder Lock-up Agreement (filed as
Exhibit 4.5 to the
Company's Form S-1 dated May 9, 1994 and incorporated
herein
by reference).
4.4 Letter Agreement Dated May 5, 1994 between
Renaissance Capital Partners
II, Ltd. and Scientific Software-Intercomp, Inc.,
regarding conversion of
debentures (filed as Exhibit 4.6 to the Company's
Form S-1 dated May 9,
1994 and incorporated herein by reference).
10. Form of Stock Option Agreement for stock options
1 issued under the informal
Non-Qualified Stock Option Plan (filed as Exhibit 4.6
to the Company's Form
S-1 dated May 9, 1994 and incorporated herein by
reference).
10.2 Employees Stock Ownership Plan and Trust as restated
on January 1, 1989
(filed as Exhibit 10.28 to the Company's Form S-1
dated May 9, 1994 and
incorporated herein by reference).
10.3 Target Benefit Plan as restated on January 1, 1989
(filed as Exhibit 10.29 to
the Company's Form S-1 dated May 9, 1994 and
incorporated herein by
reference).
10.4 First Interstate Bank of Denver, N.A. Defined
Contribution Master Plan and
Trust Agreement (filed as Exhibit 10.30 to the
Company's Form S-1 dated
May 9, 1994 and incorporated herein by reference).
10.5 Adoption Agreement #001 Nonstandardized Code Section
401(K) Profit
Sharing Plan dated July 1, 1990 (filed as Exhibit
10.31 to the Company's
Form S-1 dated May 9, 1994 and incorporated herein by
reference).
10.6 Scientific Software-Intercomp, Inc. Deferred
Compensation Plan (filed as
Exhibit 10.33 to the Company's Form S-1 dated May 9,
1994 and
incorporated herein by reference).
10.7 Business Loan Agreement for $6.5 million dated
September 20, 1994,
between Bank One, Boulder, N.A. and Scientific
Software-Intercomp, Inc.,
including Working Capital Guarantee Agreement dated
September 29, 1994,
between Bank One, Boulder, N.A. and Export-Import
Bank of the United
States referred to as "Exhibit B" (filed as Exhibit
10.37 to the Company's
Report on Form 10-K for the year ended December 31,
1994, and
incorporated herein by reference).
10.8 Promissory Note of Scientific Software-Intercomp,
Inc. to Bank One, Boulder,
N.A. for $5,000,000, dated September 20, 1994 (filed
as Exhibit 10.38 to the
Company's Report on Form 10-K for the year ended
December 31, 1994, and
incorporated herein by reference).
10.9 Promissory Note of Scientific Software-Intercomp,
Inc. to Bank One, Boulder,
N.A. for $1,500,000, dated September 20, 1994 (filed
as Exhibit 10.39 to the
Company's Report on Form 10-K for the year ended
December 31, 1994, and
incorporated herein by reference).
10.10 Change in Terms Agreement between Scientific Software-
Intercomp, Inc. to
Bank One, Boulder, N.A., dated May 30, 1995,
extending maturity to July 15,
1995 relating to original Business Loan Agreement in
the amount of $6.5
million, dated September 20, 1994 (filed as Exhibit
10.41 to the Company's
Report on Form 10-K for the year ended December 31,
1994, and
incorporated herein by reference).
10.11 Change in Terms Agreement between Scientific Software-
Intercomp, Inc. to
Bank One, Boulder, N.A., dated July 15, 1995,
extending maturity to
August 15, 1995 relating to original Business Loan
Agreement in the amount
of $6.5 million, dated September 20, 1994 (filed as
Exhibit 10.42 to the
Company's Report on Form 10-K for the year ended
December 31, 1994, and
incorporated herein by reference).
10.12 Change in Terms Agreement between Scientific Software-
Intercomp, Inc. to
Bank One, Boulder, N.A., dated August 15, 1995,
extending maturity to
September 15, 1995 relating to original Business Loan
Agreement in the
amount of $6.5 million, dated September 20,
1994(filed as Exhibit 10.43 to
the Company's Report on Form 10-K for the year ended
December 31, 1994,
and incorporated herein by reference).
10.13 Change in Terms Agreement between Scientific Software-
Intercomp, Inc. to
Bank One, Boulder, N.A., dated September 15, 1995,
extending maturity to
September 30, 1995 relating to original Business Loan
Agreement in the
amount of $6.5 million, dated September 20, 1994
(filed as Exhibit 10.44 to
the Company's Report on Form 10-K for the year ended
December 31, 1994,
and incorporated herein by reference).
10.14 Change in Terms Agreement between Scientific Software-
Intercomp, Inc. to
Bank One, Boulder, N.A., dated September 30, 1995,
extending maturity to
October 15, 1995 relating to original Business Loan
Agreement in the amount
of $6.5 million, dated September 20, 1994 (filed as
Exhibit 10.45 to the
Company's Report on Form 10-K for the year ended
December 31, 1994, and
incorporated herein by reference).
10.15 Business Loan Agreement for $5.13 million dated
October 15, 1995, renewing
maturity to March 30, 1996, between Bank One,
Boulder, N.A. and Scientific
Software-Intercomp, Inc., including Working Capital
Guarantee Agreement
dated September 21, 1995, between Bank One, Boulder,
N.A. and Export-
Import Bank of the United States referred to as
"Exhibit B" (filed as
Exhibit 10.46 to the Company's Report on Form 10-K
for the year ended
December 31, 1994, and incorporated herein by
reference).
10.16 Change in Terms Agreement between Scientific Software-
Intercomp, Inc. to
Bank One, Boulder, N.A., dated November 15, 1995, in
the amount of
$500,000.00 relating to original Business Loan
Agreement in the amount of
$5.13 million, dated October 15, 1995 (filed as
Exhibit 10.47 to the
Company's Report on Form 10-K for the year ended
December 31, 1994, and
incorporated herein by reference).
10.17 Letter of Commitment From Lindner Funds dated March
29 ,1996 evidencing
the commitment to provide the Company with a loan of
$5 million (filed as
Exhibit 10.33 to the Company's Report on Form 10-K
for the year ended
December 31, 1995, and incorporated herein by
reference).
10.18 Letter of Commitment From Renaissance Capital Group,
Inc. dated April 4,
1996 to restructure its convertible debentures (filed
as Exhibit 10.34 to the
Company's Report on Form 10-K for the year ended
December 31, 1995, and
incorporated herein by reference).
10.19 Letter of Commitment From Bank One dated April 8,
1996 to restructure and
extend a revolving line of credit in the amount of
$1.5 million through April 15,
1997 (filed as Exhibit 10.35 to the Company's Report
on Form 10-K for the
year ended December 31, 1995, and incorporated herein
by reference).
10.20 Loan Agreement dated April 26, 1996 by and between
Scientific Software-
Intercomp, Inc. and Lindner Dividend Fund, and
Renaissance Capital
Partners III, Ltd. to provide the Company with Loans
in the amount of $5
million and $1.5 million, respectively.
21 Subsidiaries of the Company
27 Financial Data Schedule
EXHIBIT 21
SUBSIDIARIES OF THE
REGISTRANT
The registrant owns all of the outstanding capital stock of the
following corporations:
CORPORATION STATE OR PROVINCE OF INCORPORATION
Intercomp Resource Development Province of Alberta, Canada
& Engineering, (Canada) Ltd.
In-Situ Research and Province of Alberta, Canada
Engineering Ltd.
Microcomp Management Ltd. Province of Alberta, Canada
IRAD Development Ltd. Province of Alberta, Canada
247011 Alberta Limited Province of Alberta, Canada
Scientific Software-Intercomp United Kingdom
(U.K.) Limited
Scientific Software Texas, Inc. Texas
SSI Bethany, Inc. Texas
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SCIENTIFIC SOFTWARE-INTERCOMP, INC.
April 15, 1997 /s/ George Steel
George Steel
Chairman of the Board of Directors,
President and Chief
Executive Officer (a principal executive
officer and director)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Company and in the capacities and on the dates indicated.
/s/ George Steel April 15, 1997
George Steel
Chairman of the Board of Directors,
President and Chief
Executive Officer (a principal
executive officer and director)
/s/ Barbara J. Cavallo April 15, 1997
Financial Controller
/s/ William B. Nichols April 15, 1997
William B. Nichols, Director
/s/ Edward O. Price April 15, 1997
Edward O. Price, Director
3.1 Articles of Incorporation of the Company dated
February 8, 1968, (filed as
Exhibit 3.1 to the Company's Report on Form 10-K
for the year ended
December 31, 1984, and incorporated herein by
reference).
3.2 Articles of Amendment to the Articles of
Incorporation of the Company
dated May 28, 1982 (filed as Exhibit 3.2 to the
Company's Report on Form
10-K for the year ended December 31, 1984, and
incorporated herein by
reference).
3.3 Articles of Amendment to the Articles of
Incorporation of the Company
dated June 7, 1984 (filed as Exhibit 3.1 to the
Company's Registration
Statement on Form S-3, Registration No. 2-95792,
and incorporated
herein by reference).
3.4 Certificate of Correction to the Articles of
Amendment to the Articles of
Incorporation of the Company dated October 23, 1985
(filed as Exhibit 3.4
to the Company's Report on Form 10-K for the year
ended December 31,
1985, and incorporated herein by reference).
3.5 Articles of Amendment to Articles of Incorporation
of the Company dated
August 9, 1991 (filed as Exhibit 3.1 to the
Company's Report on Form 8-K
dated August 27, 1991, and incorporated herein by
reference).
3.6 Articles of Amendment to Articles of Incorporation
of the Company dated
June 21, 1990 (filed as Exhibit 2.1 to the
Company's Report on Form 10-
Q for the quarter ended June 30, 1990, and
incorporated herein by
reference).
3.7 Bylaws of the Company (filed as Exhibit 3.5 to the
Company's Report on
Form 10-K for the year ended December 31, 1989, and
incorporated
herein by reference).
3.8 Amendment to the Bylaws of the Company (filed as
Exhibit 3.1 to the
Company's Report on Form 10-Q for the quarter ended
June 30, 1990,
and incorporated herein by reference).
3.9 Articles of Amendment to Articles of Incorporation
of the Company dated
August 9, 1991 (filed as Exhibit 3.1 on Form 8-K
dated August 27, 1991,
and incorporated herein by reference).
3.10 Articles of Amendment to Articles of Incorporation
of the Company dated
December 14, 1994 increasing the number of shares
of authorized stock
(filed as Exhibit 3.10 to the Company's Report on
Form 10-K/A for the year
ended December 31, 1994, and incorporated herein by
reference).
4.1 Convertible Debenture Loan Agreement for $2,500,000
dated
September 30, 1992 between Renaissance Capital
Partners II, Ltd. and
Scientific Software-Intercomp, Inc. (filed as
Exhibit 4.1 to the Company's
Form 8-K dated October 19, 1992 and incorporated
herein by reference).
4.2 First Amendment to the Convertible Debenture Loan
Agreement for an
additional $1,000,000, dated September 15, 1993,
between Renaissance
Capital Partners II, Ltd. and Scientific Software-
Intercomp, Inc. (filed as
Exhibit 4.1 to the Company's Form 8-K dated October
19, 1992 and
incorporated herein by reference).
4.3 Form of Stockholder Lock-up Agreement (filed as
Exhibit 4.5 to the
Company's Form S-1 dated May 9, 1994 and
incorporated herein
by reference).
4.4 Letter Agreement Dated May 5, 1994 between
Renaissance Capital
Partners II, Ltd. and Scientific Software-
Intercomp, Inc., regarding
conversion of debentures (filed as Exhibit 4.6 to
the Company's Form S-1
dated May 9, 1994 and incorporated herein by
reference).
10.1 Form of Stock Option Agreement for stock options
issued under the
informal Non-Qualified Stock Option Plan (filed as
Exhibit 4.6 to the
Company's Form S-1 dated May 9, 1994 and
incorporated herein by
reference).
10.2 Employees Stock Ownership Plan and Trust as
restated on January 1,
1989 (filed as Exhibit 10.28 to the Company's Form
S-1 dated May 9, 1994
and incorporated herein by reference).
10.3 Target Benefit Plan as restated on January 1, 1989
(filed as Exhibit 10.29
to the Company's Form S-1 dated May 9, 1994 and
incorporated herein by
reference).
10.4 First Interstate Bank of Denver, N.A. Defined
Contribution Master Plan and
Trust Agreement (filed as Exhibit 10.30 to the
Company's Form S-1 dated
May 9, 1994 and incorporated herein by reference).
10.5 Adoption Agreement #001 Nonstandardized Code
Section 401(K) Profit
Sharing Plan dated July 1, 1990 (filed as Exhibit
10.31 to the Company's
Form S-1 dated May 9, 1994 and incorporated herein
by reference).
10.6 Scientific Software-Intercomp, Inc. Deferred
Compensation Plan (filed as
Exhibit 10.33 to the Company's Form S-1 dated May
9, 1994 and
incorporated herein by reference).
10.7 Business Loan Agreement for $6.5 million dated
September 20, 1994,
between Bank One, Boulder, N.A. and Scientific
Software-Intercomp, Inc.,
including Working Capital Guarantee Agreement dated
September 29,
1994, between Bank One, Boulder, N.A. and Export-
Import Bank of the
United States referred to as "Exhibit B" (filed as
Exhibit 10.37 to the
Company's Report on Form 10-K for the year ended
December 31, 1994,
and incorporated herein by reference).
10.8 Promissory Note of Scientific Software-Intercomp,
Inc. to Bank One,
Boulder, N.A. for $5,000,000, dated September 20,
1994 (filed as Exhibit
10.38 to the Company's Report on Form 10-K for the
year ended
December 31, 1994, and incorporated herein by
reference).
10.9 Promissory Note of Scientific Software-Intercomp,
Inc. to Bank One,
Boulder, N.A. for $1,500,000, dated September 20,
1994 (filed as Exhibit
10.39 to the Company's Report on Form 10-K for the
year ended
December 31, 1994, and incorporated herein by
reference).
10.10 Change in Terms Agreement between Scientific
Software-Intercomp, Inc.
to Bank One, Boulder, N.A., dated May 30, 1995,
extending maturity to
July 15, 1995 relating to original Business Loan
Agreement in the amount
of $6.5 million, dated September 20, 1994 (filed as
Exhibit 10.41 to the
Company's Report on Form 10-K for the year ended
December 31, 1994,
and incorporated herein by reference).
10.11 Change in Terms Agreement between Scientific
Software-Intercomp, Inc.
to Bank One, Boulder, N.A., dated July 15, 1995,
extending maturity to
August 15, 1995 relating to original Business Loan
Agreement in the
amount of $6.5 million, dated September 20, 1994
(filed as Exhibit 10.42
to the Company's Report on Form 10-K for the year
ended December 31,
1994, and incorporated herein by reference).
10.12 Change in Terms Agreement between Scientific
Software-Intercomp, Inc.
to Bank One, Boulder, N.A., dated August 15, 1995,
extending maturity to
September 15, 1995 relating to original Business
Loan Agreement in the
amount of $6.5 million, dated September 20,
1994(filed as Exhibit 10.43 to
the Company's Report on Form 10-K for the year
ended December 31,
1994, and incorporated herein by reference).
10.13 Change in Terms Agreement between Scientific
Software-Intercomp, Inc.
to Bank One, Boulder, N.A., dated September 15,
1995, extending
maturity to September 30, 1995 relating to original
Business Loan
Agreement in the amount of $6.5 million, dated
September 20, 1994 (filed
as Exhibit 10.44 to the Company's Report on Form 10-
K for the year
ended December 31, 1994, and incorporated herein by
reference).
10.14 Change in Terms Agreement between Scientific
Software-Intercomp, Inc.
to Bank One, Boulder, N.A., dated September 30,
1995, extending
maturity to October 15, 1995 relating to original
Business Loan Agreement
in the amount of $6.5 million, dated September 20,
1994 (filed as Exhibit
10.45 to the Company's Report on Form 10-K for the
year ended
December 31, 1994, and incorporated herein by
reference).
10.15 Business Loan Agreement for $5.13 million dated
October 15, 1995,
renewing maturity to March 30, 1996, between Bank
One, Boulder, N.A.
and Scientific Software-Intercomp, Inc., including
Working Capital
Guarantee Agreement dated September 21, 1995,
between Bank One,
Boulder, N.A. and Export-Import Bank of the United
States referred to as
"Exhibit B" (filed as Exhibit 10.46 to the
Company's Report on Form 10-K
for the year ended December 31, 1994, and
incorporated herein by reference).
10.16 Change in Terms Agreement between Scientific
Software-Intercomp, Inc.
to Bank One, Boulder, N.A., dated November 15,
1995, in the amount of
$500,000.00 relating to original Business Loan
Agreement in the amount
of $5.13 million, dated October 15, 1995 (filed as
Exhibit 10.47 to the
Company's Report on Form 10-K for the year ended
December 31, 1994,
and incorporated herein by reference).
10.17 Letter of Commitment From Lindner Funds dated March
29 ,1996
evidencing the commitment to provide the Company
with a loan of $5
million (filed as Exhibit 10.33 to the Company's
Report on Form 10-K for
the year ended December 31, 1995, and incorporated
herein by
reference).
10.18 Letter of Commitment From Renaissance Capital
Group, Inc. dated April 4,
1996 to restructure its convertible debentures
(filed as Exhibit 10.34 to the
Company's Report on Form 10-K for the year ended
December 31, 1995,
and incorporated herein by reference).
10.19 Letter of Commitment From Bank One dated April 8,
1996 to restructure
and extend a revolving line of credit in the amount
of $1.5 million through
April 15, 1997 (filed as Exhibit 10.35 to the
Company's Report on Form 10-
K for the year ended December 31, 1995, and
incorporated herein by
reference).
10.20 Loan Agreement dated April 26, 1996 by and between
Scientific
Software-Intercomp, Inc. and Lindner Dividend Fund,
and Renaissance
Capital Partners III, Ltd. to provide the Company
with Loans in the amount
of $5 million and $1.5 million, respectively.
21 Subsidiaries of the Company
23.1 Consent of Ehrhardt Keefe Steiner & Hottman PC
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,870
<SECURITIES> 0
<RECEIVABLES> 6,299
<ALLOWANCES> 690
<INVENTORY> 0
<CURRENT-ASSETS> 10,794
<PP&E> 6,039
<DEPRECIATION> 5,216
<TOTAL-ASSETS> 22,708
<CURRENT-LIABILITIES> 8,524
<BONDS> 0
3,037
4,000
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,708
<SALES> 19,004
<TOTAL-REVENUES> 19,004
<CGS> 0
<TOTAL-COSTS> 18,166
<OTHER-EXPENSES> 85
<LOSS-PROVISION> 900
<INTEREST-EXPENSE> 353
<INCOME-PRETAX> (470)
<INCOME-TAX> 60
<INCOME-CONTINUING> (410)
<DISCONTINUED> (1,356)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,766)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> 0
</TABLE>
